<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT (NO. 2-56846) UNDER
THE SECURITIES ACT OF 1933
PRE-EFFECTIVE AMENDMENT NO.
POST-EFFECTIVE AMENDMENT NO. 39
AND
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY
ACT OF 1940
AMENDMENT NO. --
VANGUARD INDEX TRUST
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
P.O. BOX 2600, VALLEY FORGE, PA 19482
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)
REGISTRANT'S TELEPHONE NUMBER (610) 669-1000
RAYMOND J. KLAPINSKY, ESQUIRE
P.O. BOX 876
VALLEY FORGE, PA 19482
IT IS PROPOSED THAT THIS AMENDMENT BECOME EFFECTIVE;
on December 30, 1994, pursuant to paragraph (a) of Rule 485.
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
As soon as practicable after this Registration Statement becomes effective.
REGISTRANT ELECTS TO REGISTER AN INDEFINITE NUMBER OF SHARES PURSUANT TO
REGULATION 24F-2 UNDER THE INVESTMENT COMPANY ACT OF 1940. REGISTRANT FILED ITS
RULE 24F-2 NOTICE FOR THE YEAR ENDED DECEMBER 31, 1993 ON FEBRUARY 23, 1994.
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<PAGE> 2
VANGUARD INDEX TRUST
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
FORM N-1A
ITEM NUMBER LOCATION IN PROSPECTUS
<C> <S> <C>
Item 1. Cover Page.................................... Cover Page
Item 2. Synopsis...................................... Highlights
Item 3. Condensed Financial Information............... Financial Highlights
Item 4. General Description of Registrant............. Investment Objectives; Investment
Limitations; Investment Policies;
General Information
Item 5. Management of the Funds....................... Management of the Funds; The Vanguard
Group
Item 6. Capital Stock and Other Securities............ Opening an Account and Purchasing
Each Funds Shares; Selling Your
Shares; Share Price; Dividends,
Capital Gains and Taxes; General
Information
Item 7. Purchase of Securities Being Offered.......... Cover Page; Opening an Account and
Purchasing Shares
Item 8. Redemption or Repurchase...................... Selling Your Shares
Item 9. Pending Legal Proceedings..................... Not Applicable
<CAPTION>
FORM N-1A LOCATION IN STATEMENT
ITEM NUMBER OF ADDITIONAL INFORMATION
<C> <S> <C>
Item 10. Cover Page.................................... Cover Page
Item 11. Table of Contents............................. Cover Page
Item 12. General Information and History............... Investment Objectives and Policies;
General Information
Item 13. Investment Objective and Policies............. Investment Objectives and Policies;
Investment Limitations
Item 14. Management of the Fund........................ Management of the Fund
Item 15. Control Persons and Principal Holders of
Securities.................................... Management of the Fund; General
Information
Item 16. Investment Advisory and Other Services........ Management of the Fund
Item 17. Brokerage Allocation.......................... Not Applicable
Item 18. Capital Stock and Other Securities............ General Information; Financial
Statements
Item 19. Purchase, Redemption and Pricing of Securities
Being Offered................................. Purchase of Shares; Redemption of
Shares
Item 20. Tax Status.................................... Appendix
Item 21. Underwriters.................................. Not Applicable
Item 22. Calculations of Yield Quotations of Money
Market Fund................................... Not Applicable
Item 23. Financial Statements.......................... Financial Statements
</TABLE>
<PAGE> 3
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[FIGURE 1]
[LOGO]
P R O S P E C T U S
DECEMBER 30, 1994
VANGUARD INDEX TRUST
VANGUARD BOND INDEX FUND
VANGUARD BALANCED INDEX FUND
VANGUARD INTERNATIONAL EQUITY INDEX FUND
[LOGO]
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<PAGE> 4
[THIS PAGE INTENTIONALLY LEFT BLANK.]
<PAGE> 5
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[LOGO]
Members of The Vanguard Group
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PROSPECTUS--DECEMBER 30, 1994
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NEW ACCOUNT INFORMATION: INVESTOR INFORMATION DEPARTMENT--1-800-662-7447 (SHIP)
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SHAREHOLDER ACCOUNT SERVICES: CLIENT SERVICES DEPARTMENT--1-800-662-2739 (CREW)
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INVESTMENT
OBJECTIVES AND
POLICIES Vanguard Index Funds are four separate, individual
open-end diversified investment companies. The Funds are
organized as follows: Vanguard Bond Index Fund, Inc.
including the Total Bond Market, Short-Term Bond,
Intermediate-Term Bond and Long-Term Bond Portfolios;
Vanguard Balanced Index Fund, Inc.; Vanguard Index Trust
including the 500, Extended Market, Total Stock Market,
Small Capitalization Stock, Value and Growth Portfolios;
and Vanguard International Equity Index Fund, Inc.
including the European, Pacific and Emerging Markets
Portfolios. Each of the Portfolios invests in securities
(bonds or common stocks) in order to match the
investment performance of a distinct market index.
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OPENING AN
ACCOUNT To open a regular (non-retirement) account, please
complete and return the Account Registration Form. If
you need assistance in completing this Form, please call
our Investor Information Department. To open an
Individual Retirement Account (IRA), please use a
Vanguard IRA Adoption Agreement. To obtain a copy of
this form, call 1-800-662-7447, Monday through Friday,
from 8:00 a.m. to 9:00 p.m. and Saturday, from 9:00 a.m.
to 4:00 p.m. (Eastern time). The minimum initial
investment is $3,000 for each Portfolio ($500 for
Individual Retirement Accounts and Uniform
Gifts/Transfers to Minors Act accounts). Each of the
Vanguard Index Funds assesses a $10 annual account
maintenance fee. A portfolio transaction fee of 1% is
deducted from purchases of the Extended Market and Small
Capitalization Stock Portfolios of Vanguard Index Trust
and a 0.25% portfolio transaction fee is deducted from
purchases of its Total Stock Market Portfolio. The
European and Pacific Portfolios of Vanguard
International Equity Index Fund assess a 1% portfolio
transaction fee on purchases and its Emerging Markets
Portfolio assesses a 2% portfolio transaction fee on
purchases and a 1% portfolio transaction fee on
redemptions. Portfolio transaction fees are paid to the
Portfolios to offset transaction costs of buying and
selling securities of small- and medium-sized companies
and international companies. See "Fund Expenses."
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ABOUT THIS
PROSPECTUS This Prospectus is designed to set forth concisely the
information you should know about the Vanguard Index
Funds before you invest. It should be retained for
future reference. "Statements of Additional Information"
containing additional information about each of the
Vanguard Index Funds have been filed with the Securities
and Exchange Commission. These Statements are dated
December 30, 1994 and have been incorporated by
reference into this Prospectus. A copy may be obtained
without charge by writing to the Funds or by calling the
Investor Information Department.
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TABLE OF CONTENTS
<TABLE>
<S> <C>
Page
Highlights.................................................................... 2
Fund Expenses................................................................. 5
Financial Highlights.......................................................... 8
Yield and Total Return........................................................14
FUND INFORMATION
Investment Objectives.........................................................15
Investment Policies...........................................................17
Investment Risks..............................................................23
Who Should Invest.............................................................28
Implementation of Policies....................................................31
Investment Limitations........................................................42
Management of the Funds.......................................................43
Investment Advisers...........................................................44
Dividends, Capital Gains
and Taxes....................................................................45
The Share Price of
Each Portfolio...............................................................47
General Information...........................................................48
SHAREHOLDER GUIDE
Opening an Account and
Purchasing Shares............................................................49
When Your Account Will
Be Credited..................................................................53
Selling Your Shares...........................................................54
Exchanging Your Shares........................................................58
Important Information About
Telephone Transactions.......................................................59
Transferring Registration.....................................................60
Other Vanguard Services.......................................................60
</TABLE>
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
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<PAGE> 6
HIGHLIGHTS
Vanguard offers four index funds consisting of a total
of fourteen separate portfolios. Unlike other mutual
funds which generally attempt to "beat" market averages
with often unpredictable results, Vanguard's index funds
seek to "match" the performance of their underlying
indexes and thus are expected to provide a highly
predictable return relative to their benchmarks. The
Funds offer investors the advantages of a "passive"
approach to investing. These include low investment
costs, exceptional diversification among securities,
minimal portfolio turnover, and relative predictability.
As with any mutual fund there is no assurance that a
fund will meet its goal.
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INVESTMENT
OBJECTIVES AND
POLICIES
VANGUARD BOND
INDEX FUND Each of the four Funds is an open-end diversified
investment company.
The Fund consists of four Portfolios each of which
invests in bonds.
- The TOTAL BOND MARKET PORTFOLIO seeks to replicate the
performance of the Lehman Brothers Aggregate Bond
Index.
- The SHORT-TERM BOND PORTFOLIO seeks to replicate the
performance of the Lehman Brothers Mutual Fund Short
(1-5) Government/Corporate Index.
- The INTERMEDIATE-TERM BOND PORTFOLIO seeks to
replicate the performance of the Lehman Brothers
Mutual Fund Intermediate (5-10) Government/Corporate
Index.
- The LONG-TERM BOND PORTFOLIO seeks to replicate the
performance of the Lehman Brothers Mutual Fund Long
(10+) Government/Corporate Index.
Each Portfolio will invest at least 80% of its assets in
securities included in its respective index. The Lehman
Brothers Indexes encompass two major classes of
investment grade fixed income securities: U.S. Treasury
and agency securities and corporate bonds. Additionally,
the Lehman Brothers Aggregate Bond Index includes
mortgage-backed securities.
--------------------------------------------------------
VANGUARD BALANCED
INDEX FUND The Fund invests in U.S. common stocks and bonds. It
seeks to replicate with respect to 60% of its assets the
performance of the Wilshire 5000 Index and with respect
to 40% of its assets, the Lehman Brothers Index. Under
normal circumstances the Fund will invest primarily in
securities of its underlying indexes.
-------------------------------------------------------
VANGUARD INDEX TRUST The Trust consists of six separate Portfolios each of
which invests in U.S. common stocks.
- The 500 PORTFOLIO seeks to replicate the performance
of the S&P 500 Index.
- The EXTENDED MARKET PORTFOLIO seeks to replicate the
performance of the Wilshire 4500 Index.
- The TOTAL STOCK MARKET PORTFOLIO seeks to replicate
the performance of the Wilshire 5000 Index.
2
<PAGE> 7
- The SMALL CAPITALIZATION STOCK PORTFOLIO seeks to
replicate the performance of the Russell 2000 Small
Stock Index.
- The VALUE PORTFOLIO seeks to replicate the performance
of the S&P/BARRA Value Index.
- The GROWTH PORTFOLIO seeks to replicate the
performance of the S&P/BARRA Growth Index.
--------------------------------------------------------
VANGUARD
INTERNATIONAL
EQUITY INDEX FUND The Fund consists of three Portfolios each of which
invests in international common stocks.
- The EUROPEAN PORTFOLIO seeks to parallel the
performance of the Morgan Stanley Capital
International -- Europe (Free) Index.
- The PACIFIC PORTFOLIO seeks to parallel the
performance of the Morgan Stanley Capital
International -- Pacific Index.
- The EMERGING MARKETS PORTFOLIO seeks to parallel the
performance of the Morgan Stanley Capital
International -- Select Emerging Markets Free Index.
The European Portfolio and the Pacific Portfolio invest
primarily in the common stocks included in their
respective indexes. The Emerging Markets Portfolio
invests 95% of its assets in securities which are
representative of securities in its index and 5% in cash
reserves. PAGE -
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INVESTMENT
RISKS The Portfolios of the Vanguard Bond Index Fund and the
bond portion of the Vanguard Balanced Fund are subject
to risks associated with fixed income investing
including interest rate, income, call and credit risks.
Additionally, since the Total Bond Market Portfolio of
Vanguard Bond Index Fund invests in mortgage-backed
securities, the Portfolio is subject to prepayment risk.
The equity portion of Vanguard Balanced Index Fund and
the Portfolios of Vanguard Index Trust and Vanguard
International Equity Index Fund are subject to stock
market risk, which is the possibility that common stock
prices will decline over short or extended periods. Both
U.S. and foreign stock markets tend to be cyclical, with
periods when stock prices generally rise and periods
when stock prices generally decline. Additionally, the
Portfolios of Vanguard International Equity Index Fund
are subject to currency risk, the risk that changes in
foreign exchange rates will affect the value of foreign
securities held by the Portfolios.
Investors considering the Emerging Markets Portfolio
should be aware that emerging markets can be
substantially more volatile than both U.S. and more
developed foreign markets. Volatility in emerging
markets can be exacerbated by illiquidity in the market
for emerging market stocks.
Because of the risks associated with common stocks and
bonds, the Funds are intended to be long-term investment
vehicles and are not designed to provide investors with
a means of speculating on short-term market movements.
Investors should not consider an investment in any one
portfolio a complete investment program, but should
maintain holdings of securities with different risk
characteristics -- including
3
<PAGE> 8
U.S. common stocks, bonds and money market instruments.
For further information concerning the risks associated
with investing in the Funds, see "Investment
Risks". PAGE -
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THE VANGUARD
GROUP The Funds are members of The Vanguard Group of
Investment Companies, a group of over 30 investment
companies with over 80 distinct investment portfolios
and total assets in excess of $130 billion. The Vanguard
Group, Inc. ("Vanguard"), a subsidiary jointly owned by
the Vanguard Funds, provides all corporate management,
administrative, distribution and shareholder accounting
services on an at-cost basis to the Funds in the
Group. PAGE -
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INVESTMENT
ADVISERS The Vanguard Bond Index Fund and the bond portion of
Vanguard Balanced Index Fund receive investment advisory
services from Vanguard's Fixed Income Group. Vanguard
Index Trust, Vanguard International Equity Index Fund
and the equity portion of Vanguard Balanced Index Fund
receive investment advisory services from Vanguard's
Core Management Group. All investment advisory services
are provided to the Index Funds on an at-cost basis. As
a result, the Funds receive investment advisory services
at a substantially lower cost than would be possible if
the Funds paid an investment advisory fee to an external
investment adviser. PAGE -
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FEES AND EXPENSES The Portfolios are subject to the following transaction
fees:
<TABLE>
<CAPTION>
FEE DEDUCTED
FEE DEDUCTED FROM
FROM PURCHASES REDEMPTIONS
<S> <C> <C>
VANGUARD INDEX TRUST
Extended Market Portfolio 1% None
Total Stock Market Portfolio .25% None
Small Capitalization Stock Portfolio 1% None
VANGUARD INTERNATIONAL EQUITY INDEX
FUND
European Portfolio 1% None
Pacific Portfolio 1% None
Emerging Markets Portfolio 2% 1%
</TABLE>
Portfolio transaction fees are paid directly to the
Portfolios to offset transaction costs of buying
securities of small- and medium-sized companies and
international companies.
Additionally, shareholders will also incur a $10 annual
account maintenance fee for each account in any of
Vanguard's Index Funds. PAGE -
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4
<PAGE> 9
FUND EXPENSES The following table illustrates all expenses and fees
that you would incur as a shareholder of Vanguard Index
Trust, Vanguard Bond Index Fund, Vanguard International
Equity Index Fund and Vanguard Balanced Index Fund. The
expenses and fees set forth below are for the 1993
fiscal year.
<TABLE>
<CAPTION>
TOTAL SMALL
EXTENDED STOCK CAPITALIZATION BALANCED
SHAREHOLDER TRANSACTION 500 MARKET MARKET VALUE GROWTH STOCK INDEX
EXPENSES PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO*** FUND
<S> <C> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------
Sales Load Imposed on
Purchases...................... None None* None** None None None* None
Sales Load Imposed on
Reinvested Dividends........... None None None None None None None
Redemption Fees.................. None None None None None None None
Exchange Fees.................... None None None None None None None
</TABLE>
*Shareholders are charged a 1% portfolio transaction fee, payable directly to
the Portfolio, on each purchase of shares.
**Shareholders are charged a 0.25% portfolio transaction fee, payable directly
to the Portfolio, on each purchase of shares.
***Formerly Vanguard Small Capitalization Stock Fund, Inc.
<TABLE>
<CAPTION>
TOTAL SMALL
EXTENDED STOCK CAPITALIZATION BALANCED
ANNUAL FUND OPERATING 500 MARKET MARKET VALUE GROWTH STOCK INDEX
EXPENSES PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO*** FUND
<S> <C> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------
Management & Administrative
Expenses++..................... 0.15% 0.15% 0.15% 0.14% 0.13% 0.13% 0.14%
Investment Advisory Fees......... None None None None None None None
12b-1 Fees....................... None None None None None None None
Other Expenses
Distribution Costs............. 0.03 0.02 0.03 0.02 0.02 0.02 0.02
Miscellaneous Expenses......... 0.01 0.03 0.02 0.04 0.05 0.03 0.04
-------- -------- -------- -------- -------- ----------- --------
Total Other Expenses............. 0.04 0.05 0.05 0.06 0.07 0.05 0.06
-------- -------- -------- -------- -------- ----------- --------
TOTAL OPERATING EXPENSES..... 0.19% 0.20% 0.20% 0.20% 0.20% 0.18% 0.20%
-------- -------- -------- -------- -------- ----------- --------
-------- -------- -------- -------- -------- ----------- --------
</TABLE>
***Formerly Vanguard Small Capitalization Stock Fund, Inc.
++In addition to these costs, each Portfolio assesses an annual account
maintenance fee of $10.
<TABLE>
<CAPTION>
TOTAL SHORT- LONG-
BOND TERM INTERMEDIATE- TERM EMERGING
SHAREHOLDER TRANSACTION MARKET BOND TERM BOND BOND EUROPEAN PACIFIC MARKETS
EXPENSES PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
<S> <C> <C> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------
Sales Load Imposed on
Purchases............... None None None None None* None* None+
Sales Load Imposed on
Reinvested Dividends.... None None None None None None None
Redemption Fees++......... None None None None None None 1%**
Exchange Fees............. None None None None None None None
</TABLE>
*Shareholders are charged a 1% portfolio transaction fee, payable directly to
the Portfolio on each purchase of shares.
**The 1% portfolio transaction fee withheld from redemption proceeds is paid
to the Portfolio.
+Shareholders are charged a 2% portfolio transaction fee, payable directly to
the Portfolio on each purchase of shares.
++Wire redemptions of less than $5,000 are subject to a $5 processing fee.
5
<PAGE> 10
<TABLE>
<CAPTION>
TOTAL SHORT-
BOND TERM INTERMEDIATE- LONG-TERM EMERGING
ANNUAL FUND OPERATING MARKET BOND TERM BOND BOND EUROPEAN PACIFIC MARKETS
EXPENSES PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
<S> <C> <C> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------
Management &
Administrative
Expenses***............. 0.13% 0.13% 0.13% 0.13% 0.14% 0.18% 0.12%
Investment Advisory
Fees.................... None None None None None None None
12b-1 Fees................ None None None None None None None
Other Expenses
Distribution Costs...... 0.03 0.03 0.03 0.03 0.02 0.02 0.03
Miscellaneous
Expenses.............. 0.02 0.02 0.02 0.02 0.16 0.12 0.45
-------- -------- ---------- -------- -------- -------- --------
Total Other Expenses...... 0.05 0.05 0.05 0.05 0.18 0.14 0.48
-------- -------- ---------- -------- -------- -------- --------
TOTAL OPERATING
EXPENSES............ 0.18% 0.18% 0.18% 0.18% 0.32% 0.32% 0.60%
-------- -------- ---------- -------- -------- -------- --------
-------- -------- ---------- -------- -------- -------- --------
</TABLE>
***In addition to these costs, shareholders incur an annual account maintenance
fee of $10. (This maintenance fee will be waived until December 31, 1994 for
the Short-Term Bond, Intermediate-Term Bond, Long-Term Bond and the Emerging
Markets Portfolios.)
The purpose of this table is to assist you in
understanding the various costs and expenses that you
would bear directly or indirectly as an investor in the
Funds.
SIX PORTFOLIOS ASSESS
TRANSACTION FEES The Extended Market and Small Capitalization Stock
Portfolios of Vanguard Index Trust and the European and
Pacific Portfolios of Vanguard International Equity
Index Fund assess a portfolio transaction fee on
purchases of Portfolio shares equal to 1% of the dollar
amount invested. The Total Stock Market Portfolio of
Vanguard Index Trust assesses a portfolio transaction
fee equal to 0.25% of the dollar amount invested. The
Emerging Markets Portfolio of Vanguard International
Equity Index Fund assess a portfolio transaction fee
equal to 2% of the dollar amount invested. The portfolio
transaction fees are paid to the respective Portfolio,
not to Vanguard. They are not sales charges.
These fees apply to initial investments in the
respective Portfolios and all subsequent purchases
(including purchases made by exchange from another
Vanguard Fund or from other Portfolios within a Fund),
but not to reinvested dividend or capital gains
distributions. Portfolio transaction fees are deducted
automatically from the amount invested; they cannot be
paid separately.
The purpose of these transaction fees is to allocate
transaction costs associated with new purchases to
investors making those purchases, thus insulating
existing shareholders from those transaction costs.
These costs include: (1) brokerage costs; (2) market
impact costs -- i.e., the increase in market prices
which may result when the Portfolio purchases thinly
traded stocks; and, most importantly, (3) the effect of
the "bid-ask" spread in the over-the-counter market.
(Securities in the over-the-counter market are bought at
the "ask" or purchase price, but are valued in the
Portfolio at the mean of the "bid" or sale, and "ask"
prices.)
6
<PAGE> 11
The fees represent Vanguard's estimate of the brokerage
and other transaction costs incurred by the Portfolios
in acquiring stocks in their respective markets. Without
the fees, the Portfolios, which incur these costs
directly, would experience reduced investment
performance for all shareholders in each Portfolio. With
the fees, the transaction costs of acquiring additional
stocks are borne not by all existing shareholders, but
by those investors making additional purchases. Because
the purchaser, not the Portfolios, bears these costs,
the Portfolios are expected to track their respective
benchmark indexes more closely.
THE EMERGING MARKETS
PORTFOLIO CHARGES A
1% REDEMPTION
TRANSACTION FEE The Emerging Markets Portfolio of Vanguard
International Equity Index Fund also assesses a 1%
redemption transaction fee. This 1% charge applies to
redemptions or exchanges from the Portfolio. The 1% fee
is deducted from redemption or exchange proceeds and is
paid directly to the Portfolio, not to Vanguard. It is
not a contingent deferred sales charge.
EACH PORTFOLIO CHARGES
A $10 ACCOUNT
MAINTENANCE FEE Each Portfolio assesses an annual account maintenance
fee of $10 to allocate part of the fixed costs of
maintaining shareholder accounts equally to all
accounts. This fee is deducted from each Portfolio's
dividend at a rate of $2.50 per quarter for accounts in
the 500, Total Stock Market, Value and Growth Portfolios
of Vanguard Index Trust, Vanguard Bond Index Fund and
Vanguard Balanced Index Fund and $10 annually for
accounts in the Extended Market Portfolio of Vanguard
Index Trust and the European, Pacific and Emerging
Markets Portfolios of Vanguard International Equity
Index Fund. See "Dividends, Capital Gains and Taxes" for
more information on this fee. The $10 fee amounts to
0.33% on a $3,000 investment in a Portfolio, 0.10% on a
$10,000 investment, and 0.01% on a $100,000 investment.
The following example illustrates the expenses that you
would incur on a $1,000 investment over various time
periods, assuring (1) a 5% annual rate of return and (2)
redemption at the end of each period. The example
includes the $10 account maintenance fee for each
Portfolio; the 1% portfolio transaction fee for the
Extended Market and Small Capitalization Stock
Portfolios of Vanguard Index Trust and the European and
Pacific Portfolios of Vanguard International Equity
Index Fund; the 0.25% transaction fee for the Total
Stock Market Portfolio of Vanguard Index Trust; and the
2% purchase transaction fee and the 1% redemption
transaction fee for the Emerging Markets Portfolio of
Vanguard International Equity Index Fund.
7
<PAGE> 12
<TABLE>
<CAPTION>
1 3 5 10
YEAR YEARS YEARS YEARS
---- ----- ----- -----
<S> <C> <C> <C> <C>
Total Bond Market Portfolio...... $ 12 $36 $ 60 $122
Short-Term Bond Portfolio........ $ 12 $36 $ 60 $122
Intermediate-Term Bond
Portfolio...................... $ 12 $36 $ 60 $122
Long-Term Bond Portfolio......... $ 12 $36 $ 60 $122
Balanced Index Fund.............. $ 12 $36 $ 61 $124
500 Portfolio.................... $ 12 $36 $ 60 $123
Extended Market Portfolio........ $ 22 $46 $ 71 $134
Total Stock Market Portfolio..... $ 15 $39 $ 63 $127
Value Portfolio.................. $ 12 $36 $ 61 $124
Growth Portfolio................. $ 12 $36 $ 61 $124
Small Capitalization Stock
Portfolio...................... $ 22 $46 $ 70 $132
European Portfolio............... $ 23 $50 $ 77 $148
Pacific Portfolio................ $ 23 $50 $ 77 $148
Emerging Markets Portfolio....... $ 46 $79 $ 114 $204
</TABLE>
Included in these estimates are account maintenance fees
of $10, $30, $50 and $100 for the respective periods
shown. The $10 account maintenance fee is a flat charge
which does not vary by the size of your investment.
Accordingly, for investments larger than $1,000, your
total expenses will be substantially lower in percentage
terms than this illustration implies.
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION
OF PAST OR FUTURE EXPENSES OR PERFORMANCE. ACTUAL
EXPENSES MAY BE HIGHER OR LOWER THAN THOSE SHOWN.
- --------------------------------------------------------------------------------
FINANCIAL
HIGHLIGHTS The following financial highlights for a share
outstanding throughout each period, insofar as they
relate to each of the five years in the period ended
December 31, 1993, (September 30, 1993 with respect to
the Small Capitalization Stock Portfolio) have been
audited by Price Waterhouse LLP independent accountants,
whose reports thereon were unqualified. This financial
information should be read in conjunction with each
Fund's financial statements and notes thereto, which are
incorporated by reference in the Statements of
Additional Information and in this Prospectus, and which
appear, along with the reports of Price Waterhouse LLP,
in each Fund's 1993 Annual Report to Shareholders and
inserts thereto. The financial highlights for the Small
Capitalization Stock Portfolio, formerly Vanguard Small
Capitalization Stock Fund, Inc. should be read in
conjunction with the Small Capitalization Stock Fund's
above-referenced financial statements which are
incorporated by reference in the Statement of Additional
Information and in this Prospectus, and which appear,
along with the report of Price Waterhouse LLP, in the
Small Capitalization Stock Fund's 1993 Annual Report to
Shareholders. The information on selected per share
data and ratios for the six months ended June 30, 1994
for each Fund is unaudited and should be read in
conjunction with the financial statements appearing in
each Fund's June 30, 1994 Semi-Annual Report to
Shareholders. For a more complete discussion of each
Fund's performance, please see the 1993 Annual Report
and the June 30, 1994 Semi-Annual Report of each Fund,
which may be obtained free of charge by writing to the
Funds or calling our Investor Information Department at
1-800-662-7447.
8
<PAGE> 13
<TABLE>
<CAPTION>
500 PORTFOLIO
SIX MONTHS --------------------------------------------------------------------------------------------------
ENDED YEAR ENDED DECEMBER 31,
JUNE 30, --------------------------------------------------------------------------------------------------
1994*** 1993 1992 1991 1990 1989 1988 1987 1986 1985 1984
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE,
BEGINNING OF
PERIOD............ $43.83 $40.97 $39.32 $31.24 $33.64 $27.18 $24.65 $24.27 $22.99 $19.52 $19.70
------- ----- ------ ------ ------ ------ ------ ------ ------ ------ ------
INVESTMENT
OPERATIONS
Net Investment
Income.......... .58 1.13 1.12 1.15 1.17 1.20 1.08 .88 .89 .91 .88
Net Realized and
Unrealized Gain
(Loss) on
Investments..... (2.12) 2.89 1.75 8.20 (2.30) 7.21 2.87 .36 3.30 5.08 .30
------- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
TOTAL FROM
INVESTMENT
OPERATIONS.... (1.54) 4.02 2.87 9.35 (1.13) 8.41 3.95 1.24 4.19 5.99 1.18
- ---------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net
Investment
Income.......... (.44) (1.13) (1.12) (1.15) (1.17) (1.20) (1.10) (.69) (.89) (.91) (.88)
Distributions from
Realized Capital
Gains........... (.08) (.03) (.10) (.12) (.10) (.75) (.32) (.17) (2.02) (1.61) (.48)
------- ----- ----- ----- ----- ----- ----- ------ ----- ----- -----
TOTAL
DISTRIBUTIONS... (.52) (1.16) (1.22) (1.27) (1.27) (1.95) (1.42) (.86) (2.91) (2.52) (1.36)
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE,
END OF PERIOD..... $41.77 $43.83 $40.97 $39.32 $31.24 $33.64 $27.18 $24.65 $24.27 $22.99 $19.52
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN**..... (3.46)% 9.89% 7.42% 30.22% (3.32)% 31.36% 16.22% 4.71% 18.06% 31.23% 6.21%
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL
DATA
Net Assets, End of
Period
(Millions)........ $8,433 $8,273 $6,547 $4,345 $2,173 $1,804 $1,055 $826 $485 $394 $290
Ratio of Expenses
to Average Net
Assets............ .19%* .19% .19% .20% .22% .21% .22% .26% .28% .28% .27%
Ratio of Net
Investment Income
to Average Net
Assets............ 2.68%* 2.65% 2.81% 3.07% 3.60% 3.62% 4.08% 3.15% 3.40% 4.09% 4.53%
Portfolio Turnover
Rate.............. 7%*+ 6%+ 4%+ 5%+ 23%+ 8% 10% 15% 29% 36% 14%
</TABLE>
*Annualized.
**Total return figures do not reflect the annual account maintenance fee of
$10.
***Unaudited.
+Portfolio turnover rates excluding in-kind redemptions for the period
January 1, 1990 to June 30, 1994 were 6%, 2%, 1%, 1%, and 6%, respectively.
9
<PAGE> 14
<TABLE>
<CAPTION>
EXTENDED MARKET PORTFOLIO
SIX MONTHS -------------------------------------------------------------------------
ENDED YEAR ENDED DECEMBER 31, DEC. 21,+
JUNE 30, ------------------------------------------------------------ TO 31,
1994*** 1993 1992 1991 1990 1989 1988 1987
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD.... $19.43 $17.35 $15.82 $11.48 $13.92 $11.60 $9.99 $10.00
------- ----- ------ ------ ------ ------ ------ -------
INVESTMENT OPERATIONS
Net Investment Income.................. .13 .23 .24 .25 .30 .26 .34 .03
Net Realized and Unrealized Gain (Loss)
on Investments....................... (1.23) 2.28 1.72 4.54 (2.25) 2.52 1.63 (.04)
------- ----- ----- ----- ----- ----- ----- ------
TOTAL FROM INVESTMENT OPERATIONS..... (1.10) 2.51 1.96 4.79 (1.95) 2.78 1.97 (.01)
- -----------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income... -- (.23) (.25) (.25) (.33) (.23) (.20) --
Distributions from Realized Capital
Gains................................ (.14) (.20) (.18) (.20) (.16) (.23) (.16) --
------- ----- ----- ----- ----- ----- ----- ------
TOTAL DISTRIBUTIONS.................. (.14) (.43) (.43) (.45) (.49) (.46) (.36) --
- -----------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD.......... $18.19 $19.43 $17.35 $15.82 $11.48 $13.92 $11.60 $9.99
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN**.......................... (5.73)% 14.49% 12.47% 41.85% (14.05)% 24.10% 19.75% (0.10)%
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions).... $919 $928 $585 $372 $179 $147 $35 $5
Ratio of Expenses to Average Net
Assets................................. .20%* .20% .20% .19% .23% .23% .24% 0%
Ratio of Net Investment Income to
Average
Net Assets............................. 1.44%* 1.48% 1.73% 2.14% 2.68% 2.92% 2.90% 0%
Portfolio Turnover Rate................. 23%* 13% 9% 11% 9% 14% 26% 3%
</TABLE>
*Annualized.
**Total return figures do not reflect the 1% transaction fee on purchases or
the annual account maintenance fee of $10.
***Unaudited.
+Commencement of Operations.
<TABLE>
<CAPTION>
TOTAL STOCK
MARKET PORTFOLIO*** GROWTH PORTFOLIO** VALUE PORTFOLIO**
-------------------------------- ------------------------------- --------------------------------
SIX MONTHS YEAR MARCH 16+, SIX MONTHS YEAR NOV. 2, SIX MONTHS YEAR NOV. 2,
ENDED ENDED 1992, TO ENDED ENDED 1992, TO ENDED ENDED 1992, TO
JUNE 30, DEC. 31, DEC. 31, JUNE 30, DEC. 31, DEC. 31, JUNE 30, DEC. 31, DEC. 31,
1994++ 1993 1992 1994++ 1993 1992 1994++ 1993 1992
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE,
BEGINNING OF
PERIOD.............. $11.69 $10.84 $10.00 $10.20 $10.26 $10.00 $11.74 $10.30 $10.00
------- ------ ------- ------- ------- ------- -------- ------- -------
INVESTMENT OPERATIONS
Net Investment
Income............ .13 .26 .23 .11 .21 .06 .18 .38 .07
Net Realized and
Unrealized Gain
(Loss)
on Investments.... (.66) .88 .84 (.57) (.06) .26 (.45) 1.50 .30
------- ------ ------- ------- ------ ------ ------- ------ ------
TOTAL FROM
INVESTMENT
OPERATIONS...... (.53) 1.14 1.07 (.46) .15 .32 (.27) 1.88 .37
- ----------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net
Investment
Income............ (.12) (.26) (.23) (.10) (.21) (.06) (.14) (.38) (.07)
Distributions from
Realized Capital
Gains............. -- (.03) -- -- -- -- (.11) (.06) --
------- ------ ------- ------- ------ ------ ------- ------ ------
TOTAL
DISTRIBUTIONS... (.12) (.29) (.23) (.10) (.21) (.06) (.25) (.44) (.07)
- ----------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END
OF PERIOD........... $11.04 $11.69 $10.84 $9.64 $10.20 $10.26 $11.22 $11.74 $10.30
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN......... (4.58)% 10.62% 10.41% (4.54)% 1.53% 3.19% (2.38)% 18.35% 3.70%
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL
DATA
Net Assets, End of
Period (Millions)... $639 $512 $275 $57 $51 $21 $290 $190 $24
Ratio of Expenses to
Average Net
Assets.............. .20%* .20% .21%* .20%* .20% 0%* .20%* .20% 0%*
Ratio of Net
Investment Income to
Average
Net Assets.......... 2.31%* 2.31% 2.42%* 2.22%* 2.10% 2.85%* 3.21%* 3.26% 3.46%*
Portfolio Turnover
Rate................ 3%* 1% 3% 33%* 36% 2% 32%* 30% 4%
</TABLE>
* Annualized.
** Total return figures do not reflect the annual account maintenance fee of
$10 or applicable portfolio transaction fees.
*** Total return figures do not reflect the .25% transaction fee on purchases
or the annual account maintenance fee of $10.
Subscription period for the Portfolio was from March 16, 1992, to
April 26, 1992, during which time all assets were held in money market
instruments. Performance measurement begins on April 27, 1992.
+ Commencement of operations.
++ Unaudited.
10
<PAGE> 15
<TABLE>
<CAPTION>
SMALL CAPITALIZATION STOCK PORTFOLIO(1)
- -------------------------------------------------------------------------------------------------------------------------------
OCT. 1,
FEB. 1 TO 1993 TO YEAR ENDED SEPTEMBER 30,
JUNE 30, JAN. 31, -----------------------------------------------------------------------------------------
1994** 1994** 1993 1992 1991 1990(2) 1989+ 1988 1987 1986 1985 1984
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------------
NET
ASSET
VALUE,
BEGINNING
OF
PERIOD... $16.24 $16.23 $12.63 $12.03 $8.55 $11.88 $11.96 $15.73 $13.24 $11.68 $13.15 $19.77
------ ------ ------ ------ ----- ------ ------ ------ ------ ------ ------ ------
INVESTMENT
OPERATIONS
Net
Investment
Income
(Loss)... .08 .05 .20 .19 .20 .17 .10 .03 (.04) (.01) (.04) .14
Net
Realized
and
Unrealized
Gain
(Loss)
on
Investments.. (1.48) .96 3.73 .88 3.60 (3.46) 2.13 (2.59) 4.42 1.57 (.51) (4.25)
------ ------ ----- ----- ----- ------ ----- ----- ----- ----- ----- -----
TOTAL
FROM
INVESTMENT
OPERATIONS.. (1.40) 1.01 3.93 1.07 3.80 (3.29) 2.23 (2.56) 4.38 1.56 (.55) (4.11)
- -------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends
from
Net
Investment
Income... -- (.18) (.18) (.18) (.18) (.04) (.14) -- -- -- (.15) --
Distributions
from
Realized
Capital
Gains... -- (.82) (.15) (.29) (.14) -- (2.17) (1.21) (1.89) -- (.77) (2.51)
------- ------ ----- ----- ----- ------ ----- ----- ----- ----- ----- ------
TOTAL
DISTRIBUTIONS... -- (1.00) (.33) (.47) (.32) (.04) (2.31) (1.21) (1.89) -- (.92) (2.51)
- -------------------------------------------------------------------------------------------------------------------------------
NET
ASSET
VALUE,
END
OF
PERIOD... $14.84 $16.24 $16.23 $12.63 $12.03 $8.55 $11.88 $11.96 $15.73 $13.24 $11.68 $13.15
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL
RETURN++... (8.62)% 6.65% 31.60% 9.34% 45.91% (27.73)% 18.83% (14.30)% 38.02% 13.33% (3.67)% (22.89)%
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL
DATA
Net
Assets,
End of
Period
(Millions)... $536 $533 $432 $202 $111 $40 $20 $27 $35 $31 $32 $37
Ratio
of
Expenses
to
Average
Net
Assets... .18%* .18%* .18% .18% .21% .31% 1.00% .95% .92% .92% 1.00% 1.05%
Ratio
of
Net
Investment
Income
(Loss)
to
Average
Net
Assets... 1.29%* 1.16%* 1.47% 1.65% 2.11% 1.91% .65% .24% (.25)% (.06)% (.28)% 1.11%
Portfolio
Turnover
Rate... 48%* 5%* 26% 26% 33% 40% 160% 68% 92% 92% 103% 100%
</TABLE>
* Annualized.
** Unaudited.
(1) Results prior to January 31, 1994, are for the former Vanguard Small
Capitalization Stock Fund.
(2) Adjusted to reflect a 3-for-1 stock split as of February 3, 1990.
+ Prior to September 11, 1989, Schroder Capital Management International
provided investment advisory services to the Fund.
Effective September 11, 1989, The Vanguard Group, Inc. began providing
investment advisory services to the Fund on an at-cost basis.
++ Total return figures do not reflect the annual account maintenance fees of
$10 or applicable portfolio transaction fees.
11
<PAGE> 16
<TABLE>
<CAPTION>
EMERGING
MARKETS EUROPEAN PORTFOLIO(1) PACIFIC PORTFOLIO(1)
PORTFOLIO ------------------------------------------------- ---------------------------------------------------
------- SIX MONTHS YEAR ENDED SIX MONTHS YEAR ENDED
MAY 4+ TO ENDED DECEMBER 31, MAY 1+ TO ENDED DECEMBER 31, MAY 1+ TO
JUNE 30, JUNE 30, ---------------------- DEC. 31, JUNE 30, ----------------------- DEC. 31,
1994*** 1994*** 1993 1992 1991 1990 1994*** 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------------
NET ASSET
VALUE,
BEGINNING OF
PERIOD........ $10.00 $11.88 $9.33 $9.92 $9.06 $10.00 $10.13 $7.56 $9.42 $8.56 $10.00
----- ------- ----- ---- ---- ------ ------- ----- ----- ---- ------
INVESTMENT
OPERATIONS
Net Investment
Income...... .03 .16 .17 .25 .26 .16 .04 .06 .05 .05 .05
Net Realized
and
Unrealized
Gain (Loss)
on
Investments... .54 (.47) 2.55 (.58) .86 (.94) 1.91 2.62 (1.76) .86 (1.44)
----- ------- ----- ---- ---- ------ ------- ----- ----- ---- ------
TOTAL FROM
INVESTMENT
OPERATIONS.. .57 (.31) 2.72 (.33) 1.12 (.78) 1.95 2.68 (1.71) .91 (1.39)
- --------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from
Net
Investment
Income...... -- (.03) (.17) (.26) (.26) (.16) -- (.06) (.05) (.05) (.05)
Distributions
from
Realized
Capital
Gains....... -- -- -- -- -- -- -- (.05) (.10) -- --
----- ------- ----- ---- ---- ------ ------- ----- ----- ---- ------
TOTAL
DISTRIBUTIONS... -- (.03) (.17) (.26) (.26) (.16) -- (.11) (.15) (.05) (.05)
- --------------------------------------------------------------------------------------------------------------------------------
NET ASSET
VALUE, END OF
PERIOD........ $10.57 $11.54 $11.88 $9.33 $9.92 $9.06 $12.08 $10.13 $7.56 $9.42 $8.56
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN... 5.70%(2) (2.61)% 29.13% (3.32)% 12.40% (7.23)% 19.25% 35.46% (18.17)% 10.65% (14.01)%
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL
DATA
Net Assets, End
of Period
(Millions).... $20 $668 $601 $256 $161 $96 $693 $493 $207 $84 $31
Ratio of
Expenses to
Average Net
Assets........ -- .32%* .32% .32% .33% .40%* .32%* .32% .32% .32% .35%*
Ratio of Net
Investment
Income to
Average Net
Assets........ 2.94%* 3.15%* 2.05% 3.05% 3.06% 3.68%* .80%* .75% .92% .70% 1.02%*
Portfolio
Turnover
Rate.......... 0% 5%* 4% 1% 15%** 3% 3%* 7% 3% 21%** 2%
</TABLE>
* Annualized.
** Portfolio turnover rates for 1991 excluding in-kind redemptions were 3%
for the European Portfolio and 1% for the Pacific Portfolio.
*** Unaudited.
+ Commencement of operations.
(1) Total return figures do not reflect the 1% transaction fee on purchases
or the annual account maintenance fee of $10.
Subscription period for Portfolio was May 1, 1990, to June 17, 1990,
during which time all assets were held in money market instruments.
Performance measurement begins on June 18, 1990.
(2) Total return does not reflect the 2% transaction fee on purchases, the 1%
transaction fee on redemptions, or the annual account maintenance fee of
$10.
12
<PAGE> 17
<TABLE>
<CAPTION>
TOTAL BOND MARKET PORTFOLIO
SIX MONTHS --------------------------------------------------------------------------------------
ENDED YEAR ENDED DECEMBER 31,
JUNE 30, ------------------------------------------------------------------ DEC. 9,+
1994** 1993 1992 1991 1990 1989 1988 1987 TO 31, 1986
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF
PERIOD.......................... $10.06 $9.88 $9.99 $9.41 $9.44 $9.05 $9.20 $9.94 $10.00
------ ------ ----- ----- ----- ----- ----- ----- -----------
INVESTMENT OPERATIONS
Net Investment Income........... .302 .638 .699 .766 .796 .797 .807 .834 .028
Net Realized and Unrealized Gain
(Loss) on Investments......... (.668) .300 (.018) .605 (.030) .390 (.150) (.740) (.060)
------ ------ ----- ----- ----- ----- ----- ----- -----------
TOTAL FROM INVESTMENT
OPERATIONS............... (.366) .938 .681 1.371 .766 1.187 .657 .094 (.032)
- ----------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net
Investment Income............. (.302) (.638) (.699) (.766) (.796) (.797) (.807) (.834) (.028)
Distributions from Realized
Capital
Gains......................... (.002) (.120) (.092) (.025) -- -- -- -- --
------- ------ ----- ----- ----- ----- ----- ----- ---------
TOTAL DISTRIBUTIONS....... (.304) (.758) (.791) (.791) (.796) (.797) (.807) (.834) (.028)
- ----------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD... $9.39 $10.06 $9.88 $9.99 $9.41 $9.44 $9.05 $9.20 $9.94
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN(1).................. (3.69)% 9.68% 7.14% 15.25% 8.65% 13.65% 7.35% 1.14% (0.21)%
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period
(Millions)...................... $1,745 $1,540 $1,066 $849 $277 $139 $58 $43 $3
Ratio of Expenses to Average Net
Assets.......................... .18%* .18% .20% .16% .21% .24% .30% .14% 0%
Ratio of Net Investment Income to
Average Net Assets.............. 6.28%* 6.24% 7.06% 7.95% 8.60% 8.49% 8.84% 9.01% 6.82%*
Portfolio Turnover Rate.......... 50%*++ 50% 49% 31% 29% 33% 21% 77% 0%
</TABLE>
* Annualized.
** Unaudited.
(1) Total return figures do not reflect the annual account maintenance fee of
$10.
+ Commencement of operations.
++ Portfolio turnover rate excluding in-kind redemptions was 39%.
<TABLE>
<CAPTION>
SHORT-TERM INTERMEDIATE-TERM LONG-TERM
BOND PORTFOLIO BOND PORTFOLIO BOND PORTFOLIO
-------------------------------------------------------
JANUARY 18 TO JANUARY 18 TO JANUARY 18 TO
JUNE 30, 1994** JUNE 30, 1994** JUNE 30, 1994**
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD............... $10.00 $ 10.00 $10.00
------------ ------------ ------------
INVESTMENT OPERATIONS
Net Investment Income............................ .196 .213 .240
Net Realized and Unrealized Gain (Loss) on
Investments.................................... (.270) (.540) (.790)
----------- ----------- -----------
TOTAL FROM INVESTMENT OPERATIONS........... .074 (.327) (.550)
- ------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income............. (.196) (.213) (.240)
Distributions from Realized Capital Gains........ -- -- --
----------- ----------- -----------
TOTAL DISTRIBUTIONS........................ (.196) (.213) (.240)
- ------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD..................... $9.73 $9.46 $9.21
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
TOTAL RETURN(1).................................... (.95)% (3.36)% (5.61)%
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions)............... $59 $52 $5
Ratio of Expenses to Average Net Assets............ .18%* .18%* --
Ratio of Net Investment Income to Average Net
Assets........................................... 5.38%* 6.43%* 7.42%*
Portfolio Turnover Rate............................ 109%* 117% 164%*
</TABLE>
*Annualized.
**Unaudited.
(1)Total return reflects the period beginning March 1, 1994, the date on which
investment operations commenced. Returns do not reflect the annual account
maintenance fee of $10.
13
<PAGE> 18
<TABLE>
<CAPTION>
VANGUARD BALANCED
INDEX FUND
----------------------------
YEAR ENDED SEPT. 28, TO
SIX MONTHS ENDED DECEMBER 31, DEC. 31,
JUNE 30, 1994*** 1993 1992
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD....................... $10.91 $10.31 $10.00
------------ ---------- ----------
INVESTMENT OPERATIONS
Net Investment Income.................................... .19 .39 .08
Net Realized and Unrealized Gain (Loss) on Investments... (.67) .63 .31
----------- --------- ---------
TOTAL FROM INVESTMENT OPERATIONS................... (.48) 1.02 .39
- ------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income..................... (.16) (.39) (.08)
Distributions from Realized Capital Gains................ -- (.03) --
----------- --------- ---------
TOTAL DISTRIBUTIONS................................ (.16) (.42) (.08)
- ------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD............................. $10.27 $10.91 $10.31
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
TOTAL RETURN**............................................. (4.44)% 10.00% 3.69%
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions)....................... $382 $367 $109
Ratio of Expenses to Average Net Assets.................... .20%* .20% .22%*
Ratio of Net Investment Income to Average Net Assets....... 3.67%* 3.53% 3.76%*
Portfolio Turnover Rate.................................... 18%* 25% 17%
</TABLE>
*Annualized.
**Total return figures do not reflect the annual account maintenance fee of
$10. Subscription period for portfolio was from September 28, 1992, to
November 8, 1992, during which time all assets were held in
money market instruments. Performance measurement begins on November 9, 1992.
***Unaudited.
- --------------------------------------------------------------------------------
YIELD AND TOTAL
RETURN From time-to-time a Portfolio of the Vanguard Index
Funds may advertise its yield and total return. Both
yield and total return figures are based on historical
earnings and are not intended to indicate future
performance. The "total return" of a Portfolio refers to
the average annual compounded rates of return over one-,
five- and ten-year periods or for the life of the
Portfolio (as stated in the advertisement) that would
equate an initial amount invested at the beginning of a
stated period to the ending redeemable value of the
investment, assuming the reinvestment of all dividend
and capital gains distributions.
In accordance with industry guidelines set forth by the
U.S. Securities and Exchange Commission, the "30-day
yield" of a Portfolio is calculated by dividing the net
investment income per share earned during a 30-day
period by the net asset value per share on the last day
of the period. Net investment income includes interest
and dividend income earned on a Portfolio's securities;
it is net of all expenses and all recurring and
nonrecurring charges that have been applied to all
shareholder accounts. The yield calculation assumes that
net investment income earned over 30 days is compounded
monthly for six months and then annualized. Methods used
to calculate advertised yields are standardized for all
stock and bond mutual funds. However, these methods
differ from the accounting methods used by a Portfolio
to maintain its books and records, and so the advertised
30-day yield may not fully reflect the income paid to
your own account or the yield reported in a Portfolio's
reports to shareholders.
- --------------------------------------------------------------------------------
14
<PAGE> 19
INVESTMENT
OBJECTIVES
Vanguard Bond Index Fund, Vanguard Balanced Index Fund,
Vanguard Index Trust and Vanguard International Equity
Index Fund are each open-end diversified investment
companies designed as "index" funds.
- --------------------------------------------------------------------------------
BOND INDEX FUND
EACH PORTFOLIO SEEKS
TO MATCH THE
INVESTMENT
PERFORMANCE OF A
PARTICULAR INVESTMENT
GRADE BOND INDEX. The Fund consists of four Portfolios, each of which
seeks to match the investment results of a particular
investment grade bond index through the use of index
sampling techniques. The Total Bond Market Portfolio
seeks to replicate the performance of a broad market
weighted bond index, while the Short-Term Bond,
Intermediate-Term Bond and Long-Term Bond Portfolios
attempt to replicate the performance of market weighted
bond indexes with prescribed maturity standards. There
is no assurance that any of the Fund's Portfolios will
achieve its stated objective.
- --------------------------------------------------------------------------------
BALANCED INDEX
FUND
THE FUND SEEKS
TO TRACK THE
WILSHIRE 5000 AND THE
LEHMAN BROTHERS The objective of the Fund is to replicate, with respect
INDEX to 60% of its assets, the investment performance of the
Wilshire 5000 and, with respect to 40% of its assets,
the investment performance of the Lehman Brothers Index.
There is no assurance that the Fund will achieve its
stated objective.
The Wilshire 5000 consists of all U.S. common stocks
that trade on a regular basis on the New York and
American Stock Exchanges and in the NASDAQ
over-the-counter market. The Lehman Brothers Index
measures the total return (capital change plus income)
provided by a universe of fixed income securities,
weighted by market value. The securities included in the
index generally have an outstanding market value of at
least $25 million, are of investment grade quality and
are readily available in the marketplace.
- --------------------------------------------------------------------------------
INDEX TRUST
EACH PORTFOLIO SEEKS
TO MATCH THE
INVESTMENT
PERFORMANCE OF A
PARTICULAR STOCK The Trust consists of six Portfolios, each of which
MARKET INDEX seeks to provide investment results that correspond to a
particular stock market index. The correlation between
the performance of each of the Trust's Portfolio's and
the respective index that each Portfolio attempts to
match is expected to be at least 0.95. The 500, Extended
Market, Total Stock Market and Small Capitalization
Stock Portfolios attempt to replicate the investment
performance of broad market indexes, while the Value and
Growth Portfolios attempt to replicate indexes which
possess certain "value" and "growth" investment
characteristics.
- The 500 PORTFOLIO seeks to replicate the aggregate
price and yield performance of the Standard & Poor's
500 Composite Stock Price Index (the "S&P 500 Index"),
an index which emphasizes large-capitalization
companies.
- The EXTENDED MARKET PORTFOLIO seeks to replicate the
aggregate price and yield performance of the Wilshire
4500 Index, an index which consists of more than 5,000
medium- and small-capitalization companies that are
not included in the S&P 500 Index.
- The TOTAL STOCK MARKET PORTFOLIO seeks to replicate
the aggregate price and yield performance of the
Wilshire 5000 Index, an index
15
<PAGE> 20
which consists of all U.S. stocks that trade on a
regular basis on either the New York or American Stock
Exchange or the NASDAQ over-the-counter market. These
stocks include the large-capitalization companies of
the S&P 500 Index, with the exception of Royal Dutch
and Unilever, N.V., which trade on the New York Stock
Exchange as ADR's, as well as the medium- and
small-capitalization companies of the Wilshire 4500
Index.
- The SMALL CAPITALIZATION STOCK PORTFOLIO seeks to
replicate the aggregate price and yield performance of
the Russell 2000 Small Stock Index (the "Russell
2000"), a broadly diversified small-capitalization
stock index consisting of approximately 2,000 common
stocks.
- The VALUE PORTFOLIO seeks to replicate the aggregate
price and yield performance of the S&P/BARRA Value
Index, an index which includes stocks in the S&P 500
Index with lower than average ratios of market price
to book value. These types of stocks are often
referred to as "value" stocks.
- The GROWTH PORTFOLIO seeks to replicate the aggregate
price AND yield performance of the S&P/BARRA Growth
Index, an index which includes stocks in the S&P 500
Index with higher than average ratios of market price
to book value. These types of stocks are often
referred to as "growth" stocks.
There is no assurance that the Portfolios will achieve
their stated objectives.
- --------------------------------------------------------------------------------
INTERNATIONAL
EQUITY INDEX FUND
EACH PORTFOLIO SEEKS
TO MATCH THE
INVESTMENT
PERFORMANCE OF ITS The Fund consists of three Portfolios, each of which
RESPECTIVE INDEX seeks to match the investment results of a Morgan
Stanley Capital International Index. The European
Portfolio seeks to replicate the aggregate price and
yield performance of the Morgan Stanley Capital
International-Europe (Free) Index ("MSCI-Europe
(Free)"), a diversified, capitalization weighted index
comprised of companies located in fourteen European
countries. The Pacific Portfolio seeks to replicate the
aggregate price and yield performance of the Morgan
Stanley Capital International-Pacific Index
("MSCI-Pacific"), a diversified, capitalization weighted
index consisting of companies located in Australia,
Japan, Hong Kong, New Zealand, Singapore and Malaysia.
There is no assurance that either Portfolio will achieve
its stated objective.
By holding both the European and Pacific Portfolios in
appropriate proportions, an investor may create an
aggregate portfolio designed to approximate the total
return (income plus capital change) of the Morgan
Stanley Capital International-Europe, Australia and Far
East (Free) Index ("EAFE Free"), a broadly diversified
international index consisting of more than 1,000 equity
securities of companies located outside of the United
States. As of December, 31, 1993, the MSCI-Pacific Index
represented approximately 52% of the market
capitalization of EAFE (Free), while the MSCI-Europe
(Free) Index represented the remaining 48%.
16
<PAGE> 21
The Emerging Markets Portfolio seeks, with respect to
95% of assets, to provide investment results that
parallel the Morgan Stanley Capital International
("MSCI")-Select Emerging Markets Free Index ("Index").
The MSCI-Select Emerging Markets Free Index is a
diversified index consisting of common stocks located in
12 countries. This Index provides broader
diversification and more liquidity than other
"published" indexes and also takes into consideration
the trading capabilities of foreigners in emerging stock
market countries.
The Fund is neither sponsored by nor affiliated with
Morgan Stanley Capital International.
The investment objectives of each Portfolio of Vanguard
Bond Index Fund and Vanguard Index Trust are fundamental
and so cannot be changed without the approval of a
majority of a Portfolio's shareholders.
The investment objectives of Vanguard Balanced Index
Fund and each Portfolio of Vanguard International Equity
Index Fund are not fundamental and may be changed by the
Board of Directors without shareholder approval.
However, shareholders would be notified prior to a
material change.
- --------------------------------------------------------------------------------
INVESTMENT
POLICIES
EACH FUND USES
A "PASSIVE" The Funds are not managed according to traditional
INVESTMENT APPROACH methods of "active" investment management, which involve
the buying and selling of securities based upon
economic, financial and market analysis and investment
judgment. Instead, the Funds, utilizing a "passive" or
indexing investment approach, attempt to approximate the
investment performance of their respective indexes
through statistical procedures. The Funds are managed
without regard to tax ramifications.
The investment policies of the Funds are not fundamental
and so may be changed by the Board of Directors without
shareholder approval. However, shareholders would be
notified prior to a material change.
- --------------------------------------------------------------------------------
BOND INDEX FUND
EACH PORTFOLIO INVESTS
IN FIXED INCOME Each Portfolio will invest in a group of fixed income
SECURITIES securities selected from its respective index which,
when taken together, are expected to perform similarly
to the index as a whole. This sampling technique is
expected to enable each Portfolio to track the dividend
income and price movements of its respective index,
while minimizing brokerage, custodial and accounting
costs.
The TOTAL BOND MARKET PORTFOLIO will invest in a
portfolio of fixed income securities selected to match
the Lehman Brothers Aggregate Bond Index (the "Aggregate
Bond Index"). The Aggregate Bond Index is a broad market
weighted index which encompasses three major classes of
investment grade fixed income securities in the United
States: U.S. Treasury and agency securities, corporate
bonds, and mortgage-backed securities, with maturities
greater than one year.
The SHORT-TERM BOND PORTFOLIO will invest in a portfolio
of fixed income securities selected to match the Lehman
Brothers Mutual Fund Short
17
<PAGE> 22
(1-5) Government/Corporate Index (the "Short-Term
Index"). The Short-Term Index is a market weighted index
which encompasses two major classes of investment grade
fixed income securities: U.S. Treasury and agency
securities and corporate bonds, all with maturities
between 1 and 5 years.
The INTERMEDIATE-TERM BOND PORTFOLIO will invest in a
portfolio of fixed income securities selected to match
the Lehman Brothers Mutual Fund Intermediate (5-10)
Government/Corporate Index (the "Intermediate-Term
Index"). The Intermediate-Term Index is a market
weighted index which encompasses two major classes of
investment grade fixed income securities: U.S. Treasury
and agency securities and corporate bonds, all with
maturities between 5 and 10 years.
The LONG-TERM BOND PORTFOLIO will invest in a portfolio
of fixed income securities selected to match the Lehman
Brothers Mutual Fund Long (10+) Government/Corporate
Index (the "Long-Term Index"). The Long-Term Index is a
market weighted index which encompasses two major
classes of investment grade fixed income securities:
U.S. Treasury and agency securities and corporate bonds,
all with maturities greater than 10 years.
Each Portfolio will invest 80% or more of its assets in
securities included in its respective index. As of
December 31, 1993, the major classes of fixed income
securities represented the following proportions of the
respective indexes total market values:
<TABLE>
<CAPTION>
AGGREGATE SHORT-TERM INTERMEDIATE- LONG-TERM
BOND INDEX INDEX TERM INDEX INDEX
<S> <C> <C> <C> <C>
--------------------------------------------------------------------------
U.S. Treasury and
agency securities 53% 88% 63% 68%
Corporate bonds 19% 12% 37% 32%
Mortgage-backed
securities 28% 0% 0% 0%
Dollar-weighted
Average Maturity
(Years) 8.9 yrs 2.9 yrs 7.5 yrs 23.4 yrs
</TABLE>
The Portfolios of the Fund may, from time to time,
substitute one type of investment grade bond for
another. For instance, a Portfolio may hold more
short-term corporate bonds (fewer short U.S. Treasury
bonds) than represented in the Index so as to increase
income. This corporate substitution strategy will entail
the assumption of additional credit risk; however,
substantial diversification within the corporate sector
should moderate issue-specific credit risk. In addition,
current investment policy restricts corporate
substitutions to issues with less than 4 years remaining
to maturity and in aggregate no more than 15% of net
assets. Overall, credit risk is expected to be very low
for each of the Portfolios.
Fixed Income Securities will be primarily of investment
grade quality-- i.e., those rated at least Baa3 by
Moody's Investors Service, Inc. or BBB- by Standard &
Poor's Corporation. Securities rated Baa or BBB are
considered as medium grade obligations. Interest
payments and princi-
18
<PAGE> 23
pal are regarded as adequate for the present but certain
protective elements found in higher rated bonds may be
lacking. Such bonds lack outstanding investment
characteristics and, in fact, have speculative
characteristics as well.
In its efforts to duplicate the investment performance
of the Index, each Portfolio will invest in fixed income
securities in accordance with its relative proportion of
the Index's total market value. For the Total Bond
Market Portfolio, these investments will include U.S.
Treasury and agency securities, mortgage-backed
securities and corporate debt. For the Short-Term Bond,
Intermediate-Term Bond and Long-Term Bond Portfolios,
these investments include U.S. Treasury and agency
securities and corporate debt. The Portfolios may invest
in U.S. Treasury bills, notes and bonds and other "full
faith and credit" obligations of the U.S. Government.
The Portfolios may also invest in U.S. Government agency
securities, which are debt obligations issued or
guaranteed by agencies or instrumentalities of the U.S.
Government. Such "agency" securities may not be backed
by the "full faith and credit" of the U.S. Government.
Such U.S. Government agencies may include the Federal
Farm Credit Banks, the Resolution Trust Corporation and
in the case of the Total Bond Market Portfolio, the
Government National Mortgage Association. Even though
they all carry top (AAA) credit ratings, "agency"
obligations are not explicitly guaranteed by the U.S.
Government and so are perceived as somewhat riskier than
comparable Treasury bonds.
Each Portfolio may also invest up to 20% of its assets
in short-term money market instruments, and may invest
in bond (interest rate) futures contracts and options to
a limited extent. Such securities will be held only to
invest uncommitted cash balances, to maintain liquidity
to meet shareholder redemptions, or to minimize trading
costs. The Portfolios will not invest in such securities
as part of a temporary defensive strategy (such as
altering the aggregate maturity of a Portfolio) to
protect the Fund against potential bond market declines.
Each Portfolio intends to remain fully invested, to the
extent practicable, in a pool of securities which will
duplicate the investment characteristics of the
respective index. See "Implementation of Policies" for a
description of other investment practices of the Fund.
- --------------------------------------------------------------------------------
BALANCED INDEX
FUND
THE FUND INVESTS IN Under normal circumstances, the Fund will invest 60% of
STOCKS AND BONDS its net assets in a portfolio of common stocks selected
to track the Wilshire 5000 and 40% of its net assets in
a portfolio of investment-grade bonds designed to track
the Lehman Brothers Index. The Fund may also invest in
certain short-term fixed income securities as cash
reserves, although cash and cash equivalents are
normally expected to represent less than 1% of the
Fund's assets.
The Fund's common stock portfolio is designed to have
investment characteristics that parallel those of the
Wilshire 5000. The Fund is expected to invest in
approximately 500 of the largest securities in the
Wilshire 5000 as measured by market capitalization and a
representa-
19
<PAGE> 24
tive sample of the remainder. Typically, the Fund will
hold between 950 and 1,050 stocks, which are selected
primarily on the basis of market capitalization and
industry weightings.
The Fund's bond portfolio is designed to have investment
characteristics that parallel those of the Lehman
Brothers Index. The Fund will invest in a representative
sample of fixed income securities in the Lehman Brothers
Index, which, taken together, are expected to perform
similarly to the Index.
The Fund may also invest up to 30% of its assets in
stock or bond futures contracts and options in order to
invest uncommitted cash balances, to maintain liquidity
to meet shareholder redemptions, or to minimize trading
costs. The Fund will not invest in futures contracts,
options, or cash reserves as part of a temporary
defensive strategy, such as lowering the Fund's
investment allocation in common stocks to protect
against potential stock market declines. The Fund
intends to remain fully invested, to the extent
practicable, in a pool of securities which will
duplicate the investment characteristics of the Wilshire
5000 and Lehman Brothers Indexes. See "Implementation of
Policies" for a description of these and other
investment practices of the Fund.
- --------------------------------------------------------------------------------
INDEX TRUST
ALL SIX PORTFOLIOS
INVEST IN The 500, Value, and Growth Portfolios each invest in all
COMMON STOCKS the stocks included in each of their respective indexes
in approximately the same proportion as they are
represented in the index. The Extended Market, Total
Stock Market, and Small Capitalization Stock Portfolios
invest in statistically selected samples of the stocks
included in each of their respective indexes. This
sampling technique is expected to enable each portfolio
to track the price movements of its respective index,
while minimizing the brokerage, custodial, and
accounting costs.
The 500 PORTFOLIO invests in all 500 stocks in the S&P
500 Index in approximately the same proportions as they
are represented in the Index.
The EXTENDED MARKET PORTFOLIO invests in a statistically
selected sample of the more than 5,000 stocks included
in the Wilshire 4500 Index. Typically, the Portfolio
invests in 1,400 to 1,700 stocks. Stocks are selected
for inclusion in the Portfolio based primarily on market
capitalization and industry weightings. The Portfolio is
constructed to have aggregate investment characteristics
similar to those of the Wilshire 4500 Index.
The TOTAL STOCK MARKET PORTFOLIO invests in a
statistically selected sample of the more than 6,000
stocks included in the Wilshire 5000 Index. Typically,
the Portfolio invests in approximately 1,700 stocks.
Stocks are selected for inclusion in the Portfolio based
primarily on market capitalization and industry
weightings. The Portfolio is constructed to have
aggregate investment characteristics similar to those of
the Wilshire 5000 Index.
The SMALL CAPITALIZATION STOCK PORTFOLIO invests in a
statistically selected sample of the approximately 2,000
stocks included in the
20
<PAGE> 25
Russell 2000 Index. Typically, the Portfolio invests in
approximately 1,000 stocks. Stocks are selected for
inclusion in the Portfolio based on their contribution
to the Portfolio's market capitalization, industry
weightings and other fundamental characteristics such as
price-earnings ratios, dividend yields, price-to-book
ratios and financial leverage. The stocks held by the
Portfolio are weighted to make the Portfolio's aggregate
investment characteristics similar to those of the
Russell 2000 Index as a whole.
The VALUE PORTFOLIO invests in all of the common stocks
included in the S&P/BARRA Value Index in approximately
the same proportions as they are represented in the
Index. As of December 31, 1993, the S&P/BARRA Value
Index included 310 of the stocks that make up the S&P
500 Index, and 50% of the total market value of the
Index.
The GROWTH PORTFOLIO invests in all of the common stocks
included in the S&P/BARRA Growth Index in approximately
the same proportions as they are represented in the
Index. As of December 31, 1993, the S&P/BARRA Growth
Index included 190 of the stocks that make up the S&P
500 Index, and 50% of the total market value of the
Index.
ALL SIX PORTFOLIOS
ATTEMPT TO REMAIN
FULLY INVESTED Each Portfolio attempts to remain fully invested in
common stocks. Under normal circumstances each Portfolio
will invest at least 95% of its assets in the common
stocks of its respective index and futures contracts and
options. Each Portfolio may invest in certain short-term
fixed income securities as cash reserves, although cash
or cash equivalents are normally expected to represent
less than 1% of each Portfolio's assets. Each Portfolio
may also invest up to 20% of its assets in stock futures
contracts and options in order to invest uncommitted
cash balances, to maintain liquidity to meet shareholder
redemptions, or to minimize trading costs. The
Portfolios will not invest in cash reserves, futures
contracts or options as part of a temporary defensive
strategy, such as lowering a Portfolio's investment in
common stocks to protect against potential stock market
declines. The Portfolios intend to remain fully
invested, to the extent practicable, in a pool of
securities which will duplicate the investment
characteristics of their respective indexes. See
"Implementation of Policies" for a description of these
and other investment practices of the Trust.
- --------------------------------------------------------------------------------
INTERNATIONAL
EQUITY INDEX FUND
EACH PORTFOLIO
INVESTS IN Each of the three Portfolios invest in statistically
INTERNATIONAL STOCKS selected samples of the stocks included in each of their
respective indexes. This sampling technique is expected
to enable each portfolio to track the price movements of
its respective index, while minimizing the brokerage,
custodial, and accounting costs.
The EUROPEAN PORTFOLIO invests in a statistically
selected sample of approximately 575 stocks included in
the MSCI-Europe (Free) Index, an index of equity
securities of companies located in fourteen European
countries. Three countries, the United Kingdom, Germany
and France, dominate MSCI-Europe (Free), with 38%, 14%,
and 14% of the market
21
<PAGE> 26
capitalization of the Index, respectively, as of
December 31, 1993. The 11 other countries are
individually much less significant to the Index and,
consequently, the Portfolio. The "Free" Index includes
only shares that U.S. investors are "free" to purchase.
Specifically, the Index excludes restricted shares in
Finland, Norway, Sweden and Switzerland.
The PACIFIC PORTFOLIO invests in a statistically
selected sample of the more than 425 stocks included in
the MSCI-Pacific Index, an index of equity securities of
Pacific Basin companies. The MSCI-Pacific Index is
dominated by the Japanese stock market, which
represented 75% of the market capitalization of the
Index as of December 31, 1993.
The European and Pacific Portfolios are each expected to
invest in approximately 250 stocks or more. Stocks are
selected for inclusion in each Portfolio based on
country, market capitalization, industry weightings, and
fundamental characteristics such as return variability,
earnings valuation, and yield. Each of the two
Portfolios is constructed to have aggregate investment
characteristics similar to those of its respective
index. In order to parallel the performance of its
respective index, each Portfolio will invest in each
country in approximately the same percentage as the
country's weight in the index.
Each of the two Portfolio's policy is to remain fully
invested in common stocks. Under normal circumstances at
least 80% of the assets of each Portfolio will be
invested in stocks that are represented in its
respective index. Each Portfolio may invest in certain
short-term fixed income securities such as cash
reserves, although cash or cash equivalents are normally
expected to represent less than 1% of each Portfolio's
assets. Each Portfolio may also invest up to 50% of its
assets in stock futures contracts, options, and warrants
in order to invest uncommitted cash balances, maintain
liquidity to meet shareholder redemptions, or minimize
trading costs.
The European and Pacific Portfolios will not invest in
cash reserves, futures contracts, options or warrants as
part of a temporary defensive strategy, such as lowering
a Portfolio's investment in common stocks, to protect
against potential stock market declines. The Portfolios
intend to remain fully invested, to the extent
practicable, in a pool of securities which will
approximate the investment characteristics of their
respective indexes. The Portfolios may also enter into
forward foreign currency exchange contracts in order to
maintain the same currency exposure as their respective
indexes, but not as part of a defensive strategy to
protect against fluctuations in exchange rates.
The EMERGING MARKETS PORTFOLIO invests in a
statistically selected sample of approximately 300
stocks included in the MSCI-Select Emerging Markets Free
Index, an index of equity securities of companies
located in the countries of 12 emerging markets. Three
countries, Malaysia, Mexico and Hong Kong represent a
majority of the MSCI-Select Emerging Markets Free Index,
with 20%, 19% and 15% of the market capitalization of
the Index, respectively, as of December 31, 1993.
22
<PAGE> 27
The Index includes only shares that U.S. investors are
"free" or allowed by law, to purchase and sell and that
have sufficient trading liquidity.
The Portfolio is expected to invest in approximately 300
stocks. Stocks are selected for inclusion in the
Portfolio in order to form a statistically
representative sample corresponding to the MSCI-Select
Emerging Markets Free Index. The Portfolio is
constructed to have aggregate investment characteristics
(based on country, market capitalization and industry
weightings), fundamental characteristics (such as return
variability, earnings valuation and yield) and liquidity
measures, similar to those of its Index.
The Portfolio's policy is to remain 95% invested in
common stocks. The remaining 5% of the Portfolio will
be invested in cash reserves in order to maintain a
higher degree of portfolio liquidity to meet daily
redemption requests.
Under normal circumstances at least 80% of the assets of
the Portfolio will be invested in stocks that are
represented in the Index and futures contracts and
options thereon. The Portfolio may also invest up to 50%
of its assets in stock futures contracts, options,
warrants, convertible securities or swap agreements in
order to invest uncommitted cash balances, maintain
liquidity to meet shareholder redemptions, or minimize
trading costs.
See "Implementation of Policies" for a description of
these and other investment practices of the Portfolios.
- --------------------------------------------------------------------------------
INVESTMENT
RISKS
EACH PORTFOLIO IS
SUBJECT TO MARKET RISK As mutual funds investing primarily in common stocks,
Vanguard Balanced Index Fund and the Portfolios of
Vanguard Index Trust and Vanguard International Equity
Index Fund are subject to market risk-- i.e., the
possibility that common stock prices will decline over
short or even extended periods. Both U.S. and foreign
stock markets tend to be cyclical, with periods when
stock prices generally rise and periods when prices
generally decline.
From 1926 to 1993, common stocks, as measured by the S&P
500 Index, have provided an annual total return (capital
appreciation plus dividend income), on average, of
+12.3%. Average return may not be useful for forecasting
future returns in any particular period, as stock
returns are quite volatile from year-to-year.
- --------------------------------------------------------------------------------
23
<PAGE> 28
INDEX TRUST
THE EXTENDED MARKET,
TOTAL STOCK MARKET
AND SMALL
CAPITALIZATION STOCK
PORTFOLIOS MAY EXHIBIT
GREATER VOLATILITY Historically, medium- and small-capitalization stocks
have been more volatile in price than the
larger-capitalization stocks included in the S&P 500
Index. Among the reasons for the greater price
volatility of these securities are the less certain
growth prospects of smaller firms, the lower degree of
liquidity in the markets for such stocks, and the
greater sensitivity of medium- and small-size companies
to changing economic conditions. Besides exhibiting
greater volatility, medium- and small-size company
stocks may, to a degree, fluctuate independently of
larger company stocks. Medium- and small-size company
stocks may decline in price as large company stocks
rise, or rise in price as large company stocks decline.
Medium- and small-size company stocks constitute the
investments of the Extended Market Portfolio while the
Small Capitalization Stock Portfolio is composed
primarily of small-size company stocks. Investors in
the Portfolios should therefore expect that the
Extended Market and Small Capitalization Stock
Portfolios will be more volatile than, and may
fluctuate independently of, the 500 Portfolio.
Similarly, medium- and small-size company stocks
constituted approximately 33% of the net assets of the
Total Stock Market Portfolio on December 31, 1993.
Investors in the Portfolio should therefore anticipate
somewhat greater price volatility in the Total Stock
Market Portfolio relative to the 500 Portfolio.
THE VALUE AND
GROWTH PORTFOLIOS
MAY FLUCTUATE
INDEPENDENTLY Stocks that emphasize particular investment
characteristics, such as "value" and "growth," may
fluctuate divergently from the broad market as
represented by the S&P 500 Index, and may also
demonstrate greater volatility over short or extended
periods relative to the broad market.
The S&P/BARRA Value Index maintains a lower
price-to-book ratio and historically has had a higher
yield than the S&P 500 Index, while the S&P/BARRA Growth
Index maintains a higher price-to-book and historically
has had a lower yield than the S&P 500 Index. Because of
these investment characteristics, the S&P/BARRA Value
Index has exhibited somewhat less short-term volatility
than the S&P 500 Index, while the S&P/BARRA Growth Index
has displayed somewhat greater short-term volatility
than the S&P 500 Index from 1975 through 1993. However,
as stated above, both Indexes may be more volatile than
the S&P 500 Index over short or extended periods. The
Indexes have been in existence since May, 1992.
Historical performance data was generated by BARRA by
constructing the S&P/BARRA Value and Growth Indexes from
actual S&P 500 Index holdings.
- --------------------------------------------------------------------------------
INTERNATIONAL
EQUITY INDEX FUND
INTERNATIONAL STOCKS
MAY EXHIBIT GREATER
VOLATILITY THAN
U.S. STOCKS Investments in foreign stock markets can be as volatile,
if not more volatile, than investments in U.S. markets.
Over the period from 1970 to 1993 the MSCI-Europe Index
has provided an annual total return, on average, of
+14.0%, and the MSCI-Pacific Index has provided an
annual total return, on average of +18.9%. By
comparison, the average annual total return of U.S.
stocks during this same period was +12.3% (as measured
by the Standard & Poor's 500
24
<PAGE> 29
Composite Stock Price Index). Note, however, that the
period from 1970 to 1993 was a very favorable one for
foreign stock market investing. The figures on total
return and stock market volatility are provided here
only as a guide to potential market risk, and may not be
useful for forecasting future returns in any particular
period.
THE JAPANESE STOCK
MARKET IS A MAJOR
COMPONENT OF THE
PACIFIC INDEX Investors should realize that Japanese securities
comprised 75% of the MSCI-Pacific Index as of December
31, 1993, and that therefore stocks of Japanese
companies will represent a correspondingly large
component of the Pacific Portfolio's investment assets.
Such a large investment in the Japanese stock market may
entail a higher degree of risk than with more
diversified international portfolios, especially
considering that by fundamental measures of corporate
valuation, such as its high price-earnings ratios and
low dividend yields, the Japanese market as a whole may
appear expensive relative to other world stock markets.
STOCKS FROM THREE
COUNTRIES DOMINATE
THE EUROPE (FREE)
INDEX Stocks from the United Kingdom, Germany and France
comprised 38%, 14% and 14% of the MSCI-Europe (Free)
Index, respectively, as of December 31, 1993. The
remaining 11 countries in the MSCI-Europe (Free) Index
have much less significant capitalization weightings in
the Index and will therefore have much less impact on
the total return of the Index and the European
Portfolio.
EMERGING MARKETS
MAY EXHIBIT GREATER
VOLATILITY THAN
DEVELOPED MARKETS Emerging markets, such as those invested in by the
Emerging Markets Portfolio, are associated with
substantial investment risks. These risks include market
volatility, investment illiquidity, currency risk,
political instability and unexpected changes in economic
policy including capital controls, expropriation, taxes
and hyper-inflation.
Investors should be aware that emerging markets can be
substantially more volatile than both U.S. and more
developed foreign markets. For example, from 1989-1993,
the average positive monthly return for the Wilshire
5000 Index, a broad measure of the U.S. equity market
was 3.3%. The average negative monthly return for the
Wilshire 5000 Index was -2.6%. In contrast, from
1989-1993, the average positive monthly return of the
Morgan Stanley Capital International Emerging Markets
Free Index, a widely quoted emerging market benchmark,
was 5.9%; while the average negative monthly return was
-4.8%.
INVESTMENT ILLIQUIDITY
RISK Volatility in emerging markets may be exacerbated by
illiquidity. Average daily trading volume in all of the
emerging markets combined is a small fraction of the
average daily volume of the U.S. market. Small trading
volumes may result in investors being forced to purchase
securities at substantially higher prices than the
current market, or sell securities at much lower prices
than the current market.
25
<PAGE> 30
INTERNATIONAL STOCKS
ALSO EXPOSE INVESTORS
TO CURRENCY AND OTHER
RISKS For U.S investors, the returns of foreign investments,
such as those held by the three Portfolios are
influenced by not only the returns on foreign common
stocks themselves, but also by the returns on the
currencies in which the stocks are denominated. Currency
risk is the risk that changes in foreign exchange rates
will affect, favorably or unfavorably, the value of
foreign securities held by a Portfolio. In a period when
the U.S. dollar generally rises against foreign
currencies, the returns on foreign stocks for a U.S.
investor will be diminished. By contrast, in a period
when the U.S. dollar generally declines, the returns on
foreign stocks will be enhanced. Currency risk in
emerging markets may be exacerbated by unexpected
exchange rate devaluations.
Other risks and considerations of international
investing include: differences in accounting, auditing
and financial reporting standards; generally higher
transaction costs on foreign portfolio transactions;
small trading volumes and generally lower liquidity of
foreign stock markets, which may result in greater price
volatility; foreign withholding taxes payable on a
Portfolio's foreign securities, which may reduce
dividend income payable to shareholders; the possibility
of expropriation or confiscatory taxation; adverse
change in investment or exchange control regulations;
difficulty in obtaining a judgement from a foreign
court; political instability which could affect U.S.
investment in foreign countries; and potential
restriction on the flow of international capital.
- --------------------------------------------------------------------------------
BOND INDEX FUND
THE PORTFOLIOS ARE
SUBJECT TO INTEREST
RATE RISK INTEREST RATE RISK is the potential for fluctuations in
bond prices due to changing interest rates. As a rule,
bond prices vary inversely with interest rates. If
interest rates rise, bond prices generally decline; if
interest rates fall, bond prices generally rise. In
addition, for a given change in interest rates,
longer-maturity bonds fluctuate more in price than
shorter-maturity bonds. To compensate investors for
these larger fluctuations, longer-maturity bonds usually
offer higher yields than shorter-maturity bonds, other
factors, including credit quality, being equal.
These basic principles of bond prices also apply to U.S.
Government securities. A security backed by the "full
faith and credit" of the U.S. Government is guaranteed
only as to its stated interest rate and face value at
maturity, not its current market price. Just like other
fixed income securities, government-guaranteed
securities will fluctuate in value when interest rates
change.
The TOTAL BOND MARKET and INTERMEDIATE-TERM BOND
PORTFOLIOS maintain an intermediate-term average
weighted maturity, and are therefore subject to a
moderate to high level of interest rate risk. Interest
rate risk for the SHORT-TERM BOND PORTFOLIO should be
modest. Because of the short-term average weighted
maturities, the Portfolio is expected to exhibit low to
moderate price fluctuations as interest rates change.
The LONG-TERM BOND PORTFOLIO is exposed to substantial
interest rate risk. The Portfolio is expected to have an
average maturity in excess of
26
<PAGE> 31
15 years which exposes it to high to very high price
fluctuations due to changing interest rates.
THE PORTFOLIOS ARE
SUBJECT TO INCOME RISK INCOME RISK is the potential for a decline in a
Portfolio's income due to falling market interest rates.
In relative terms, income risk will be higher for the
Fund's shorter-term Portfolios and lower for the Fund's
longer-term Portfolios.
THE LONG-TERM BOND
PORTFOLIO IS SUBJECT TO
CALL RISK An additional risk associated with long-term corporate
bonds is call risk. CALL RISK is the possibility that
corporate bonds held by the Portfolio will be repaid
prior to maturity. Call provisions, common in many
corporate bonds, allow bond issuers to redeem bonds
prior to maturity (at a specific price). When interest
rates are falling, bond issuers often exercise these
call provisions, paying off bonds that carry high stated
interest rates and often issuing new bonds at lower
rates. For the Portfolio, the result would be that bonds
with high interest rates are "called" and must be
replaced with lower-yielding instruments. In these
circumstances, the income of the Portfolio would
decline. Reflecting these additional credit and call
risks, the corporate portion of the portfolio will
generally offer higher yields than the government
portion.
THE TOTAL BOND
MARKET PORTFOLIO IS
SUBJECT TO
PREPAYMENT RISK As a mutual fund investing a portion of its assets in
mortgage-backed securities (see chart on page --), the
Total Bond Market Portfolio is subject to prepayment
risk to a limited extent. PREPAYMENT RISK is the
possibility that, during periods of declining interest
rates, the principal invested in high-yielding
mortgage-backed securities will be repaid earlier than
scheduled, and the Fund will be forced to reinvest the
unanticipated payments at generally lower interest
rates.
Prepayment risk has two important effects on the
Portfolio. First, when interest rates fall and principal
prepayments are reinvested at lower interest rates, the
income that the Portfolio derives from mortgage-backed
securities is reduced. Second, like other fixed income
securities, mortgage-backed securities generally decline
in price when interest rates rise. However, because of
prepayment risk, mortgage-backed securities (and thus in
part the share price of the Portfolio and the value of
the Index) will not enjoy as large a gain in market
value as ordinary bonds when interest rates fall. In
part to compensate for prepayment risk, mortgage-backed
securities generally offer higher yields than bonds of
comparable credit quality and maturity.
CREDIT RISK IS EXPECTED
TO BE LOW CREDIT RISK is the possibility that an issuer of
securities held by a Portfolio will be unable to make
payments of either interest or principal. The credit
risk of a Portfolio is a function of the credit quality
of its underlying securities.
The credit quality of each Portfolio is expected to be
very high, and thus credit risk should be low. As of
September 30, 1994, the average quality,
27
<PAGE> 32
as rated by Moody's Investors Service, Inc., of each
Portfolio's benchmark index was as follows:
<TABLE>
<S> <C>
Aggregate Bond Index.............................. --
Short-Term Bond Index............................. --
Intermediate-Term Bond Index...................... --
Long-Term Bond Index.............................. --
</TABLE>
To a limited extent, the Portfolios are also exposed to
event risk, the possibility that corporate fixed income
securities held by the Portfolios may suffer a
substantial decline in credit quality and market value
due to a corporate restructuring. Corporate
restructurings, such as mergers, leveraged buyouts,
takeovers or similar events, are often financed by a
significant expansion of corporate debt. As a result of
the added debt burden, the credit quality and market
value of a firm's existing debt securities may decline
significantly. While event risk may be high for certain
corporate securities held by the Portfolios, event risk
for each Portfolio in the aggregate should be low
because of each Portfolios diversified holdings and the
small percentage of the Portfolio assets invested in
corporate securities.
The corporate substitution strategy used by the Fund
(see discussion on page --) will increase credit risk
somewhat, as short-term investment grade corporate bonds
are substituted for U.S. Treasury bonds and notes;
however, owing to the diversified nature of the
Portfolios, and policies limiting the maturity and
maximum amount of substitutions, the overall credit and
event risk of the Portfolio is expected to be low.
- --------------------------------------------------------------------------------
WHO SHOULD
INVEST The Funds offer investors the advantage of a "passive"
approach to investing. These include low investment
costs, exceptional diversification among a wide range of
stocks and bonds, minimal portfolio turnover, and
relative predictability. Unlike other mutual funds,
which generally attempt to "beat" market averages with
often unpredictable results, the Portfolios of the Funds
seek to "match" the performance of their underlying
indexes and thus are expected to provide a highly
predictable return relative to these benchmarks.
However, shareholders should expect to be fully exposed
to the market risks inherent in investing in stocks and
bonds. As the prices of stocks and bonds may be
volatile, only investors able to tolerate short-term,
possibly substantial fluctuations in the value of their
investment, brought about by generally declining stock
or bond prices, should contemplate an investment in the
Funds.
Investors may wish to reduce the potential risk of
investing in a Portfolio by purchasing shares on a
regular, periodic basis (dollar-cost averaging) rather
than making an investment in one lump sum.
The Funds are intended to be a long-term investment
vehicle and not designed to provide investors with a
means of speculating on short-term market movements.
Investors who engage in excessive account activity
28
<PAGE> 33
generate additional costs which are borne by all
shareholders. In order to minimize such costs the Funds
have adopted the following policies. The Funds reserve
the right to reject any purchase request (including
exchange purchases from other Vanguard portfolios) that
is reasonably deemed to be disruptive to efficient
portfolio management, either because of the timing of
the investment or previous excessive trading by the
investor. Additionally, the Funds have adopted exchange
privilege limitations as described in the section
"Exchange Privilege Limitations." Finally, the Funds
reserve the right to suspend the offering of their
shares.
Investors should not consider an investment in any one
Fund a complete investment program, but should maintain
holdings of securities with different risk
characteristics -- including common stocks, bonds and
money market instruments.
- --------------------------------------------------------------------------------
BOND INDEX FUND
INVESTORS SEEKING TO
PARTICIPATE IN THE
"BOND MARKET" AS A
WHOLE OR ITS VARIOUS
MATURITY SEGMENTS The Portfolios are designed for individual and
institutional investors seeking well-diversified,
low-cost ways to participate in the U.S. fixed income
markets. The Portfolios will be essentially fully
invested at all times. Because the Total Bond Market
Portfolio will represent all major sectors of the
investment grade fixed income securities market, the
Portfolio is a suitable vehicle for those investors
seeking ownership in the "bond market" as a whole,
without regard to particular sectors. The Short-Term
Bond, Intermediate-Term Bond and Long-Term Bond
Portfolios are suitable vehicles for those investors
seeking ownership in specific maturity segments of the
"bond market." Each Portfolio concentrates on bonds of
various maturities as illustrated in the chart on page
--. Because of the risks associated with bond
investments, each Portfolio is intended to be a
long-term investment vehicle and is not designed to
provide investors with a means of speculating on
short-term bond market movements.
As with all longer-term, fixed income investments, the
share price of the Total Bond Market, Intermediate-Term
Bond and Long-Term Bond Portfolios will vary, with the
Long-Term Bond Portfolio expected to exhibit the
greatest volatility. Share price volatility should be
significantly less for the Short-Term Bond Portfolio.
Credit risk should be minimal for each Portfolio. The
investment risks are described on page --.
The Portfolios are also suitable for those investors
with common stock holdings who are seeking a
complementary fixed income investment to create a more
balanced asset mix. Because of potential share price
fluctuations, the Portfolios may be inappropriate for
investors who have short-term objectives or who require
stability of principal.
- --------------------------------------------------------------------------------
29
<PAGE> 34
BALANCED INDEX
FUND
INVESTORS SEEKING A
BALANCE BETWEEN
CURRENT INCOME AND
CAPITAL GROWTH The Fund is designed for conservative investors seeking
a long-term investment offering both current income and
the potential for capital growth. By balancing its
investments among common stocks and bonds, the Fund is
expected to provide lower investment risk and share
price volatility than a mutual fund which invests
exclusively in common stocks. The balanced investment
approach of the Fund tends to reduce exposure to stock
and bond market risks; it does not eliminate them. The
Fund is thus suitable for investors who wish to gain
exposure to the potential capital growth provided by the
stock market, while limiting investment risk. Such a
balanced investment program might be particularly well-
suited to long-term investment objectives such as
retirement savings.
- --------------------------------------------------------------------------------
INDEX TRUST
LONG-TERM INVESTORS
SEEKING A "PASSIVE"
APPROACH FOR INVESTING
IN COMMON STOCKS All six Portfolios of the Trust are designed for
long-term investors seeking the advantages of investing
in a diversified portfolio of common stocks.
Four Portfolios of the Trust provide a vehicle for
investing in a broad market index:
- The 500 PORTFOLIO is designed for investors seeking to
replicate the total return of the S&P 500 Index, an
index emphasizing large capitalization common stocks.
- The EXTENDED MARKET PORTFOLIO is designed for
investors seeking to replicate the total return of the
Wilshire 4500 Index, an index consisting of small and
medium capitalization companies.
- The TOTAL STOCK MARKET PORTFOLIO is designed for
investors seeking to replicate the total return of the
Wilshire 5000 Index, an index consisting of all U.S.
stocks that trade on a regular basis on either the New
York or American Stock Exchange or the NASDAQ
over-the-counter market. The Total Stock Market
Portfolio will therefore reflect the performance of
the entire U.S. stock market.
- The SMALL CAPITALIZATION STOCK PORTFOLIO is designed
for investors seeking to replicate the total return of
the Russell 2000 Small Stock Index, an index
consisting of approximately 2,000 small-capitalization
stocks.
Two Portfolios are designed for investors seeking to
emphasize certain investment characteristics while
continuing to utilize a "passive" investment approach:
- The VALUE PORTFOLIO is designed for investors seeking
to replicate the total return of the S&P/BARRA Value
Index, an index consisting of companies of the S&P 500
Index with lower than average market price to book
value ratios. Such a "value-oriented" Portfolio may be
appropriate for more conservative stock market
investors who are seeking higher dividend income and
somewhat below average stock market volatility.
- The GROWTH PORTFOLIO is designed for investors seeking
to replicate the total return of the S&P/BARRA Growth
Index, an index consisting of
30
<PAGE> 35
companies of the S&P 500 Index with higher than
average market price to book value ratios. Such a
"growth-oriented" Portfolio may be appropriate for
investors who have little need for current dividend
income and who can tolerate somewhat above average
stock market volatility.
Taken together in appropriate proportions, the Value and
Growth Portfolios are expected to approximate the total
returns achieved by the 500 Portfolio.
- --------------------------------------------------------------------------------
INTERNATIONAL
EQUITY INDEX FUND
LONG-TERM INVESTORS
SEEKING TO INVEST
IN INTERNATIONAL
COMMON STOCKS The Portfolios are designed for investors who seek a
low-cost "passive" approach for investing in a broadly
diversified portfolio of international common stocks.
Unlike other equity mutual funds, which generally seek
to "beat" market averages with often unpredictable
results, the Portfolios of the Fund seek to "match"
their respective indexes and thus are expected to
provide a predictable return relative to their
respective benchmarks. In particular, the European
Portfolio is designed for investors seeking to
approximate the total investment results (before fund
expenses and withholding taxes) of the MSCI-Europe
(Free) Index, a diversified index of European common
stocks. The Pacific Portfolio is designed for investors
seeking to approximate the total investment results
(before fund expenses and withholding taxes) of the
MSCI-Pacific Index, a diversified index of Pacific Basin
common stocks.
The European and Pacific Portfolios are also suitable
for investors seeking to create a portfolio which
parallels the performance of the MSCI-EAFE (Free) Index,
a broadly diversified index consisting of over 1,000
international equity securities. By investing in the two
portfolios in the appropriate percentages (52% in the
Pacific Portfolio and 48% in the European Portfolio as
of December 31, 1993), a portfolio approximating the
investment characteristics of EAFE (Free) may be
created.
The Emerging Markets Portfolio is designed for investors
seeking to approximate the total investment results
(before fund expenses and withholding taxes) of the
MSCI-Select Emerging Markets Free Index, a diversified
index of common stocks of emerging market countries.
- --------------------------------------------------------------------------------
IMPLEMENTATION
OF POLICIES The Portfolios follow a variety of investment practices
in an effort to duplicate the total return of their
respective indexes.
- --------------------------------------------------------------------------------
BOND INDEX FUND
THE PORTFOLIOS INVEST
IN FIXED INCOME
SECURITIES Each Portfolio will invest at least 80% or more of its
assets in securities included in its benchmark Index.
The Indexes measure the total investment return (capital
change plus income) provided by a universe of fixed
income securities, weighted by the market value
outstanding of each security. The securities included in
each Index generally meet the following criteria, as
defined by Lehman Brothers: an outstanding market value
of at least $100 million; and investment grade
quality -- i.e., rated a minimum of Baa by Moody's
Investors Service, Inc. or BBB by Standard & Poor's
Corporation. The maturities of securities included in
each index will vary as described on page --.
31
<PAGE> 36
THE PORTFOLIOS USE A
"SAMPLING" TECHNIQUE The Portfolios will be unable to hold all of the
individual issues which comprise the Indexes because of
the large number of securities involved. Instead, each
Portfolio will hold a representative sample of the
securities in its respective Index, selecting one or two
issues to represent entire "classes" or types of
securities in the Index. Each Portfolio will be
constructed so as to match the composition of its
benchmark index as described below.
At the broadest level, each Portfolio will seek to hold
securities which reflect the weighting of the major
asset classes in its respective index. For the Total
Bond Market Portfolio, these classes include U.S.
Treasury and agency securities, corporate bonds, and
mortgage-backed securities. For the Short-Term Bond,
Intermediate-Term Bond and Long-Term Bond Portfolios,
the two major classes of securities include U.S.
Treasury and agency securities and corporate bonds.
Such a sampling technique is expected to be an effective
means of substantially duplicating the income and
capital returns provided by each Index. Over time, the
correlation between the performance of the Fund and the
Index is expected to be 0.95 or higher. A correlation of
1.00 would indicate perfect correlation, which would be
achieved when the net asset value of a Portfolio,
including the value of its dividend and capital gain
distributions, increases or decreases in exact
proportion to changes in the Index. Because the
Portfolios of the Fund incur operating expenses, as
opposed to their respective indexes, which do not, a
perfect correlation of 1.00 is unlikely to be achieved.
THE TOTAL BOND
MARKET PORTFOLIO MAY
INVEST IN MORTGAGE-
BACKED SECURITIES As part of its effort to duplicate the investment
performance of its Index, the Total Bond Market
Portfolio may invest in mortgage-backed securities.
Mortgage-backed securities represent an interest in an
underlying pool of mortgages. Unlike ordinary fixed
income securities, which generally pay a fixed rate of
interest and return principal upon maturity,
mortgage-backed securities repay both interest income
and principal as part of their periodic payments.
Because the mortgages underlying mortgage-backed
certificates can be prepaid at any time by homeowners or
corporate borrowers, mortgage-backed securities give
rise to certain unique "prepayment" risks. See
"Investment Risks."
The Total Bond Market Portfolio may purchase
mortgage-backed securities issued by the Government
National Mortgage Association (GNMA), the Federal Home
Loan Mortgage Corporation (FHLMC), the Federal National
Mortgage Association (FNMA), and the Federal Housing
Authority (FHA). GNMA securities are guaranteed by the
U.S. Government as to the timely payment of principal
and interest; securities from other Government-sponsored
entities are generally not secured by an explicit pledge
of the U.S. Government. The Portfolio may also invest in
conventional mortgage securities, which are packaged by
private corporations and are not guaranteed by the U.S.
Government. Mortgage securities that are guaranteed by
the U.S. Government are guaranteed
32
<PAGE> 37
only as to the timely payment of principal and interest.
The market value of such securities is not guaranteed
and may fluctuate.
- --------------------------------------------------------------------------------
BALANCED INDEX
FUND
THE FUND INVESTS IN
A SAMPLE OF ALL U.S.
COMMON STOCKS The Fund's common stock investments will be selected
from securities included in the Wilshire 5000, an index
of all regularly and publicly traded U.S. common stocks
that trade on the New York and American Stock Exchanges
and in the NASDAQ over-the-counter market. Approximately
6,000 stocks, including large, medium, and small
capitalization companies, are included in the Wilshire
5000, which serves as a proxy for the complete U.S.
stock market.
Under normal circumstances, the Fund will invest 60% of
its net assets in common stocks included in the Wilshire
5000. In an effort to replicate the investment
performance of the Wilshire 5000, the Fund's common
stock holdings will include approximately 500 of the
largest market capitalization stocks in the Index and an
additional representative sample of the remaining
stocks. The high transaction costs and illiquidity of
many of the smaller stocks in the Wilshire 5000 make
complete replication of the Index's holding impractical.
COMMON STOCKS ARE
SELECTED USING
OPTIMIZATION
TECHNIQUES ("PORTFOLIO
OPTIMIZATION") The stocks of the Wilshire 5000 included in the Fund are
selected using a statistical technique known as
"optimization." This process selects stocks for the Fund
so that various industry weightings, market
capitalizations, and fundamental characteristics (e.g.,
price-to-book, price-to-earnings, and debt-to-asset
ratios, as well as dividend yields) match those of the
Wilshire 5000. For instance, if 10% of the
capitalization of the Wilshire 5000 consists of utility
companies with relatively large market capitalizations,
then the Fund's stock holdings are constructed so that
approximately 10% of the Fund's stocks represent
utilities with relatively large capitalizations.
The Fund is not sponsored, endorsed, sold or promoted by
Wilshire Associates. Wilshire(R) and Wilshire 5000(R)
are registered service marks of Wilshire Associates.
THE FUND INVESTS IN A
SAMPLE OF ALL U.S.
INVESTMENT GRADE DEBT Under normal circumstances, the Fund will invest 40% of
its net assets in fixed income securities included in
the Lehman Brothers Index, an index of U.S.
investment-grade, fixed income securities. More than
4,500 individual bond issues, including U.S. Treasury
and Government agency securities, corporate debt
obligations, and mortgage-backed securities are included
in the Lehman Brothers Index.
The securities included in the Lehman Brothers Index in
which the Fund may invest generally meet the following
criteria, as defined by Lehman Brothers: an effective
maturity of not less than one year; an outstanding
market value of at least $50 million; investment grade
quality--i.e., rated a minimum of Baa by Moody's
Investors Service, Inc. or BBB by Standard & Poor's
Corporation; and general availability in the
marketplace. If a security held in the Fund's portfolio
is downgraded to a rating below these minimum standards,
the Fund may continue to hold it until
33
<PAGE> 38
such time as the adviser deems it most advantageous to
dispose of the security.
BONDS ARE SELECTED
USING A STRATIFIED
SAMPLING TECHNIQUE The large number of issues in the Index makes it
impractical for the Fund to hold all of the individual
issues which comprise the Index. Instead, the Fund will
attempt to replicate the investment performance of the
Lehman Brothers Index by holding a representative sample
of the securities in the Index. In choosing a
representative sample of bond investments from the
Lehman Brothers Index, the Fund utilizes a "stratified
sampling" technique, which means that, the Fund will
select one or two individual bond issues to represent
entire "classes" or types of fixed income investments in
the Index.
At the broadest level, the Fund will seek to hold
securities reflecting the three major classes of fixed
income investments in the Lehman Brothers Index -- U.S.
Treasury and Government agency securities, corporate
debt obligations, and mortgage-backed securities. For
example, if corporate debt obligations represent 25% of
the Index, then 25% of the Fund's bond holdings will
also be invested in such securities. As the Fund's
assets grow, these classes of investments will be
further delineated along the lines of sector, term to
maturity, coupon, and credit rating. For example, within
the corporate debt class, all long-term, low coupon AA-
rated utility bonds might be represented in the Fund by
one or two individual utility securities, which would
result in less diversification and greater security
specific risk in the Fund compared to the Index.
The Lehman Brothers Index is a trademark of Lehman
Brothers, Inc. Inclusion of a security in the Index in
no way implies an opinion by Lehman Brothers, Inc. as to
the attractiveness or appropriateness of a security as
an investment. Lehman Brothers, Inc. is neither a
sponsor of nor in any way affiliated with the Fund.
THE FUND'S RETURNS
SHOULD BE CLOSELY
CORRELATED WITH ITS
UNDERLYING INDEXES The sampling techniques utilized by the Fund are
expected to be an effective means of substantially
duplicating the investment performance (dividend income
plus capital change) of the Fund's underlying indexes:
the Wilshire 5000 (for the 60% of net assets invested in
common stocks) and the Lehman Brothers Index (for the
40% of net assets invested in bonds). The correlation
between the performance of the Fund's stock and bond
investments and the Wilshire 5000 and Lehman Brothers
Indexes, respectively, is expected to be at least 0.95.
Due to the use of sampling techniques, however, neither
the stock nor bond holdings of the Fund are expected to
track their target benchmarks with the degree of
accuracy that complete replication of the indexes would
have provided. The principal advantage of this sampling
approach is to provide an efficient means of investing
in a large universe of stocks and bonds. In particular,
the Fund is expected to provide exceptionally broad
diversification, and should operate at low costs due to
both its "passive" approach to portfolio management and
expected low portfolio turnover rate.
- --------------------------------------------------------------------------------
34
<PAGE> 39
INDEX TRUST
THE 500 PORTFOLIO
INVESTS IN ALL 500 S&P
STOCKS The 500 Portfolio attempts to duplicate the investment
results of the S&P 500 Index by holding all 500 stocks
in approximately the same proportions as they are
represented in the Index. This indexing technique is
known as "complete replication."
The S&P 500 Index is composed of 500 common stocks,
which are chosen by Standard & Poor's Corporation on a
statistical basis to be included in the Index. The
inclusion of a stock in the S&P 500 Index in no way
implies that Standard & Poor's Corporation believes the
stock to be an attractive investment. The 500
securities, most of which trade on the New York Stock
Exchange, represented, as of December 31, 1993,
approximately 67.4% of the market value of all U.S.
common stocks. Each stock in the S&P 500 Index is
weighted by its market value.
Because of the market-value weighting, the 50 largest
companies in the S&P 500 Index currently account for
approximately 50% of the Index. Typically, companies
included in the S&P 500 Index are the largest and most
dominant firms in their respective industries. As of
December 31, 1993, the five largest companies in the
Index were: General Electric (2.7%), Exxon Corporation
(2.4%), AT&T (2.2%), Wal-Mart Stores (1.8%) and Coca
Cola (1.7%). The largest industry categories were
international oil companies (7.2%), telephone companies
(6.0%), electric power (4.8%), electrical equipment
(3.8%) and diversified health care companies (3.6%).
THE EXTENDED MARKET
PORTFOLIO INVESTS IN
MEDIUM-AND
SMALL-SIZE COMPANY
STOCKS While the S&P 500 Index includes the preponderance of
large market capitalization stocks, it excludes most of
the medium- and small-size companies which comprise the
remaining 33% of the capitalization of the U.S. stock
market. The Wilshire 4500 Index consists of all U.S.
stocks that are not in the S&P 500 Index and that trade
regularly on the New York and American Stock Exchanges
as well as in the NASDAQ over-the-counter market. More
than 5,000 stocks of medium- and small-capitalization
companies are included in the Wilshire 4500 Index.
The Extended Market Portfolio will be unable to hold all
of the more than 5,000 issues which comprise the
Wilshire 4500 Index because of the costs involved and
the illiquidity of many of the securities. Instead, the
Portfolio will hold a representative sample of the
securities in the Wilshire 4500 Index.
THE TOTAL STOCK
MARKET PORTFOLIO
INVESTS IN A SAMPLE OF
ALL U.S. STOCKS Neither the S&P 500 Index nor the Wilshire 4500 Index
independently represents the U.S. stock market as a
whole. The Wilshire 5000 Index, which consists of all
regularly and publicly traded U.S. stocks, provides a
complete proxy for the U.S. stock market. More than
6,000 stocks, including large-, medium-, and
small-capitalization companies are included in the
Wilshire 5000 Index.
In an effort to replicate the investment performance of
the Wilshire 5000 Index, the Total Stock Market
Portfolio will invest in approximately 1,000 of the
largest stocks in the index and an additional
representative sample of the remaining stocks. As in the
case for the Extended Market Portfolio, the high
transaction costs and illiquidity of many of the
35
<PAGE> 40
smaller stocks make complete replication of the Wilshire
4500 Index's holdings impractical.
The Extended Market and Total Stock Market Portfolios
are not sponsored, endorsed, sold or promoted by
Wilshire Associates. Wilshire(R) and Wilshire 5000(R)
are registered service marks of Wilshire Associates.
THE SMALL
CAPITALIZATION STOCK
PORTFOLIO INVESTS IN
SMALL-SIZE COMPANY
STOCKS The Small Capitalization Stock Portfolio attempts to
duplicate the investment results of the Russell 2000
Index by investing in approximately 1,000 of the 2,000
stocks in the Russell 2000 Index. The Russell 2000 Index
is composed of approximately 2,000 small-capitalization
common stocks. A company's stock market capitalization
is the total market value of its floating outstanding
shares. As of September 30, 1993, the average stock
market capitalization of the Russell 2000 was $360
million. As in the case of the Extended Market
Portfolio, the high transaction costs and illiquidity of
many of the small stocks contained in the Russell 2000
Index make complete replication of the holdings
impractical.
The Portfolio is neither sponsored by nor affiliated
with the Frank Russell Company. Frank Russell's only
relationship to the Portfolio is the licensing of the
use of the Russell 2000 Small Stock Index. Frank Russell
Company is the owner of the trademarks and copyrights
relating to the Russell indexes.
THE EXTENDED MARKET,
TOTAL STOCK MARKET
AND SMALL
CAPITALIZATION STOCK
PORTFOLIOS USE
SAMPLING TECHNIQUES The stocks of the Wilshire 4500 Index to be included in
the Extended Market, Total Stock Market and Small
Capitalization Stock Portfolios will be selected
utilizing a statistical sampling technique known as
"optimization."
This sampling technique, which is described on page --,
is expected to be an effective means of substantially
duplicating the income and capital returns of the
Extended Market, Total Stock Market and Small
Capitalization Stock Portfolios' target benchmarks. Over
time, the correlation between the performance of the
Extended Market, Total Stock Market and Small
Capitalization Stock Portfolios and their respective
indexes, the Wilshire 4500 Index, Wilshire 5000 Index
and Russell 2000 Index, is expected to be at least 0.95.
A correlation of 1.00 would indicate perfect
correlation, which would be achieved when the net asset
value of a Portfolio, including the value of its
dividend and capital gains distributions, increases or
decreases in exact proportion to changes in the
respective target benchmark.
Due to the use of the sampling technique, neither the
Extended Market Portfolio, Total Stock Market Portfolio
nor the Small Capitalization Stock Portfolio is expected
to track its benchmark index with the same degree of
accuracy as evidenced by the high degree of correlation
between the 500 Portfolio and its benchmark. However,
the principal advantage of this technique is to provide
an efficient means to invest in the universe of stocks.
In particular, the three Portfolios are expected to
provide broad diversification, and should operate at low
costs due both to their "passive" approach to portfolio
management and low portfolio turnover rate.
36
<PAGE> 41
THE VALUE AND GROWTH
PORTFOLIOS EMPHASIZE
STOCKS WITH CERTAIN
INVESTMENT
CHARACTERISTICS In an effort to duplicate the investment results of
their respective indexes, the Value and Growth
Portfolios will utilize "complete replication," the same
indexing technique used for the 500 Portfolio.
Specifically, the Value and Growth Portfolios will hold
all of the stocks included in the S&P/BARRA Value and
Growth Indexes, respectively, in approximately the same
proportions as those stocks are represented in the
Indexes.
Standard & Poor's Corporation constructs the S&P/BARRA
Value and Growth Indexes semi-annually by ranking all
common stocks included in the S&P 500 Index by their
price-to-book ratios. The resulting list is then divided
in half by market capitalization. Those companies
representing half of the market capitalization of the
S&P 500 Index and having lower price-to-book ratios are
included in the S&P/BARRA Value Index; the remaining
companies are incorporated in the S&P/BARRA Growth
Index. On December 31, 1993, after the semi-annual
reconstitution of the indexes, the S&P/BARRA Value Index
consisted of 310 common stocks in the S&P 500 Index,
while the S&P/BARRA Growth Index consisted of the
remaining 190. Each Index represented half of the market
capitalization of the S&P 500 Index.
Investment managers may use a number of different
methods to classify stocks as "value" or "growth". There
may also be other ways to define benchmarks for "value"
and "growth" investing. If other methods were applied to
the companies comprising the S&P/BARRA Value and Growth
Indexes, the classification of the stocks as "growth" or
"value" might be different.
Typically, the stocks included in the S&P/BARRA Value
Index exhibit above-average dividend yields and lower
price-to-book ratios. By comparison, the stocks included
in the S&P/BARRA Growth Index exhibit below-average
dividend yields and higher price-to-book ratios. As of
December 31, 1993, the five largest companies in the
S&P/BARRA Value Index were Exxon Corp., Royal Dutch
Petroleum Co., DuPont E.I. de Nemour, IBM, and Mobil,
the five largest companies in the S&P/BARRA Growth Index
were Wal Mart Stores, General Electric Co., Exxon
Corporation, American Telephone & Telegraph, and Coca
Cola Co.
The 500, Value and Growth Portfolios are not sponsored,
endorsed, sold or promoted by Standard & Poor's
Corporation ("S&P"). S&P makes no representations or
warranty, implied or expressed, to the purchasers of the
Portfolios or any member of the public regarding the
advisability of investing in index funds or the ability
of the S&P 500, S&P/BARRA Value and S&P/BARRA Growth
Indexes to track general stock market performance or to
track the general performance of value and growth
stocks. S&P does not guarantee the accuracy and/or the
completeness of the S&P 500, S&P/BARRA Value and
S&P/BARRA Growth Indexes or any data included herein.
S&P's only relationship to the Portfolios is the
licensing of the S&P marks and the S&P 500, S&P/BARRA
Value and S&P/BARRA Growth
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<PAGE> 42
Indexes, which are determined, composed and calculated
by S&P without regard to the 500, Value and Growth
Portfolios.
- --------------------------------------------------------------------------------
INTERNATIONAL
EQUITY INDEX FUND
EUROPEAN PORTFOLIO
AND PACIFIC PORTFOLIO
THE PORTFOLIOS INVEST
IN INTERNATIONAL
COMMON STOCKS USING
SAMPLING TECHNIQUES
("PORTFOLIO
OPTIMIZATION") The MCSI-Europe (Free) Index consists of approximately
575 equity securities from Europe, and the MSCI-Pacific
Index consists of more than 425 equity securities from
Australia and the Far East. The stocks included in each
index are chosen by Morgan Stanley Capital International
on a statistical basis. Each stock in MSCI-Europe (Free)
and MSCI-Pacific is weighted according to its market
value as a percentage of the total market value of all
stocks in the index. (A stock's market value equals the
number of shares outstanding times the most recent price
of the security.) The inclusion of a stock in the index
in no way implies the Morgan Stanley Capital
International believes the stock to be an attractive
investment.
The Portfolios will be unable to hold all of the issues
that comprise their respective indexes because of the
costs involved and the illiquidity of many of the
securities. Instead, each Portfolio will attempt to hold
a representative sample of approximately 250 or more of
the securities in its respective Index, which will be
selected utilizing the statistical technique, "portfolio
optimization." (See page -- for a general explanation of
"portfolio optimization".)
Due to the use of this sampling or "portfolio
optimization" technique, the Portfolios are not expected
to track their benchmark indexes with the same degree of
accuracy as large capitalization domestic index funds.
Over time, the correlation between the performance of
each Portfolio and its respective index is expected to
be greater than 0.95. A correlation of 1.00 would
indicate perfect correlation, which would be achieved
when the net asset value of each Portfolio, including
the value of its dividend and capital gains
distributions, increases or decreases in exact
proportion to changes in its respective index.
--------------------------------------------------------
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<PAGE> 43
EMERGING MARKETS
PORTFOLIO
THE PORTFOLIO INVESTS
IN INTERNATIONAL
COMMON STOCKS USING
SAMPLING TECHNIQUES
("PORTFOLIO
OPTIMIZATION") The MSCI -- Select Emerging Markets Free Index consists
of approximately 460 equity securities from emerging
market countries in Europe, Latin America and Southeast
Asia. The stocks included in the Index are chosen on a
statistical basis. The companies based in Hong Kong and
Singapore are included in the Index to provide
participation in more liquid emerging markets; their
combined weight is limited to 20% of the Index. Each
stock within Hong Kong and Singapore will be weighted
according to its market value as a percentage of the
total market value of all of the Hong Kong and Singapore
stocks included in the index. (A stock's market value
equals the number of shares outstanding times the most
recent price of the security). The remaining portion of
the Index will be comprised of common stocks from 10
other emerging market countries -- Indonesia, Malaysia,
the Philippines, Thailand, Argentina, Brazil, Mexico,
Greece, Portugal and Turkey. Each stock in these
countries will be weighted according to its market value
as a percentage of the total market value of the
companies in the 10 countries multiplied by the
percentage of the index that these countries represent.
From time to time, additional emerging markets will be
analyzed for inclusion in the Index, based on liquidity
and tradeability. The inclusion of a country or stock in
the Index in no way implies that the country or stock is
an attractive investment.
The Portfolio will be unable to hold all of the issues
that comprise its Index, because of the transaction
costs involved and the illiquidity of many of the
securities. Instead, the Portfolio will attempt to hold
a representative sample of approximately 300 or more of
the securities in its Index by selecting stocks
utilizing the statistical technique, "portfolio
optimization." (See page -- for a general explanation of
"portfolio optimization".)
Due to the use of this sampling or "portfolio
optimization" technique, the Portfolio is not expected
to track its benchmark with the same degree of accuracy
as large capitalization domestic index funds. Over time,
the correlation between the performance of the Portfolio
and the Index is expected to be greater than 0.95. A
correlation of 0.95 or higher is expected to be achieved
when the Portfolio exceeds $100 million in assets.
THE THREE PORTFOLIOS
MAY ENTER INTO
FORWARD CURRENCY
CONTRACTS Each Portfolio may enter into foreign currency forward
and foreign currency futures contracts in order to
maintain the same currency exposure as their respective
indexes. A Portfolio may not enter into such contracts
for speculative purposes, or as a way of protecting
against anticipated adverse changes in exchange rates
between foreign currencies and the U.S. dollar. A
foreign currency forward contract is an obligation to
purchase or sell a specific currency at a future date,
which may be any fixed number of days from the date of
the contract agreed upon by the parties, at a price set
at the time of the contract.
THE THREE PORTFOLIOS
MAY BORROW MONEY Each Portfolio may borrow money from a bank up to a
limit of 15% of the market value of its assets, but only
for temporary or emergency purposes. A Portfolio may
borrow money only to meet redemption
39
<PAGE> 44
requests prior to the settlement of securities already
sold or in the process of being sold by the Portfolio.
To the extent that a Portfolio borrows money prior to
selling securities, the Portfolio may be leveraged; at
such times, the Portfolio may appreciate or depreciate
in value more rapidly than its benchmark index. Both
Portfolios will repay any money borrowed in excess of 5%
of the market value of their total assets prior to
purchasing additional portfolio securities.
ALL PORTFOLIOS MAY
INVEST IN SHORT-TERM
MONEY MARKET
INSTRUMENTS Although they normally seek to remain substantially
fully invested in securities in the respective indexes,
all Portfolios of the Funds may invest temporarily in
certain short-term money market instruments. Such
securities may be used to invest uncommitted cash
balances or to maintain liquidity to meet shareholder
redemptions. These securities include: obligations of
the United States Government and its agencies or
instrumentalities; commercial paper, bank certificates
of deposit, and bankers' acceptances; and repurchase
agreements collateralized by these securities.
- --------------------------------------------------------------------------------
The Funds may use futures contracts, options, warrants,
convertible securities and swap agreements.
BOND INDEX FUND The Portfolios of the Fund may utilize bond (interest
rate) futures contracts and options to a limited extent.
Specifically, each Portfolio may enter into futures
contracts provided that not more than 5% of its assets
are required as a futures contract deposit. In addition,
the Portfolios may enter into futures contracts and
options transactions only to the extent that obligations
under such contracts or transactions represent not more
than 20% of a Portfolio's assets.
- --------------------------------------------------------------------------------
BALANCED INDEX
FUND The Fund may utilize stock and bond (interest rate)
futures contracts, options, warrants, convertible
securities and swap agreements to a limited extent.
Specifically, the Fund may enter into futures contracts
and options provided that not more than 5% of its assets
are required as a margin deposit for futures contracts
or options. Additionally, the Fund's investment in
warrants will not exceed more than 5% of its assets (2%
with respect to warrants not listed on the New York or
American Stock Exchanges).
- --------------------------------------------------------------------------------
INDEX TRUST Each Portfolio of the Trust may utilize stock futures
contracts, options, warrants, convertible securities and
swap agreements to a limited extent. Specifically, each
Portfolio may enter into futures contracts and options
provided that not more than 5% of its assets are
required as a margin deposit for futures contracts or
options and provided that not more than 20% of a
Portfolio's assets are invested in futures and options
at any time. Additionally, the Trust's investment in
warrants will not exceed more than 5% of its assets (2%
with respect to warrants not listed on the New York or
American Stock Exchanges).
- --------------------------------------------------------------------------------
INTERNATIONAL
EQUITY INDEX FUND The Portfolios of the Fund may utilize stock futures
contracts, options, warrants, convertible securities and
swap agreements to a limited
40
<PAGE> 45
extent. Specifically, each Portfolio may enter into
futures contracts and options provided that not more
than 5% of its assets are required as a margin deposit
for futures contracts or options. Additionally, the
Fund's investment in warrants will not exceed more than
5% of its assets (for the European Portfolio and the
Pacific Portfolio 2% with respect to warrants not listed
on the New York or American Stock Exchanges).
Futures contracts, options, warrants, convertible
securities and swap agreements may be used for several
reasons: to simulate full investment in the underlying
index while retaining a cash balance for fund management
purposes, to facilitate trading, to reduce transaction
costs or to seek higher investment returns when a
futures contract, option, warrant, convertible security
or swap agreement is priced more attractively than the
underlying equity security or index. While each of these
securities can be used as leveraged investments, the
Portfolios may not use them to leverage their net
assets.
FUTURES CONTRACTS,
OPTIONS, WARRANTS,
CONVERTIBLE SECURITIES
AND SWAP AGREEMENTS
POSE CERTAIN RISKS The risk of loss associated with futures contracts in
some strategies can be substantial due both to the low
margin deposits required and the extremely high degree
of leverage involved in futures pricing. As a result, a
relatively small price movement in a futures contract
may result in an immediate and substantial loss or gain.
When investing in futures contracts, Portfolios of the
Vanguard Bond Index Fund will segregate cash or cash
equivalents in the amount of the underlying obligation.
The Portfolios of the Vanguard Balanced Index Fund,
Vanguard Index Trust and Vanguard International Equity
Index Fund will not use futures contracts, options,
warrants, convertible securities or swap agreements for
speculative purposes or to leverage its net assets.
Accordingly, the primary risks associated with the use
of futures contracts, options, warrants, convertible
securities or swap agreements by the Portfolio are: (i)
imperfect correlation between the change in market value
of the stocks held by the Portfolio and the prices of
futures contracts, options, warrants, convertible
securities or swap agreements; (ii) possible lack of a
liquid secondary market for a futures contract and the
resulting inability to close a futures position prior to
its maturity date; and (iii) the risk of the
counterparty or guaranteeing agent defaulting. The risk
of imperfect correlation will be minimized by investing
only in those contracts whose behavior is expected to
resemble that of the Portfolio's underlying securities.
The risk that the Portfolio will be unable to close out
a futures position will be minimized by entering into
such transactions on an exchange with an active and
liquid secondary market. However, options, warrants,
convertible securities or swap agreements purchased or
sold over-the-counter may be less liquid than exchange
traded securities. Illiquid securities, in general,
including swap agreements, may not represent more than
15% of the net assets of the Portfolio.
Since there are no futures traded on the S&P/BARRA Value
and Growth Indexes, MSCI-Europe (Free), Pacific Index or
the MSCI-Select Emerging Markets Free Index, it will be
necessary for the Vanguard Index Trust
41
<PAGE> 46
Value and Growth Portfolios and the Portfolios of
Vanguard International Equity Index Fund to utilize a
composite of other futures contracts to simulate the
performance of the Indexes. This process may magnify the
"tracking error" of a Portfolio's performance compared
to that of its Index, due to lower correlation of the
selected futures with its Index. The investment adviser
will attempt to reduce this tracking error by investing
in futures contracts whose behavior is expected to
resemble that of the underlying securities, although
there can be no assurance that these selected futures
will perfectly correlate with the performance of either
Index.
SWAP AGREEMENTS Swap agreements are contracts between parties in which
one party agrees to make payments to the other party
based on the change in market value of a specified index
or asset. In return, the other party agrees to make
payments to the first party based on the return of a
different specified index or asset. Although swap
agreements entail the risk that a party will default on
its payment obligations thereunder, the Portfolios will
minimize this risk by entering into agreements that mark
to market no less frequently than quarterly. Swap
agreements also bear the risk that the Portfolios will
not be able to meet its obligation to the counterparty.
This risk will be mitigated by investing the Portfolios
in the specific asset for which it is obligated to pay a
return.
ALL PORTFOLIOS MAY
LEND THEIR SECURITIES All Portfolios may lend their investment securities to
qualified institutional investors for either short-term
or long-term purposes of realizing additional income.
Loans of securities by the Portfolio will be
collateralized by cash, letters of credit, or securities
issued or guaranteed by the U.S. Government or its
agencies. The collateral will equal at least 100% of the
current market value of the loaned securities.
PORTFOLIO TURNOVER FOR
ALL PORTFOLIOS IS
EXPECTED TO BE LOW Although they generally seek to invest for the long
term, each Portfolio of Vanguard Bond Index Fund,
Vanguard Balanced Index Fund, Vanguard Index Trust, and
Vanguard International Equity Index Fund retains the
right to sell securities irrespective of how long they
have been held. It is anticipated that the annual
portfolio turnover of each Portfolio of the Funds
(except Vanguard Balanced Index Fund) will not exceed
50%. The annual portfolio turnover rate for the Vanguard
Balanced Index Fund is not expected to exceed 100%. A
turnover rate of 50% would occur, for example, if one
half of the securities of a Portfolio were replaced
within one year.
- --------------------------------------------------------------------------------
INVESTMENT
LIMITATIONS
EACH PORTFOLIO HAS
ADOPTED CERTAIN
FUNDAMENTAL
LIMITATIONS Each portfolio of the Funds has adopted certain
limitations on its investment practices. Specifically,
each Portfolio will not:
(a) invest more than 25% of its assets in any one
industry;
(b) borrow money, except that the Funds may borrow from
banks (or through reverse repurchase agreements),
for temporary or emergency (not leveraging)
purposes, including the meeting of redemption
requests which might otherwise require the untimely
disposition of securities, in an amount not
exceeding 15% of the
42
<PAGE> 47
value of the Funds' net assets. Whenever borrowing
exceeds 5% of the value of the Funds' net assets,
the Funds will not make any additional investments.
Each Portfolio of Vanguard Bond Index will not:
(a) invest more than 5% of its assets in the securities
of any single issuer except obligations of the
United States Government;
(b) purchase more than 5% of the voting securities of
any issuer;
(c) pledge, mortgage or hypothecate its assets to an
extent greater than 5% of the value of its total
assets.
Each Portfolio of Vanguard Balanced Index Fund, Vanguard
Index Trust, and Vanguard International Equity Index
Fund will not:
(a) with respect to 75% of its assets, purchase
securities of any issuer (except obligations of the
U.S. Government and its instrumentalities) if, as a
result, more than 5% of the value of the Fund's
assets would be invested in the securities of each
issuer; and
(b) with respect to 75% of its assets, purchase more
than 10% of the voting securities of any issuer.
These investment limitations are considered at the time
investment securities are purchased. The limitations
described here and in the Statement of Additional
Information may be changed for a specific Fund only with
the approval of a majority of the shareholders.
- --------------------------------------------------------------------------------
MANAGEMENT OF
THE FUNDS
VANGUARD ADMINISTERS
AND DISTRIBUTES
THE FUNDS The Funds are members of The Vanguard Group of
Investment Companies, a family of over 30 investment
companies with over 80 distinct portfolios and total
assets in excess of $130 billion. Through their jointly
owned subsidiary, The Vanguard Group, Inc. ("Vanguard"),
they and the other funds in the Group obtain at cost
virtually all of their corporate management,
administrative, shareholder accounting and distribution
services. Vanguard also provides investment advisory
services on an at-cost basis to certain Vanguard funds.
As a result of Vanguard's unique corporate structure,
the Vanguard funds have costs substantially lower than
those of most competing mutual funds. In 1993, the
average expense ratio (annual costs including advisory
fees divided by total net assets) for the Vanguard funds
amounted to approximately .30% compared to an average of
1.02% for the mutual fund industry (data provided by
Lipper Analytical Services).
Vanguard employs a supporting staff of management and
administrative personnel needed to provide the requisite
services to the funds and also furnishes the funds with
necessary office space, furnishings and equipment. Each
fund pays its share of Vanguard's net expenses, which
are allocated among the funds under methods approved by
the Board of Directors (Trustees) of each fund. In
addition, each fund bears its own direct expenses, such
as legal, auditing and custodian fees.
43
<PAGE> 48
Vanguard also provides distribution and marketing
services to the Vanguard funds. The funds are available
on a no-load basis (i.e., there are no sales commissions
or 12b-1 fees). However, each fund bears it share of the
Group's distribution costs.
- --------------------------------------------------------------------------------
INVESTMENT
ADVISERS
VANGUARD'S FIXED
INCOME GROUP
MANAGES SOME OF THE
FUNDS' INVESTMENTS Each Portfolio of Vanguard Bond Index Fund and the bond
portion of Vanguard Balanced Index Fund receive all
investment advisory services from Vanguard's Fixed
Income Group. The Fixed Income Group provides investment
advisory services to 35 Vanguard money market and bond
portfolios, both taxable and tax-exempt. Total assets
under management by Vanguard's Fixed Income Group were
$52 billion as of December 31, 1993. The Portfolios are
not actively managed, but are instead administered by
the Fixed Income Group using computerized, quantitative
techniques. The Fixed Income Group is supervised by the
Officers of the Fund. Ian A. MacKinnon, Senior Vice
President of Vanguard, has been in charge of the Group
since its inception in 1981.
Mr. MacKinnon is responsible for setting the broad
investment strategies employed by the Fund, and for
overseeing the portfolio manager who implements those
strategies on a day-to-day basis.
The portfolio manager for Vanguard Bond Index Fund and
the bond portion of Vanguard Balanced Index Fund is
Kenneth E. Volpert, Assistant Vice President of
Vanguard, who serves as portfolio manager of the
Vanguard Variable Insurance Fund -- High-Grade Portfolio
and the bond portion of the Balanced Portfolio. Mr.
Volpert began managing the Vanguard Bond Index fund in
1992. For six years prior to joining Vanguard, Mr.
Volpert was associated with Mellon Bond Associates.
The Fixed Income Group places all orders for purchases
and sales of portfolio securities. Purchases of
portfolio securities are made either directly from the
issuer or from securities dealers. The Fixed Income
Group may sell portfolio securities prior to their
maturity if circumstances and considerations warrant and
if it believes such dispositions advisable. The Group
seeks to obtain the best available net price and most
favorable execution for all portfolio transactions.
VANGUARD'S CORE
MANAGEMENT GROUP
MANAGES SOME OF THE
FUNDS, ON AN AT-COST
BASIS Each Portfolio of Index Trust, International Equity
Index Fund and the equity portion of Balanced Index Fund
receive their investment advisory services on an at-cost
basis from Vanguard's Core Management Group, which also
provides investment advisory services to Vanguard
Institutional Index Fund, a portion of the assets of
Vanguard/Windsor II and Vanguard Morgan Growth Fund, and
several indexed separate accounts. Total indexed assets
under management as of December 31, 1993 were $16.4
billion. The Portfolios of the Fund are not actively
managed, but are instead administered by the Core
Management Group using computerized, quantitative
techniques. The Group is supervised by the Officers of
the Fund.
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<PAGE> 49
In placing portfolio transactions, Vanguard's Core
Management Group uses its best judgment to choose the
broker most capable of providing the brokerage services
necessary to obtain the best available price and most
favorable execution at the lowest commission rate. The
full range and quality of brokerage services available
are considered in making these determinations. In those
instances where it is reasonably determined that more
than one broker can offer the services needed to obtain
the best available price and most favorable execution,
consideration may be given to those brokers which supply
statistical information and provide other services in
addition to execution services to the Fund.
- --------------------------------------------------------------------------------
DIVIDENDS,
CAPITAL GAINS
AND TAXES
FOUR PORTFOLIOS PAY
QUARTERLY DIVIDENDS;
TWO PAY DIVIDENDS Vanguard Index Trust distributes substantially all of
ONCE A YEAR its net investment income in the form of dividends. The
500, Total Stock Market, Value and Growth Portfolios pay
quarterly dividends, while the Extended Market and Small
Capitalization Stock Portfolios pay annual dividends.
For all six Portfolios, net capital gains, if any, are
distributed annually.
Each Portfolio of the International Equity Index Fund
intends to distribute substantially all of its ordinary
income in the form of dividends. The Portfolios pay
annual dividends. Capital gains distributions, if any,
are also made annually.
The Balanced Index Fund will distribute substantially
all of its net investment income in the form of
quarterly dividends.
Dividends consisting of virtually all of the ordinary
income of each Portfolio of Bond Index Fund are declared
daily and are payable to shareholders of record at the
time of declaration. Such dividends are paid on the
first business day of each month. Capital gains
distributions, if any, are made annually.
A Portfolio's dividend and capital gains distributions
may be reinvested in additional shares or received in
cash. See "Choosing a Distribution Option" for a
description of these distribution methods. Shareholders
of Bond Index Fund who choose to reinvest their dividend
distributions will receive a quarterly (not monthly)
confirmation statement.
Pursuant to the Internal Revenue Code, certain dividend
and capital gains distributions declared by each
Portfolio during December. Such distributions, if
received by shareholders by January 31, are deemed to
have been paid by the Funds and received by shareholders
on December 31 of the prior year.
Each Portfolio of the Funds intends to continue to
qualify for taxation as a "regulated investment company"
under the Internal Revenue Code so that each Portfolio
will not be subject to federal income tax to the extent
its income is distributed to shareholders. Dividends
paid by each Portfolio from net investment income,
whether received in cash or reinvested in additional
shares, will be taxable to shareholders as ordinary
income. For corporate investors, dividends from net
investment income will generally qualify in part for the
intercorporate dividends-
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<PAGE> 50
received deduction. However, the portion of the
dividends so qualified depends on the aggregate taxable
qualifying dividend income received by a Portfolio from
domestic (U.S.) sources.
Distributions paid by a Portfolio from long-term capital
gains, whether received in cash or reinvested in
additional shares, are taxable as long-term capital
gains, regardless of the length of time you have owned
shares in the Portfolio. Capital gains distributions are
made when a Portfolio realizes net capital gains on
sales of portfolio securities during the year. A
Portfolio does not seek to realize any particular amount
of capital gains during a year; rather, realized gains
are a byproduct of portfolio management activities.
Consequently, capital gains distributions may be
expected to vary considerably from year-to-year; there
will be no capital gains distributions in years when a
Portfolio realizes net capital losses.
Note that if you elect to receive capital gains
distributions in cash, instead of reinvesting them in
additional shares, you are in effect reducing the
capital at work for you in a Portfolio. Also, keep in
mind that if you purchase shares in a Portfolio shortly
before the record date for a dividend or capital gains
distribution, a portion of your investment will be
returned to you as a taxable distribution, regardless of
whether you are reinvesting your distributions or
receiving them in cash.
The Funds will notify you annually as to the tax status
of dividend and capital gains distributions paid by each
Portfolio.
EACH PORTFOLIO OF
INTERNATIONAL EQUITY
INDEX FUND MAY
"PASS THROUGH"
FOREIGN TAXES Each Portfolio may elect to "pass through" to its
shareholders the amount of foreign income taxes paid by
a Portfolio. The Portfolios will make such an election
only if it is deemed to be in the best interests of the
shareholders. If this election is made, shareholders of
a Portfolio will be required to include in their gross
income their pro rata share of foreign taxes paid by the
Portfolio. However, shareholders will be able to treat
their pro rata share of foreign taxes as either an
itemized deduction or a foreign credit against U.S.
income taxes (but not both) on their tax return.
A CAPITAL GAIN OR LOSS
MAY BE REALIZED UPON
EXCHANGE OR
REDEMPTION A sale of shares of a Portfolio is a taxable event, and
may result in a capital gain or loss. A capital gain or
loss may be realized from an ordinary redemption of
shares or an exchange of shares between two mutual funds
(or two portfolios of the same fund).
Dividend distributions, capital gain distributions, and
capital gains or losses from redemptions and exchanges
may be subject to state and local taxes.
Each Portfolio of the Funds is required to withhold 31%
of taxable dividends, capital gains distributions, and
redemptions paid to shareholders who have not complied
with IRS taxpayer identification regulations. You may
avoid this withholding requirement by certifying on your
Account Registration Form your proper Social Security or
Taxpayer
46
<PAGE> 51
Identification Number and by certifying that you are not
subject to backup withholding.
Vanguard Index Trust is organized as a Pennsylvania
business trust and, in the opinion of counsel, is not
liable for any income or franchise tax in the
Commonwealth of Pennsylvania. The Trust will be subject
to Pennsylvania county personal property tax in the
county which is the site of its principal office.
Shareholders who are Pennsylvania residents will not be
subject to county personal property taxes, with the
exception of non-exempt holders who are residents of the
City and School District of Pittsburgh.
The International Equity Index, Balanced Index and Bond
Index Funds have obtained Certificates of Authority to
do business as foreign corporations in Pennsylvania and
do business and maintain offices in that state. In the
opinion of counsel, the shares of each of the Funds are
exempt from Pennsylvania personal property taxes.
The tax discussion set forth above is included for
general information only. Prospective investors should
consult their own tax advisers concerning the tax
consequences of an investment in the Funds.
- --------------------------------------------------------------------------------
THE SHARE
PRICE OF
EACH PORTFOLIO The share price or "net asset value" per share of each
Portfolio is determined by dividing the total market
value of the Portfolio's investments and other assets,
less any liabilities, by the number of outstanding
shares of the Portfolio. Net asset value per share is
determined once daily at the close of regular trading on
the New York Stock Exchange (generally 4:00 p.m. Eastern
time).
Portfolio securities that are listed on a securities
exchange are valued at the last quoted sales price on
the day the valuation is made. Price information on
listed securities is taken from the exchange where the
security is primarily traded. Securities which are
listed on an exchange and which are not traded on the
valuation date are valued at the mean of the bid and ask
prices. For the 500, Value and Growth Portfolios of
Vanguard Index Trust, Vanguard International Equity
Index Fund, and each Portfolio of Vanguard Bond Index
Fund, unlisted securities for which market quotations
are not readily available are valued at the latest
quoted bid price. For the Extended Market, Total Stock
Market and Small Capitalization Stock Portfolios, and
Vanguard Balanced Index Fund, unlisted securities for
which market quotations are not readily available are
valued at the mean of the bid and ask prices. Temporary
cash investments are valued at amortized cost which
approximates market value. For all Funds, securities for
which no current quotations are readily available are
valued at fair market value as determined in good faith
by the Directors (Trustees). Securities may be valued on
the basis of prices provided by a pricing service when
such prices are believed to reflect the fair market
value of such securities.
Each Portfolios's share price can be found daily in the
mutual fund listings of most major newspapers under the
heading of The Vanguard Group.
- --------------------------------------------------------------------------------
47
<PAGE> 52
GENERAL
INFORMATION Vanguard Bond Index, Vanguard Balanced Index and
Vanguard International Equity Index Funds are organized
as Maryland corporations. The Articles of Incorporation
permit the Directors to issue 1,000,000,000 shares of
common stock of each Fund, with a $.001 par value. The
Board of Directors has the power to designate one or
more classes ("series") of shares of common stock and to
classify or reclassify any unissued shares with respect
to such series. Currently, Vanguard Bond Index Fund is
offering shares of four series, Vanguard Balanced Index
Fund is offering shares of one series and Vanguard
International Equity Index is offering shares of three
series.
Vanguard Index Trust is a Pennsylvania business trust.
The Declaration of Trust permits the Trustees to issue
an unlimited number of shares of beneficial interest
with no par value. The Board of Trustees has the power
to designate one or more classes or series of shares of
common stock and to classify or reclassify any unissued
shares with respect to such series. Currently, the Trust
is offering shares of six series.
The shares of each series of the Funds are fully paid
and non-assessable; have no preference as to conversion,
exchange, dividends, retirement or other features; and
have no preemptive rights. Such shares have non-
cumulative voting rights, meaning that the holders of
more than 50% of the shares voting for the election of
Directors (Trustees) can elect 100% of the Directors
(Trustees) if they so choose.
Annual meetings of shareholders will not be held except
as required by the Investment Company Act of 1940 and
other applicable law. An annual meeting will be held to
vote on the removal of a Director (Trustee) or Directors
(Trustees) of a Fund if requested in writing by the
holders of not less than 10% of the outstanding shares
of such Fund.
All securities and cash for the Total Bond Market
Portfolio of Vanguard Bond Index Fund are held by Morgan
Guaranty Trust Company, New York, NY. All securities and
cash for the Short-Term Bond, Intermediate-Term Bond and
Long-Term Bond Portfolios are held by State Street Bank
and Trust Company ("State Street Bank"), Boston, MA. All
securities and cash for Vanguard Balanced Index Fund are
held by CoreStates Bank, N.A. ("CoreStates"),
Philadelphia, PA. All Securities and cash for Vanguard
International Equity Index Fund are held by Morgan
Stanley Trust Company. All securities and cash for the
500, Extended Market, Total Stock Market and Small
Capitalization Stock Portfolios of Vanguard Index Trust
are held by State Street Bank. All securities and cash
for the Value and Growth Portfolios are held by
CoreStates.
The Vanguard Group, Inc., Valley Forge, PA, serves as
the Funds' Transfer and Dividend Disbursing Agent. Price
Waterhouse LLP, serves as independent accountants for
the Funds and will audit their financial statements
annually. The Funds are not involved in any litigation.
- --------------------------------------------------------------------------------
48
<PAGE> 53
SHAREHOLDER GUIDE
OPENING AN
ACCOUNT AND
PURCHASING
SHARES You may open a regular (non-retirement) account, either
by mail or wire. Simply complete and return an Account
Registration Form and any required legal documentation,
indicating the Portfolio you have chosen and amount you
wish to invest. Your purchase must be equal to or
greater than the $3,000 minimum initial investment
requirement in any Portfolio ($500 for Uniform
Gifts/Transfers to Minors Act accounts). You must open a
new Individual Retirement Account by mail (IRAs may not
be opened by wire) using a Vanguard IRA Adoption
Agreement. Your purchase must be equal to or greater
than the $500 minimum initial investment requirement,
but no more than $2,000 if you are making a regular IRA
contribution. Rollover contributions are generally
limited to the amount withdrawn within the past 60 days
from an IRA or other qualified Retirement Plan. If you
need assistance with the Account Registration Form or
have any questions about the Fund, please call our
Investor Information Department (1-800-662-7447). NOTE:
For other types of account registrations (e.g.,
corporations, associations, other organizations, trusts
or power of attorney), please call us to determine which
additional forms you may need.
Because of the risks associated with bond and stock
investments, each Portfolio is intended to be a
long-term investment vehicle and is not designed to
provide investors with a means of speculating on
short-term bond market movements. Consequently, the Fund
reserves the right to reject any specific purchase (and
exchange purchase) request. The Fund also reserves the
right to suspend the offering of shares for a period of
time.
Each Portfolio's shares are purchased at the
next-determined net asset value after your investment
has been received in the form of Federal Funds. See
"When Your Account Will Be Credited". The Fund is
offered on a no-load basis (i.e., there are no sales
commissions or 12b-1 fees).
49
<PAGE> 54
IMPORTANT NOTE
ON EXPENSES Transaction fees are charged by Portfolios as follows:
<TABLE>
<CAPTION>
FEES ON FEES ON
PURCHASES REDEMPTIONS
--------- -----------
<S> <C> <C>
Vanguard Bond Index Fund............ None None
Vanguard Balanced Fund.............. None None
Vanguard Index Trust
500 Portfolio..................... None None
Extended Market Portfolio......... 1% None
Total Stock Market Portfolio...... .25% None
Small Capitalization Stock
Portfolio...................... 1% None
Value Portfolio................... None None
Growth Portfolio.................. None None
Vanguard International Equity Index Fund
European Portfolio................ 1% None
Pacific Portfolio................. 1% None
Emerging Markets Portfolio........ 2% 1%
</TABLE>
Additionally, each Portfolio of all of the Funds and the
Trust assessed $10 annual account maintenance fee. See
"Portfolio Expenses" for more information.
ADDITIONAL
INVESTMENTS Subsequent investments may be made by mail ($100 minimum
per Portfolio), wire ($1,000 minimum), exchange from
another Vanguard Fund account ($100 minimum per
Portfolio), or Vanguard Fund Express. Subsequent
investments to Individual Retirement Accounts may be
made by mail ($100 minimum) or exchange from another
Vanguard Fund account. In some instances, contributions
may be made by wire or Vanguard Fund Express. Please
call us for more information on these options.
--------------------------------------------------------
<TABLE>
<S> <C> <C>
ADDITIONAL INVESTMENTS
NEW ACCOUNT TO EXISTING ACCOUNTS
PURCHASING BY MAIL Please include the amount Additional investments
of your initial investment should include the
Complete and sign the and the name of the Invest-by-Mail remittance
enclosed Account Portfolios you have form attached to your Fund
Registration Form selected on the registra- confirmation statements.
tion form, make your check Please make your check
payable to The Vanguard payable to The Vanguard
Group (Portfolio Number), Group (Portfolio Number),
see below for the write your account number
appropriate number and mail on your check, and using
to: the return envelope
provided, mail to the
VANGUARD FINANCIAL CENTER address indicated on the
P.O. BOX 2600 Invest-by-Mail Form. See
VALLEY FORGE, PA 19482 below for the appropriate
Portfolio number.
</TABLE>
50
<PAGE> 55
<TABLE>
<S> <C> <C>
For express or VANGUARD FINANCIAL CENTER All written requests should
registered mail, 455 DEVON PARK DRIVE be mailed to one of the
send to: WAYNE, PA 19087 addresses indicated for new
accounts. Do not send
registered or express mail
to the post office box
address.
PORTFOLIO NUMBERS
VANGUARD BOND VANGUARD BALANCED
INDEX FUND INDEX FUND -- 02
Total Bond Market
Portfolio -- 84 VANGUARD INDEX TRUST
Short-Term Bond 500 Portfolio -- 40
Portfolio -- 132 Extended Market
Intermediate-Term Bond Portfolio -- 98
Portfolio -- 314 Total Stock Market
Long-Term Bond Portfolio -- 85
Portfolio -- 522 Small Capitalization Stock
Portfolio -- 48
VANGUARD INTERNATIONAL Value Portfolio -- 06
EQUITY INDEX FUND Growth Portfolio -- 09
European Portfolio -- 79
Pacific Portfolio -- 72
Emerging Markets
Portfolio -- 533
----------------------------------------------------------------
PURCHASING BY WIRE CORESTATES BANK, N.A.
ABA 031000011
Money should be CORESTATES ACCT NO 0101 9897
wired to: ATTN VANGUARD
NAME OF FUND OR TRUST
BEFORE WIRING NAME OF PORTFOLIO
ACCOUNT NUMBER
Please contact ACCOUNT REGISTRATION
Client Services
(1-800-662-2739) To assure proper receipt, please be sure your bank includes the
name of the Portfolio, the account number Vanguard has assigned
to you and the eight digit CoreStates number. If you are
opening a new account, please complete the Account Registration
Form and mail it to the "New Account" address above after
completing your wire arrangement. NOTE: Federal Funds wire
purchase orders will be accepted only when the Fund and
Custodian Bank are open for business.
</TABLE>
PURCHASING BY
EXCHANGE (from a
Vanguard account) You may open an account or purchase additional shares by
making an exchange from an existing Vanguard Fund
account. However, the Funds reserve the right to refuse
any exchange purchase request. Call our Client Services
Department (1-800-662-2739) for assistance. The new
account will have the same registration as the existing
account.
51
<PAGE> 56
Telephone exchanges are not accepted for the Portfolios
of Vanguard Balanced Index Fund, Vanguard Index Trust,
and Vanguard International Equity Index Fund. You may,
however, open an account by exchange by providing the
appropriate information on the Account Registration
Form.
PURCHASING BY
FUND EXPRESS
AUTOMATIC INVESTMENT
AND SPECIAL PURCHASE The Fund Express Automatic Investment option lets you
move money from your bank account to your Vanguard
account on the schedule (monthly, bimonthly [every other
month], quarterly or yearly) you select. Additionally,
the Fund Express Special Purchase option which is only
available for Portfolios of the Vanguard Bond Index Fund
lets you move money from your bank account to your
Vanguard account at your request. To establish this
option, please provide the appropriate information on
the Account Registration Form. We will send you a
confirmation of your Fund Express enrollment; please
wait three weeks before using the service.
- --------------------------------------------------------------------------------
CHOOSING A
DISTRIBUTION
OPTION You must select one of three distribution options:
1. AUTOMATIC REINVESTMENT OPTION -- Both dividends and
capital gains distributions will be reinvested in
additional Fund shares. This option will be selected
for you automatically unless you specify one of the
other options.
2. CASH DIVIDEND OPTION -- Your dividends will be paid
in cash and your capital gains will be reinvested in
additional Fund shares.
3. ALL CASH OPTION -- Both dividend and capital gains
distributions will be paid in cash.
You may change your option by calling our Client
Services Department (1-800-662-2739).
In addition, an option to invest your cash dividends
and/or capital gains distributions in another Vanguard
Fund account is available. Please call our Client
Services Department (1-800-662-2739) for information.
You may also elect Vanguard Dividend Express which
allows you to transfer your cash dividends and/or
capital gains distributions automatically to your bank
account. Please see "Other Vanguard Services" for more
information.
- --------------------------------------------------------------------------------
TAX CAUTION
INVESTORS SHOULD ASK
ABOUT THE TIMING OF
CAPITAL GAINS AND
DIVIDEND DISTRIBUTIONS
BEFORE INVESTING Under Federal tax laws, the Fund is required to
distribute net capital gains and dividend income to Fund
shareholders. These distributions are made to all
shareholders who own Fund shares as of the
distribution's record date, regardless of how long the
shares have been owned. Purchasing shares just prior to
the record date could have a significant impact on your
tax liability for the year. For example, if you purchase
shares immediately prior to the record date of a sizable
capital gain or income dividend distribution, you will
be assessed taxes on the amount of the capital gain
and/or dividend distribution later paid even though you
owned the Fund shares for just a short period of time.
(Taxes are due on the distributions even if the dividend
or gain is reinvested in
52
<PAGE> 57
additional Fund shares.) While the total value of your
investment will be the same after the
distribution -- the amount of the distribution will
offset the drop in the NAV of the shares -- you should
be aware of the tax implications the timing of your
purchase may have.
Prospective investors should, therefore, inquire about
potential distributions before investing. Each Fund's
annual capital gains distributions normally occurs in
December. Income dividends are generally paid on the
first day of each month for the four Portfolios of
Vanguard Bond Index Fund, annually in December for the
three Portfolios of Vanguard International Equity Index
Fund, and the Extended Market and Small Capitalization
Stock Portfolio of Vanguard Index Trust, and quarterly
in March, June, September and December for Vanguard
Balanced Index Fund, and the 500, Total Stock Market,
and the Value and Growth Portfolios of Vanguard Index
Trust. For additional information on distributions and
taxes, see the section titled "Dividends, Capital Gains,
and Taxes."
- --------------------------------------------------------------------------------
IMPORTANT
INFORMATION
ESTABLISHING OPTIONAL The easiest way to establish optional Vanguard services
SERVICES on your account is to select the options you desire when
you complete your Account Registration Form. IF YOU WISH
TO ADD OPTIONS LATER, YOU MAY NEED TO PROVIDE VANGUARD
WITH ADDITIONAL INFORMATION AND A SIGNATURE GUARANTEE.
PLEASE CALL OUR CLIENT SERVICES DEPARTMENT
(1-800-662-2739) FOR FURTHER ASSISTANCE.
SIGNATURE
GUARANTEES For our mutual protection, we may require a signature
guarantee on certain written transaction requests. A
signature guarantee verifies the authenticity of your
signature and may be obtained from banks, brokers and
any other guarantor that Vanguard deems acceptable. A
SIGNATURE GUARANTEE CANNOT BE PROVIDED BY A NOTARY
PUBLIC.
CERTIFICATES Share certificates will be issued upon request for
Portfolios of Vanguard Bond Index Fund, Vanguard Index
Trust, and the European and Pacific Portfolios of
Vanguard International Equity Index Fund. If a
certificate is lost, you may incur an expense to replace
it. Share certificates will not be available for
Vanguard Balanced Index Fund and the Emerging Markets
Portfolio of Vanguard International Equity Index Fund.
BROKER-DEALER
PURCHASES If you purchase shares in Vanguard Funds through a
registered broker-dealer or investment adviser, the
broker-dealer or adviser may charge a service fee.
CANCELLING
TRADES The Fund will not cancel any trade (e.g., a purchase,
exchange or redemption) believed to be authentic,
received in writing or by telephone, once the trade has
been received.
- --------------------------------------------------------------------------------
WHEN YOUR
ACCOUNT WILL
BE CREDITED The trade date is the date on which your account is
credited.
For the Vanguard Bond Index Fund, the trade date is
generally the day on which the Fund receives your
investment in the form of Federal Funds (monies credited
to the Fund's Custodian Bank by a Federal Reserve
53
<PAGE> 58
Bank). Your trade date varies according to your method
of payment for your shares.
For purchases by check the Fund is ordinarily credited
with Federal Funds within one business day. Thus, if
your purchase by check is received by the close of the
New York Stock Exchange (generally 4:00 p.m. Eastern
time), your trade date is the business day following
receipt of your check or wire. If your purchase is
received after the close of the Exchange, your trade
date is the second business day following receipt of
your check or wire.
For purchases by Federal Funds wire or exchange, the
Fund is credited immediately with Federal Funds. Thus,
if your purchase by Federal Funds wire or exchange is
received by the close of the Exchange, your trade date
is the day of receipt. If your purchase is received
after the close of the Exchange, your trade date is the
business day following receipt of your wire or exchange.
For Vanguard Balanced Fund, Vanguard Index Trust and
Vanguard International Equity Index Fund, if your
purchase is made by check, Federal Funds wire or
exchange, and is received by the close of regular
trading the New York Stock Exchange (generally 4:00 p.m.
Eastern time), your trade date is the day of receipt. If
your purchase is received after the close of the
Exchange, your trade date is the next business day.
Shares of the Funds are purchased at the net asset value
determined on your trade date. Shares of the Extended
Market and Small Capitalization Stock Portfolios are
also subject to a 1% portfolio transaction fee, shares
of the Total Stock Market Portfolio are subject to a
0.25% portfolio transaction fee. Shares of Vanguard
International Equity Index Fund-Pacific Portfolio and
European Portfolio are subject to a 1% transaction fee
while shares of the Emerging Markets Portfolio are
subject to a 2% transaction fee on purchases. See "Fund
Expenses" for additional information.
In order to prevent lengthy processing delays caused by
the clearing of foreign checks, Vanguard will only
accept a foreign check which has been drawn in U.S.
dollars and has been issued by a foreign bank with a
U.S. correspondent bank. The name of the U.S.
correspondent bank must be printed on the face of the
foreign check.
Your shares are purchased at the next-determined net
asset value after your investment has been received in
the form of Federal Funds. You will begin to earn
dividends on the calendar day following the trade date.
(For a Friday trade date, you will begin earning
dividends on Saturday.)
- --------------------------------------------------------------------------------
SELLING YOUR
SHARES You may withdraw any portion of the funds in your
account by redeeming shares at any time. You may
initiate a request by writing or by telephoning. Your
redemption proceeds are normally mailed, credited or
wired -- depending upon the method of withdrawal you
have PREVIOUSLY chosen -- within two business days after
the receipt of the request in Good Order.
--------------------------------------------------------
54
<PAGE> 59
SELLING BY WRITING
A CHECK Redemption by check is only available to shareholders of
Vanguard Bond Index Fund. You may withdraw funds from
your Vanguard Bond Index account by writing a check
payable in the amount of $250 or more. When a check is
presented for payment to the Fund's agent, CoreStates
Bank, the Fund will redeem sufficient shares in your
account at the next-determined net asset value to cover
the amount of the check.
In order to establish the checkwriting option on your
account, all registered shareholders must sign a
signature card. After your completed signature card is
received by the Fund, an initial supply of checks will
be mailed within 10 business days. There is no charge
for checks or for their clearance. CORPORATIONS, TRUSTS
AND OTHER ORGANIZATIONS SHOULD CALL OR WRITE OUR CLIENT
SERVICES DEPARTMENT (1-800-662-2739) BEFORE SUBMITTING
SIGNATURE CARDS, AS ADDITIONAL DOCUMENTS MAY BE REQUIRED
TO ESTABLISH THE CHECKWRITING SERVICE.
Before establishing the checkwriting option, you should
be aware that:
1. Writing a check (a redemption of shares) is a taxable
event.
2. The Fund does not allow an account to be closed
through the checkwriting option.
3. Vanguard cannot guarantee a stop payment on the
checkwriting option. If you wish to reverse a stop
payment order, you must do so in writing.
4. Shares held in certificate form cannot be redeemed
using the checkwriting option.
5. The Fund reserves the right to terminate or alter
this service at any time.
--------------------------------------------------------
SELLING BY MAIL Requests should be mailed to VANGUARD FINANCIAL CENTER,
VANGUARD INDEX FUNDS, P.O. BOX 1120, VALLEY FORGE, PA
19482. (For express or registered mail, send your
request to Vanguard Financial Center, Vanguard Index
Funds, 455 Devon Park Drive, Wayne, PA 19087.)
The redemption price of shares will be the Portfolio's
net asset value next determined after Vanguard has
received all required documents in Good Order.
--------------------------------------------------------
DEFINITION OF
GOOD ORDER GOOD ORDER means that the request includes the
following:
1. The account number and Portfolio name.
2. The amount of the transaction (specified in dollars
or shares).
3. The signatures of all owners EXACTLY as they are
registered on the account.
4. Any required signature guarantees.
5. Other supporting legal documentation that might be
required, in the case of estates, corporations,
trusts, and certain other accounts.
6. Any certificates you are holding for the account.
IF YOU HAVE QUESTIONS ABOUT THIS DEFINITION AS IT
PERTAINS TO YOUR REQUEST, PLEASE CALL OUR CLIENT
SERVICES (1-800-662-2739).
--------------------------------------------------------
55
<PAGE> 60
SELLING BY
TELEPHONE To sell shares by telephone, you or your pre-authorized
representative may call our Client Services Department
at 1-800-662-2739. For telephone redemptions, you may
have the proceeds sent to you either by mail or by wire.
In addition to the details below, please see "Important
Information About Telephone Transactions."
BY MAIL: Telephone mail redemption is automatically
established on your account unless you indicate
otherwise on your Account Registration Form. You may
redeem any amount by calling Vanguard. The proceeds will
be paid to the registered shareholders and mailed to the
address of record.
BY WIRE: Telephone wire redemption must be specifically
elected for your account. The best time to elect
telephone wire redemption is at the time you complete
your Account Registration Form. If you do not presently
have telephone wire redemption and wish to establish it,
please contact Client Services.
With the wire redemption option, you may withdraw a
minimum of $1,000 and have the amount wired directly to
your bank account. Wire redemptions less than $5,000 are
subject to a $5 charge deducted by Vanguard. There is no
Vanguard charge for wire redemptions of $5,000 or more.
However, your bank may assess a separate fee to accept
incoming wires.
A request to change the bank associated with your wire
redemption option must be received in writing, signed by
each registered shareholder, and accompanied by a voided
check or preprinted deposit slip. A signature guarantee
is required if your bank registration is not identical
to your Vanguard Fund account registration.
--------------------------------------------------------
SELLING BY FUND
EXPRESS
AUTOMATIC WITHDRAWAL
& SPECIAL REDEMPTION If you select the Fund Express Automatic Withdrawal
option, money will be automatically moved from your
Vanguard Fund account to your bank account according to
the schedule you have selected. The Special Redemption
option (only available to Vanguard Bond Index Fund
Shareholders) lets you move money from your Vanguard
account to your bank account on your request. You may
elect Fund Express on the Account Registration Form or
call our Investor Information Department
(1-800-662-7447) for a Fund Express application.
--------------------------------------------------------
SELLING BY
EXCHANGE You may sell shares of the Portfolio by making an
exchange into another Vanguard Fund account. Exchanges
to and from Vanguard Balanced Fund, Vanguard Index Trust
and Vanguard International Equity Index Fund may be made
only by mail. Send your exchange request to Vanguard
Financial Center, Vanguard (insert Fund name), P.O. Box
1120, Valley Forge, PA 19482. Please see "Exchanging
Your Shares" for details.
--------------------------------------------------------
56
<PAGE> 61
IMPORTANT REDEMPTION
INFORMATION Shares purchased by check or Fund Express may not be
redeemed until payment for the purchase is collected,
which may take up to ten calendar days. Your money is
invested and earns dividends during the holding period.
--------------------------------------------------------
DELIVERY OF
REDEMPTION
PROCEEDS Redemption requests received by telephone prior to the
close of the New York Stock Exchange (generally 4:00
p.m. Eastern time), are processed on the day of receipt
and the redemption proceeds are normally sent on the
following business day.
Redemption requests received by telephone after the
close of the Exchange are processed on the business day
following receipt and the proceeds are normally sent on
the second business day following receipt.
Redemption proceeds must be sent to you within seven
days of receipt of your request in Good Order.
If you experience difficulty in making a telephone
redemption during periods of drastic economic or market
changes, your redemption request may be made by regular
or express mail. It will be implemented at the net asset
value next determined after your request has been
received by Vanguard in Good Order. The Fund reserves
the right to revise or terminate the telephone
redemption privilege at any time.
The Fund may suspend the redemption right or postpone
payment at times when the New York Stock Exchange is
closed or under any emergency circumstances as
determined by the United States Securities and Exchange
Commission.
If the Board of Directors determines that it would be
detrimental to the best interests of the Fund's
remaining shareholders to make payment in cash, the Fund
may pay redemption proceeds in whole or in part by a
distribution in kind of readily marketable securities.
--------------------------------------------------------
VANGUARD'S AVERAGE
COST STATEMENT If you make a redemption from a qualifying account,
Vanguard will send you an Average Cost Statement which
provides you with the tax basis of the shares you
redeemed. Please see "Other Vanguard Services" for
additional information.
--------------------------------------------------------
MINIMUM ACCOUNT
BALANCE REQUIREMENT Due to the relatively high cost of maintaining smaller
accounts, the Fund reserves the right to redeem shares
in any account that is below the minimum initial
investment amount of $3,000. In addition, if at any time
the total investment does not have a value of at least
$1,000, you may be notified that the value of your
account is below the Fund's minimum account balance
requirement. You would then be allowed 60 days to make
an additional investment before the account is
liquidated. Proceeds would be promptly paid to the
shareholder. This minimum requirement does not apply to
IRAs, other retirement accounts, and Uniform
Gifts/Transfers to Minors Act accounts.
- --------------------------------------------------------------------------------
57
<PAGE> 62
EXCHANGING
YOUR SHARES
EXCHANGING BY
TELEPHONE
Call Client Services
(1-800-662-2739) Should your investment goals change, you may exchange
your shares for those of other available Vanguard Funds.
Vanguard Bond Index Fund is the only Vanguard Index Fund
that allows telephone exchange. When exchanging shares
by telephone, please have ready the Portfolio name,
account number, Social Security Number or Taxpayer
Identification Number listed on the account, and account
address. Requests for telephone exchanges received prior
to the close of the New York Stock Exchange (generally
4:00 p.m. Eastern time) are processed at the close of
business that same day. Requests received after the
close of the Exchange are processed the next business
day. TELEPHONE EXCHANGES ARE NOT ACCEPTED INTO OR FROM
VANGUARD BALANCED INDEX FUND, VANGUARD EXPLORER FUND,
VANGUARD INDEX TRUST, VANGUARD INTERNATIONAL EQUITY
INDEX FUND -- EUROPEAN AND PACIFIC PORTFOLIOS, AND
VANGUARD QUANTITATIVE PORTFOLIOS. If you experience
difficulty in making a telephone exchange, your exchange
request may be made by regular or express mail, and it
will be implemented at the closing net asset value on
the date received by Vanguard provided the request is
received in Good Order.
--------------------------------------------------------
EXCHANGING BY MAIL Please be sure to include on your exchange request the
name and account number of your current Portfolio, the
name of the Fund you wish to exchange into, the amount
you wish to exchange, and the signatures of all
registered account holders. Send your request to
VANGUARD FINANCIAL CENTER, VANGUARD INDEX FUNDS, P.O.
BOX 1120, VALLEY FORGE, PA 19482. (For express or
registered mail, send your request to Vanguard Financial
Center, Vanguard Index Funds, 455 Devon Park Drive,
Wayne, PA 19087.)
--------------------------------------------------------
IMPORTANT EXCHANGE
INFORMATION Before you make an exchange, you should consider the
following:
- Please read the Fund's prospectus before making an
exchange. For a copy and for answers to any questions
you may have, call our Investor Information Department
(1-800-662-7447).
- An exchange is treated as a redemption and a purchase.
Therefore, you could realize a taxable gain or loss on
the transaction.
- Exchanges are accepted only if the registrations and
the Taxpayer Identification numbers of the two
accounts are identical.
- New accounts are not currently accepted in
Vanguard/Windsor Fund.
- The redemption price of shares redeemed by exchange is
the net asset value next determined after Vanguard has
received all required documentation in Good Order.
- When opening a new account by exchange, you must meet
the minimum investment requirement of the new Fund.
58
<PAGE> 63
Every effort will be made to maintain the exchange
privilege. However, the Fund reserves the right to
revise or terminate its provisions, limit the amount of
or reject any exchange, as deemed necessary, at any
time.
- --------------------------------------------------------------------------------
EXCHANGE
PRIVILEGE
LIMITATIONS The Fund's exchange privilege is not intended to afford
shareholders a way to speculate on short-term movements
in the market. Accordingly, in order to prevent
excessive use of the exchange privilege that may
potentially disrupt the management of the Fund and
increase transaction costs, the Fund has established a
policy of limiting excessive exchange activity.
Exchange activity generally will not be deemed excessive
if limited to TWO SUBSTANTIVE EXCHANGE REDEMPTIONS (AT
LEAST 30 DAYS APART) from a Portfolio of the Fund during
any twelve month period. Notwithstanding these
limitations, the Fund reserves the right to reject any
purchase request (including exchange purchases from
other Vanguard portfolios) that is reasonably deemed to
be disruptive to efficient portfolio management.
- --------------------------------------------------------------------------------
IMPORTANT
INFORMATION
ABOUT TELEPHONE
TRANSACTIONS The ability to initiate redemptions (except wire
redemptions) and exchanges by telephone is automatically
established on your account unless you request in
writing that telephone transactions on your account not
be permitted. The ability to initiate wire redemptions
by telephone will be established on your account only if
you specifically elect this option in writing.
To protect your account from losses resulting from
unauthorized or fraudulent telephone instructions,
Vanguard adheres to the following security procedures:
1. SECURITY CHECK. To request a transaction by
telephone, the caller must know (i) the name of the
Portfolio; (ii) the 10-digit account number; (iii)
the exact name in which the account is registered;
and (iv) the Social Security or Taxpayer
Identification number listed on the account.
2. PAYMENT POLICY. The proceeds of any telephone
redemption by mail will be made payable to the
registered shareowner and mailed to the address of
record, only. In the case of a telephone redemption
by wire, the wire transfer will be made only in
accordance with the shareowner's prior written
instructions.
Neither the Fund nor Vanguard will be responsible for
the authenticity of transaction instructions received by
telephone, provided that reasonable security procedures
have been followed. Vanguard believes that the security
procedures described above are reasonable and that if
such procedures are followed, you will bear the risk of
any losses resulting from unauthorized or fraudulent
telephone transactions on your account. If Vanguard
fails to follow reasonable security procedures, it may
be liable for any losses resulting from unauthorized or
fraudulent telephone transactions on your account.
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TRANSFERRING
REGISTRATION You may transfer the registration of any of your Fund
shares to another person by completing a transfer form
and sending it to: VANGUARD FINANCIAL CENTER, P.O. BOX
1110, VALLEY FORGE, PA 19482, ATTENTION: TRANSFER
DEPARTMENT. The request must be in Good Order. To obtain
a transfer form, please call our Client Services
Department (1-800-662-2739).
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OTHER VANGUARD
SERVICES
STATEMENTS AND
REPORTS For more information about any of these services, please
call our Investor Information Department at
1-800-662-7447.
Vanguard will send you a confirmation statement each
time you initiate a transaction in your account. You
will also receive a comprehensive account statement at
the end of each calendar quarter. The fourth-quarter
statement will be a year-end statement, listing all
transaction activity for the entire calendar year.
Vanguard's Average Cost Statement provides you with the
average cost of shares redeemed from your account, using
the average cost single category method. This service is
available for most taxable accounts opened since January
1, 1986. In general, investors who redeemed shares from
a qualifying Vanguard account may expect to receive
their Average Cost Statement in February of the
following year. Please call our Client Services
Department (1-800-662-2739) for information.
Financial reports on the Fund will be mailed to you
semi-annually, according to the Fund's fiscal year-end.
VANGUARD DIRECT
DEPOSIT SERVICE With Vanguard's Direct Deposit Service, most U.S.
Government checks (including Social Security and
military pension checks) and private payroll checks may
be automatically deposited into your Vanguard Fund
account. Separate brochures and forms are available for
direct deposit of U.S. Government and private payroll
checks.
VANGUARD AUTOMATIC
EXCHANGE SERVICE Vanguard's Automatic Exchange Service allows you to move
money automatically among your Vanguard Fund accounts.
For instance, the service can be used to "dollar cost
average" from a money market portfolio into a stock or
bond fund or to contribute to an IRA or other retirement
plan.
VANGUARD FUND
EXPRESS Vanguard's Fund Express allows you to transfer money
between your Fund account and your account at a bank,
savings and loan association, or a credit union that is
a member of the Automated Clearing House (ACH) system.
You may elect this service on the Account Registration
Form or call our Investor Information Department
(1-800-662-7447) for a Fund Express application.
The minimum amount that can be transferred by telephone
is $100. However, if you have established one of the
automatic options, the minimum amount is $50. The
maximum amount that can be transferred using any of the
options is $100,000.
Special rules govern how your Fund Express purchases or
redemptions are credited to your account. In addition,
some services of Fund Express
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cannot be used with specific Vanguard Funds. For more
information, please refer to the Vanguard Fund Express
brochure.
VANGUARD DIVIDEND
EXPRESS Vanguard's Dividend Express allows you to transfer your
dividends and/or capital gains distributions
automatically from your Fund account, one business day
after the Fund's payable date, to your account at a
bank, savings and loan association, or a credit union
that is a member of the Automated Clearing House (ACH)
network. You may elect this service on the Account
Registration Form or call our Investor Information
Department (1-800-662-7447) for a Vanguard Dividend
Express application.
VANGUARD
TELE-ACCOUNT Vanguard Tele-Account is a convenient, automated service
that provides share price, price change and yield
quotations on Vanguard Funds through any TouchToneTM
telephone. This service also lets you obtain information
about your account balance, your last transaction, and
your most recent dividend or capital gains payment. To
contact Vanguard's Tele-Account service, dial
1-800-ON-BOARD (1-800-662-6273). A brochure offering
detailed operating instructions is available from our
Investor Information Department (1-800-662-7447).
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<TABLE>
<S> <C>
[LOGO]
---------------------------
THE VANGUARD GROUP
OF INVESTMENT
COMPANIES
Vanguard Financial Center
P.O. Box 2600
Valley Forge, PA 19482
INVESTOR INFORMATION
DEPARTMENT:
1-800-662-7447 (SHIP)
CLIENT SERVICES
DEPARTMENT:
1-800-662-2739 (CREW)
TELE-ACCOUNT FOR
24-HOUR ACCESS:
1-800-662-6273 (ON BOARD)
TELECOMMUNICATION SERVICE
FOR THE HEARING-IMPAIRED:
1-800-662-2738
TRANSFER AGENT:
The Vanguard Group, Inc.
Vanguard Financial Center
Valley Forge, PA 19482
PO----
</TABLE>
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<PAGE> 67
EDGAR APPENDIX
1. Vanguard Banner Waving.
<PAGE> 68
PART B
VANGUARD INDEX TRUST
STATEMENT OF ADDITIONAL INFORMATION
DECEMBER 30, 1994
This Statement is not a prospectus but should be read in conjunction with
the Trust's current Prospectus (dated December 30, 1994). To obtain the
Prospectus please call:
VANGUARD INVESTOR INFORMATION CENTER
1-800-662-7447
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
Investment Objectives and Policies........................................................ 1
Investment Limitations.................................................................... 5
Purchase of Shares........................................................................ 6
Redemption of Shares...................................................................... 7
Yield and Total Return.................................................................... 7
Management of the Trust................................................................... 8
Portfolio Transactions.................................................................... 10
Description of Shares and Voting Rights................................................... 10
Performance Measures...................................................................... 11
Financial Statements...................................................................... 12
</TABLE>
INVESTMENT OBJECTIVES AND POLICIES
REPURCHASE AGREEMENTS Each Portfolio of the Trust may invest in repurchase
agreements with commercial banks, brokers or dealers either for defensive
purposes due to market conditions or to generate income from its excess cash
balances. A repurchase agreement is an agreement under which the Portfolio
acquires a money market instrument (generally a security issued by the U.S.
Government or an agency thereof, a banker's acceptance or a certificate of
deposit) from a commercial bank, broker or dealer, subject to resale to the
seller at an agreed upon price and date (normally, the next business day). A
repurchase agreement may be considered a loan collateralized by securities. The
resale price reflects an agreed upon interest rate effective for the period the
instrument is held by the Portfolio and is unrelated to the interest rate on the
underlying instrument. In these transactions, the securities acquired by the
Portfolio (including accrued interest earned thereon) must have a total value in
excess of the value of the repurchase agreement and are held by the Trust's
custodian banks until repurchased. In addition, the Board of Trustees will
monitor the Trust's repurchase agreement transactions generally and will
establish guidelines and standards for review of the creditworthiness of any
bank, broker or dealer party to a repurchase agreement with the Trust. No more
than an aggregate of 15% of a Portfolio's assets at the time of investment, will
be invested in repurchase agreements having maturities longer than seven days
and securities subject to legal or contractual restrictions on resale, or for
which there are no readily available market quotations.
The use of repurchase agreements involves certain risks. For example, if
the other party to the agreement defaults on its obligation to repurchase the
underlying security at a time when the value of the security has declined, the
Portfolio may incur a loss upon disposition of the security. If the other party
to the agreement becomes insolvent and subject to liquidation or reorganization
under the Bankruptcy Code or other laws, a court may determine that the
underlying security is collateral for a loan by the Portfolio not within the
control of the Portfolio and therefore the Portfolio may not be able to
substantiate its interest in the underlying security and may be deemed an
unsecured creditor of the other party to the agreement. While the Trust's
management acknowledges these risks, it is expected that they can be controlled
through careful monitoring procedures.
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LENDING OF SECURITIES Each Portfolio of the Trust may lend its securities
to qualified institutional investors who need to borrow securities in order to
complete certain transactions, such as covering short sales, avoiding failures
to deliver securities or completing arbitrage operations. By lending its
portfolio securities, a Portfolio attempts to increase its net investment income
through the receipt of interest on the loan. Any gain or loss in the market
price of the securities loaned that might occur during the term of the loan
would be for the account of the Portfolio. The Portfolio may lend its portfolio
securities to qualified brokers, dealers, banks or other financial institutions,
so long as the terms, the structure and the aggregate amount of such loans are
not inconsistent with the Investment Company Act of 1940, or the Rules and
Regulations or interpretations of the Securities and Exchange Commission (the
"Commission") thereunder, which currently require that (a) the borrower pledge
and maintain with the Trust collateral consisting of cash, a letter of credit
issued by a domestic U.S. bank, or securities issued or guaranteed by the United
States Government having at all times not less than 100% of the value of the
securities loaned, (b) the borrower add to such collateral whenever the price of
the securities loaned rises (i.e. the borrower "marks to the market" on a daily
basis), (c) the loan be made subject to termination by the Trust at any time and
(d) the Portfolio receive reasonable interest on the loan (which may include the
Portfolio's investing any cash collateral in interest bearing short-term
investments), any distribution on the loaned securities and any increase in
their market value. Loan arrangements made by the Trust will comply with all
other applicable regulatory requirements, including the rules of the New York
Stock Exchange, which rules presently require the borrower, after notice, to
redeliver the securities within the normal settlement time of five business
days. All relevant facts and circumstances, including the creditworthiness of
the broker, dealer or institution, will be considered in making decisions with
respect to the lending of securities, subject to review by the Board of
Trustees.
At the present time, the Staff of the Commission does not object if an
investment company pays reasonable negotiated fees in connection with loaned
securities, so long as such fees are set forth in a written contract and
approved by the investment company's trustees. In addition, voting rights may
pass with the loaned securities, but if a material event will occur affecting an
investment on loan, the loan must be called and the securities voted.
FUTURES CONTRACTS Each Portfolio of the Trust may enter into futures
contracts, options, warrants, options on futures contracts, convertible
securities and swap agreements for the purpose of simulating full investment and
reducing transactions costs. The Trust does not use futures or options for
speculative purposes. Each Portfolio will only use futures and options to
simulate full investment in the underlying index while retaining a cash balance
for fund management purposes. Futures contracts provide for the future sale by
one party and purchase by another party of a specified amount of a specific
security at a specified future time and at a specified price. Futures contracts
which are standardized as to maturity date and underlying financial instrument
are traded on national futures exchanges. Futures exchanges and trading are
regulated under the Commodity Exchange Act by the Commodity Futures Trading
Commission ("CFTC"), a U.S. Government Agency.
Although futures contracts by their terms call for actual delivery or
acceptance of the underlying securities, in most cases the contracts are closed
out before the settlement date without the making or taking of delivery. Closing
out an open futures position is done by taking an opposite position ("buying" a
contract which has previously been "sold," or "selling" a contract previously
purchased) in an identical contract to terminate the position. Brokerage
commissions are incurred when a futures contract is bought or sold.
Futures traders are required to make a good faith margin deposit in cash or
government securities with a broker or custodian to initiate and maintain open
positions in futures contracts. A margin deposit is intended to assure
completion of the contract (delivery or acceptance of the underlying security)
if it is not terminated prior to the specified delivery date. Minimal initial
margin requirements are established by the futures exchange and may be changed.
Brokers may establish deposit requirements which are higher than the exchange
minimums. Futures contracts are customarily purchased and sold on deposits which
may range upward from less than 5% of the value of the contract being traded.
After a futures contract position is opened, the value of the contract is
marked to market daily. If the futures contract price changes to the extent that
the margin on deposit does not satisfy margin requirements, payment of
additional "variation" margin will be required. Conversely, change in the
contract value may
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<PAGE> 70
reduce the required margin, resulting in a repayment of excess margin to the
contract holder. Variation margin payments are made to and from the futures
broker for as long as the contract remains open. A Portfolio of the Trust
expects to earn interest income on its margin deposits.
Traders in futures contracts may be broadly classified as either "hedgers"
or "speculators." Hedgers use the futures markets primarily to offset
unfavorable changes in the value of securities otherwise held for investment
purposes or expected to be acquired by them. Speculators are less inclined to
own the securities underlying the futures contracts which they trade, and use
futures contracts with the expectation of realizing profits from fluctuations in
the prices of underlying securities. The Trust's Portfolios intend to use
futures contracts only for bonafide hedging purposes.
Regulations of the CFTC applicable to the Trust require that all of its
futures transactions constitute bonafide hedging transactions. A Portfolio will
only sell futures contracts to protect against a decrease in the price of
securities it intends to sell or purchase contracts to protect against an
increase in the price of securities it intends to purchase. As evidence of this
hedging interest, the Portfolio expects that approximately 75% of its futures
contract purchases will be "completed," that is, equivalent amounts of related
securities will have been purchased or are being purchased by the Portfolio upon
sale of open futures contracts.
Although techniques other than the sale and purchase of futures contracts
could be used to control the Portfolio's exposure to market fluctuations, the
use of futures contracts may be a more effective means of hedging this exposure.
While a Portfolio will incur commission expenses in both opening and closing out
futures positions, these costs are lower than transaction costs incurred in the
purchase and sale of the underlying securities.
RESTRICTIONS ON THE USE OF FUTURES CONTRACTS A Portfolio will not enter
into futures contract transactions to the extent that, immediately thereafter,
the sum of its initial margin deposits on open contracts exceeds 5% of the
market value of the Portfolio's total assets. In addition, a Portfolio will not
enter into futures contracts to the extent that its outstanding obligations to
purchase securities under these contracts would exceed 20% of the Portfolio's
total assets.
RISK FACTORS IN FUTURES TRANSACTIONS Positions in futures contracts may be
closed out only on an Exchange which provides a secondary market for such
futures. However, there can be no assurance that a liquid secondary market will
exist for any particular futures contract at any specific time. Thus, it may not
be possible to close a futures position. In the event of adverse price
movements, the Portfolio would continue to be required to make daily cash
payments to maintain its required margin. In such situations, if the Portfolio
has insufficient cash, it may have to sell portfolio securities to meet daily
margin requirements at a time when it may be disadvantageous to do so. In
addition, the Portfolio may be required to make delivery of the instruments
underlying futures contracts it holds. The inability to close options and
futures positions also could have an adverse impact on the ability to
effectively hedge it.
Each Portfolio will minimize the risk that it will be unable to close out a
futures contract by only entering into futures which are traded on national
futures exchanges and for which there appears to be a liquid secondary market.
The risk of loss in trading futures contracts in some strategies can be
substantial, due both to the low margin deposits required, and the extremely
high degree of leverage involved in futures pricing. As a result, a relatively
small price movement in a futures contract may result in immediate and
substantial loss (as well as gain) to the investor. For example, if at the time
of purchase, 10% of the value of the futures contract is deposited as margin, a
subsequent 10% decrease in the value of the futures contract would result in a
total loss of the margin deposit, before any deduction for the transaction
costs, if the account were then closed out. A 15% decrease would result in a
loss equal to 150% of the original margin deposit if the contract were closed
out. Thus, a purchase or sale of a futures contract may result in losses in
excess of the amount invested in the contract. The Trust also bears the risk
that the adviser will incorrectly predict future stock market trends. However,
because the futures strategies of the Trust are engaged in only for hedging
purposes, the Trust's officers do not believe that the Portfolios are subject to
the risks of loss frequently associated with futures
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<PAGE> 71
transactions. A Portfolio would presumably have sustained comparable losses if,
instead of the futures contract, it had invested in the underlying financial
instrument and sold it after the decline.
Utilization of futures transactions by the Trust does involve the risk of
imperfect or no correlation where the securities underlying futures contracts
have different maturities than the portfolio securities being hedged.
It is also possible that the Portfolio could both lose money on futures
contracts and also experience a decline in value of its portfolio securities.
There is also the risk of loss by the Portfolio of margin deposits in the event
of bankruptcy of a broker with whom the Portfolio has an open position in a
futures contract or related option.
Most futures exchanges limit the amount of fluctuation permitted in futures
contract prices during a single trading day. The daily limit establishes the
maximum amount that the price of a futures contract may vary either up or down
from the previous day's settlement price at the end of a trading session. Once
the daily limit has been reached in a particular type of contract, no trades may
be made on that day at a price beyond that limit. The daily limit governs only
price movement during a particular trading day and therefore does not limit
potential losses, because the limit may prevent the liquidation of unfavorable
positions. Futures contract prices have occasionally moved to the daily limit
for several consecutive trading days with little or no trading, thereby
preventing prompt liquidation of future positions and subjecting some futures
traders to substantial losses.
FEDERAL TAX TREATMENT OF FUTURES CONTRACTS Except for transactions the
Trust has identified as hedging transactions, each Portfolio of the Trust is
required for federal income tax purposes to recognize as income for each taxable
year its net unrealized gains and losses on certain futures contracts as of the
end of the year as well as those actually realized during the year. In most
cases, any gain or loss recognized with respect to a futures contract is
considered to be 60% long-term capital gain or loss and 40% short-term capital
gain or loss, without regard to the holding period of the contract. Furthermore,
sales of futures contracts which are intended to hedge against a change in the
value of securities held by the Portfolio may affect the holding period of such
securities and, consequently, the nature of the gain or loss on such securities
upon disposition.
In order for each Portfolio to continue to qualify for Federal income tax
treatment as a regulated investment company, at least 90% of its gross income
for a taxable year must be derived from qualifying income; i.e., dividends,
interest, income derived from loans of securities, gains from the sale of
securities or of foreign currencies as other income derived with respect to the
Portfolio's business of investing in securities. In addition, gains realized on
the sale or other disposition of securities held for less than three months must
be limited to less than 30% of the Portfolio's annual gross income. Net gain
realized from the closing out of futures contracts will be considered gain from
the sale of securities and therefore be qualifying income for purposes of the
90% requirement. In order to avoid realizing excessive gains on securities held
less than three months, the Portfolio may be required to defer the closing out
of futures contracts beyond the time when it would otherwise be advantageous to
do so. It is anticipated that unrealized gains on futures contracts, which have
been open for less than three months as of the end of the Portfolio's fiscal
year and which are recognized for tax purposes, will not be considered gains on
sales of securities held less than three months for the purpose of the 30% test.
Each Portfolio will distribute to shareholders annually any net capital
gains which have been recognized for federal income tax purposes (including
unrealized gains at the end of the Portfolio's fiscal year) on futures
transactions. Such distributions will be combined with distributions of capital
gains realized on the Portfolio's other investments and shareholders will be
advised on the nature of the transactions.
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<PAGE> 72
INVESTMENT LIMITATIONS
The following restrictions and fundamental policies cannot be changed
without approval of the holders of a majority of the outstanding shares of each
Portfolio (as defined in the Investment Company Act of 1940). Each Portfolio may
not under any circumstances:
1) change its investment objective, which is to provide investment results
that correspond to the performance of a particular stock index as set
forth in (2) below;
2) change its investment policy, which is, in the case of the 500
Portfolio, is to attempt to duplicate the performance of Standard &
Poor's 500 Composite Stock Price Index by owning as many of the 500
stocks contained in the index as is feasible; in the case of the
Extended Market Portfolio, is to attempt to duplicate the performance
of common stocks traded on the New York Stock Exchange, American Stock
Exchange and NASDAQ not included in the S&P 500 Index as represented by
the Wilshire 4500 Index; in the case of the Total Stock Market
Portfolio to match the investment performance of the Wilshire 5000
Index, an index consisting of all regularly traded U.S. stocks; in the
case of the Value Portfolio to attempt to duplicate the performance of
the Standard & Poor's/BARRA Value Index by owning as many of the stocks
contained in the index as is feasible; in the case of the Growth
Portfolio to attempt to duplicate the performance of the Standard &
Poor's/BARRA Growth Index by owning as many of the stocks contained in
the index as is feasible; and, in the case of the Small Capitalization
Stock Portfolio to duplicate the investment performance of the Russell
2000 Small Stock Index;
3) invest in commodities or purchase real estate, although it may purchase
securities of companies which deal in real estate or interests therein,
and that each Portfolio may invest in stock index futures contracts,
stock options and options on stock index futures contracts to that
extent that not more than 5% of the Portfolio's assets are required as
margin deposit for futures contracts and not more than 20% of a
Portfolio's assets are invested in futures and options at any time;
4) lend money to any person except (i) by purchasing a portion of an issue
of short-term debt securities or similar obligations (including
repurchase agreements) which are publicly distributed or customarily
purchased by institutional investors, and (ii) as provided under
"Lending of Securities";
5) purchase securities on margin or sell securities short, except as set
forth in paragraph 3 above;
6) with respect to 75% of net assets, purchase more than 10% of the
outstanding voting securities of any company;
7) with respect to 75% of its assets, purchase securities of any issuer
(except obligations of the United States Government and its
instrumentalities), if, as a result, more than 5% of the value of the
Portfolio's total assets would be invested in the securities of such
issuer;
8) borrow money, except from banks (or through reverse repurchase
agreements) for temporary or emergency (not leveraging) purposes,
including the meeting of redemption requests which might otherwise
require the untimely disposition of securities, in an amount not
exceeding 15% of its net assets (including the amount borrowed and the
value of any outstanding reverse repurchase agreements) at the time the
borrowing is made. Whenever a borrowing exceeds 5% of a Portfolio's net
assets, the Portfolio will not make any additional investments;
9) pledge, mortgage, or hypothecate any of its assets to an extent greater
than 5% of the value of its total assets;
10) engage in the business of underwriting securities issued by other
persons except to the extent that a Portfolio may technically be deemed
an underwriter under the Securities Act of 1933, as amended, in
disposing of portfolio securities;
11) purchase or otherwise acquire any security if, as a result, more than
15% of its net assets would be invested in securities that are illiquid
(included in this limitation is the Trust's investment in The Vanguard
Group, Inc.);
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<PAGE> 73
12) invest for the purpose of controlling management of any company;
13) invest in securities of other investment companies, except as may be
acquired as a part of a merger, consolidation or acquisition of assets
approved by the Portfolio's shareholders, or otherwise to the extent
permitted by Section 12 of the Investment Company Act of 1940. The
Portfolio will invest only in investment companies which have
investment objectives and investment policies consistent with those of
the Portfolio;
14) invest more than 25% of the value of its total assets in any one
industry; or
15) invest in put, call, straddle or spread options or in interests in oil,
gas or other mineral exploration or development programs, except as set
forth in limitation number "3", above.
The above-mentioned investment limitations are considered at the time
investment securities are purchased. Notwithstanding these limitations, the
Trust may own all or any portion of the securities of, or make loans to, or
contribute to the costs or other financial requirements of any company which
will be wholly owned by the Trust and one or more other investment companies and
is primarily engaged in the business of providing, at-cost, management,
administrative, distribution or related services to the Trust and other
investment companies. See "The Vanguard Group". Each Portfolio of the Trust may
not invest more than 5% of its total assets in securities of companies which
have (with predecessors) a record of less than three years' of continuous
operation. Additionally, each Portfolio of the Trust will not purchase or retain
securities of an issuer if those Officers and Trustees of the Trust owning more
than 1/2 of 1% of such securities together own more than 5% of such securities.
These are non-fundamental policies which may be changed by the vote of a
majority of the Trustees.
PURCHASE OF SHARES
The Trust reserves the right in its sole discretion (i) to suspend the
offerings of its shares, (ii) to reject purchase or exchange purchase orders
when in the judgment of management such rejection is in the best interest of the
Trust, and (iii) to reduce or waive the minimum for initial and subsequent
investments for certain fiduciary accounts or under circumstances where certain
economies can be achieved in sales of the Trust's shares.
EXCHANGE OF SECURITIES FOR SHARES OF THE TRUST In certain circumstances,
shares of the Trust's Portfolios may be purchased in exchange for a minimum
value of $1 million in common stocks. Such common stocks must be included in the
appropriate Index and each position must have a market value in excess of
$10,000. Additionally, such securities will be acquired by a Portfolio of the
Trust for investment purpose and not for resale and must be liquid securities
which are not restricted as to transfer and have a value which is readily
ascertainable as evidenced by a listing on the American Stock Exchange, the New
York Stock Exchange or NASDAQ. Securities accepted by the Portfolio will be
valued as set forth under "The Share Price of Each Portfolio" in the Trust's
prospectus as of the time of the next determination of net asset value after
such acceptance. Shares of each Portfolio of the Trust are issued at net asset
value determined as of the same time. "IN-KIND" PURCHASES OF THE EXTENDED MARKET
PORTFOLIO, SMALL CAPITALIZATION STOCK AND THE TOTAL STOCK MARKET PORTFOLIO WILL
NOT BE SUBJECT TO THE 1% AND 0.25% TRANSACTION FEES. All dividends,
subscription, or other rights which are reflected in the market price of
accepted securities at the time of valuation become the property of the
Portfolio and must be delivered to the Portfolio by the investor upon receipt
from the issuer. A gain or loss for Federal income tax purposes would be
realized by the investor upon the exchange depending upon the cost of the
securities tendered.
The Portfolio will not accept securities in exchange unless: (1) such
securities are, at the time of the exchange, included in the Portfolio; (2) such
an exchange will not cause the Portfolio's weightings to come imbalanced with
respect to the weightings of the stocks included in the Index; (3) the investor
represents and agrees that all securities offered to the Portfolio are not
subject to any restrictions upon their sale by the Portfolio under the
Securities Act of 1933, or otherwise; (4) such securities are traded in an
unrelated transaction with a quoted sales price on the same day the exchange
valuation is made; (5) the quoted sales price used as a basis of valuation is
representative (i.e., one that does not involve a trade of substantial size
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<PAGE> 74
which artificially influences the price of the security); and (6) the value of
any such security being exchanged will not exceed 5% of the Portfolio's net
assets immediately prior to the transaction.
Investors interested in such purchases should contact the Trust.
REDEMPTION OF SHARES
Each Portfolio may suspend redemption privileges or postpone the date of
payment (i) during any period that the New York Stock Exchange is closed, or
trading on the Exchange is restricted as determined by the Securities and
Exchange Commission (the "Commission"), (ii) during any period when an emergency
exists as defined by the rules of the Commission as a result of which it is not
reasonably practicable for the Trust to dispose of securities owned by it, or
fairly to determine the value of its assets, and (iii) for such other periods as
the Commission may permit.
No charge is made by the Trust for redemptions. Any redemption may be more
or less than the shareholder's cost depending on the market value of the
securities held by each Portfolio.
The Trust has made an election with the Commission to pay in cash all
redemptions requested by any shareholder of record limited in amount during any
90-day period to the lesser of $250,000 or 1% of the net assets of a Portfolio
at the beginning of such period. Such committment is irrevocable without the
prior approval of the Commission. Redemptions in excess of the above limits may
be paid in whole or in part, in investment securities or in cash, as the
Trustees may deem advisable; however, payment will be made wholly in cash unless
the Trustees believe that economic or market conditions exist which would make
such a practice detrimental to the best interests of the Trust. If redemptions
are paid in investment securities, such securities will be valued as set forth
in the Prospectus under "The Share Price of Each Portfolio" and a redeeming
shareholder would normally incur brokerage expenses if he converted these
securities to cash.
YIELD AND TOTAL RETURN
The yield of the 500 Portfolio of the Trust for the 30 day period ended
June 30, 1994 was 2.78%. The yield of the Extended Market Portfolio of the Trust
for the 30 day period ended June 30, 1994 was 1.53%. The yield of the Total
Stock Market Portfolio of the Trust for the 30 day period ended June 30, 1994
was 2.36%. The yield of the Value Portfolio for the 30 day period ended June 30,
1994 was 3.27%. The yield of the Growth Portfolio for the 30 day period ended
June 30, 1994 was 2.19%. The yield of the Small Capitalization Stock Portfolio+
for the 30 day period ended June 30, 1994 was 1.29%.
The average annual total return of the 500 Portfolio* for the one, five and
ten year periods ended June 30, 1994 was +1.20%, +10.06% and +14.72%,
respectively. The average annual total return for the Extended Market
Portfolio** for the one and five year periods ended June 30, 1994 and since the
Portfolio's inception on December 21, 1987 was +1.32%, +9.15% and +12.59%,
respectively. The average annual total return of the Total Stock Market
Portfolio*** for the period ended June 30, 1994, and since the Portfolio's
inception on April 27, 1992 was +0.50% and +7.12%. The average annual total
return of the Value Portfolio* for the period ended June 30, 1994 and since
inception on November 2, 1992 was +2.94% and +11.46%. The average annual total
return of the Growth Portfolio* for the period ended June 30, 1994 and since
inception on November 2, 1992 was -0.57% and -0.09%. The average annual return
of the Small Capitalization Stock Portfolio** for the one, five and ten year
periods ended June 30, 1994 was +4.33%, +9.15% and +8.49%, respectively. Total
return is computed by finding the average compounded rates of return over the
one, five and ten year periods set forth above that would equate an initial
amount invested at the beginning of the periods to the ending redeemable value
of the investment.
- ---------------
* Total return figures are adjusted to reflect the $10 annual account
maintenance fee.
** Total return figures for the Extended Market and the Small Capitalization
Stock Portfolios reflect the 1% portfolio transaction fee and the $10 annual
account maintenance fee.
*** Total return figures for the Total Stock Market Portfolio reflect the 0.25%
portfolio transaction fee and the $10 annual account maintenance fee.
+ Formerly Vanguard Small Capitalization Stock Fund, Inc.
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<PAGE> 75
MANAGEMENT OF THE TRUST
TRUSTEES AND OFFICERS
The Officers of the Trust manage its day-to-day operations and are
responsible to the Trust's Board of Trustees. The Trustees set broad policies
for the Trust and choose its Officers. The following is a list of the Trustees
and Officers of the Trust and a statement of their present positions and
principal occupations during the past five years. The mailing address of the
Trustees and Officers of the Trust is Post Office Box 876, Valley Forge, PA
19482.
JOHN C. BOGLE, Chairman, Chief Executive Officer and Trustee*
Chairman, Chief Executive Officer, and Director of The Vanguard Group,
Inc., and of each of the investment companies in The Vanguard Group.
Director of The Mead Corporation and General Accident Insurance.
JOHN J. BRENNAN, President & Trustee*
President and Director of The Vanguard Group, Inc. and of each of the
investment companies in The Vanguard Group.
ROBERT E. CAWTHORN, Trustee
Chairman and Chief Executive Officer, Rhone-Poulenc Rorer, Inc.; Director
of Immune Response Corp. and Sun Company, Inc.; Trustee, Universal Health
Realty Income Trust.
BARBARA BARNES HAUPTFUHRER, Trustee
Director of The Great Atlantic and Pacific Tea Company. Alco Standard
Corp., Raytheon Company, Knight-Ridder Inc., and Massachusetts Mutual Life
Insurance Co.
BRUCE K. MACLAURY, Trustee
President, The Brookings Institution; Director of American Express Bank,
Ltd., The St. Paul Companies, Inc., and Scott Paper Co.
BURTON G. MALKIEL, Trustee
Chemical Bank Chairmen's Professor of Economics, Princeton University;
Director of Prudential Insurance Co. of America, Amdahl Corporation, Baker
Fentress & Co., Jeffrey Co., and The Southern New England Telephone
Company.
ALFRED M. RANKIN, JR., Trustee
President, Chief Executive Officer and Director of NACCO Industries, Inc.;
Director of The BFGoodrich Company, The Standard Products Company and The
Reliance Electric Company.
JOHN C. SAWHILL, Trustee
President and Chief Executive Officer, The Nature Conservancy; formerly,
Director and Senior Partner, McKinsey & Co.; President, New York
University; Director of Pacific Gas and Electric Company and NACCO
Industries.
JAMES O. WELCH, JR., Trustee
Retired Chairman of Nabisco Brands, Inc. retired Vice Chairman and Director
of RJR Nabisco; Director of TECO Energy, Inc.
J. LAWRENCE WILSON, Trustee
Chairman and Chief Executive Officer of Rohm & Haas Company; Director of
Cummins Engine Company; Trustee of Vanderbilt University and the Culver
Educational Foundation.
RAYMOND J. KLAPINSKY, Secretary*
Senior Vice President and Secretary of The Vanguard Group, Inc.; Secretary
of each of the investment companies in The Vanguard Group.
RICHARD F. HYLAND, Treasurer*
Treasurer of The Vanguard Group, Inc. and of each of the investment
companies in The Vanguard Group.
KAREN E. WEST, Controller*
Vice President of The Vanguard Group, Inc.; Controller of each of the
investment companies in The Vanguard Group.
- ---------------
*Officers of the Trust are "interested persons" as defined in the Investment
Company Act of 1940.
THE VANGUARD GROUP, INC.
Vanguard Index Trust is a member of the Vanguard Group of Investment
companies which consists of over 30 investment companies. Through their
jointly-owned subsidiary, The Vanguard Group, Inc. ("Vanguard"), the Trust and
the other Funds in the Group obtain at cost virtually all of their corporate
8
<PAGE> 76
management, administrative and distribution services. Vanguard also provides
investment advisory services on an at-cost basis to several of the Vanguard
Funds.
Vanguard employs a supporting staff of management and administrative
personnel needed to provide the requisite services to the Funds and also
furnishes the Funds with necessary office space, furnishings and equipment. Each
Fund pays its share of Vanguard's total expenses which are allocated among the
Funds under methods approved by the Board of Trustees (Directors) of each Fund.
In addition, each Fund bears its own direct expenses such as legal, auditing and
custodian fees.
The Fund's Officers are Officers of Vanguard. No Officer or employee owns,
or is permitted to own, any securities of any external adviser for the Funds.
The Vanguard Group was established and operates under a Funds' Service
Agreement which was approved by the shareholders of each of the Funds. The
Funds' Service Agreement provides as follows: (a) each aggregate Vanguard Fund
may invest up to .40% of its current assets in Vanguard, and (b) there is no
limitation on the amount that the Vanguard Funds may contribute to Vanguard's
capitalization. The amounts which each of the Funds have invested are adjusted
from time to time in order to maintain the proportionate relationship between
each Fund's relative net assets and its contribution to Vanguard's capital. At
December 31, 1993 and for the six months ended June 30, 1994 the Trust had
contributed capital of $1,590,000* and $1,754,000, respectively, to Vanguard,
representing 7.9% and 8.8%, respectively, of Vanguard's capitalization.
MANAGEMENT Corporate management and administrative services include: (1)
executive staff; (2) accounting and financial; (3) legal and regulatory; (4)
shareholder account maintenance; (5) monitoring and control of custodian
relationships; (6) shareholder reporting; and (7) review and evaluation of
advisory and other services provided to the Funds by third parties. During the
fiscal year ended December 31, 1993 and for the six months ended June 30, 1994
the Trust's share of Vanguard's actual net costs of operation relating to
management and administrative services (including transfer agency) totaled
approximately $13,291,000* and $7,646,000, respectively.
DISTRIBUTION Vanguard provides all distribution and marketing activities
for the Funds in the Group. Vanguard Marketing Corporation, a wholly-owned
subsidiary of The Vanguard Group, Inc., acts as Sales Agent for the shares of
the Funds in connection with any sales made directly to investors in the states
of Florida, Missouri, New York, Ohio, Texas and such other states as it may be
required.
The principal distribution expenses are for advertising, promotional
materials and marketing personnel. Distribution services may also include
organizing and offering to the public, from time to time, one or more new
investment companies which will become members of the Group. The directors and
officers of Vanguard determine the amount to be spent annually on distribution
activities, the manner and amount to be spent on each Fund, and whether to
organize new investment companies.
One-half of the distribution expenses of a marketing and promotional nature
is allocated among the Funds based upon relative net assets. The remaining
one-half of those expenses is allocated among the Funds based upon each Fund's
sales for the preceding 24 months relative to the total sales of the Funds as a
Group, provided, however, that no Fund's aggregate quarterly rate of
contribution for distribution expenses of a marketing and promotional nature
shall exceed 125% of average distribution expense rate for the Group, and that
no Fund shall incur annual distribution expenses in excess of 20/100 of l% of
its average month-end net assets. During the fiscal year ended December 31, 1993
and the six months ended June 30, 1994 the Trust paid approximately $2,327,000*
and $1,168,000, respectively, of the Group's distribution and marketing
expenses.
INVESTMENT ADVISORY SERVICES Vanguard also provides investment advisory
services to Vanguard Municipal Bond Fund, Vanguard Admiral Funds, Vanguard
Balanced Index Fund, several Portfolios of Vanguard Variable Insurance Fund,
Vanguard Bond Index Fund, Vanguard International Equity Index Fund, Vanguard
Institutional Index Fund, Vanguard Money Market Reserves, Vanguard Institutional
Portfolios, several Portfolios of Vanguard Fixed Income Securities Fund and the
Vanguard State Tax-Free Funds (California, Florida, New Jersey, New York, Ohio
and Pennsylvania). These services are provided on an at-cost basis from money
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<PAGE> 77
management staff employed directly by Vanguard. The compensation and other
expenses of this staff are paid by the Funds utilizing these services.
REMUNERATION OF TRUSTEES AND OFFICERS The Trust pays each Trustee, who is
not also an Officer, an annual fee plus travel and other expenses incurred in
attending Board meetings. The Trust's Officers and employees are paid by
Vanguard which, in turn, is reimbursed by the Trust and each other Fund in the
Group, for its proportionate share of Officers' and employees' salaries and
retirement benefits.
During the fiscal year ended December 31, 1993, the Trust paid
approximately $1,000 in Trustees' fees and expenses. The Trust's proportionate
share of remuneration paid by Vanguard (and reimbursed by the Trust) during the
year to John C. Bogle, Chairman and Chief Executive Officer of the Trust and
John J. Brennan, President of the Trust was $224,974* and $65,920* respectively,
and its proportionate share of compensation paid to all Officers of the Trust,
as a group, was approximately $391,220.
Upon retirement, Trustees who are not Officers receive an annual fee of
$1,000 for each year of service on the Board up to a maximum of $15,000. Under
its retirement plan, Vanguard contributes annually an amount equal to 10% of
each Officer's annual compensation plus 7% of that part of the Officer's
compensation during the year, if any, that exceeds the Social Security Taxable
Wage Base then in effect. The Trust's proportionate share of retirement
contributions made by Vanguard on behalf of all Officers of the Trust, as a
group, during the 1993 fiscal year was approximately $48,493.*
*Does not include the Small Capitalization Stock Portfolio, formerly Vanguard
Small Capitalization Stock Fund, Inc.
PORTFOLIO TRANSACTIONS
In placing portfolio transactions, the Trust uses its best judgment to
choose the broker most capable of providing the brokerage services necessary to
obtain best available price and most favorable execution. The full range and
quality of brokerage services available are considered in making these
determinations. In those instances where it is reasonably determined that more
than one broker can offer the brokerage services needed to obtain the best
available price and most favorable execution, consideration will be given to
those brokers which supply statistical information and provide other services in
addition to execution services to the Trust.
Since the Trust does not market its shares through intermediary brokers or
dealers, it is not the Trust's practice to allocate brokerage or principal
business on the basis of sales of its shares which may be made through such
firms. However, the Trust may place portfolio orders with qualified
broker-dealers who recommend the Trust to clients, and may, when a number of
brokers and dealers can provide best price and execution on a particular
transaction, consider the sale of Trust shares by a broker or dealer in
selecting among broker-dealers.
During the years ended December 31, 1991, 1992 and 1993 the Trust paid
brokerage commissions of $1,038,742*, $1,239,271*, and $1,454,492*,
respectively.
*Does not include the Small Capitalization Stock Portfolio (formerly Vanguard
Small Capitalization Stock Fund, Inc.).
DESCRIPTION OF SHARES AND VOTING RIGHTS
The Declaration of Trust permits the Trustees to issue an unlimited number
of shares of beneficial interest, without par value, from an unlimited number of
classes ("Portfolios") of shares. Currently the Trust is offering shares of six
Portfolios.
The shares of the Trust are fully paid and nonassessable, except as set
forth under "Shareholder and Trustee Liability," and have no preference as to
conversion, exchange, dividends, retirement or other features. The shares of the
Trust have no pre-emptive rights. The shares of the Trust have non-cumulative
voting rights, which means that the holders of more than 50% of the shares
voting for the election of Trustees can elect 100% of the Trustees if they
choose to do so. A shareholder is entitled to one vote for each full share held
(and a fractional vote for each fractional share held), then standing in his
name on the books of the Trust. On any matter submitted to a vote of
shareholders, all shares of the Trust then issued and outstanding and entitled
to vote, irrespective of the class, shall be voted in the aggregate and not by
class: except (i) when required by the Investment Company Act of 1940, shares
shall be voted by individual class; and (ii) when the matter does not
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<PAGE> 78
affect any interest of a particular class, then only shareholders of the
affected class or classes shall be entitled to vote thereon.
The Trust will continue without limitation of time, provided however that:
1) Subject to the majority vote of the holders of shares of any Portfolio
of the Trust outstanding, the Trustees may sell or convert the assets of
such Portfolio to another investment company in exchange for shares of
such investment company and distribute such shares ratably among the
shareholders of such Portfolio;
2) Subject to the majority vote of shares of any Portfolio of the Trust
outstanding, the Trustees may sell and convert into money the assets of
such Portfolio and distribute such assets ratably among the shareholders
of such Portfolio; and
3) Without the approval of the shareholders of any Portfolio, unless
otherwise required by law, the Trustees may combine the assets of any
two or more Portfolios into a single Portfolio so long as such
combination will not have a material adverse effect upon the
shareholders of such Portfolio.
Upon completion of the distribution of the remaining proceeds or the
remaining assets of any Portfolio as provided in paragraphs 1), 2), 3) above the
Trust shall terminate as to that Portfolio and the Trustees shall be discharged
of any and all further liabilities and duties hereunder and the right, title and
interest of all parties shall be cancelled and discharged.
SHAREHOLDER AND TRUSTEE LIABILITY Under Pennsylvania law, shareholders of
such a Trust may, under certain circumstances, be held personally liable as
partners for the obligations of the Trust. Therefore, the Declaration of Trust
contains an express disclaimer of shareholder liability for acts or obligations
of the Trust and requires that notice of such disclaimer be given in each
agreement, obligation, or instrument entered into or executed by the Trust or
the Trustees. The Declaration of Trust provides for indemnification out of the
Trust property of any shareholder held personally liable for the obligations of
the Trust. The Declaration of Trust also provides that the Trust shall, upon
request, assume the defense of any claim against any shareholder for any act or
obligation of the Trust and satisfy any judgment thereon. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which the Trust itself would be unable to meet its
obligations.
The Declaration of Trust further provides that the Trustees will not be
liable for errors of judgment or mistakes of fact or law, but nothing in the
Declaration of Trust protects a Trustee against any liability to which he would
otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties involved in the conduct of his
office.
PERFORMANCE MEASURES
Each of the investment company members of the Vanguard Group, including
Vanguard Index Trust, may from time to time, use one or more of the following
unmanaged indices for comparative performance purposes.
STANDARD & POOR'S 500 COMPOSITE STOCK PRICE INDEX -- is a well diversified list
of 500 companies representing the U.S. Stock Market.
STANDARD & POOR'S/BARRA VALUE INDEX -- contains common stocks of the S&P 500
Index which have lower than average price-to-book ratios.
STANDARD & POOR'S/BARRA GROWTH INDEX -- contains common stocks of the S&P 500
Index which have higher than average price-to-book ratios.
WILSHIRE 5000 EQUITY INDEXES -- consists of nearly 5,000 common equity
securities, covering all stocks in the U.S. for which daily pricing is
available.
WILSHIRE 4500 EQUITY INDEX -- consists of all stocks in the Wilshire 5000 except
for the 500 stocks in the Standard & Poor's 500 Index.
RUSSELL 2000 INDEX -- is composed of approximately 2,000 small capitalization
stocks.
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<PAGE> 79
MORGAN STANLEY CAPITAL INTERNATIONAL EAFE INDEX -- is an arithmetic, market
value-weighted average of the performance of over 900 securities listed on the
stock exchanges of countries in Europe, Australia and the Far East.
GOLDMAN SACHS 100 CONVERTIBLE BOND INDEX -- currently includes 67 bonds and 33
preferred. The original list of names was generated by screening for convertible
issues of 100 million or greater in market capitalization. The index is priced
monthly.
SALOMON BROTHERS GNMA INDEX -- includes pools of mortgages originated by private
lenders and guaranteed by the mortgage pools of the Government National Mortgage
Association.
SALOMON BROTHERS HIGH-GRADE CORPORATE BOND INDEX -- consists of publicly issued,
non-convertible corporate bonds rated AA or AAA. It is a value-weighted, total
return index, including approximately 800 issues with maturities of 12 years or
greater.
SALOMON BROTHERS BROAD INVESTMENT-GRADE BOND -- is a market-weighted index that
contains approximately 4700 individually priced investment-grade corporate bonds
rated BBB or better, U.S. Treasury/agency issues and mortgage passthrough
securities.
SHEARSON LEHMAN LONG-TERM TREASURY BOND -- is composed of all bonds covered by
the Shearson Lehman Hutton Treasury Bond Index with maturities of 10 years or
greater.
NASDAQ INDUSTRIAL INDEX -- is composed of more than 3,000 industrial issues. It
is a value-weighted index calculated on price change only and does not include
income.
COMPOSITE INDEX -- 70% Standard & Poor's 500 Index and 30% NASDAQ Industrial
Index.
COMPOSITE INDEX -- 35% Standard & Poor's 500 Index and 65% Salomon Brothers High
Grade Bond Index.
COMPOSITE INDEX -- 65% Standard & Poor's 500 Index and 35% Salomon Brothers High
Grade Bond Index.
LEHMAN BROTHERS AGGREGATE BOND INDEX -- is a market weighted index that contains
individually priced U.S. Treasury, agency, corporate, and mortgage pass-through
securities corporate rated BBB- or better. The Index has a market value of over
$4 trillion.
LEHMAN BROTHERS MUTUAL FUND SHORT (1-5) GOVERNMENT/CORPORATE INDEX -- is a
market weighted index that contains individually priced U.S. Treasury, agency,
and corporate investment grade bonds rated BBB- or better with maturities
between 1 and 5 years. The index has a market value of over $1.3 trillion.
LEHMAN BROTHERS MUTUAL FUND INTERMEDIATE (5-10+) GOVERNMENT/CORPORATE
INDEX -- is a market weighted index that contains individually priced U.S.
Treasury, agency, and corporate securities rated BBB- or better with maturities
between 5 and 10 years. The index has a market value of over $600 billion.
LEHMAN BROTHERS MUTUAL FUND LONG (10+) GOVERNMENT/CORPORATE INDEX -- is a market
weighted index that contains individually priced U.S. Treasury, agency, and
corporate securities rated BBB- or better with maturities greater than 10 years.
The index has a market value of over $900 billion.
FINANCIAL STATEMENTS
The Trust's Financial Statements for the year ended December 31, 1993,
including the financial highlights for each of the respective periods presented,
appearing in the Vanguard Index Trust 1993 Annual Report to Shareholders and
inserts thereto, and the reports thereon of Price Waterhouse LLP, independent
accountants, also appearing therein, are incorporated by reference in this
Statement of Additional Information. The Trust's 1993 Annual Report and 1994
Semi-Annual Report to Shareholders and inserts thereto, are enclosed with this
Statement of Additional Information. The audited financial statements and the
financial highlights for each of the respective periods presented, appearing in
the Vanguard Small Capitalization Stock Fund, Inc. 1993 Annual Report to
Shareholders, and the report thereon of Price Waterhouse LLP, independent
accountants, also appearing therein, are incorporated by reference in this
Statement of Additional Information. The Trust's unaudited financial statements
for the six months ended June 30, 1994 appearing in the Trust's June 30, 1994
Semi-Annual Report to Shareholders are also incorporated by reference in this
Statement of Additional Information.
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<PAGE> 80
PART C
VANGUARD INDEX TRUST
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(A) FINANCIAL STATEMENTS
The Trust's Financial Statements for the year ended December 31, 1993,
including the financial highlights for each of the respective periods presented,
appearing in the Vanguard Index Trust 1993 Annual Report to Shareholders and
inserts thereto, and the reports thereon of Price Waterhouse LLP, independent
accountants, also appearing therein, are incorporated by reference in this
Statement of Additional Information. The Trust's unaudited financial statements
for the six months ended June 30, 1994 appearing in the Trust's 1994 Semi-Annual
Report to Shareholders are also incorporated by reference in the Statement of
Additional Information. The Financial Statements included in the Annual Report
and Semi-Annual Report are:
1. Statement of Net Assets as of December 31, 1993 and June 30, 1994.
2.Statement of Operations for the year ended December 31, 1993 and the six
months ended June 30, 1994.
3. Statement of Changes in Net Assets for each of the two years in the
period ended December 31, 1993 and the six months ended June 30, 1994.
4. Financial Highlights for each of the five years in the period ended
December 31, 1993 and June 30, 1994.
5. Notes to Financial Statements.
6. Reports of Independent Accountants.
(B) EXHIBITS
1. Articles of Declaration of Trust**
2. By-Laws of Registrant**
3. Not Applicable
4. Not Applicable
5. Not Applicable
6. Not Applicable
7. Reference is made to the section entitled "Management of the Fund" in
the Registrant's Statement of Additional Information
8. Form of Custody Agreement**
9. Form of Vanguard Service Agreement**
10. Opinion of Counsel**
11. Consent of Independent Accountants*
12. Financial Statements -- reference is made to (a) above
13. Not Applicable
14. Not Applicable
15. Not Applicable
16. Schedule for Computation of Performance Quotations*
- ---------------
* Filed herewith
** Previously filed.
The Vanguard Small Capitalization Stock Fund's Financial Statements for the
year ended September 30, 1993, including the financial highlights for each of
the respective periods presented, appearing in the Vanguard Small Capitalization
Stock Fund's 1993 Annual Report to Shareholders, and the reports thereon of
Price Waterhouse LLP, independent accountants, also appearing therein, are
incorporated by reference in this Statement of Additional Information. The
Portfolio's unaudited financial statements for the six months ended June 30,
1994 appearing in the Vanguard Index Trust's 1994 Semi-Annual Report to
Shareholders are also
<PAGE> 81
incorporated by reference in the Statement of Additional Information. The
Financial Statements included in the Annual Report and Semi-Annual Report are:
1. Statement of Net Assets as of September 30, 1993 and June 30, 1994.
2. Statement of Operations for the year ended September 30, 1993 and the
six months ended June 30, 1994.
3. Statement of Changes in Net Assets for each of the two years in the
period ended September 30, 1993 and the six months ended June 30, 1994.
4. Financial Highlights for each of the five years in the period ended
September 30, 1993 and the six months ended June 30, 1994.
5. Notes to Financial Statements.
6. Report of Independent Accountants.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
Registrant is not controlled by or under common control with any person.
The Officers of the Registrant, the 32 investment companies in The Vanguard
Group of Investment Companies and The Vanguard Group, Inc. are identical.
Reference is made to the caption "Management of the Fund" in the Prospectus
constituting Part A and in the Statement of Additional Information constituting
Part B of this Registration Statement.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES
As of December 31, 1993 there were 385,270 shareholders of the 500
Portfolio, 37,335 shareholders of the Extended Market Portfolio, 24,420
shareholders of the Total Stock Market Portfolio, 11,081 shareholders of the
Value Portfolio, 5,143 shareholders of the Growth Portfolio and 26,040
shareholders of Vanguard Small Capitalization Stock Fund, Inc. as of September
30, 1993.
ITEM 27. INDEMNIFICATION
Reference is made to Article XI of Registrant's Declaration of Trust.
Insofar as indemnification for liability arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
Investment advisory services are provided to the Registrant on an at-cost
basis by The Vanguard Group, Inc., a jointly-owned subsidiary of the Registrant
and the other Funds in the Group. See the information concerning The Vanguard
Group set forth in Parts A and B.
ITEM 29. PRINCIPAL UNDERWRITERS
(a) None
(b) Not Applicable
<PAGE> 82
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
The books, accounts and other documents required by Section 31(a) under the
Investment Company Act and the rules promulgated thereunder will be maintained
in the physical possession of Registrant; Registrant's Transfer Agent, The
Vanguard Group, Inc. c/o The Vanguard Financial Center, Valley Forge,
Pennsylvania 19482; and the Registrant's Custodians, State Street Bank and Trust
Company, 225 Franklin Street, Boston, Massachusetts 02105, and CoreStates Bank,
N.A., Broad and Market Sts., Philadelphia, PA 19103.
ITEM 31. MANAGEMENT SERVICES
Other than the Amended and Restated Funds' Service Agreement with The
Vanguard Group, Inc. which was previously filed as Exhibit 9(c) and described
Registrant is not a party of any management-related service contract.
ITEM 32. UNDERTAKINGS
Registrant hereby undertakes to comply with the provisions of Section 16(c)
of the Investment Company Act of 1940 in regard to shareholder's rights to call
a meeting of shareholders for the purpose of voting on the removal of trustees
and to assist in shareholder communications in such matters to the extent
required by law.
Registrant hereby undertakes to provide an Annual Report to Shareholders of
prospective investors, free of charge, upon request.
<PAGE> 83
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this
Post-Effective Amendment to this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the Town of Valley
Forge and the Commonwealth of Pennsylvania, on the 7th day of October, 1994.
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment to the Registration Statement has been signed below by
the following persons in the capacities and on the date indicated:
BY: John C. Bogle*, Chairman of the Board, Trustee,
and Chief Executive Officer
October 7, 1994
BY: John J. Brennan*, Trustee and President
October 7, 1994
BY: Robert E. Cawthorn*, Trustee
October 7, 1994
BY: Barbara B. Hauptfuhrer*, Trustee
October 7, 1994
BY: Bruce K. MacLaury*, Trustee
October 7, 1994
BY: Burton G. Malkiel*, Trustee
October 7, 1994
BY: Alfred M. Rankin, Jr.*, Trustee
October 7, 1994
BY: John C. Sawhill*, Trustee
October 7, 1994
BY: James O. Welch, Jr.*, Trustee
October 7, 1994
BY: J. Lawrence Wilson*, Trustee
October 7, 1994
BY: Richard F. Hyland*, Treasurer and Principal
Financial Officer and Accounting Officer
October 7, 1994
*By Power of Attorney. See File Number 2-14336, January 23, 1990. Incorporated
by Reference.
<PAGE> 84
INDEX TO EXHIBITS
<TABLE>
<S> <C>
Consent of Independent Accountants................................................... EX-99.B11
Schedule for Computation of Performance Quotations................................... EX-99.B16
Financial Data Schedules............................................................. EX-27
</TABLE>
<PAGE> 1
EX-99.B11
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to incorporation by reference in the Combined Prospectus
and the Statement of Additional Information, constituting parts of this amended
Registration Statement on Form N-1A, of our reports dated January 24, 1994 and
October 25, 1993 relating to the financial statements, including the financial
highlights appearing in the 1993 Annual Reports to Shareholders of Vanguard
Index Trust (comprising the 500, Extended Market, Total Stock Market, Value and
Growth Portfolios) and inserts thereto and Vanguard Small Capitalization Stock
Fund, Inc., respectively, which are also incorporated by reference into the
Registration Statement. We also consent to the references to us under the
headings "Financial Highlights" and "General Information" in Prospectus and
"Financial Statements" in the Statement of Additional Information.
PRICE WATERHOUSE LLP
Philadelphia, PA
October 6, 1994
<PAGE> 1
EX-99.B16
SCHEDULE FOR COMPUTATION OF PERFORMANCE QUOTATIONS
VANGUARD INDEX TRUST -- 500 PORTFOLIO
1. Average Annual Total Return (As of December 31, 1993)
n
P (1 + T) = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
N = number of years
ERV = ending redeemable value at the end of the period
EXAMPLE:
One Year
P = $1,000
T = 9.84%
N = 1
ERV = $1,098.45*
Five Year
P = $1,000
T = 14.27%
N = 5
ERV = $1,948.18*
Ten Year
P = $1,000
T = 14.56%
N = 10
ERV = $3,894.18*
*Adjusted for $10 account maintenance fee.
2. YIELD (30 Days Ended December 31, 1993)
a 6
Yield = 2[(----- + 1) - 1] -b x 100
c x d
Where: a = dividends and interest paid during the period
b = expense ratios during the period (net of reimbursements)
c = the average daily number of shares outstanding during
the period
d = the maximum offering price per share on the last day of
the period
Example a = $18,511,538.95
b = .190
c = 185,843,744.806
d = $43.83
Yield = 2.55%
<PAGE> 2
VANGUARD INDEX TRUST -- EXTENDED MARKET PORTFOLIO
1. Average Annual Total Return (As of December 31, 1993)
n
P (1 + T) = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
N = number of years
ERV = ending redeemable value at the end of the period
EXAMPLE:
One Year
P = $1,000
T = 13.30%
N = 1
ERV = $1,132.96*
Five Year
P = $1,000
T = 13.98%
N = 5
ERV = $1,923.42*
*Since Inception, December 31, 1987
P = $1,000
T = 14.81%
N = since inception 12/21/87
ERV = $2,299.46*
*Adjusted for $10 account maintenance fee and 1% portfolio transaction fee.
2. YIELD (30 Days Ended December 31, 1993)
a 6
Yield = 2[(----- + 1) - 1] -b x 100
c x d
Where: a = dividends and interest paid during the period
b = expense ratios during the period (net of reimbursements)
c = the average daily number of shares outstanding during
the period
d = the maximum offering price per share on the last day of
the period
Example a = $1,146,608.81
b = .207
c = 45,947,573.139
d = $19.43
Yield = 1.34%
<PAGE> 3
VANGUARD INDEX TRUST -- TOTAL STOCK MARKET PORTFOLIO
1. Average Annual Total Return (As of December 31, 1993)
n
P (1 + T) = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
N = number of years
ERV = ending redeemable value at the end of the period
EXAMPLE:
P = $1,000
T = 10.29%
N = 1
ERV = $1,100.93**
P = $1,000
T = 12.43%
N = *
ERV = $1,217.19**
* Since inception March 16, 1992.
** Adjusted for $10 account maintenance fee and .25% portfolio transaction
fee.
2. YIELD (30 Days Ended December 31, 1993)
a 6
Yield = 2[(----- + 1) - 1] -b x 100
c x d
Where: a = dividends and interest paid during the period
b = expense ratios during the period (net of reimbursements)
c = the average daily number of shares outstanding during
the period
d = the maximum offering price per share on the last day of
the period
Example a = $1,003,662.96
b = .212
c = 42,804,484.283
d = $11.69
Yield = 2.21%
<PAGE> 4
VANGUARD INDEX TRUST -- VALUE PORTFOLIO
1. Average Annual Total Return (As of December 31, 1993)
n
P (1 + T) = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
N = number of years
ERV = ending redeemable value at the end of the period
EXAMPLE:
P = $1,000
T = 18.29%
N = 1
ERV = $1,182.86**
P = $1,000
T = 19.23%
N = *
ERV = $1,226.55**
* Since inception November 2, 1992.
** Adjusted for $10 account maintenance fee.
2. YIELD (30 Days Ended December 31, 1993)
a 6
Yield = 2[(----- + 1) - 1] -b x 100
c x d
Where: a = dividends and interest paid during the period
b = expense ratios during the period (net of reimbursements)
c = the average daily number of shares outstanding during
the period
d = the maximum offering price per share on the last day of
the period
Example a = $493,153.12
b = .217
c = 15,488,232.534
d = $11.73
Yield = 3.06%
<PAGE> 5
VANGUARD INDEX TRUST -- GROWTH PORTFOLIO
1. Average Annual Total Return (As of December 31, 1993)
n
P (1 + T) = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
N = number of years
ERV = ending redeemable value at the end of the period
EXAMPLE:
P = $1,000
T = 1.42%
N = 1
ERV = $1,014.21**
P = $1,000
T = 3.99%
N = *
ERV = $1,046.52**
* Since inception November 2, 1992.
** Adjusted for $10 account maintenance fee.
2. YIELD (30 Days Ended December 31, 1993)
a 6
Yield = 2[(----- + 1) - 1] -b x 100
c x d
Where: a = dividends and interest paid during the period
b = expense ratios during the period (net of reimbursements)
c = the average daily number of shares outstanding during
the period
d = the maximum offering price per share on the last day of
the period
Example a = $91,528.19
b = .263
c = 4,875,713.614
d = $10.20
Yield = 1.96%
<PAGE> 6
SMALL CAPITALIZATION STOCK PORTFOLIO
(FORMERLY VANGUARD SMALL CAPITALIZATION STOCK FUND, INC.)
1. Average Annual Total Return (As of September 30, 1993)
n
P (1 + T) = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
N = number of years
ERV = ending redeemable value at the end of the period
EXAMPLE:
One Year
P = $1,000
T = +30.21%
N = 1
ERV = $1,315.99*
Five Year
P = $1
T = +12.20%
N = 5
ERV = $1,803.08*
Ten Year
P = $1
T = +5.85%
N = 10
ERV = $1,795.51*
*Net of $10 account maintenance fee.
2. YIELD (30 Days Ended September 30, 1993)
a 6
Yield = 2[(----- + 1) - 1] -b x 100
c x d
Where: a = dividends and interest paid during the period
b = expense ratios during the period (net of reimbursements)
c = the average daily number of shares outstanding during
the period
d = the maximum offering price per share on the last day of
the period
Example a = $464,099.17
b = $.15
c = 26,052,447.535
d = $16.22
Yield = 1.17%
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
EX-27.1
</LEGEND>
<CIK> 0000036405
<NAME> VANGUARD INDEX TRUST
<SERIES>
<NUMBER> 1
<NAME> 500 PORTFOLIO
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> JUN-30-1994
<INVESTMENTS-AT-COST> 7,617,435
<INVESTMENTS-AT-VALUE> 8,430,650
<RECEIVABLES> 81,540
<ASSETS-OTHER> 1,362
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 8,513,552
<PAYABLE-FOR-SECURITIES> 19,927
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 60,926
<TOTAL-LIABILITIES> 60,926
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 7,597,435
<SHARES-COMMON-STOCK> 201,693
<SHARES-COMMON-PRIOR> 188,758
<ACCUMULATED-NII-CURRENT> 36,521
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (8,755)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 807,498
<NET-ASSETS> 8,432,699
<DIVIDEND-INCOME> 119,147
<INTEREST-INCOME> 1,603
<OTHER-INCOME> 0
<EXPENSES-NET> 7,955
<NET-INVESTMENT-INCOME> 112,795
<REALIZED-GAINS-CURRENT> 18,598
<APPREC-INCREASE-CURRENT> (429,135)
<NET-CHANGE-FROM-OPS> (297,742)
<EQUALIZATION> 2,502
<DISTRIBUTIONS-OF-INCOME> 86,732
<DISTRIBUTIONS-OF-GAINS> 15,455
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 33,070
<NUMBER-OF-SHARES-REDEEMED> 22,238
<SHARES-REINVESTED> 2,104
<NET-CHANGE-IN-ASSETS> 160,002
<ACCUMULATED-NII-PRIOR> 7,956
<ACCUMULATED-GAINS-PRIOR> 14,958
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 23
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 7,955
<AVERAGE-NET-ASSETS> 8,424,732
<PER-SHARE-NAV-BEGIN> 43.83
<PER-SHARE-NII> 0.58
<PER-SHARE-GAIN-APPREC> (2.12)
<PER-SHARE-DIVIDEND> 0.44
<PER-SHARE-DISTRIBUTIONS> 0.08
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 41.77
<EXPENSE-RATIO> .002
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
EX-27.2
</LEGEND>
<CIK> 0000036405
<NAME> VANGUARD INDEX TRUST
<SERIES>
<NUMBER> 2
<NAME> EXTENDED MARKET PORTFOLIO
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> JUN-30-1994
<INVESTMENTS-AT-COST> 849,443
<INVESTMENTS-AT-VALUE> 921,140
<RECEIVABLES> 45,802
<ASSETS-OTHER> 149
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 967,091
<PAYABLE-FOR-SECURITIES> 10,179
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 38,139
<TOTAL-LIABILITIES> 38,139
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 812,154
<SHARES-COMMON-STOCK> 50,503,083
<SHARES-COMMON-PRIOR> 47,768,420
<ACCUMULATED-NII-CURRENT> 6,630
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 29,213
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 70,776
<NET-ASSETS> 918,773
<DIVIDEND-INCOME> 7,361
<INTEREST-INCOME> 355
<OTHER-INCOME> 0
<EXPENSES-NET> 939
<NET-INVESTMENT-INCOME> 6,777
<REALIZED-GAINS-CURRENT> 29,340
<APPREC-INCREASE-CURRENT> (91,471)
<NET-CHANGE-FROM-OPS> (56,377)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 6,869
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 7,020
<NUMBER-OF-SHARES-REDEEMED> 4,609
<SHARES-REINVESTED> 324
<NET-CHANGE-IN-ASSETS> (9,198)
<ACCUMULATED-NII-PRIOR> (147)
<ACCUMULATED-GAINS-PRIOR> 6,754
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 45
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 939
<AVERAGE-NET-ASSETS> 942,541
<PER-SHARE-NAV-BEGIN> 19.43
<PER-SHARE-NII> 0.13
<PER-SHARE-GAIN-APPREC> (1.23)
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0.14
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 18.19
<EXPENSE-RATIO> 0.002
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
EX-27.3
</LEGEND>
<CIK> 0000036405
<NAME> VANGUARD INDEX TRUST
<SERIES>
<NUMBER> 3
<NAME> TOTAL STOCK MARKET PORTFOLIO
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> JUN-01-1994
<INVESTMENTS-AT-COST> 630,627
<INVESTMENTS-AT-VALUE> 641,714
<RECEIVABLES> 8,995
<ASSETS-OTHER> 101
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 650,810
<PAYABLE-FOR-SECURITIES> 4,535
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 7,021
<TOTAL-LIABILITIES> 7,021
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 626,401
<SHARES-COMMON-STOCK> 57,878,194
<SHARES-COMMON-PRIOR> 43,824,943
<ACCUMULATED-NII-CURRENT> 644
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 1,440
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 10,769
<NET-ASSETS> 639,254
<DIVIDEND-INCOME> 7,141
<INTEREST-INCOME> 252
<OTHER-INCOME> 0
<EXPENSES-NET> 590
<NET-INVESTMENT-INCOME> 6,803
<REALIZED-GAINS-CURRENT> 1,380
<APPREC-INCREASE-CURRENT> (37,386)
<NET-CHANGE-FROM-OPS> (29,203)
<EQUALIZATION> 330
<DISTRIBUTIONS-OF-INCOME> 6,447
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 17,195
<NUMBER-OF-SHARES-REDEEMED> 3,617
<SHARES-REINVESTED> 475
<NET-CHANGE-IN-ASSETS> 126,972
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 60
<OVERDISTRIB-NII-PRIOR> (42)
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 45
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 590
<AVERAGE-NET-ASSETS> 588,388
<PER-SHARE-NAV-BEGIN> 11.69
<PER-SHARE-NII> 0.13
<PER-SHARE-GAIN-APPREC> (0.66)
<PER-SHARE-DIVIDEND> (0.12)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.04
<EXPENSE-RATIO> 0.002
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
EX-27.4
</LEGEND>
<CIK> 0000036405
<NAME> VANGUARD INDEX TRUST
<SERIES>
<NUMBER> 4
<NAME> VALUE PORTFOLIO
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> JUN-30-1994
<INVESTMENTS-AT-COST> 296,647
<INVESTMENTS-AT-VALUE> 289,885
<RECEIVABLES> 34,784
<ASSETS-OTHER> 46
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 324,715
<PAYABLE-FOR-SECURITIES> 33,003
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,501
<TOTAL-LIABILITIES> 1,501
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 293,737
<SHARES-COMMON-STOCK> 25,868,694
<SHARES-COMMON-PRIOR> 16,197,510
<ACCUMULATED-NII-CURRENT> 1,122
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 2,114
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (6,762)
<NET-ASSETS> 290,211
<DIVIDEND-INCOME> 4,214
<INTEREST-INCOME> 76
<OTHER-INCOME> 0
<EXPENSES-NET> 253
<NET-INVESTMENT-INCOME> 4,037
<REALIZED-GAINS-CURRENT> 2,206
<APPREC-INCREASE-CURRENT> (14,749)
<NET-CHANGE-FROM-OPS> (8,506)
<EQUALIZATION> 494
<DISTRIBUTIONS-OF-INCOME> (3,380)
<DISTRIBUTIONS-OF-GAINS> (2,486)
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 12,871
<NUMBER-OF-SHARES-REDEEMED> (3,663)
<SHARES-REINVESTED> 463
<NET-CHANGE-IN-ASSETS> 100,100
<ACCUMULATED-NII-PRIOR> (29)
<ACCUMULATED-GAINS-PRIOR> 2,394
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 20
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 253
<AVERAGE-NET-ASSETS> 251,829
<PER-SHARE-NAV-BEGIN> 11.74
<PER-SHARE-NII> 0.18
<PER-SHARE-GAIN-APPREC> (0.45)
<PER-SHARE-DIVIDEND> (0.14)
<PER-SHARE-DISTRIBUTIONS> (0.11)
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.22
<EXPENSE-RATIO> 0.002
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
EX-27.5
</LEGEND>
<CIK> 0000036405
<NAME> VANGUARD INDEX TRUST
<SERIES>
<NUMBER> 5
<NAME> GROWTH PORTFOLIO
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> JUN-30-1994
<INVESTMENTS-AT-COST> 59,438
<INVESTMENTS-AT-VALUE> 57,496
<RECEIVABLES> 7,066
<ASSETS-OTHER> 9
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 64,571
<PAYABLE-FOR-SECURITIES> 7,008
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 107
<TOTAL-LIABILITIES> 107
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 60,200
<SHARES-COMMON-STOCK> 5,959,132
<SHARES-COMMON-PRIOR> 4,964,135
<ACCUMULATED-NII-CURRENT> 48
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (850)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (1,942)
<NET-ASSETS> 57,456
<DIVIDEND-INCOME> 648
<INTEREST-INCOME> 7
<OTHER-INCOME> 0
<EXPENSES-NET> 54
<NET-INVESTMENT-INCOME> 601
<REALIZED-GAINS-CURRENT> (248)
<APPREC-INCREASE-CURRENT> (2,842)
<NET-CHANGE-FROM-OPS> (2,489)
<EQUALIZATION> 21
<DISTRIBUTIONS-OF-INCOME> 559
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,915
<NUMBER-OF-SHARES-REDEEMED> (971)
<SHARES-REINVESTED> 51
<NET-CHANGE-IN-ASSETS> 6,832
<ACCUMULATED-NII-PRIOR> (15)
<ACCUMULATED-GAINS-PRIOR> (602)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 23
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 54
<AVERAGE-NET-ASSETS> 54,209
<PER-SHARE-NAV-BEGIN> 10.20
<PER-SHARE-NII> 0.11
<PER-SHARE-GAIN-APPREC> (0.57)
<PER-SHARE-DIVIDEND> (0.10)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.64
<EXPENSE-RATIO> 0.002
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<LEGEND>
EX-27.6
</LEGEND>
<CIK> 0000036405
<NAME> VANGUARD INDEX TRUST
<SERIES>
<NUMBER> 6
<NAME> SMALL CAPITALIZATION STOCK PORTFOLIO
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 5-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> FEB-01-1994
<PERIOD-END> JUN-30-1994
<INVESTMENTS-AT-COST> 514,519
<INVESTMENTS-AT-VALUE> 534,445
<RECEIVABLES> 87,474
<ASSETS-OTHER> 87
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 622,006
<PAYABLE-FOR-SECURITIES> 63,999
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 21,508
<TOTAL-LIABILITIES> 21,508
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 501,416
<SHARES-COMMON-STOCK> 36,143,666
<SHARES-COMMON-PRIOR> 26,614,965
<ACCUMULATED-NII-CURRENT> 3,115
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 12,354
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 19,614
<NET-ASSETS> 536,499
<DIVIDEND-INCOME> 3,131
<INTEREST-INCOME> 166
<OTHER-INCOME> 0
<EXPENSES-NET> 402
<NET-INVESTMENT-INCOME> 2,895
<REALIZED-GAINS-CURRENT> 12,693
<APPREC-INCREASE-CURRENT> (65,764)
<NET-CHANGE-FROM-OPS> (50,176)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 6,014
<NUMBER-OF-SHARES-REDEEMED> (2,716)
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 3,110
<ACCUMULATED-NII-PRIOR> 3,644
<ACCUMULATED-GAINS-PRIOR> 22,163
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 30
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 402
<AVERAGE-NET-ASSETS> 532,962
<PER-SHARE-NAV-BEGIN> 16.24
<PER-SHARE-NII> 0.08
<PER-SHARE-GAIN-APPREC> (1.48)
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 14.84
<EXPENSE-RATIO> 0.002
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
