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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
P R O S P E C T U S
APRIL 4, 1994
<PAGE>
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A Member of The Vanguard Group
===============================================================================
PROSPECTUS--APRIL 4, 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 OBJECTIVE AND POLICIES
Vanguard Index Trust (the "Trust") is an open-end diversified
investment company designed as an "index" fund. THE TRUST
CONSISTS OF SIX PORTFOLIOS: THE 500, EXTENDED MARKET, TOTAL
STOCK MARKET, SMALL CAPITALIZATION STOCK, VALUE AND GROWTH
PORTFOLIOS. Each of the Portfolios invests in 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 8:00 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). A portfolio transaction
fee of 1% is deducted from purchases of the Extended Market
and Small Capitalization Stock Portfolios; a 0.25% portfolio
transaction fee is deducted from purchases of the Total Stock
Market Portfolio. Portfolio transaction fees are paid to the
Portfolios to offset transaction costs of buying securities
of small- and medium-sized companies. Shareholders in each
Portfolio will also incur a $10 annual account maintenance
fee, deducted from the Portfolio's dividend. See "Trust
Expenses."
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ABOUT THIS PROSPECTUS
This Prospectus is designed to set forth concisely the
information you should know about the Trust before you
invest. It should be retained for future reference. A
"Statement of Additional Information" containing additional
information about the Trust has been filed with the
Securities and Exchange Commission. This Statement is dated
April 4, 1994 and has been incorporated by reference into
this Prospectus. A copy may be obtained without charge by
writing to the Trust or by calling the Investor Information
Department.
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<TABLE>
TABLE OF CONTENTS
<CAPTION>
Page Page Page
<C> <C> <C>
Highlights.......................... 2 Implementation of Policies.......... 16 SHAREHOLDER GUIDE
Trust Expenses...................... 4 Investment Limitations.............. 21 Opening an Account and
Financial Highlights................ 6 Management of the Trust............. 21 Purchasing Shares................. 27
Yield and Total Return.............. 9 Investment Adviser.................. 22 When Your Account Will Be
FUND INFORMATION Performance Record.................. 22 Credited.......................... 30
Investment Objectives............... 10 Dividends, Capital Gains and Taxes.. 24 Selling Your Shares................. 31
Investment Policies................. 12 The Share Price of Each Portfolio... 25 Exchanging Your Shares.............. 32
Investment Risks.................... 13 General Information................. 26 Important Information About
Who Should Invest................... 14 Telephone Transactions............ 33
Transferring Registration........... 34
Other Vanguard Services............. 34
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</TABLE>
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>
HIGHLIGHTS
OBJECTIVE AND POLICIES
The Trust is an open-end diversified investment company
designed as an "index" fund. Shares of the Trust are offered
on a no-load basis, although the Trust incurs certain
distribution expenses. The Trust consists of six separate
Portfolios, each of which invests in common stocks in order
to match the performance of a selected market index. There is
no assurance, however, that the Trust will achieve its stated
objective. Page 10
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SIX SEPARATE PORTFOLIOS
Investors may choose to invest in any of six Portfolios of
the Trust:
500 PORTFOLIO--seeks to match the investment performance of
the Standard & Poor's 500 Composite Stock Price Index, an
index emphasizing large-capitalization stocks.
EXTENDED MARKET PORTFOLIO--seeks to match the investment
performance of the Wilshire 4500 Index, an index consisting
of medium- and small-capitalization stocks.
TOTAL STOCK MARKET PORTFOLIO--seeks to match the investment
performance of the Wilshire 5000 Index, an index consisting
of all regularly and publicly traded U.S. stocks.
SMALL CAPITALIZATION STOCK PORTFOLIO--seeks to match the
investment performance of the Russell 2000 Small Stock Index,
an index consisting of 2,000 small-capitalization common
stocks.
VALUE PORTFOLIO--seeks to match the investment performance of
the S&P/BARRA Value Index, an index consisting of stocks
selected from the Standard & Poor's 500 Index with lower than
average ratios of market price to book value.
GROWTH PORTFOLIO--seeks to match the investment performance
of the S&P/BARRA Growth Index, an index consisting of stocks
selected from the Standard & Poor's 500 Index with higher
than average ratios of market price to book value. Page 12
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RISK CHARACTERISTICS
As mutual funds investing in common stocks, all six
Portfolios of the Trust are subject to market risk, which is
the possibility that common stock prices will decline,
sometimes substantially, over short or extended periods. Due
to differences in the securities they hold, the six
Portfolios may exhibit varying levels of volatility. Page 13
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THE VANGUARD GROUP
The Trust is a member of The Vanguard Group of Investment
Companies, a group of 32 investment companies with 78
distinct investment portfolios and total assets in excess of
$120 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 21
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INVESTMENT ADVISER
The Trust receives investment advisory services on an at-cost
basis from Vanguard's Core Management Group. As a result, the
Trust receives its investment advisory services at a
<PAGE>
substantially lower cost than would be possible if the Trust
paid an investment advisory fee to an external investment
adviser. Page 22
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FEES AND EXPENSES
A portfolio transaction fee of 1% is deducted from purchases
of the Extended Market and Small Capitalization Stock
Portfolios; a 0.25% portfolio transaction fee is deducted
from purchases of the Total Stock Market Portfolio. Portfolio
transaction fees are paid to the Portfolios to offset
transaction costs of buying securities of small- and medium-
sized companies. Shareholders in each Portfolio will also
incur a $10 annual account maintenance fee deducted from the
Portfolio's dividend. Page 4
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DIVIDEND POLICY
The Trust distributes substantially all of its net investment
income in the form of dividends. The 500, Total Stock Market,
Value and Growth Portfolios distribute dividends quarterly,
whereas the Extended Market and Small Capitalization Stock
Portfolios distribute dividends annually. In all six
Portfolios, net capital gains, if any, are distributed
annually. Page 24
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TAXES
A sale of shares of a Portfolio is a taxable event and may
result in a capital gain or loss. Dividend distributions,
capital gain distributions, and capital gains or losses from
redemptions and exchanges may be subject to federal, state
and local taxes. Page 24
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PURCHASING SHARES
You may purchase shares by mail, wire or written exchange
from another Vanguard Fund. The minimum initial investment is
$3,000 per Portfolio ($500 for Individual Retirement Accounts
and Uniform Gifts/Transfers to Minors Act accounts); the
minimum for subsequent investments is $100. There are no
sales commissions or 12b-1 fees. Telephone exchanges from
other Vanguard Funds are not permitted. Page 27
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SELLING SHARES
You may redeem shares of each Portfolio in writing or by
telephone; however, telephone exchanges into other Vanguard
Funds are not permitted (except for certain retirement
accounts). The share price of each Portfolio is expected to
fluctuate, and may at redemption be more or less than at the
time of initial purchase, resulting in a gain or loss.Page 31
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OTHER VANGUARD SERVICES
The Trust offers two special services: Fund Express, for
electronic transfers between the Fund and your bank account;
and Tele-Account, for round-the-clock telephone access to
your Fund account. Page 34
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SPECIAL CONSIDERATIONS
(1) Each Portfolio may invest a portion of its assets in
futures contracts, options, convertible securities & swap
agreements. Page 19
(2) Each Portfolio may invest in short-term fixed income
securities. Page 19
(3) Each Portfolio may lend its securities. Page 20
(4) Each Portfolio may borrow money. Page 21
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<PAGE>
TRUST EXPENSES
The following table illustrates ALL expenses and fees that
you would incur as a shareholder of the Trust. The expenses
and fees for the 500, Extended Market, Total Stock Market,
Value and Growth Portfolios are based on the year ended
December 31, 1993. The fees and expenses for the Small
Capitalization Stock Portfolio are based on the year ended
September 30, 1993.
<TABLE>
<CAPTION>
TOTAL SMALL
SHAREHOLDER EXTENDED STOCK CAPITALIZATION
TRANSACTION 500 MARKET MARKET VALUE GROWTH STOCK
EXPENSES PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO***
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<S> <C> <C> <C> <C> <C> <C>
Sales Load Imposed
on Purchases..... None None* None** None None None*
Sales Load Imposed
on Reinvested
Dividends........ None None None None None None
Redemption Fees.... None None None None None None
Exchange Fees...... None None None None None None
<FN>
*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>
<TABLE>
<CAPTION>
TOTAL SMALL
ANNUAL FUND EXTENDED STOCK CAPITALIZATION
OPERATING 500 MARKET MARKET VALUE GROWTH STOCK
EXPENSES PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO***
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Management &
Administrative
Expenses++.......... 0.15% 0.15% 0.15% 0.14% 0.13% 0.13%
Investment Advisory
Fees................ None None None None None None
12b-1 Fees............ None None None None None None
Other Expenses
Distribution Costs.. 0.03 0.02 0.03 0.02 0.02 0.02
Miscellaneous
Expenses.......... 0.01 0.03 0.02 0.04 0.05 0.03
---- ---- ---- ---- ---- ----
Total Other Expenses.. 0.04 0.05 0.05 0.06 0.07 0.05
---- ---- ---- ---- ---- ----
TOTAL OPERATING
EXPENSES........ 0.19% 0.20% 0.20% 0.20% 0.20% 0.18%
==== ==== ==== ==== ==== ====
<FN>
***Formerly Vanguard Small Capitalization Stock Fund, Inc.
++In addition to these costs, each Portfolio assesses an annual account maintenance fee of $10.
</TABLE>
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 Trust.
THREE PORTFOLIOS ASSESS TRANSACTION FEES
The Extended Market and Small Capitalization Stock Portfolios
assess a portfolio transaction fee on purchases of Portfolio
shares equal to 1% of the dollar amount invested; the Total
Stock Market Portfolio assesses a portfolio transaction fee
equal to 0.25% of the dollar amount invested. The portfolio
transaction fees are paid to the respective Portfolio, not to
Vanguard. They are not sales charges.
<PAGE>
These fees apply to initial investments in the Extended
Market, Small Capitalization Stock and Total Stock Market
Portfolios and all subsequent purchases (including purchases
made by exchange from another Vanguard Fund or from the other
Portfolios of the Trust), 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.)
The 1% and 0.25% fees represent Vanguard's estimate of the
brokerage and other transaction costs incurred by the
Extended Market, Small Capitalization Stock and Total Stock
Market Portfolios in acquiring stocks of mid- and small-
capitalization companies. Without the fees, the three
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.
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, and $10 annually for accounts in
the Extended Market and Small Capitalization Stock
Portfolios. 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 of the Trust, 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,
assuming (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; and the 0.25% transaction
fee for the Total Stock Market Portfolio. As noted in the
table on the previous page, the Trust charges no redemption
fees of any kind.
<PAGE>
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
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
</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.
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FINANCIAL HIGHLIGHTS
The following financial highlights for a share outstanding
throughout each period, insofar as they relate to each of the
five years ended December 31, 1993, (September 30, 1993 with
respect to the Small Capitalization Stock Portfolio) have
been audited by Price Waterhouse, independent accountants,
whose reports thereon were unqualified. This financial
information should be read in conjunction with the Trust's
financial statements and notes thereto, which are
incorporated by reference in the Statement of Additional
Information and in this Prospectus, and which appear, along
with the reports of Price Waterhouse, in the Trust'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,
in the Small Capitalization Stock Fund's 1993 Annual Report
to Shareholders. For a more complete discussion of the
Trust's performance, please see the Trust's 1993 Annual
Report to Shareholders, which may be obtained free of charge
by writing to the Trust or calling our Investor Information
Department at 1-800-662-7447.
<PAGE>
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------
500 PORTFOLIO
--------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------------
1993 1992 1991 1990 1989 1988 1987 1986 1985 1984
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<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR....... $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................... 1.13 1.12 1.15 1.17 1.20 1.08 .88 .89 .91 .88
Net Realized and Unrealized Gain
(Loss) on Investments.................. 2.89 1.75 8.20 (2.30) 7.21 2.87 .36 3.30 5.08 .30
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
TOTAL FROM INVESTMENT OPERATIONS...... 4.02 2.87 9.35 (1.13) 8.41 3.95 1.24 4.19 5.99 1.18
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DISTRIBUTIONS
Dividends from Net Investment Income.... (1.13) (1.12) (1.15) (1.17) (1.20) (1.10) (.69) (.89) (.91) (.88)
Distributions from Realized Capital
Gains.................................. (.03) (.10) (.12) (.10) (.75) (.32) (.17) (2.02) (1.61) (.48)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
TOTAL DISTRIBUTIONS................... (1.16) (1.22) (1.27) (1.27) (1.95) (1.42) (.86) (2.91) (2.52) (1.36)
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR............. $43.83 $40.97 $39.32 $31.24 $33.64 $27.18 $24.65 $24.27 $22.99 $19.52
=================================================================================================================================
TOTAL RETURN*............................ 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 Year (Millions)....... $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% .20% .22% .21% .22% .26% .28% .28% .27%
Ratio of Net Investment Income to Average
Net Assets.............................. 2.65% 2.81% 3.07% 3.60% 3.62% 4.08% 3.15% 3.40% 4.09% 4.53%
Portfolio Turnover Rate.................. 6%+ 4%+ 5%+ 23%+ 8% 10% 15% 29% 36% 14%
<FN>
*Total return figures do not reflect the annual account maintenance fee of $10 or applicable portfolio transaction fees.
+Portfolio turn over rates excluding in-kind redemptions were 2%, 1%, 1% and 6%, respectively.
</TABLE>
<TABLE>
<CAPTION>
----------------------------------------------------------------------
EXTENDED MARKET PORTFOLIO
----------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------
DEC. 21+
1993 1992 1991 1990 1989 1988 TO 31, 1987
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<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD........................ $17.35 $15.82 $11.48 $13.92 $11.60 $ 9.99 $10.00
------ ------ ------ ------ ------ ------ ------
INVESTMENT OPERATIONS
Net Investment Income..................................... .23 .24 .25 .30 .26 .34 .03
Net Realized and Unrealized Gain (Loss) on Investments.... 2.28 1.72 4.54 (2.25) 2.52 1.63 (.04)
------ ------ ------ ------ ------ ------ ------
TOTAL FROM INVESTMENT OPERATIONS......................... 2.51 1.96 4.79 (1.95) 2.78 1.97 (.01)
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DISTRIBUTIONS
Dividends from Net Investment Income...................... (.23) (.25) (.25) (.33) (.23) (.20) --
Distributions from Realized Capital Gain.................. (.20) (.18) (.20) (.16) (.23) (.16) --
------ ------ ------ ------ ------ ------ ------
TOTAL DISTRIBUTIONS...................................... (.43) (.43) (.45) (.49) (.46) (.36) --
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NET ASSET VALUE, END OF PERIOD.............................. $19.43 $17.35 $15.82 $11.48 $13.92 $11.60 $ 9.99
==================================================================================================================================
TOTAL RETURN*............................................... 14.49% 12.47% 41.85% (14.05)% 24.10% 19.75% (0.10)%
==================================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions)........................ $928 $585 $372 $179 $147 $35 $5
Ratio of Expenses to Average Net Assets..................... .20% .20% .19% .23% .23% .24% 0%
Ratio of Net Investment Income to Average Net Assets........ 1.48% 1.73% 2.14% 2.68% 2.92% 2.90% 0%
Portfolio Turnover Rate..................................... 13% 9% 11% 9% 14% 26% 3%
<FN>
*Total return figures do not reflect the annual account maintenance fee of $10 or applicable portfolio transaction fees.
+Commencement of Operations.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
--------------------------------- -------------------------------- -------------------------------
TOTAL STOCK
MARKET PORTFOLIO GROWTH PORTFOLIO VALUE PORTFOLIO
--------------------------------- -------------------------------- -------------------------------
YEAR ENDED MARCH 16+, 1992, YEAR ENDED NOV, 2, 1992, YEAR ENDED NOV. 2, 1992,
DEC. 31, 1993 TO DEC. 31, 1992 DEC. 31, 1993 TO DEC. 31, 1992 DEC. 31, 1993 TO DEC. 31, 1992
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD........ $10.84 $10.00 $10.26 $10.00 $10.30 $10.00
------ ------ ------ ------ ------ ------
INVESTMENT OPERATIONS
Net Investment Income...... .26 .23 .21 .06 .38 .07
Net Realized and Unrealized
Gain (Loss) on Investments .88 .84 (.06) .26 1.50 .30
------ ------ ------ ------ ------ ------
TOTAL FROM INVESTMENT
OPERATIONS............. 1.14 1.07 .15 .32 1.88 .37
- ----------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment
Income.................... (.26) (.23) (.21) (.06) (.38) (.07)
Distributions from Realized
Capital Gains............. (.03) -- -- -- (.06) --
------ ------ ------ ------ ------ ------
TOTAL DISTRIBUTIONS...... (.29) (.23) (.21) (.06) (.44) (.07)
- ----------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF
PERIOD..................... $11.69 $10.84 $10.20 $10.26 $11.47 $10.30
==================================================================================================================================
TOTAL RETURN**.............. 10.62% 10.41% 1.53% 3.19% 18.35% 3.70%
==================================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period
(Millions)................. $512 $275 $51 $21 $190 $24
Ratio of Expenses to Average
Net Assets................. .20% .21%* .20% 0%* 20% 0%
Ratio of Net Investment
Income to Average Net
Assets...................... 2.31% 2.42%* 2.10% 2.85%* 3.26% 3.46%
Portfolio Turnover Rate..... 1% 3% 36% 2% 30% 4%
<FN>
*Annualized.
**Total return figures do not reflect the annual account maintenance fee of $10 or applicable portfolio transaction fees.
+Commencement of operations.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------
SMALL CAPITALIZATION STOCK PORTFOLIO*
------------------------------------------------------------------------------------------------
YEAR ENDED SEPTEMBER 30,
------------------------------------------------------------------------------------------------
1993 1992 1991 1990(1) 1989+ 1988 1987 1986 1985 1984 1983
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR. $12.63 $12.03 $ 8.55 $11.88 $11.96 $15.73 $13.24 $11.68 $13.15 $19.77 $12.50
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
INVESTMENT OPERATIONS
Net Investment Income (Loss)...... .20 .19 .20 .17 .10 .03 (.04) (.01) (.04) .14 (.08)
Net Realized and Unrealized Gain
(Loss) on Investments............ 3.73 .88 3.60 (3.46) 2.13 (2.59) 4.42 1.57 (.51) (4.25) 8.57
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
TOTAL FROM INVESTMENT OPERATIONS. 3.93 1.07 3.80 (3.29) 2.23 (2.56) 4.38 1.56 (.55) (4.11) 8.49
- -----------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment
Income........................... (.18) (.18) (.18) (.04) (.14) -- -- -- (.15) -- (.30)
Distributions from Realized
Capital Gains.................... (.15) (.29) (.14) -- (2.17) (1.21) (1.89) -- (.77) (2.51) (.92)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
TOTAL DISTRIBUTIONS.............. (.33) (.47) (.32) (.04) (2.31) (1.21) (1.89) -- (.92) (2.51) (1.22)
- -----------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR....... $16.23 $12.63 $12.03 $ 8.55 $11.88 $11.96 $15.73 $13.24 $11.68 $13.15 $19.77
===================================================================================================================================
TOTAL RETURN++..................... 31.60% 9.34% 45.91% (27.73)% 18.83% (14.30)% 38.02% 13.33% (3.67)% (22.89)% 70.44%
===================================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions). $432 $202 $111 $40 $20 $27 $35 $31 $32 $37 N/A
Ratio of Expenses to Average Net
Assets........................... .18% .18% .21% .31% 1.00% .95% .92% .92% 1.00% 1.05% 1.41%
Ratio of Net Investment Income
(Loss) to Average Net Assets...... 1.47% 1.65% 2.11% 1.91% .65% .24% (.25%) (.06%) (.28%) 1.11% (.54%)
Portfolio Turnover Rate............ 26% 26% 33% 40% 160% 68% 92% 92% 103% 100% 83%
<FN>
(1) Adjusted to reflect a 3-for-1 stock split as of February 3, 1990.
*Formerly Vanguard Small Capitalization Stock Fund, Inc. (the "Fund").
+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.
</TABLE>
- ------------------------------------------------------------------------------
YIELD AND TOTAL RETURN
From time-to-time a Portfolio of the Trust 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.
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.
<PAGE>
Additionally, the Portfolios may compare their performance to
that of their comparative indexes. The target benchmarks
include the Standard & Poor's 500 Composite Stock Price
Index, the Wilshire 4500 Index, the Wilshire 5000 Index, the
Russell 2000 Small Stock Index, the S&P/BARRA Value Index and
the S&P/BARRA Growth Index.
- ------------------------------------------------------------------------------
INVESTMENT OBJECTIVES
EACH PORTFOLIO SEEKS TO MATCH THE INVESTMENT PERFORMANCE OF ITS RESPECTIVE
INDEX
The Trust is an open-end diversified investment company
designed as an "index" fund. The Trust consists of six
Portfolios, each of which 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 pie chart below illustrates how, as measured by market
capitalization, the Standard & Poor's 500 Index, the Wilshire
4500 Index and the Russell 2000 Index cover the entire U.S.
equity market, as represented by the Wilshire 5000 Index:
GRAPHIC PIE CHART HERE ON PRINTED PROSPECTUS
* 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.
<PAGE>
* The TOTAL STOCK MARKET PORTFOLIO seeks to replicate the
aggregate price and yield performance of the Wilshire 5000
Index, an index 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 pie chart below illustrates how, as measured by market
capitalization, the S&P 500 Index is divided into the S&P/
BARRA Value and S&P/BARRA Growth Indexes.
GRAPHIC PIE CHART HERE ON PRINTED PROSPECTUS
* 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.
These investment objectives are fundamental and so cannot be
changed without the approval of a majority of a Portfolio's
shareholders.
- ------------------------------------------------------------------------------
<PAGE>
INVESTMENT POLICIES
ALL SIX PORTFOLIOS USE A "PASSIVE" APPROACH TO INVEST IN COMMON STOCKS
The six Portfolios of the Trust are not managed according to
traditional 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 Portfolios, utilizing a "passive" or
"indexing" investment approach, attempt to duplicate the
investment performance of their respective indexes through
statistical procedures. The Portfolios are managed without
regard to tax ramifications.
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 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
<PAGE>
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.
These investment policies are not fundamental and so may be
changed by the Board of Trustees without shareholder
approval.
- ------------------------------------------------------------------------------
INVESTMENT RISKS
EACH PORTFOLIO IS SUBJECT TO MARKET RISK
As mutual funds investing primarily in common stocks, the
Portfolios of the Trust are subject to market risk--i.e., the
possibility that common stock prices will decline over
short or even extended periods. The U.S. stock market tends
to be cyclical, with periods when stock prices generally rise
and periods when prices generally decline.
To illustrate the volatility of stock prices, the following
table sets forth the extremes for stock market returns as
well as the average return for the period from 1926 to 1993,
as measured by the S&P 500 Composite Stock Price Index:
<TABLE>
U.S. STOCK MARKET RETURNS (1926-1993)
OVER VARIOUS TIME HORIZONS
<CAPTION>
1 YEAR 5 YEARS 10 YEARS 20 YEARS
------ ------- -------- --------
<S> <C> <C> <C> <C>
Best +53.9% +23.9% +20.1% +16.9%
Worst -43.3 -12.5 - 0.9 + 3.1
Average +12.3 +10.3 +10.6 +10.6
</TABLE>
As shown, 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%. While this average return can be used as a guide for
setting reasonable expectations for future stock market
returns, it may not be useful for forecasting future returns
in any particular period, as stock returns are quite volatile
from year-to-year.
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
<PAGE>
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.
- ------------------------------------------------------------------------------
WHO SHOULD INVEST
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 a low-cost, "passive"
approach for investing in a diversified portfolio of common
stocks. Unlike other equity mutual funds, which generally
seek to "beat" stock market averages with unpredictable
results, all six Portfolios seek to "match" their respective
indexes and thus are expected to provide a highly predictable
return relative to their benchmarks.
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.
<PAGE>
* 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 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.
The share price of each Portfolio is expected to be volatile,
and investors should be able to tolerate sudden, sometimes
substantial fluctuations in the value of their investment.
No assurance can be given that the Portfolios will achieve
their stated objectives or that shareholders will be protected
from the risks inherent in equity investing. Investors may
wish to purchase shares on a regular, periodic basis (dollar-
cost averaging) rather than investing in one lump sum in order
to reduce the risk of investing all their monies in common
stocks at a particularly unfavorable time.
The Trust is intended to be a long-term investment vehicle
and is not designed to provide investors with a means of
speculating on short-term market movements. Investors who
engage in excessive account activity generate additional
costs which are borne by all of the Trust's shareholders. In
order to minimize such costs the Trust has adopted the
following policies. The Trust 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, either because
of the timing of the investment or previous excessive trading
by the investor. Additionally, the Trust has adopted exchange
privilege limitations as described in the section "Exchange
Privilege Limitations." Finally, the Trust reserves the right
to suspend the offering of its shares.
Investors should not consider the Trust a complete
investment program, but should maintain holdings of
securities with different risk characteristics--including
common stocks, bonds and money market instruments. Investors
may also wish to complement an investment in the Trust with
other types of common stock investments.
- ------------------------------------------------------------------------------
<PAGE>
IMPLEMENTATION OF POLICIES
Each Portfolio of the Trust utilizes a number of investment
practices in an effort to match the investment performance of
its respective index.
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.
The following table illustrates the changing proportions that
the S&P 500 Index and the Wilshire 4500 Index have
represented in the Wilshire 5000 Index since 1984.
<PAGE>
<TABLE>
<CAPTION>
WILSHIRE 5000 INDEX 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993
------------------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
S&P 500........................ 69% 69% 70% 71% 71% 73% 72% 75% 71% 67%
Wilshire 4500.................. 31% 31% 30% 29% 29% 27% 28% 25% 29% 33%
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
</TABLE>
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 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 Portfolio will be selected utilizing a
statistical sampling technique known as "optimization." This
process selects stocks for the Portfolio so that various
industry weightings, market capitalizations and fundamental
characteristics (e.g. price-to-book, price-to-earnings, debt-
to-asset ratios, and dividend yields) closely approximate
those of the appropriate Index. For instance, if 10% of the
capitalization of the Wilshire 4500 Index consists of utility
companies with relatively large stock capitalizations, then
the Extended Market Portfolio is constructed so that
approximately 10% of the Portfolio's assets are invested in
the stocks of utility companies with relatively large
capitalizations. The Total Stock Market and Small
Capitalization Stock Portfolios are constructed using the
same sampling technique.
This sampling technique 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
<PAGE>
Portfolios and their respectives 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.
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.
<PAGE>
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 Indexes, which are determined, composed and calculated
by S&P without regard to the 500, Value and Growth
Portfolios.
EACH PORTFOLIO MAY INVEST IN SHORT-TERM FIXED INCOME SECURITIES
Although all six Portfolios normally seek to remain
substantially fully invested in common stocks, the Portfolios
of the Trust may invest temporarily in certain short-term
fixed income securities. 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.
EACH PORTFOLIO MAY USE FUTURES CONTRACTS, OPTIONS AND WARRANTS, CONVERTIBLE
SECURITIES AND SWAP AGREEMENTS
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). Futures contracts,
options, warrants, convertible securites 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 its 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. However, the
Portfolios will not use futures contracts, options, warrants,
convertible securities and swap agreements for speculative
purposes or to leverage their net assets. Accordingly, the
primary risks associated with the use of futures contracts,
options, warrants, convertible securities and swap agreements
by the Portfolios are: (i) imperfect correlation between the
change in market value of the stocks held by a Portfolio and
the prices of futures contracts, options, warrants,
convertible securities and swap agreements; and (ii) possible
<PAGE>
lack of a liquid secondary market for a futures contract and
the resulting inability to close a futures position prior to
its maturity date. The risk of imperfect correlation will be
minimized by investing only in those contracts whose
behavior is expected to resemble that of a Portfolio's
underlying securities. The risk that a 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 and swap agreements purchased or sold
over-the-counter may be less liquid than exchange traded
securities. Illiquid securities, in general, may not
represent more than 15% of the net assets of a Portfolio of
the Trust.
Since there are no futures traded on the S&P/BARRA Value or
Growth Indexes, it will be necessary for the Value and Growth
Portfolios to utilize a composite of other futures contracts
to simulate the performance of each of these Indexes. This
process may magnify the "tracking error" of each Portfolio's
performance compared to that of the Indexes, due to lower
correlation of the selected futures with the Indexes. 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 the indexes.
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.
EACH PORTFOLIO MAY LEND ITS SECURITIES
Each Portfolio of the Trust may lend its investment
securities to qualified institutional investors for either
short-term or long-term purposes of realizing additional
income. Loans of securities by a 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, and such loans may not exceed
33-1/3% of the value of the Portfolio's net assets.
PORTFOLIO TURNOVER IS EXPECTED TO BE LOW
Although each Portfolio generally seeks to invest for the
long term, the six Portfolios of the Trust retain the right
to sell securities irrespective of how long they have been
held. However, because of the "passive" investment management
approach of the Trust, the portfolio turnover rate for each
Portfolio is expected to be under 50%, a generally lower
turnover rate than for most other investment companies. A
portfolio turnover rate of 50% would occur if one half of a
Portfolio's securities were sold within one year. Ordinarily,
securities will be sold from a Portfolio only to reflect
certain administrative changes in an index (including mergers
or changes in the composition of an index) or to accommodate
cash flows into and out of each Portfolio while maintaining
the similarity of a Portfolio to its benchmark index.
- ------------------------------------------------------------------------------
<PAGE>
INVESTMENT LIMITATIONS
THE TRUST HAS ADOPTED CERTAIN FUNDAMENTAL LIMITATIONS
The Trust has adopted certain limitations on its investment
practices. Specifically, each Portfolio of the Trust 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 Portfolio's assets would be invested in
the securities of such issuer;
(b) with respect to 75% of its assets, purchase more than 10%
of the voting securities of any issuer;
(c) invest more than 25% of its assets in any one industry;
and
(d) borrow money, except that a Portfolio 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 value of the
Portfolio's net assets (including the amount borrowed and
the value of any outstanding reverse repurchase
agreements) at the time the borrowing is made. Whenever
borrowings exceed 5% of the value of a Portfolio's net
assets, the Portfolio will not make any additional
investments.
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 only with the approval of a majority of a
Portfolio's shareholders.
- ------------------------------------------------------------------------------
MANAGEMENT OF THE TRUST
VANGUARD ADMINISTERS AND DISTRIBUTES THE TRUST
The Trust is a member of The Vanguard Group of Investment
Companies, a family of 32 investment companies with 78
distinct portfolios and total assets in excess of $120
billion. 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
management, administrative 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).
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. 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 can be found in the
Statement of Additional Information.
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
<PAGE>
of Trustees (Directors) of each fund. In addition, each fund
bears its own direct expenses, such as legal, auditing and
custodian fees.
Vanguard provides distribution and marketing services to the
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 its share of the Group's distribution costs.
- ------------------------------------------------------------------------------
INVESTMENT ADVISER
VANGUARD MANAGES THE TRUST ON AN AT-COST BASIS
The six Portfolios of the Trust receive all investment
advisory services on an at-cost basis from Vanguard's Core
Management Group. The Core Management Group also provides
investment advisory services to several other Vanguard Funds,
including Vanguard International Equity Index Fund, Vanguard
Institutional Index Fund, Vanguard Balanced Index Fund,
Vanguard Variable Insurance Fund--Equity Index Portfolio, and
a portion of Vanguard/Windsor II, as well as to several
indexed separate accounts. Total assets under management by
the Core Management Group were $16.4 billion as of December
31, 1993. The Trust is not actively managed, but is instead
administered by the Core Management Group using computerized,
quantitative techniques. The Core Management Group is
supervised by the Officers of the Trust.
In placing portfolio transactions, the 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 Trust.
- ------------------------------------------------------------------------------
PERFORMANCE RECORD
The table in this section provide investment results for the
500, Extended Market and Small Capitalization Stock
Portfolios of the Trust for several periods throughout the
Trust's lifetime. The results shown represent "total return"
investment performance, which assumes the reinvestment of all
capital gains and income dividends for the indicated periods.
Also included is comparative information with respect to the
unmanaged S&P 500 Composite Stock Price Index, the Wilshire
4500 Index and the Russell 2000 Index. The results for the
Portfolios are net of all expenses while the results of the
stock indexes are hypothetical and make no allowances for the
costs of investing. The tables do not make any allowance for
federal, state or local income taxes, which shareholders must
pay on a current basis. The Total Stock Market, Value, and
Growth Portfolios were introduced in 1992, and so long-term
investment results are not yet available.
The results shown should not be considered a representation
of the total return from an investment made in the Trust
today. The periods shown were generally favorable ones for
stock market investing. This information is provided to help
investors better understand the Trust and may not provide a
basis for comparison with other investments or mutual funds
which use a different method to calculate performance.
<PAGE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN FOR
VANGUARD INDEX TRUST--500 PORTFOLIO
----------------------------------------------
FISCAL PERIODS 500 S&P 500
ENDED 12/31/93 PORTFOLIO* INDEX
-------------------------------- ------ -------------------
<S> <C> <C>
1 Year + 9.8% +10.1%
5 Years +14.3 +14.5
10 Years +14.6 +14.9
Lifetime** +13.2 +13.7
<FN>
*Inclusive of $10 annual account maintenance fee.
**August 31, 1976 to December 31, 1993.
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN FOR
VANGUARD INDEX TRUST--
EXTENDED MARKET PORTFOLIO
----------------------------------------------
EXTENDED WILSHIRE
FISCAL PERIODS MARKET 4500
ENDED 12/31/93 PORTFOLIO* INDEX
-------------------------------- ---------------------- -------------------
<S> <C> <C>
1 Year +13.3% +14.6%
5 Years +14.3 +14.5
Lifetime** +14.8 +15.5
<FN>
*Includes 1% portfolio transaction fee and $10 annual account maintenance fee.
**December 21, 1987 to December 31, 1993.
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN FOR
VANGUARD INDEX TRUST--
SMALL CAPITALIZATION STOCK PORTFOLIO+
----------------------------------------------
SMALL RUSSELL
FISCAL PERIODS CAPITALIZATION 2000
ENDED 9/30/93 STOCK PORTFOLIO* INDEX
-------------------------------- ---------------------- -------------------
<S> <C> <C>
1 Year +30.2% +33.2%
3 Years +27.5 +28.1
Since September 11, 1989 +10.2 N/A
<FN>
*Includes 1% portfolio transaction fee and $10 annual account maintenance fee.
+Formerly Vanguard Small Capitalization Stock Fund, Inc.
</TABLE>
- ------------------------------------------------------------------------------
<PAGE>
DIVIDENDS, CAPITAL GAINS AND TAXES
FOUR PORTFOLIOS PAY QUARTERLY DIVIDENDS; TWO PAY DIVIDENDS ONCE A YEAR
The Trust distributes substantially all of 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.
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.
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 Trust and
received by shareholders on December 31 of the prior year.
EACH PORTFOLIO CHARGES A $10 ANNUAL ACCOUNT MAINTENANCE FEE
The Trust automatically deducts a $10 annual account
maintenance fee from the dividend income paid to each
Portfolio account. For the 500, Total Stock Market, Value and
Growth Portfolios the $10 account maintenance fee is deducted
at a rate of $2.50 per quarter from the dividend; while for
the Extended Market and Small Capitalization Stock Portfolios
the $10 fee is deducted once a year from the dividend. If the
dividend to be paid to an account is less than the fee to be
deducted, sufficient shares will be redeemed from an account
to make up the difference. The Board of Trustees reserves the
right to change the annual account maintenance fee to reflect
the actual cost of maintaining shareholder accounts.
Each Portfolio of the Trust 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-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
<PAGE>
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 Trust will notify you annually as to the tax status of
dividend and capital gains distributions paid by each
Portfolio.
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 Trust 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
Identification Number and by certifying that you are not
subject to backup withholding.
The 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 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 Trust.
- ------------------------------------------------------------------------------
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 by the Portfolio. 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, 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, 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
<PAGE>
approximates market value. Securities for which no current
quotations are readily available are valued at fair market
value as determined in good faith by the 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 Portfolio's share price can be found daily in the mutual
fund listings of most major newspapers under the heading of
The Vanguard Group.
- ------------------------------------------------------------------------------
GENERAL INFORMATION
The 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 are fully paid and non-assessable;
have no preference as to conversion, exchange, dividends,
retirement or other features; and have no pre-emptive rights.
Such shares have non-cumulative voting rights, meaning that
the holders of more than 50% of the shares voting for the
election of Trustees can elect 100% of the 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 Trustee or Trustees of the Trust if requested in
writing by the holders of not less than 10% of the
outstanding shares of the Trust.
All securities and cash for the 500, Extended Market, Total
Stock Market and Small Capitalization Stock Portfolios are
held by State Street Bank and Trust Company, Boston, MA. All
securities and cash for the Value and Growth Portfolios are
held by CoreStates National Bank, Philadelphia, PA. The
Vanguard Group, Inc., Valley Forge, PA, serves as the Trust's
Transfer and Dividend Disbursing Agent. Price Waterhouse
serves as independent accountants for the Trust and will
audit its financial statements annually. The Trust is not
involved in any litigation.
- ------------------------------------------------------------------------------
<PAGE>
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 or appropriate Adoption Agreement (e.g.,
the IRA Adoption Agreement) and any required legal
documentation, indicating the amount you wish to invest. Your
purchase must be equal to or greater than the $3,000 minimum
initial investment requirement for each Portfolio ($500 for
retirement accounts or 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 forms or have any questions about the Trust, 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 powers of
attorney), please call us to determine which additional forms
you may need.
Because of the risks associated with common stock
investments, the Trust is intended to be a long-term
investment vehicle and is not designed to provide investors
with a means of speculating on short-term market movements.
Consequently, the Trust reserves the right to reject any
specific purchase (and exchange purchase) request. The Trust
also reserves the right to suspend the offering of shares for
a period of time.
IMPORTANT NOTE ON EXPENSES
Shares of each Portfolio are purchased at the next-determined
net asset value per share after your investment has been
received. Purchases of the Extended Market and Small
Capitalization Stock Portfolios are subject to a portfolio
transaction fee of 1%, while purchases of the Total Stock
Market Portfolio are subject to a 0.25% portfolio transaction
fee. In addition, all six Portfolios charge a $10 annual
account maintenance fee. See "Trust Expenses." The Trust is
offered on a no-load basis (i.e., there are no sales
commissions or 12b-1 fees).
ADDITIONAL INVESTMENTS
Subsequent investments to regular accounts may be made by
mail ($100 minimum), wire ($1,000 minimum), written exchange
from another Vanguard Fund account ($100 minimum), or
Vanguard Fund Express. However, the Trust reserves the right
to reject any specific purchase request, whether it be made
by check, wire, exchange from another Vanguard Fund account,
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.
-------------------------------------------------------------
<PAGE>
ADDITIONAL INVESTMENTS
NEW ACCOUNT TO EXISTING ACCOUNTS
PURCHASING BY MAIL Please include the amount Additional investments
Complete and sign of your initial should include the Invest-
the enclosed investment and indicate by-Mail remittance form
Account the Portfolio(s) you have attached to your Fund
Registration Form selected on the confirmation statements.
registration form, make Please make your check
your check payable to The payable to The Vanguard
Vanguard Group Group--(Portfolio Number),
--(Portfolio Number), see see below for the
below for the appropriate appropriate portfolio
portfolio number, and number, write your account
mail to: number on your check and,
VANGUARD FINANCIAL CENTER using the return envelope
P.O. BOX 2600 provided, mail to the
VALLEY FORGE, PA 19482 address indicated on the
Invest-by-Mail Form.
For express or VANGUARD FINANCIAL CENTER All requests should be
registered mail, 455 DEVON PARK DRIVE 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.
VANGUARD INDEX TRUST PORTFOLIO NUMBERS:
500 Portfolio--40
Extended Market Portfolio--98
Total Stock Market Portfolio--85
Small Capitalization Stock Portfolio--48
Value Portfolio--06
Growth Portfolio--09
-----------------------------------------------------------
PURCHASING BY WIRE CORESTATES BANK, N.A.
Money should be ABA 031000011
wired to: CORESTATES NO. 0101 9897
ATTN VANGUARD
BEFORE WIRING VANGUARD INDEX TRUST
Please contact our NAME OF PORTFOLIO
Client Services Department ACCOUNT NUMBER
(1-800-662-2739) ACCOUNT REGISTRATION
You should notify our Client Services Department of your
intended wire purchase, including the federal wire number to
be used, by 12:00 noon (Eastern time). To assure proper
receipt, please be sure your bank includes the Portfolio
name, 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 after completing your
wire arrangement. NOTE: Federal Funds wire purchase orders
will be accepted only when the Trust and Custodian Banks are
open for business.
-------------------------------------------------------------
<PAGE>
PURCHASING BY EXCHANGE (from a Vanguard account)
Telephone exchanges are not accepted for Vanguard Index
Trust. You may, however, open an account by exchange by
providing the appropriate information on the Account
Registration Form. The new account will have the same
registration as the existing account. However, the Trust
reserves the right to refuse any exchange purchase request.
-------------------------------------------------------------
PURCHASING BY FUND EXPRESS
Automatic Investment
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. To establish this Fund Express 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
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
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 Trust is required to
distribute net capital gains and dividend income to Trust
shareholders. These distributions are made to all
shareholders who own Trust 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 Trust shares for just a short period of
time. (Taxes are due on the distributions even if the
dividend or gain is reinvested in additional Trust 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 net asset value of the shares--you
should be aware of the tax implications the timing of your
purchase may have.
<PAGE>
Prospective investors should, therefore, inquire about
potential distributions before investing. The Trust's annual
capital gains distribution normally occurs in December, while
income dividends are generally paid quarterly for the 500,
Total Stock Market, Value and Growth Portfolios in March,
June, September & December; annually for the Extended Market
Portfolio in December; and annually for Small Capitalization
Stock Portfolio in September. For additional information on
distributions and taxes, see the section titled "Dividends,
Capital Gains and Taxes."
- ------------------------------------------------------------------------------
IMPORTANT INFORMATION
ESTABLISHING OPTIONAL SERVICES
The easiest way to establish optional Vanguard 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 (except for
the Total Stock Market, Value and Growth Portfolios). If a
certificate is lost, you may incur an expense to replace it.
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 Trust will not cancel any trade (e.g., 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
Your trade date is the date on which your account is
credited. 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 500,
Extended Market, Total Stock Market, Small Capitalization
Stock, Value and Growth Portfolios 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 while shares
of the Total Stock Market Portfolio are subject to a 0.25%
portfolio transaction fee. (See "Trust Expenses.")
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.
- ------------------------------------------------------------------------------
<PAGE>
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 within two business days after the receipt of
the request in Good Order.
-------------------------------------------------------------
SELLING BY MAIL
Requests should be mailed to VANGUARD FINANCIAL CENTER,
VANGUARD INDEX TRUST, P.O. BOX 1120, VALLEY FORGE, PA 19482.
(For express or registered mail, send your request to
Vanguard Financial Center, Vanguard Index Trust, 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. 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 that you hold for the account.
IF YOU HAVE QUESTIONS ABOUT THIS DEFINITION AS IT PERTAINS TO
YOUR REQUEST, PLEASE CALL OUR CLIENT SERVICES DEPARTMENT
(1-800-662-2739).
-------------------------------------------------------------
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. The proceeds will be sent to you by mail.
Please see "Important Information About Telephone
Transactions."
-------------------------------------------------------------
SELLING BY FUND EXPRESS
Automatic Withdrawal
With 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. 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 by making an exchange to another Vanguard
Fund account. Exchanges to or from Vanguard Index Trust may
be made only by mail. Send your exchange request to VANGUARD
FINANCIAL CENTER, VANGUARD INDEX TRUST, P.O. BOX 1120, VALLEY
FORGE, PA 19482.
-------------------------------------------------------------
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 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.
<PAGE>
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 Trust reserves the right to revise or terminate
the telephone redemption privilege at any time.
The Trust 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 Trustees determines that it would be
detrimental to the best interests of the Trust's remaining
shareholders to make payment in cash, the Trust 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 Trust reserves the right to redeem shares in
any account that is below $3,000 ($250 with respect to the
500 Portfolio). It is the Trust's current policy that, at any
time your total investment in the Extended Market, Total
Stock Market, Small Capitalization Stock, Value or Growth
Portfolios falls below $1,000 ($250 with respect to the 500
Portfolio), you may be notified that the value of your
account is below the Portfolio'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. These
minimums do not apply to IRAs, other retirement accounts,
and Uniform Gifts/Transfers to Minors Act accounts.
- ------------------------------------------------------------------------------
EXCHANGING YOUR SHARES
Should your investment goals change, you may exchange your
shares of Vanguard Index Trust for those of other available
Vanguard Funds. Exchanges to or from Vanguard Index Trust may
be made only by mail. TELEPHONE EXCHANGES ARE NOT ACCEPTED
FOR THE TRUST.
-------------------------------------------------------------
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
Trust 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 TRUST, P.O. BOX 1120, VALLEY FORGE, PA 19482.
<PAGE>
(For express or registered mail, send your request to
Vanguard Financial Center, Vanguard Index Trust, 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.
* The shares to be exchanged must be on deposit and not held
in certificate form.
* New accounts are not currently accepted in the 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.
Every effort will be made to maintain the exchange privilege.
However, the Trust 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 Trust'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 Trust and increase transaction costs, the
Trust 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 Trust during any twelve
month period. Notwithstanding these limitations, the Trust
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.
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
<PAGE>
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.
Neither the Trust 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.
- ------------------------------------------------------------------------------
TRANSFERRING REGISTRATION
You may transfer the registration of any of your Trust 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 and full
instructions, please call our Client Services Department (1-
800-662-2739).
- ------------------------------------------------------------------------------
OTHER VANGUARD SERVICES
For more information about any of these services, please call
our Investor Information Department at 1-800-662-7447.
STATEMENTS AND REPORTS
Vanguard will send you a confirmation statement each time you
initiate a transaction in your account except for
checkwriting redemptions from Vanguard money market accounts.
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.
Financial reports on the Trust will be mailed to you semi-
annually, according to the Fund's fiscal year-end.
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.
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.
<PAGE>
VANGUARD FUND EXPRESS
Vanguard's Fund Express allows you to transfer money between
your Trust 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 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 Trust account, one business day after the Trust'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 the Investor
Information Department (1-800-662-7447) for a Vanguard
Dividend Express application.
VANGUARD TELE-ACCOUNT
Vanguard's Tele-Account is a convenient, automated service
that provides share price, price change and yield quotations
on Vanguard Funds through any TouchTone(TM) telephone. This
free 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
free brochure offering detailed operating instructions is
available from our Investor Information Department
(1-800-662-7447).
- ------------------------------------------------------------------------------
<PAGE>
- ------------------------------------------------------------------------------
THE VANGUARD GROUP
OF INVESTMENT
COMPANIES
Vanguard Financial Center
P.O. Box 2900
Valley Forge, PA 19482
INSTITUTIONAL PARTICIPANT
SERVICES DEPARTMENT:
1-800-523-1188
TRANSFER AGENT:
The Vanguard Group, Inc.
Vanguard Financial Center
Valley Forge, PA 19482
I N S T I T U T I O N A L
P R O S P E C T U S
APRIL 4, 1994
<PAGE>
==============================================================================
A Member of The Vanguard Group
==============================================================================
PROSPECTUS--APRIL 4, 1994
- ------------------------------------------------------------------------------
FUND INFORMATION: PARTICIPANT SERVICES--1-800-523-1188
- ------------------------------------------------------------------------------
INVESTMENT OBJECTIVE AND POLICIES
Vanguard Index Trust (the "Trust") is an open-end diversified
investment company designed as an "index" fund. THE TRUST
CONSISTS OF SIX PORTFOLIOS: THE 500, EXTENDED MARKET, TOTAL
STOCK MARKET, SMALL CAPITALIZATION STOCK, VALUE AND GROWTH
PORTFOLIOS. Each of these Portfolios invests in common stocks
in order to match the investment performance of a distinct
market index.
- ------------------------------------------------------------------------------
IMPORTANT NOTE
This Prospectus is intended exclusively for participants in
employer-sponsored retirement or savings plans, such as tax-
qualified pension and profit-sharing plans and 401(k) thrift
plans, as well as 403(b) custodial accounts for non-profit
educational and charitable organizations. Another version of
this Prospectus, containing information on how to open a
personal investment account with the Trust, is available for
individual investors. To obtain a copy of that version of the
Prospectus, please call 1-800-662-7447.
- ------------------------------------------------------------------------------
OPENING AN ACCOUNT
A Portfolio of the Trust is an investment option under a
retirement or savings program sponsored by your employer. The
administrator of your retirement plan or your employee
benefits office can provide you with detailed information on
how to participate in your plan and how to elect a Portfolio
of the Trust as an investment option.
If you have any questions about the Trust, please contact
Participant Services at 1-800-523-1188. If you have any
questions about your plan account, contact your plan
administrator or the organization that provides recordkeeping
services for your plan.
- ------------------------------------------------------------------------------
ABOUT THIS PROSPECTUS
This Prospectus is designed to set forth concisely the
information you should know about the Trust before you
invest. It should be retained for future reference. A
"Statement of Additional Information" containing additional
information about the Trust has been filed with the
Securities and Exchange Commission. This Statement is dated
April 4,, 1994 and has been incorporated by reference into
this Prospectus. A copy may be obtained without charge by
writing to the Trust or by calling the Investor Information
Department.
- ------------------------------------------------------------------------------
<TABLE>
TABLE OF CONTENTS
<CAPTION>
Page Page Page
<S> <C> <C>
Highlights.......................... 2 Investment Risks.................... 13 Performance Record.................. 22
Trust Expenses...................... 4 Who Should Invest................... 14 Dividends, Capital Gains and Taxes.. 24
Financial Highlights................ 6 Implementation of Policies.......... 16 The Share Price of Each Portfolio... 24
Yield and Total Return.............. 9 Investment Limitations.............. 21 General Information................. 25
Investment Objectives............... 10 Management of the Trust............. 21 Service Guide....................... 26
Investment Policies................. 12 Investment Adviser.................. 22
- ------------------------------------------------------------------------------
</TABLE>
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.
- ------------------------------------------------------------------------------
<PAGE>
HIGHLIGHTS
OBJECTIVE AND POLICIES
The Trust is an open-end diversified investment company
designed as an "index" fund. Shares of the Trust are offered
on a no-load basis, although the Trust incurs certain
distribution expenses. The Trust consists of six separate
Portfolios, each of which invests in common stocks in order
to match the performance of a selected market index. There is
no assurance, however, that the Trust will achieve its stated
objective. Page 10
- ------------------------------------------------------------------------------
SIX SEPARATE PORTFOLIOS
Investors may choose to invest in any of six Portfolios of
the Trust:
500 PORTFOLIO--seeks to match the investment performance of
the Standard & Poor's 500 Composite Stock Price Index, an
index emphasizing large-capitalization stocks.
EXTENDED MARKET PORTFOLIO--seeks to match the investment
performance of the Wilshire 4500 Index, an index consisting
of medium- and small-capitalization stocks.
TOTAL STOCK MARKET PORTFOLIO--seeks to match the investment
performance of the Wilshire 5000 Index, an index consisting
of all regularly and publicly traded U.S. stocks.
SMALL CAPITALIZATION STOCK PORTFOLIO--seeks to match the
investment performance of the Russell 2000 Small Stock Index,
an index consisting of 2,000 small-capitalization common
stocks.
VALUE PORTFOLIO--seeks to match the investment performance of
the S&P/BARRA Value Index, an index consisting of stocks
selected from the Standard & Poor's 500 Index with lower than
average ratios of market price to book value.
GROWTH PORTFOLIO--seeks to match the investment performance
of the S&P/BARRA Growth Index, an index consisting of stocks
selected from the Standard & Poor's 500 Index with higher
than average ratios of market price to book value. Page 12
- ------------------------------------------------------------------------------
RISK CHARACTERISTICS
As mutual funds investing in common stocks, all six
Portfolios of the Trust are subject to market risk, which is
the possibility that common stock prices will decline,
sometimes substantially over short or extended periods. Due
to differences in the securities they hold, the six
Portfolios may exhibit varying levels of volatility. Page 13
- ------------------------------------------------------------------------------
THE VANGUARD GROUP
The Trust is a member of The Vanguard Group of Investment
Companies, a group of 32 investment companies with 78
distinct investment portfolios and total assets in excess of
$120 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 21
- ------------------------------------------------------------------------------
<PAGE>
INVESTMENT ADVISER
The Trust receives investment advisory services on an at-cost
basis from Vanguard's Core Management Group. As a result, the
Trust receives its investment advisory services at a
substantially lower cost than would be possible if the Trust
paid an investment advisory fee to an external investment
adviser. Page 22
- ------------------------------------------------------------------------------
FEES AND EXPENSES
A portfolio transaction fee of 1% is deducted from purchases
of the Extended Market and Small Capitalization Stock
Portfolios; a 0.25% portfolio transaction fee is deducted
from purchases of the Total Stock Market Portfolio. Portfolio
transaction fees are paid to the Portfolios to offset
transaction costs of buying securities of small- and medium-
sized companies. Page 4
- ------------------------------------------------------------------------------
DIVIDEND POLICY
The Trust distributes substantially all of its net investment
income in the form of dividends. The 500, Total Stock Market,
Value and Growth Portfolios distribute dividends quarterly,
whereas the Extended Market and Small Capitalization Stock
Portfolios distribute dividends annually. In all six
Portfolios, net capital gains, if any, are distributed
annually. Page 24
- ------------------------------------------------------------------------------
SPECIAL CONSIDERATIONS
(1) Each Portfolio may invest a portion of its assets in
futures contracts, options, convertible securities & swap
agreements. Page 19
(2) Each Portfolio may invest in short-term fixed income
securities. Page 19
(3) Each Portfolio may lend its securities. Page 20
(4) Each Portfolio may borrow money. Page 21
- ------------------------------------------------------------------------------
<PAGE>
TRUST EXPENSES
The following table illustrates ALL expenses and fees that
you would incur as a shareholder of the Trust. The expenses
and fees for the 500, Extended Market, Total Stock Market,
Value and Growth Portfolios are based on the year ended
December 31, 1993. The fees and expenses for the Small
Capitalization Stock Portfolio are based on the year ended
September 30, 1993.
<TABLE>
<CAPTION>
TOTAL SMALL
SHAREHOLDER EXTENDED STOCK CAPITALIZATION
TRANSACTION 500 MARKET MARKET VALUE GROWTH STOCK
EXPENSES PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO***
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Sales Load Imposed *
on Purchases....... None None* None* None None None*
Sales Load Imposed
on Reinvested
Dividends.......... None None None None None None
Redemption Fees...... None None None None None None
Exchange Fees........ None None None None None None
<FN>
*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>
<TABLE>
<CAPTION>
TOTAL SMALL
EXTENDED STOCK CAPITALIZATION
ANNUAL FUND OPERATING 500 MARKET MARKET VALUE GROWTH STOCK
EXPENSES PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO***
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Management &
Administrative
Expenses++.......... 0.15% 0.15% 0.15% 0.14% 0.13% 0.13%
Investment Advisory
Fees................ None None None None None None
12b-1 Fees............ None None None None None None
Other Expenses
Distribution Costs.. 0.03 0.02 0.03 0.02 0.02 0.02
Miscellaneous
Expenses.......... 0.01 0.03 0.02 0.04 0.05 0.03
---- ---- ---- ---- ---- ----
Total Other Expenses.. 0.04 0.05 0.05 0.06 0.07 0.05
---- ---- ---- ---- ---- ----
TOTAL OPERATING
EXPENSES........ 0.19% 0.20% 0.20% 0.20% 0.20% 0.18%
==== ==== ==== ==== ==== ====
<FN>
***Formerly Vanguard Small Capitalization Stock Fund, Inc.
++In addition to these costs, each Portfolio assesses an annual account maintenance fee of $10.
</TABLE>
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 Trust.
THREE PORTFOLIOS ASSESS TRANSACTION FEES
The Extended Market and Small Capitalization Stock Portfolios
assess a portfolio transaction fee on purchases of Portfolio
shares equal to 1% of the dollar amount invested; the Total
Stock Market Portfolio assesses a portfolio transaction fee
equal to 0.25% 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 Extended
Market, Small Capitalization Stock and Total Stock Market
Portfolios and all subsequent purchases (including purchases
<PAGE>
made by exchange from another Vanguard Fund or from the other
portfolios of the Trust), 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.)
The 1% and 0.25% fees represent Vanguard's estimate of the
brokerage and other transaction costs incurred by the
Extended Market, Small Capitalization Stock and Total Stock
Market Portfolios in acquiring stocks of mid-sized and small
capitalization companies. Without the fees, the three
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 following example illustrates the expenses that you would
incur on a $1,000 investment over various time periods,
assuming (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; and the 0.25% transaction
fee for the Total Stock Market Portfolio. As noted in the
table on the previous page, the Trust charges no redemption
fees of any kind.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
----- ----- ----- ------
<S> <C> <C> <C> <C>
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
</TABLE>
<PAGE>
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 ended December 31, 1993, (September 30, 1993 with
respect to the Small Capitalization Stock Portfolio) have
been audited by Price Waterhouse, independent accountants,
whose reports thereon were unqualified. This financial
information should be read in conjunction with the Trust's
financial statements and notes thereto, which are
incorporated by reference in the Statement of Additional
Information and in this Prospectus, and which appear, along
with the reports of Price Waterhouse, in the Trust'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,
in the Small Capitalization Stock Fund's 1993 Annual Report
to Shareholders. For a more complete discussion of the
Trust's performance, please see the Trust's 1993 Annual
Report to Shareholders, which may be obtained free of charge
by writing to the Trust or calling Participant Services at
1-800-523-1188.
<PAGE>
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------
500 PORTFOLIO
----------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------------------
1993 1992 1991 1990 1989 1988 1987 1986 1985 1984
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR....... $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................... 1.13 1.12 1.15 1.17 1.20 1.08 .88 .89 .91 .88
Net Realized and Unrealized Gain
(Loss) on Investments.................. 2.89 1.75 8.20 (2.30) 7.21 2.87 .36 3.30 5.08 .30
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
TOTAL FROM INVESTMENT OPERATIONS...... 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.... (1.13) (1.12) (1.15) (1.17) (1.20) (1.10) (.69) (.89) (.91) (.88)
Distributions from Realized Capital
Gains.................................. (.03) (.10) (.12) (.10) (.75) (.32) (.17) (2.02) (1.61) (.48)
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
TOTAL DISTRIBUTIONS................... (1.16) (1.22) (1.27) (1.27) (1.95) (1.42) (.86) (2.91) (2.52) (1.36)
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR............. $43.83 $40.97 $39.32 $31.24 $33.64 $27.18 $24.65 $24.27 $22.99 $19.52
=================================================================================================================================
TOTAL RETURN*............................ 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 Year (Millions)....... $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% .20% .22% .21% .22% .26% .28% .28% .27%
Ratio of Net Investment Income to Average
Net Assets.............................. 2.65% 2.81% 3.07% 3.60% 3.62% 4.08% 3.15% 3.40% 4.09% 4.53%
Portfolio Turnover Rate.................. 6%+ 4%+ 5%+ 23%+ 8% 10% 15% 29% 36% 14 %
<FN>
*Total return figures do not reflect the annual account maintenance fee of $10 or applicable portfolio transaction fees.
+Portfolio turn over rates excluding in-kind redemptions were 2%, 1%, 1% and 6%, respectively.
</TABLE>
<TABLE>
<CAPTION>
----------------------------------------------------------------------
EXTENDED MARKET PORTFOLIO
----------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------
DEC. 21+
1993 1992 1991 1990 1989 1988 TO 31, 1987
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD........................ $17.35 $15.82 $11.48 $13.92 $11.60 $ 9.99 $10.00
------ ------ ------ ------ ------ ------ ------
INVESTMENT OPERATIONS
Net Investment Income..................................... .23 .24 .25 .30 .26 .34 .03
Net Realized and Unrealized Gain (Loss) on Investments.... 2.28 1.72 4.54 (2.25) 2.52 1.63 (.04)
------ ------ ------ ------ ------ ------ ------
TOTAL FROM INVESTMENT OPERATIONS......................... 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 Gain.................. (.20) (.18) (.20) (.16) (.23) (.16) --
------ ------ ------ ------ ------ ------ ------
TOTAL DISTRIBUTIONS...................................... (.43) (.43) (.45) (.49) (.46) (.36) --
- ----------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD.............................. $19.43 $17.35 $15.82 $11.48 $13.92 $11.60 $ 9.99
==================================================================================================================================
TOTAL RETURN*............................................... 14.49% 12.47% 41.85% (14.05)% 24.10% 19.75% (0.10)%
==================================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions)........................ $928 $585 $372 $179 $147 $35 $5
Ratio of Expenses to Average Net Assets..................... .20% .20% .19% .23% .23% .24% 0%
Ratio of Net Investment Income to Average Net Assets........ 1.48% 1.73% 2.14% 2.68% 2.92% 2.90% 0%
Portfolio Turnover Rate..................................... 13% 9% 11% 9% 14% 26% 3%
<FN>
*Total return figures do not reflect the annual account maintenance fee of $10 or applicable portfolio transaction fees.
+Commencement of Operations.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
--------------------------------- -------------------------------- -------------------------------
TOTAL STOCK
MARKET PORTFOLIO GROWTH PORTFOLIO VALUE PORTFOLIO
--------------------------------- -------------------------------- -------------------------------
YEAR ENDED MARCH 16+, 1992, YEAR ENDED NOV, 2, 1992, YEAR ENDED NOV. 2, 1992,
DEC. 31, 1993 TO DEC. 31, 1992 DEC. 31, 1993 TO DEC. 31, 1992 DEC. 31, 1993 TO DEC. 31, 1992
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD........ $10.84 $10.00 $10.26 $10.00 $10.30 $10.00
------ ------ ------ ------ ------ ------
INVESTMENT OPERATIONS
Net Investment Income...... .26 .23 .21 .06 .38 .07
Net Realized and Unrealized
Gain (Loss) on Investments .88 .84 (.06) .26 1.50 .30
------ ------ ------ ------ ------ ------
TOTAL FROM INVESTMENT
OPERATIONS............. 1.14 1.07 .15 .32 1.88 .37
- ----------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment
Income.................... (.26) (.23) (.21) (.06) (.38) (.07)
Distributions from Realized
Capital Gains............. (.03) -- -- -- (.06) --
------ ------ ------ ------ ------ ------
TOTAL DISTRIBUTIONS...... (.29) (.23) (.21) (.06) (.44) (.07)
- ----------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF
PERIOD..................... $11.69 $10.84 $10.20 $10.26 $11.47 $10.30
==================================================================================================================================
TOTAL RETURN**.............. 10.62% 10.41% 1.53% 3.19% 18.35% 3.70%
==================================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period
(Millions)................. $512 $275 $51 $21 $190 $24
Ratio of Expenses to Average
Net Assets................. .20% .21%* .20% 0%* 20% 0%
Ratio of Net Investment
Income to Average Net
Assets...................... 2.31% 2.42%* 2.10% 2.85%* 3.26% 3.46%
Portfolio Turnover Rate..... 1% 3% 36% 2% 30% 4%
<FN>
*Annualized.
**Total return figures do not reflect the annual account maintenance fee of $10 or applicable portfolio transaction fees.
+Commencement of operations.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------
SMALL CAPITALIZATION STOCK PORTFOLIO*
------------------------------------------------------------------------------------------------
YEAR ENDED SEPTEMBER 30,
------------------------------------------------------------------------------------------------
1993 1992 1991 1990(1) 1989+ 1988 1987 1986 1985 1984 1983
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR. $12.63 $12.03 $ 8.55 $11.88 $11.96 $15.73 $13.24 $11.68 $13.15 $19.77 $12.50
------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
INVESTMENT OPERATIONS
Net Investment Income (Loss)...... .20 .19 .20 .17 .10 .03 (.04) (.01) (.04) .14 (.08)
Net Realized and Unrealized Gain
(Loss) on Investments............ 3.73 .88 3.60 (3.46) 2.13 (2.59) 4.42 1.57 (.51) (4.25) 8.57
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
TOTAL FROM INVESTMENT OPERATIONS. 3.93 1.07 3.80 (3.29) 2.23 (2.56) 4.38 1.56 (.55) (4.11) 8.49
- -----------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment
Income........................... (.18) (.18) (.18) (.04) (.14) -- -- -- (.15) -- (.30)
Distributions from Realized
Capital Gains...................... (.15) (.29) (.14) -- (2.17) (1.21) (1.89) -- (.77) (2.51) (.92)
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
TOTAL DISTRIBUTIONS.............. (.33) (.47) (.32) (.04) (2.31) (1.21) (1.89) -- (.92) (2.51) (1.22)
- -----------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR....... $16.23 $12.63 $12.03 $ 8.55 $11.88 $11.96 $15.73 $13.24 $11.68 $13.15 $19.77
===================================================================================================================================
TOTAL RETURN++..................... 31.60% 9.34% 45.91% (27.73)% 18.83% (14.30)% 38.02% 13.33% (3.67)% (22.89)% 70.44%
===================================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions). $432 $202 $111 $40 $20 $27 $35 $31 $32 $37 N/A
Ratio of Expenses to Average Net
Assets............................. .18% .18% .21% .31% 1.00% .95% .92% .92% 1.00% 1.05% 1.41%
Ratio of Net Investment Income
(Loss) to Average Net Assets....... 1.47% 1.65% 2.11% 1.91% .65% .24% (.25%) (.06%) (.28%) 1.11% (.54%)
Portfolio Turnover Rate............ 26% 26% 33% 40% 160% 68% 92% 92% 103% 100% 83%
<FN>
(1) Adjusted to reflect a 3-for-1 stock split as of February 3, 1990.
*Formerly Vanguard Small Capitalization Stock Fund, Inc. (the "Fund").
+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.
</TABLE>
- ------------------------------------------------------------------------------
YIELD AND TOTAL RETURN
From time-to-time a Portfolio of the Trust 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.
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.
Additionally, the Portfolios may compare their performance to
that of their comparative indexes. The target benchmarks
include the Standard & Poor's 500 Composite Stock
<PAGE>
Price Index, the Wilshire 4500 Index, the Wilshire 5000
Index, the Russell 2000 Small Stock Index, the S&P/BARRA
Value Index and the S&P/BARRA Growth Index.
- ------------------------------------------------------------------------------
INVESTMENT OBJECTIVES
EACH PORTFOLIO SEEKS TO MATCH THE INVESTMENT PERFORMANCE OF ITS RESPECTIVE
INDEX
The Trust is a no-load, open-end diversified investment
company designed as an "index" fund. The Trust consists of
six Portfolios, each of which seeks to provide investment
results that correspond to a particular stock market index.
The correlation between the performance of each of the
Trust's Portfolios 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 pie chart below illustrates how, as measured by
capitalization, the Standard & Poor's 500 Index, the Wilshire
4500 Index and the Russell 2000 Index cover the entire U.S.
equity market, as represented by the Wilshire 5000 Index:
GRAPHIC PIE CHART HERE ON PRINTED PROSPECTUS
* 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.
<PAGE>
* The TOTAL STOCK MARKET PORTFOLIO seeks to replicate the
aggregate price and yield performance of the Wilshire 5000
Index, an index 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 under 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 pie chart below illustrates how, as measured by market
capitalization, the S&P 500 Index is divided into the S&P/
BARRA Value and S&P/BARRA Growth Indexes.
GRAPHIC PIE CHART HERE ON PRINTED PROSPECTUS
* 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 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 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.
These investment objectives are fundamental and so cannot be
changed without the approval of a majority of a Portfolio's
shareholders.
- ------------------------------------------------------------------------------
<PAGE>
INVESTMENT POLICIES
ALL SIX PORTFOLIOS USE A "PASSIVE" APPROACH TO INVEST IN COMMON STOCKS
The six Portfolios of the Trust are not managed according to
traditional 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 Portfolios, utilizing a "passive" or
"indexing" investment approach, attempt to duplicate the
investment performance of their respective indexes through
statistical procedures. The Portfolios are managed without
regard to tax ramifications.
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 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
<PAGE>
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.
These investment policies are not fundamental and so may be
changed by the Board of Trustees without shareholder
approval.
- ------------------------------------------------------------------------------
INVESTMENT RISKS
EACH PORTFOLIO IS SUBJECT TO MARKET RISK
As mutual funds investing primarily in common stocks, the
Portfolios of the Trust are subject to market risk -- i.e.,
the possibility that common stock prices will decline over
short or even extended periods. The U.S. stock market tends
to be cyclical, with periods when stock prices generally rise
and periods when prices generally decline.
To illustrate the volatility of stock prices, the following
table sets forth the extremes for stock market returns as
well as the average return for the period from 1926 to 1993,
as measured by the S&P 500 Composite Stock Price Index:
<TABLE>
<CAPTION>
U.S. STOCK MARKET RETURNS (1926-1993)
OVER VARIOUS TIME HORIZONS
1 YEAR 5 YEARS 10 YEARS 20 YEARS
----- ----- ------ ------
<S> <C> <C> <C> <C>
Best +53.9% +23.9% +20.1% +16.9%
Worst -43.3 -12.5 - 0.9 + 3.1
Average +12.3 +10.3 +10.6 +10.6
</TABLE>
As shown, 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%. While this average return can be used as a guide for
setting reasonable expectations for future stock market
returns, it may not be useful for forecasting future returns
in any particular period, as stock returns are quite volatile
from year-to-year.
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
<PAGE>
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.
- ------------------------------------------------------------------------------
WHO SHOULD INVEST
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 a low-cost, "passive"
approach for investing in a diversified portfolio of common
stocks. Unlike other equity mutual funds, which generally
seek to "beat" stock market averages with unpredictable
results, all six Portfolios seek to "match" their respective
indexes and thus are expected to provide a highly predictable
return relative to their benchmarks.
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 medium- and small-
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.
<PAGE>
* 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 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.
The share price of each Portfolio is expected to be volatile,
and investors should be able to tolerate sudden, sometimes
substantial fluctuations in the value of their investment. No
assurance can be given that the Portfolios will achieve their
stated objectives or that shareholders will be protected from
the risks inherent in equity investing. Investors may wish to
purchase shares on a regular, periodic basis (dollar-cost
averaging) rather than investing in one lump sum in order to
reduce the risk of investing all their monies in common
stocks at a particularly unfavorable time.
The Trust is intended to be a long-term investment vehicle
and is not designed to provide investors with a means of
speculating on short-term market movements. Investors who
engage in excessive account activity generate additional
costs which are borne by all of the Trust's shareholders. In
order to minimize such costs the Trust has adopted the
following policies. The Trust 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, either because
of the timing of the investment or previous excessive trading
by the investor. Finally, the Trust reserves the right to
suspend the offering of its shares.
Investors should not consider the Trust a complete
investment program, but should maintain holdings of
securities with different risk characteristics--including
common stocks, bonds and money market instruments. Investors
may also wish to complement an investment in the Trust with
other types of common stock investments.
- ------------------------------------------------------------------------------
<PAGE>
IMPLEMENTATION OF POLICIES
Each Portfolio of the Trust utilizes a number of investment
practices in an effort to match the investment performance of
its respective index.
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.
The following table illustrates the changing proportions that
the S&P 500 Index and the Wilshire 4500 Index have
represented in the Wilshire 5000 Index since 1984.
<PAGE>
<TABLE>
<CAPTION>
WILSHIRE 5000 INDEX 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993
------------------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
S&P 500.......................... 69% 69% 70% 71% 71% 73% 72% 75% 71% 67%
Wilshire 4500.................... 31% 31% 30% 29% 29% 27% 28% 25% 29% 33%
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
</TABLE>
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 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 Portfolio will be selected utilizing a
statistical sampling technique known as "optimization." This
process selects stocks for the Portfolio so that various
industry weightings, market capitalizations, and fundamental
characteristics (e.g. price-to-book, price-to-earnings, debt
to asset ratios, and dividend yields) closely approximate
those of the appropriate Index. For instance, if 10% of the
capitalization of the Wilshire 4500 Index consists of utility
companies with relatively large stock capitalizations, then
the Extended Market Portfolio is constructed so that
approximately 10% of the Portfolio's assets are invested in
the stocks of utility companies with relatively large
capitalizations. The Total Stock Market and Small
Capitalization Stock Portfolios are constructed using a
sampling technique known as optimization.
This sampling technique 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 Portfolio's target benchmarks. Over
time, the correlation between the performance of the Extended
<PAGE>
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.
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.
<PAGE>
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 Indexes, which are determined composed and calculated
by S&P without regard to the 500, Value and Growth
Portfolios.
EACH PORTFOLIO MAY INVEST IN SHORT-TERM FIXED INCOME SECURITIES
Although all six Portfolios normally seek to remain
substantially fully invested in common stocks, the Portfolios
of the Trust may invest temporarily in certain short-term
fixed income securities. 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.
EACH PORTFOLIO MAY USE FUTURES CONTRACTS, OPTIONS AND WARRANTS, CONVERTIBLE
SECURITIES AND SWAP AGREEMENTS
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). Futures contracts,
options, warrants, convertible securites 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 its 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. However, the
Portfolios will not use futures contracts, options, warrants,
convertible securities and swap agreements for speculative
purposes or to leverage their net assets. Accordingly, the
primary risks associated with the use of futures contracts,
options, warrants, convertible securities and swap agreements
by the Portfolios are: (i) imperfect correlation between the
<PAGE>
change in market value of the stocks held by a Portfolio and
the prices of futures contracts, options, warrants,
convertible securities and swap agreements; and (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. The risk of imperfect correlation will be
minimized by investing only in those contracts whose behavior
is expected to resemble that of a Portfolio's underlying
securities. The risk that a 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 and swap agreements purchased or sold over-the-
counter may be less liquid than exchange traded securities.
Illiquid securities, in general, may not represent more than
15% of the net assets of a Portfolio of the Trust.
Since there are no futures traded on the S&P/BARRA Value or
Growth Indexes, it will be necessary for the Value and Growth
Portfolios to utilize a composite of other
futures contracts to simulate the performance of each of
these Indexes. This process may magnify the "tracking error"
of each Portfolio's performance compared to that of the
Indexes, due to lower correlation of the selected futures
with the Indexes. 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 the indexes.
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.
EACH PORTFOLIO MAY LEND ITS SECURITIES
Each Portfolio of the Trust may lend its investment
securities to qualified institutional investors for either
short-term or long-term purposes of realizing additional
income. Loans of securities by a 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, and such loans may not exceed
331/3% of the value of the Portfolio's securities.
PORTFOLIO TURNOVER IS EXPECTED TO BE LOW
Although each Portfolio generally seeks to invest for the
long term, the six Portfolios of the Trust retain the right
to sell securities irrespective of how long they have been
held. However, because of the "passive" investment management
approach of the Trust, the portfolio turnover rate for each
Portfolio is expected to be under 50%, a generally lower
turnover rate than for most other investment companies. A
portfolio turnover rate of 50% would occur if one half of a
Portfolio's securities were sold within one year. Ordinarily,
<PAGE>
securities will be sold from a Portfolio only to reflect
certain administrative changes in an index (including mergers
or changes in the composition of an index) or to accommodate
cash flows into and out of each Portfolio while maintaining
the similarity of a Portfolio to its benchmark index.
- ------------------------------------------------------------------------------
INVESTMENT LIMITATIONS
THE TRUST HAS ADOPTED CERTAIN FUNDAMENTAL LIMITATIONS
The Trust has adopted certain limitations on its investment
practices. Specifically, each Portfolio of the Trust 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 Portfolio's assets would be invested in
the securities of such issuer;
(b) with respect to 75% of its assets, purchase more than 10%
of the voting securities of any issuer;
(c) invest more than 25% of its assets in any one industry;
and
(d) borrow money, except that a Portfolio 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 value of the
Portfolio's net assets (including the amount borrowed and
the value of any outstanding reverse repurchase
agreements) at the time the borrowing is made. Whenever
borrowings exceed 5% of the value of a Portfolio's net
assets, the Portfolio will not make any additional
investments.
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 only with the approval of a majority of a
Portfolio's shareholders.
- ------------------------------------------------------------------------------
MANAGEMENT OF THE TRUST
VANGUARD ADMINISTERS AND DISTRIBUTES THE TRUST
The Trust is a member of The Vanguard Group of Investment
Companies, a family of 32 investment companies with 78
distinct portfolios and total assets in excess of $120
billion. 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
management, administrative 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).
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. 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 can be found in the
Statement of Additional Information.
<PAGE>
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.
Vanguard provides distribution and marketing services to the
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 its share of the Group's distribution costs.
- ------------------------------------------------------------------------------
INVESTMENT ADVISER
VANGUARD MANAGES THE TRUST ON AN AT-COST BASIS
The six Portfolios of the Trust receive all investment
advisory services on an at-cost basis from Vanguard's Core
Management Group. The Core Management Group also provides
investment advisory services to several other Vanguard Funds,
including Vanguard International Equity Index Fund, Vanguard
Institutional Index Fund, Vanguard Balanced Index Fund,
Vanguard Variable Insurance Fund -- Equity Index Portfolio,
and a portion of Vanguard/Windsor II, as well as to several
indexed separate accounts. Total assets under management by
the Core Management Group were $16.4 billion as of December
31, 1993. The Trust is not actively managed, but is instead
administered by the Core Management Group using computerized,
quantitative techniques. The Core Management Group is
supervised by the Officers of the Trust.
In placing portfolio transactions, the 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 determina-
tions. 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 Trust.
- ------------------------------------------------------------------------------
PERFORMANCE RECORD
The tables in this section provide investment results for the
500, Extended Market and Small Capitalization Stock
Portfolios of the Trust for several periods throughout the
Trust's lifetime. The results shown represent "total return"
investment performance, which assumes the reinvestment of all
capital gains and income dividends for the indicated periods.
Also included is comparative information with respect to the
unmanaged S&P 500 Composite Stock Price Index, the Wilshire
4500 Index and the Russell 2000 Index. The results for the
Portfolios are net of all expenses while the results of the
stock indexes are hypothetical and make no allowances for the
costs of investing. The tables do not make any allowance for
federal, state or local income taxes, which shareholders must
pay on a current basis. The Total Stock Market, Value and
Growth Portfolios were introduced in 1992, and so long-term
investment results are not yet available.
The results shown should not be considered a representation
of the total return from an investment made in the Trust
today. The periods shown were generally favorable ones for
<PAGE>
stock market investing. This information is provided to help
investors better understand the Trust and may not provide a
basis for comparison with other investments or mutual funds
which use a different method to calculate performance.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN FOR
VANGUARD INDEX TRUST--500 PORTFOLIO
----------------------------------------------
FISCAL PERIODS 500 S&P 500
ENDED 12/31/93 PORTFOLIO* INDEX
-------------------------------- ------ -------------------
<S> <C> <C>
1 Year + 9.9% +10.1%
5 Years +14.3 +14.5
10 Years +14.6 +14.9
Lifetime** +13.3 +13.7
<FN>
*Exclusive of $10 annual account maintenance fee.
**August 31, 1976 to December 31, 1993.
</TABLE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN FOR
VANGUARD INDEX TRUST--
EXTENDED MARKET PORTFOLIO
----------------------------------------------
EXTENDED WILSHIRE
FISCAL PERIODS MARKET 4500
ENDED 12/31/93 PORTFOLIO* INDEX
-------------------------------- ---------------------- -------------------
<S> <C> <C>
1 Year +13.3% +14.6%
5 Years +14.3 +14.5
Lifetime** +14.9 +15.5
<FN>
*Includes 1% portfolio transaction fee but exclusive of $10 annual account
maintenance fee.
**December 21, 1987 to December 31, 1993.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN FOR
VANGUARD INDEX TRUST--
SMALL CAPITALIZATION STOCK PORTFOLIO+
----------------------------------------------
SMALL RUSSELL
FISCAL PERIODS CAPITALIZATION 2000
ENDED 9/30/93 STOCK PORTFOLIO* INDEX
-------------------------------- ---------------------- -------------------
<S> <C> <C>
1 Year +30.3% +33.2%
3 Years +27.6 +28.1
Since September 11, 1989 +10.3 N/A
<FN>
*Includes 1% portfolio transaction fee but exclusive of $10 annual account
maintenance fee.
+Formerly Vanguard Small Capitalization Stock Fund, Inc.
</TABLE>
- ------------------------------------------------------------------------------
<PAGE>
DIVIDENDS, CAPITAL GAINS AND TAXES
FOUR PORTFOLIOS PAY QUARTERLY DIVIDENDS; TWO PORTFOLIOS PAY DIVIDENDS ONCE A
YEAR
The Trust distributes substantially all of 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. A Portfolio's
dividend and capital gains distributions are automatically
reinvested in additional shares. Each Portfolio of the Trust
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.
If you utilize a Portfolio of the Trust as a investment
option in an employer-sponsored retirement savings plan,
dividend and capital gains distributions from the Portfolio
ordinarily will not be subject to current taxation, but will
accumulate on a tax-deferred basis. In general, employer-
sponsored retirement and savings plans are governed by
complex tax rules. If you participate in such a plan, consult
your plan administrator, your plan's Summary Plan
Description, or a professional tax adviser regarding the tax
consequences of your participation in the plan and of any
plan contributions or withdrawals.
- ------------------------------------------------------------------------------
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 by the Portfolio. 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, 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, 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. Securities for which no current
quotations are readily available are valued at fair market
value as determined in good faith by the 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 Portfolio's share price can be found daily in the mutual
fund listings of most major newspapers under the heading of
The Vanguard Group.
- ------------------------------------------------------------------------------
<PAGE>
GENERAL INFORMATION
The 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 are fully paid and non-assessable;
have no preference as to conversion, exchange, dividends,
retirement or other features; and have no pre-emptive rights.
Such shares have non-cumulative voting rights, meaning that
the holders of more than 50% of the shares voting for the
election of Trustees can elect 100% of the 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 Trustee or Trustees of the Trust if requested in
writing by the holders of not less than 10% of the
outstanding shares of the Trust.
All securities and cash for the 500, Extended Market, Total
Stock Market and Small Capitalization Stock Portfolios are
held by State Street Bank and Trust Company, Boston, MA. All
securities and cash for the Value and Growth Portfolios are
held by CoreStates National Bank, Philadelphia, PA. The
Vanguard Group, Inc., Valley Forge, PA, serves as the Trust's
Transfer and Dividend Disbursing Agent. Price Waterhouse
serves as independent accountants for the Trust and will
audit its financial statements annually. The Trust is not
involved in any litigation.
- ------------------------------------------------------------------------------
<PAGE>
SERVICE GUIDE
PARTICIPATING IN YOUR PLAN
One or more Portfolios of the Trust are available as
investment options in your retirement or savings plan. The
administrator of your plan or your employee benefits office
can provide you with detailed information on how to
participate in your plan and how to elect a Portfolio of the
Trust as an investment option.
If you have any questions about a Portfolio, including the
Portfolio's investment objective, policies, risk
characteristics or historical performance, please contact
Participant Services at 1-800-523-1188.
If you have questions about your account, contact your plan
administrator or the organization which provides
recordkeeping services for your plan.
-------------------------------------------------------------
INVESTMENT OPTIONS AND ALLOCATIONS
You may be permitted to elect different investment options,
alter the amounts contributed to your plan, or change how
contributions are allocated among your investment options in
accordance with your plan's specific provisions. See your
plan administrator or employee benefits office for more
details.
-------------------------------------------------------------
TRANSACTIONS IN FUND SHARES
Contributions, exchanges or redemptions of a Portfolio's
shares are effective when received in "good order" by
Vanguard. "Good order" means that complete information on the
contribution, exchange or redemption and the appropriate
monies have been received by Vanguard.
-------------------------------------------------------------
MAKING EXCHANGES
Your plan may allow you to exchange monies from one
investment option to another. Check with your plan
administrator for details on the rules governing exchanges in
your plan. Certain investment options, particularly company
stock or investment contracts, may be subject to unique
restrictions.
Before making an exchange, you should consider the following:
* If you are making an exchange to another Vanguard Fund
option, please read the Fund's prospectus. Contact
Participant Services at 1-800-523-1188 for a copy.
* Exchanges are accepted by Vanguard only as permitted by
your plan. Your plan administrator can explain how
frequently exchanges are allowed.
- ------------------------------------------------------------------------------
<PAGE>
(This page intentionally left blank.)
<PAGE>
PART B
VANGUARD INDEX TRUST
STATEMENT OF ADDITIONAL INFORMATION
APRIL 4, 1994
This Statement is not a prospectus but should be read in conjunction with
the Trust's current Prospectus (dated April 4, 1994). To obtain the Prospectus
please call:
VANGUARD INVESTOR INFORMATION CENTER
1-800-662-7447
Table of Contents Page
Investment Objectives and Policies..................................... 1
Investment Limitations................................................. 4
Purchase of Shares..................................................... 6
Redemption of Shares................................................... 6
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
INVESTMENT OBJECTIVE 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.
<PAGE>
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 reduce the required margin, resulting in a repayment of
excess margin to the contract holder. Variation margin
<PAGE>
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 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.
<PAGE>
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.
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
<PAGE>
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.);
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.
<PAGE>
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
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.
<PAGE>
YIELD AND TOTAL RETURN
The yield of the 500 Portfolio of the Trust for the 30 day period ended
December 31, 1993 was 2.55%. The yield of the Extended Market Portfolio** of
the Trust for the 30 day period ended December 31, 1993 was 1.34%. The yield
of the Total Stock Market Portfolio*** of the Trust for the 30 day period
ended December 31, 1993 was 2.21%. The yield of the Value Portfolio for the 30
day period ended December 31, 1993 was 3.06%. The yield of the Growth
Portfolio for the 30 day period ended December 31, 1993 was 1.96%. The yield
of the Small Capitalization Stock Portfolio** for the 30 day period ended
December 31, 1993 was 1.15%.
The average annual total return of the 500 Portfolio for the one, five and
ten year periods ended December 31, 1993 was +9.84%, +14.27% and +14.56%,
respectively. The average annual total return for the Extended Market
Portfolio for the one and five year periods ended December 31, 1993 and since
the Portfolio's inception on December 21, 1987 was +13.30%, +13.98% and
+14.81%, respectively. The total return of the Total Stock Market Portfolio
for the period April 27, 1992 (end of subscription period) to December 31,
1993 was 12.43%. The average annual return of the Value and Growth Portfolios
from November 2, 1992 to December 31, 1993 was 19.23% and 3.99%, respectively.
The average annual return of the Small Capitalization Stock Portfolio for the
one, five and ten year periods ended December 31, 1993 was +17.45%, +12.71%
and +6.84%, 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 for the 500 Portfolio 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.
<PAGE>
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.
<TABLE>
<C> <C>
JOHN C. BOGLE, Chairman, Chief Executive Officer and ALFRED M. RANKIN, Trustee
Trustee* President, Chief Executive Officer and Director of NACCO
Chairman, Chief Executive Officer, and Director of The Industries, Inc.; Director of The BFGoodrich Company, The
Vanguard Group, Inc., and of each of the investment Standard Products Company and The Reliance Electric
companies in The Vanguard Group. Director of The Mead Company.
Corporation and General Accident Insurance. JOHN C. SAWHILL, Trustee
JOHN J. BRENNAN, President & Trustee* President and Chief Executive Officer, The Nature
President and Director of The Vanguard Group, Inc. and of Conservancy; formerly, Director and Senior Partner,
each of the investment companies in The Vanguard Group. McKinsey & Co.; President, New York University; Director
ROBERT E. CAWTHORN, Trustee of Pacific Gas and Electric Company and NACCO Industries.
Chairman and Chief Executive Officer, Rhone-Poulenc Rorer, JAMES O. WELCH, JR., Trustee
Inc.; Director of Immune Response Corp. and Sun Company, Retired Chairman of Nabisco Brands, Inc. retired Vice
Inc.; Trustee, Universal Health Realty Income Trust. Chairman and Director of RJR Nabisco; Director of TECO
BARBARA BARNES HAUPTFUHRER, Trustee Energy, Inc.
Director of The Great Atlantic and Pacific Tea Company, J. LAWRENCE WILSON, Trustee
Alco Standard Corp., Raytheon Company, Knight-Ridder Inc., Chairman and Director of Rohm & Haas Company; Director of
and Massachusetts Mutual Life Insurance Co. Cummins Engine Company and Vanderbilt University; Trustee
BRUCE K. MACLAURY, Trustee of the Culver Educational Foundation.
President, The Brookings Institution; Director of Dayton RAYMOND J. KLAPINSKY, Secretary*
Hudson Corporation, American Express Bank, Ltd., and The Senior Vice President and Secretary of The Vanguard Group,
St. Paul Companies, Inc. Inc.; Secretary of each of the investment companies in The
BURTON G. MALKIEL, Trustee Vanguard Group.
Chemical Bank Chairmen's Professor of Economics, Princeton RICHARD F. HYLAND, Treasurer*
University; Director of Prudential Insurance Co. of Treasurer of The Vanguard Group, Inc. and of each of the
America, Amdahl Corporation, Baker Fentress & Co., Jeffrey investment companies in The Vanguard Group.
Co., and The Southern New England Telephone Company. KAREN E. WEST, Controller*
Vice President of The Vanguard Group, Inc.; Controller of
each of the investment companies in The Vanguard Group.
<FN>
- ---------
*Officers of the Trust are "interested persons" as defined in the Investment Company Act of 1940.
</TABLE>
THE VANGUARD GROUP, INC.
Vanguard Index Trust is a member of the Vanguard Group of Investment
companies which consists of 32 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
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
<PAGE>
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, the Trust had
contributed capital of $1,590,000* to Vanguard, representing 7.9% 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, 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*.
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 spend 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, the Trust paid approximately $2,327,000* 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 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
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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 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
<PAGE>
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.
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
preferreds. 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.
<PAGE>
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,
independent accountants, also appearing therein, are incorporated by reference
in this Statement of Additional Information. The Trust's 1993 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, independent
accountants, also appearing therein, are incorporated by reference in this
Statement of Additional Information.
