<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT (NO. 2-56846) UNDER
THE SECURITIES ACT OF 1933
PRE-EFFECTIVE AMENDMENT NO.
POST-EFFECTIVE AMENDMENT NO. 41
AND
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY
ACT OF 1940
AMENDMENT NO. 43
VANGUARD INDEX TRUST
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
P.O. BOX 2600, VALLEY FORGE, PA 19482
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)
REGISTRANT'S TELEPHONE NUMBER (610) 669-1000
RAYMOND J. KLAPINSKY, ESQUIRE
P.O. BOX 876
VALLEY FORGE, PA 19482
IT IS PROPOSED THAT THIS AMENDMENT BECOME EFFECTIVE;
on April 28, 1995, pursuant to paragraph (b) of Rule 485.
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
As soon as practicable after this Registration Statement becomes effective.
REGISTRANT ELECTS TO REGISTER AN INDEFINITE NUMBER OF SHARES PURSUANT TO
REGULATION 24F-2 UNDER THE INVESTMENT COMPANY ACT OF 1940. REGISTRANT FILED ITS
RULE 24F-2 NOTICE FOR THE YEAR ENDED DECEMBER 31, 1994 ON FEBRUARY 15, 1995.
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<PAGE> 2
VANGUARD INDEX TRUST
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
FORM N-1A
ITEM NUMBER LOCATION IN PROSPECTUS
<C> <S> <C>
Item 1. Cover Page.................................... Cover Page
Item 2. Synopsis...................................... Highlights
Item 3. Condensed Financial Information............... Financial Highlights
Item 4. General Description of Registrant............. Investment Objectives; Investment
Limitations; Investment Policies;
General Information
Item 5. Management of the Funds....................... Management of the Funds
Item 6. Capital Stock and Other Securities............ Opening an Account and Purchasing
Each Funds Shares; Selling Your
Shares; The Share Price of Each
Portfolio; Dividends, Capital Gains
and Taxes; General Information
Item 7. Purchase of Securities Being Offered.......... Cover Page; Opening an Account and
Purchasing Shares
Item 8. Redemption or Repurchase...................... Selling Your Shares
Item 9. Pending Legal Proceedings..................... Not Applicable
<CAPTION>
FORM N-1A LOCATION IN STATEMENT
ITEM NUMBER OF ADDITIONAL INFORMATION
<C> <S> <C>
Item 10. Cover Page.................................... Cover Page
Item 11. Table of Contents............................. Cover Page
Item 12. General Information and History............... Investment Objectives and Policies
Item 13. Investment Objective and Policies............. Investment Objectives and Policies;
Investment Limitations
Item 14. Management of the Fund........................ Management of the Fund
Item 15. Control Persons and Principal Holders of
Securities.................................... Management of the Fund
Item 16. Investment Advisory and Other Services........ Management of the Fund
Item 17. Brokerage Allocation.......................... Not Applicable
Item 18. Capital Stock and Other Securities............ Financial Statements
Item 19. Purchase, Redemption and Pricing of Securities
Being Offered................................. Purchase of Shares; Redemption of
Shares
Item 20. Tax Status.................................... Appendix
Item 21. Underwriters.................................. Not Applicable
Item 22. Calculations of Yield Quotations of Money
Market Fund................................... Not Applicable
Item 23. Financial Statements.......................... Financial Statements
</TABLE>
<PAGE> 3
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(VANGUARD INDEX TRUST LOGO) A Member of The Vanguard Group
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PROSPECTUS -- APRIL 28 1995
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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. There is no
assurance that the Portfolios will achieve their stated
objectives. Shares of the Trust are neither insured nor
guaranteed by any agency of the U.S. Government, including
the FDIC.
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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. and Saturday, from 9:00 a.m. to 4:00 p.m.
(Eastern time). The minimum initial investment is $3,000
for each Portfolio or $500 for Uniform Gifts/Transfers to
Minors Act accounts. A portfolio transaction fee of 1% is
deducted from purchases of the Small Capitalization Stock
Portfolio; a 0.5% portfolio transaction fee is deducted
from purchases of the Extended Market Portfolio; and 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 28, 1995 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 OF CONTENTS
<TABLE>
<S> <C> <C>
Page Page Page
Highlights ....................... 2 Implementation of SHAREHOLDER GUIDE
Trust Expenses ................... 4 Policies ........................ 16 Opening an Account and
Financial Highlights ............. 6 Investment Limitations ............ 22 Purchasing Shares ............... 28
Yield and Total Management of the Trust ........... 22 When Your Account Will
Return ......................... 10 Investment Adviser ................ 23 Be Credited ..................... 31
TRUST INFORMATION Performance Record ................ 23 Selling Your Shares ............... 32
Investment Objectives ............ 10 Dividends, Capital Gains Exchanging Your Shares ............ 34
Investment and Taxes ....................... 24 Important Information About
Policies ......................... 12 The Share Price of Each Telephone Transactions .......... 35
Investment Risks ................. 14 Portfolio ....................... 26 Transferring
Who Should Invest ................ 15 General Information ............... 27 Registration .................... 35
Other Vanguard Services ........... 36
</TABLE>
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
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<PAGE> 4
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 14
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THE VANGUARD
GROUP The Trust is a member of The Vanguard Group of Investment
Companies, a group of more than 30 investment companies
with more than 80 distinct investment portfolios and total
assets in excess of $130 billion. The Vanguard Group, Inc.
("Vanguard"), a subsidiary jointly owned by the Vanguard
Funds, provides all corporate management, administrative,
distribution and shareholder accounting services on an
at-cost basis to the Funds in the Group. PAGE 22
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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 substantially lower cost than would be
possible if the Trust paid an investment advisory fee to
an external investment adviser. PAGE 23
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2
<PAGE> 5
FEES AND EXPENSES A portfolio transaction fee of 1% is deducted from
purchases of the Small Capitalization Stock Portfolio; a
0.5% portfolio transaction fee is deducted from purchases
of the Extended Market Portfolio; and 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. This fee will be waived for
shareholders with an account balance of $10,000 or
more. 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
request 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 28
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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 32
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OTHER VANGUARD
SERVICES The Trust offers special services: Fund Express, for
electronic transfers between the Fund and your bank
account; and Tele-Account, for 24-hour telephone access to
your Fund account balance and certain transactions.
PAGE 36
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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 20
(2) Each Portfolio may invest in short-term fixed income
securities. PAGE 20
(3) Each Portfolio may lend its securities. PAGE 21
(4) Each Portfolio may borrow money. PAGE 22
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3
<PAGE> 6
TRUST EXPENSES The following table illustrates all expenses and fees that
you would incur as a shareholder of the Trust. The
expenses and fees are for the fiscal year ended December
31, 1994.
<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
</TABLE>
* Shareholders are charged a 1% portfolio transaction
fee, payable directly to the Portfolio, on each
purchase of shares.
** Shareholders are charged a 0.25% portfolio transaction
fee, payable directly to the Portfolio, on each
purchase of shares.
*** Shareholders are charged a 0.5% portfolio transaction
fee, payable directly to the Portfolio, on each
purchase of shares.
+ Formerly Vanguard Small Capitalization Stock Fund,
Inc.
<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++...... 0.16% 0.15% 0.14% 0.14% 0.07% 0.12%
Investment
Advisory Fees... 0.00 0.01 0.01 0.01 0.06 0.01
12b-1 Fees........ None None None None None None
Other Expenses
Distribution
Costs........... 0.02 0.02 0.02 0.02 0.02 0.02
Miscellaneous
Expenses...... 0.01 0.02 0.03 0.03 0.05 0.02
----- ----- ----- ----- ----- -----
Total Other
Expenses........ 0.03 0.04 0.05 0.05 0.07 0.04
----- ----- ----- ----- ----- -----
TOTAL
OPERATING
EXPENSES.... 0.19% 0.20% 0.20% 0.20% 0.20% 0.17%
----- ----- ----- ----- ----- -----
----- ----- ----- ----- ----- -----
</TABLE>
+ Formerly Vanguard Small Capitalization Stock Fund, Inc.
++ In addition to these costs, each Portfolio assesses an
annual account maintenance fee of $10. This fee will be
waived for shareholders with an account balance of
$10,000 or more.
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 Small Capitalization Stock Portfolio assesses a
portfolio transaction fee on purchases of Portfolio shares
equal to 1% of the dollar amount invested; the Extended
Market Portfolio assesses a portfolio transaction fee
equal to 0.5% of the dollar amount invested; and 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.
4
<PAGE> 7
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%, 0.5% and 0.25% fees represent Vanguard's estimate
of the brokerage and other transaction costs incurred by
the Small Capitalization Stock, Extended Market 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 1.00%
on a $1,000 investment in a Portfolio of the Trust and
0.33% on a $3,000 investment. This fee will be waived for
shareholders with an account balance of $10,000 or more.
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 Small Capitalization
Stock Portfolio; the 0.5% transaction fee for the Extended
Market Portfolio; 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.
5
<PAGE> 8
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------- -------- -------- ---------
<S> <C> <C> <C> <C>
500 Portfolio....................... $12 $ 36 $ 60 $ 123
Extended Market Portfolio........... $17 $ 41 $ 66 $ 129
Total Stock Market Portfolio........ $15 $ 39 $ 63 $ 127
Growth Portfolio.................... $12 $ 36 $ 61 $ 124
Value Portfolio..................... $12 $ 36 $ 61 $ 124
Small Capitalization Stock
Portfolio......................... $22 $ 45 $ 69 $ 131
</TABLE>
Included in these estimates are account maintenance fees
of $10, $30, $50 and $100 for the respective periods
shown. 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, 1994, have been audited
by Price Waterhouse LLP, 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 LLP, in the
Trust's 1994 Annual Report to Shareholders and inserts
thereto. For a more complete discussion of the Trust's
performance, please see the Trust's 1994 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.
6
<PAGE> 9
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------
500 PORTFOLIO
----------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------------------------------------
1994 1993 1992 1991 1990 1989 1988 1987 1986 1985
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF
YEAR................ $43.83 $40.97 $39.32 $31.24 $33.64 $27.18 $24.65 $24.27 $22.99 $19.52
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
INVESTMENT
OPERATIONS
Net Investment
Income.............. 1.18 1.13 1.12 1.15 1.17 1.20 1.08 .88 .89 .91
Net Realized
and
Unrealized
Gain (Loss)
on
Investments......... (.67) 2.89 1.75 8.20 (2.30) 7.21 2.87 .36 3.30 5.08
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
TOTAL FROM
INVESTMENT
OPERATIONS....... .51 4.02 2.87 9.35 (1.13) 8.41 3.95 1.24 4.19 5.99
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from
Net
Investment
Income............ (1.17) (1.13) (1.12) (1.15) (1.17) (1.20) (1.10) (.69) (.89) (.91)
Distributions
from
Realized
Capital
Gains............. (.20) (.03) (.10) (.12) (.10) (.75) (.32) (.17) (2.02) (1.61)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
TOTAL
DISTRIBUTIONS... (1.37) (1.16) (1.22) (1.27) (1.27) (1.95) (1.42) (.86) (2.91) (2.52)
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE,
END OF YEAR......... $42.97 $43.83 $40.97 $39.32 $31.24 $33.64 $27.18 $24.65 $24.27 $22.99
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN*......... 1.18% 9.89% 7.42% 30.22% (3.32)% 31.36% 16.22% 4.71% 18.06% 31.23%
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL
DATA
Net Assets, End
of Year
(Millions).......... $9,356 $8,273 $6,547 $4,345 $2,173 $1,804 $1,055 $826 $485 $394
Ratio of
Expenses to
Average Net
Assets.............. .19% .19% .19% .20% .22% .21% .22% .26% .28% .28%
Ratio of Net
Investment
Income to
Average Net
Assets.............. 2.72% 2.65% 2.81% 3.07% 3.60% 3.62% 4.08% 3.15% 3.40% 4.09%
Portfolio
Turnover
Rate................ 6%+ 6%+ 4%+ 5%+ 23%+ 8% 10% 15% 29% 36%
</TABLE>
* Total return figures do not reflect the annual account maintenance fee of $10.
+ Portfolio turnover rates excluding in-kind redemptions were 4%, 2%, 1%, 1% and
6%, respectively.
<TABLE>
---------------------------------------------------------------------------------------
EXTENDED MARKET PORTFOLIO
---------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------------------
DEC. 21.+
1994 1993 1992 1991 1990 1989 1988 TO 31, 1987
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD... $19.43 $17.35 $15.82 $11.48 $13.92 $11.60 $9.99 $10.00
------ ------ ------ ------ ------ ------ ------ ---------
INVESTMENT OPERATIONS
Net Investment Income................ .28 .23 .24 .25 .30 .26 .34 .03
Net Realized and Unrealized Gain
(Loss) on Investments.............. (.62) 2.28 1.72 4.54 (2.25) 2.52 1.63 (.04)
------ ------ ------ ------ ------ ------ ------ ---------
TOTAL FROM INVESTMENT OPERATIONS... (.34) 2.51 1.96 4.79 (1.95) 2.78 1.97 (.01)
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment
Income............................. (.28) (.23) (.25) (.25) (.33) (.23) (.20) --
Distributions from Realized Capital
Gains.............................. (.29) (.20) (.18) (.20) (.16) (.23) (.16) --
------ ------ ------ ------ ------ ------ ------ ---------
TOTAL DISTRIBUTIONS................ (.57) (.43) (.43) (.45) (.49) (.46) (.36) --
- -----------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD......... $18.52 $19.43 $17.35 $15.82 $11.48 $13.92 $11.60 $9.99
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN*.......................... (1.76)% 14.49% 12.47% 41.85% (14.05)% 24.10% 19.75% (0.10)%
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions)... $967 $928 $585 $372 $179 $147 $35 $5
Ratio of Expenses to Average Net
Assets............................... .20% .20% .20% .19% .23% .23% .24% 0%
Ratio of Net Investment Income to
Average Net Assets................... 1.51% 1.48% 1.73% 2.14% 2.68% 2.92% 2.90% 0%
Portfolio Turnover Rate................ 19% 13% 9% 11% 9% 14% 26% 3%
</TABLE>
* Total return figures do not reflect the annual account maintenance fee of $10
or applicable portfolio transaction fees.
+ Commencement of operations.
7
<PAGE> 10
<TABLE>
<CAPTION>
--------------------------------------------------
TOTAL STOCK MARKET PORTFOLIO
--------------------------------------------------
YEAR ENDED DECEMBER 31, MARCH 16+, 1992,
1994 1993 TO DECEMBER 31, 1992
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD.............................. $11.69 $10.84 $10.00
------ ------ -------------
INVESTMENT OPERATIONS
Net Investment Income........................................... .27 .26 .23
Net Realized and Unrealized Gain (Loss) on Investments.......... (.29) .88 .84
------ ------ -------------
TOTAL FROM INVESTMENT OPERATIONS.............................. (.02) 1.14 1.07
- ------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income............................ (.27) (.26) (.23)
Distributions from Realized Capital Gains....................... (.03) (.03) --
------ ------ -------------
TOTAL DISTRIBUTIONS........................................... (.30) (.29) (.23)
- ------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD.................................... $11.37 $11.69 $10.84
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN**.................................................... (0.17)% 10.62% 10.41%
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions).............................. $786 $512 $275
Ratio of Expenses to Average Net Assets........................... .20% .20% .21%*
Ratio of Net Investment Income to Average Net Assets.............. 2.35% 2.31% 2.42%*
Portfolio Turnover Rate........................................... 2% 1% 3%
</TABLE>
* Annualized.
** Total return figures do not reflect the annual account maintenance fee of $10
or applicable portfolio transaction fees.
+ Commencement of operations.
<TABLE>
<CAPTION>
--------------------------------------------------
GROWTH PORTFOLIO
--------------------------------------------------
YEAR ENDED DECEMBER 31, NOVEMBER 2+, 1992,
1994 1993 TO DECEMBER 31, 1992
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD.............................. $10.20 $10.26 $10.00
------ ------ -------------
INVESTMENT OPERATIONS
Net Investment Income........................................... .21 .21 .06
Net Realized and Unrealized Gain (Loss) on Investments.......... .08 (.06) .26
------ ------ -------------
TOTAL FROM INVESTMENT OPERATIONS.............................. .29 .15 .32
- ------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income............................ (.21) (.21) (.06)
Distributions from Realized Capital Gains....................... -- -- --
------ ------ -------------
TOTAL DISTRIBUTIONS........................................... (.21) (.21) (.06)
- ------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD.................................... $10.28 $10.20 $10.26
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN**.................................................... 2.89% 1.53% 3.19%
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions).............................. $86 $51 $21
Ratio of Expenses to Average Net Assets........................... .20% .20% 0%*
Ratio of Net Investment Income to Average Net Assets.............. 2.08% 2.10% 2.85%*
Portfolio Turnover Rate........................................... 28% 36% 2%
</TABLE>
* Annualized.
** Total return figures do not reflect the annual account maintenance fee of
$10.
+ Commencement of operations.
8
<PAGE> 11
<TABLE>
<CAPTION>
--------------------------------------------------
VALUE PORTFOLIO
--------------------------------------------------
YEAR ENDED DECEMBER 31, NOVEMBER 2+, 1992,
1994 1993 TO DECEMBER 31, 1992
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD.............................. $11.74 $10.30 $10.00
------ ------ -------------
INVESTMENT OPERATIONS
Net Investment Income........................................... .38 .38 .07
Net Realized and Unrealized Gain (Loss) on Investments.......... (.46) 1.50 .30
------ ------ -------------
TOTAL FROM INVESTMENT OPERATIONS.............................. (.08) 1.88 .37
- ------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income............................ (.38) (.38) (.07)
Distributions from Realized Capital Gains....................... (.16) (.06) --
------ ------ -------------
TOTAL DISTRIBUTIONS........................................... (.54) (.44) (.07)
- ------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD.................................... $11.12 $11.74 $10.30
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN**.................................................... (0.73)% 18.35% 3.70%
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions).............................. $297 $190 $24
Ratio of Expenses to Average Net Assets........................... .20% .20% 0%*
Ratio of Net Investment Income to Average Net Assets.............. 3.37% 3.26% 3.46%*
Portfolio Turnover Rate........................................... 32% 30% 4%
</TABLE>
* Annualized.
** Total return figures do not reflect the annual account maintenance fee of
$10.
+ Commencement of operations.
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------
SMALL CAPITALIZATION STOCK PORTFOLIO*
---------------------------------------------------------------------------------------------
FEB. 1 TO OCT. 1, 1993 YEAR ENDED SEPTEMBER 30,
DEC. 31, TO JAN. 31, ------------------------------------------------------------------
1994 1994 1993 1992 1991 1990(1) 1989+ 1988 1987
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD.............................. $16.24 $16.23 $12.63 $12.03 $8.55 $11.88 $11.96 $15.73 $13.24
------- --------- ------ ------ ------ ------ ------ ------ ------
INVESTMENT OPERATIONS
Net Investment Income (Loss)........ .20 .05 .20 .19 .20 .17 .10 .03 (.04)
Net Realized and Unrealized Gain
(Loss) on Investments............. (.86) .96 3.73 .88 3.60 (3.46) 2.13 (2.59) 4.42
------ -------- ----- ----- ----- ----- ----- ----- -----
TOTAL FROM INVESTMENT
OPERATIONS...................... (.66) 1.01 3.93 1.07 3.80 (3.29) 2.23 (2.56) 4.38
- ----------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment
Income............................ (.22) (.18) (.18) (.18) (.18) (.04) (.14) -- --
Distributions from Realized Capital
Gains............................. (.37) (.82) (.15) (.29) (.14) -- (2.17) (1.21) (1.89)
------ -------- ----- ----- ----- ----- ----- ----- -----
TOTAL DISTRIBUTIONS............... (.59) (1.00) (.33) (.47) (.32) (.04) (2.31) (1.21) (1.89)
- ----------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD....... $14.99 $16.24 $16.23 $12.63 $12.03 $8.55 $11.88 $11.96 $15.73
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN++....................... (4.00)% 6.65% 31.60% 9.34% 45.91% (27.73)% 18.83% (14.30)% 38.02%
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period
(Millions).......................... $605 $533 $432 $202 $111 $40 $20 $27 $35
Ratio of Expenses to Average Net
Assets.............................. .17%** .18%** .18% .18% .21% .31% 1.00% .95% .92%
Ratio of Net Investment Income (Loss)
to Average Net Assets............... 1.50%** 1.16%** 1.47% 1.65% 2.11% 1.91% .65% .24% (.25%)
Portfolio Turnover Rate.............. 25% 5% 26% 26% 33% 40% 160% 68% 92%
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
- --------------------------------------------------------
1986 1985
- --------------------------------------------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD.............................. $11.68 $13.15
------ ------
INVESTMENT OPERATIONS
Net Investment Income (Loss)........ (.01) (.04)
Net Realized and Unrealized Gain
(Loss) on Investments............. 1.57 (.51)
----- -----
TOTAL FROM INVESTMENT
OPERATIONS...................... 1.56 (.55)
- --------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment
Income............................ -- (.15)
Distributions from Realized Capital
Gains............................. -- (.77)
----- -----
TOTAL DISTRIBUTIONS............... -- (.92)
- --------------------------------------------------------
NET ASSET VALUE, END OF PERIOD....... $13.24 $11.68
- --------------------------------------------------------
- --------------------------------------------------------
TOTAL RETURN++....................... 13.33% (3.67 %
- --------------------------------------------------------
- --------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period
(Millions).......................... $31 $32
Ratio of Expenses to Average Net
Assets.............................. .92% 1.00%
Ratio of Net Investment Income (Loss)
to Average Net Assets............... (.06%) (.28
Portfolio Turnover Rate.............. 92% 103%
</TABLE>
(1) Adjusted to reflect a 3-for-1 stock split as of February 3, 1990.
* Results prior to January 31, 1994, are for the former Vanguard Small
Capitalization Stock Fund.
** Annualized.
+ 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.
- --------------------------------------------------------------------------------
9
<PAGE> 12
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.
In accordance with industry guidelines set forth by the
U.S. Securities and Exchange Commission, the "30-day
yield" of a Portfolio is calculated by dividing the net
investment income per share earned during a 30-day period
by the net asset value per share on the last day of the
period. Net investment income includes interest and
dividend income earned on a Portfolio's securities; it is
net of all expenses and all recurring and nonrecurring
charges that have been applied to all shareholder
accounts. The yield calculation assumes that net
investment income earned over 30 days is compounded
monthly for six months and then annualized. Methods used
to calculate advertised yields are standardized for all
stock and bond mutual funds. However, these methods differ
from the accounting methods used by a Portfolio to
maintain its books and records, and so the advertised
30-day yield may not fully reflect the income paid to your
own account.
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 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.
10
<PAGE> 13
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:
[INSERT CHART]
- The 500 PORTFOLIO seeks to replicate the aggregate price
and yield performance of the Standard & Poor's 500
Composite Stock Price Index (the "S&P 500 Index"), an
index which emphasizes large-capitalization companies.
- The EXTENDED MARKET PORTFOLIO seeks to replicate the
aggregate price and yield performance of the Wilshire
4500 Index, an index which consists of more than 5,000
medium- and small-capitalization companies that are not
included in the S&P 500 Index.
- The TOTAL STOCK MARKET PORTFOLIO seeks to replicate the
aggregate price and yield performance of the Wilshire
5000 Index, an index 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.
11
<PAGE> 14
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.
[INSERT CHART]
- 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.
- --------------------------------------------------------------------------------
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
12
<PAGE> 15
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, 1994, the S&P/BARRA Value Index included
318 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, 1994, the S&P/BARRA Growth Index
included 182 of the stocks that make up the S&P 500 Index,
and 50% of the total market value of the Index.
ALL SIX PORTFOLIOS
ATTEMPT TO REMAIN
FULLY INVESTED Each Portfolio attempts to remain fully invested in common
stocks. Under normal circumstances each Portfolio will
invest at least 95% of its assets in the common stocks of
its respective index and futures contracts and options.
Each Portfolio may invest in certain short-term fixed
income securities as cash reserves, although cash or cash
equivalents are normally expected to represent less than
1% of each Portfolio's assets. Each Portfolio may also
invest up to 20% of its assets in stock futures contracts
and options in order to invest uncommitted cash balances,
to maintain liquidity to meet shareholder redemptions, or
to minimize trading costs. The Portfolios will not invest
in cash reserves, futures contracts or options as part of
a temporary defensive strategy, such as lowering a
Portfolio's investment in common stocks to protect against
potential stock market declines. The Portfolios intend to
remain fully invested, to the extent practicable, in a
pool of securities which will duplicate the investment
characteristics of their respective indexes. See
"Implementation of Policies" for a description of these
and other investment practices of the Trust.
13
<PAGE> 16
These investment policies are not fundamental and so may
be changed by the Board of Trustees without shareholder
approval. However, shareholders would be notified prior to
a material change in either.
- --------------------------------------------------------------------------------
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 1994, as measured by the S&P 500 Composite Stock
Price Index:
<TABLE>
<CAPTION>
U.S. STOCK MARKET RETURNS (1926-1994)
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 +12.2 +10.2 +10.7 +10.7
</TABLE>
As shown, common stocks have provided annual total returns
(capital appreciation plus dividend income) averaging
+10.7% for all 10-year periods from 1926 to 1994. Average
return 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
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 31% of the net assets of the
Total Stock Market Portfolio on December 31, 1994.
Investors in the Portfolio should therefore anticipate
somewhat greater price volatility in the Total Stock
Market Portfolio relative to the 500 Portfolio.
14
<PAGE> 17
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 1994. 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.
- 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
15
<PAGE> 18
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.
- --------------------------------------------------------------------------------
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,
16
<PAGE> 19
most of which trade on the New York Stock Exchange,
represented, as of December 31, 1994, approximately 69% 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 46% 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, 1994, the five largest companies in the Index
were: General Electric (2.6%), American Telephone and
Telegraph (2.4%), Exxon Corporation (2.3%), Coca Cola
(2.0%), and Royal Dutch Petroleum (1.7%). The largest
industry categories were: telephone companies (8.5%),
international oil companies (6.3%), pharmaceutical
companies (5.3%), banks (5.3%), and electric power (4.0%).
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 31% 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 1985.
<TABLE>
<CAPTION>
WILSHIRE 5000 INDEX
-------------------
1985 1986 1987 1988 1989 1990 1991 1992 1993 1994
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
S&P 500.............. 69% 70% 71% 71% 73% 72% 75% 71% 67% 69%
Wilshire 4500........ 31% 30% 29% 29% 27% 28% 25% 29% 33% 31%
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
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.
17
<PAGE> 20
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
December 31, 1994, the average stock market capitalization
of the Russell 2000 was $211 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 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
18
<PAGE> 21
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, 1994, after the semi-annual reconstitution
of the indexes, the S&P/BARRA Value Index consisted of 318
common stocks in the S&P 500 Index, while the S&P/BARRA
Growth Index consisted of the remaining 182. 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, 1994, the five largest companies in the
S&P/BARRA Value Index were Exxon Corp., Royal Dutch
Petroleum Co., IBM, DuPont E.I. de Nemour, and Mobil, the
five largest companies in the S&P/BARRA Growth Index were
General Electric Co., American Telephone & Telegraph, Coca
Cola Co., Phillip Morris Cos., Inc., and Wal-Mart Stores.
"Standard & Poor's(R)," "S&P(R)," "S&P 500(R)," "Standard
& Poor's 500(R)," and "500" are trademarks of McGraw-Hill,
Inc. and have been licensed for use by Vanguard. 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.
THE S&P MAKES NO WARRANTY, EXPRESS OR IMPLIED, AS TO
RESULTS TO BE OBTAINED BY LICENSEE, OWNERS OF THE TRUST,
ANY PERSON OR ENTITY FROM
19
<PAGE> 22
THE USE OF THE S&P 500 OR ANY DATA INCLUDED THEREIN IN
CONNECTION WITH THE USE LICENSED HEREUNDER, OR FOR ANY
OTHER USE. S&P MAKES NO EXPRESS OR IMPLIED WARRANTIES, AND
HEREBY EXPRESSLY DISCLAIMS ALL SUCH WARRANTIES OF
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE FOR
USE WITH RESPECT TO THE S&P 500 OR ANY DATA INCLUDED
THEREIN.
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 securities and swap agreements may be used for
several reasons: to simulate full investment in the
underlying index while retaining a cash balance for fund
management purposes, to facilitate trading, to reduce
transaction costs or to seek higher investment returns
when a futures contract, option, warrant, convertible
security or swap agreement is priced more attractively
than the underlying equity security or index. While each
of these securities can be used as leveraged investments,
the Portfolios may not use them to leverage 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 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
20
<PAGE> 23
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.
- --------------------------------------------------------------------------------
21
<PAGE> 24
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 more than 30 investment companies
with more than 80 distinct portfolios and total assets in
excess of $130 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 1994, 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 1.05% 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
22
<PAGE> 25
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 $18
billion as of December 31, 1994. 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 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 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.
23
<PAGE> 26
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL
RETURN FOR
VANGUARD INDEX TRUST -- 500
PORTFOLIO
--------------------------
FISCAL PERIODS 500 S&P 500
ENDED 12/31/94 PORTFOLIO* INDEX
------------------ ------------ ---------
<S> <C> <C>
1 Year + 1.1% + 1.3%
5 Years + 8.5 + 8.7
10 Years +14.0 +14.3
Lifetime** +12.5 +13.0
</TABLE>
*Inclusive of $10 annual account maintenance fee.
**August 31, 1976 to December 31, 1994.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
FOR
VANGUARD INDEX TRUST --
EXTENDED MARKET PORTFOLIO
---------------------------
EXTENDED WILSHIRE
FISCAL PERIODS MARKET 4500
ENDED 12/31/94 PORTFOLIO* INDEX
------------------ ------------ ----------
<S> <C> <C>
1 Year - 2.8% - 2.7%
5 Years + 8.8 + 9.1
Lifetime** +12.3 +12.7
</TABLE>
*Includes 1% portfolio transaction fee and $10
annual account maintenance fee.
**December 21, 1987 to December 31, 1994.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN FOR
VANGUARD INDEX TRUST --
SMALL CAPITALIZATION STOCK
PORTFOLIO+
--------------------------------
SMALL RUSSELL
FISCAL PERIODS CAPITALIZATION 2000
ENDED 12/31/94 STOCK PORTFOLIO* INDEX
------------------------- ------------------ ---------
<S> <C> <C>
1 Year - 1.6% - 1.8%
3 Years +11.3 +11.4
5 Years +10.4 +10.2
Since September 11, 1989 + 8.2 N/A
</TABLE>
*Includes 1% portfolio transaction fee and $10
annual account maintenance fee.
+Formerly Vanguard Small Capitalization Stock Fund,
Inc.
- --------------------------------------------------------------------------------
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, if received by shareholders by
24
<PAGE> 27
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. This fee will be waived
for shareholders with an account balance of $10,000 or
more.
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 and net short-term
capital gains, 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 by-product of portfolio
management activities. Consequently, capital gains
distributions may be expected to vary considerably from
year to year; there will be no capital gains distributions
in years when a Portfolio realizes net capital losses.
Note that if you elect to receive capital gains
distributions in cash, instead of reinvesting them in
additional shares, you are in effect reducing the capital
at work for you in a Portfolio. Also, keep in mind that if
you purchase shares in a Portfolio shortly before the
record date for a dividend or capital gains distribution,
a portion of your investment will be returned to you as a
taxable distribution, regardless of whether you are
reinvesting your distributions or receiving them in cash.
The 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).
25
<PAGE> 28
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
Employer 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 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 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.
- --------------------------------------------------------------------------------
26
<PAGE> 29
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 and
Total Stock Market Portfolios are held by State Street
Bank and Trust Company, Boston, MA. All securities and
cash for the Small Capitalization Stock and the Value and
Growth Portfolios are held by CoreStates Bank,
Philadelphia, PA. The Vanguard Group, Inc., Valley Forge,
PA, serves as the Trust's Transfer and Dividend Disbursing
Agent. Price Waterhouse LLP serves as independent
accountants for the Trust and will audit its financial
statements annually. The Trust is not involved in any
litigation.
- --------------------------------------------------------------------------------
27
<PAGE> 30
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.
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28
<PAGE> 31
<TABLE>
<S> <C> <C>
ADDITIONAL INVESTMENTS
NEW ACCOUNT TO EXISTING ACCOUNTS
PURCHASING BY MAIL Please include the amount of Additional investments should
your initial investment and include the Invest-by-Mail
Complete and sign the indicate the Portfolio(s) you remittance form attached to your
enclosed Account have selected on the Fund confirmation statements.
Registration Form registration form, make your Please make your check payable
check payable to The Vanguard to The Vanguard
Group-- (Portfolio Number), see Group--(Portfolio Number), see
below for the appropriate below for the appropriate
portfolio number, and mail to: portfolio number, write your
account number on your check
VANGUARD FINANCIAL CENTER and, using the return envelope
P.O. BOX 2600 provided, mail to the address
VALLEY FORGE, PA 19482 indicated on the Invest-by-Mail
Form.
For express or VANGUARD FINANCIAL CENTER All written requests should be
registered mail, 455 DEVON PARK DRIVE mailed to one of the addresses
send to: WAYNE, PA 19087 indicated for new accounts. Do
not send registered or express
mail to the post office box
address.
</TABLE>
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
<TABLE>
<S> <C> <C>
--------------------------------
CORESTATES BANK, N.A.
ABA 031000011
CORESTATES NO. 0101 9897
ATTN VANGUARD
VANGUARD INDEX TRUST
NAME OF PORTFOLIO
ACCOUNT NUMBER
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
PURCHASING BY WIRE
Money should be Registra-
wired to: tion Form and mail it to the "New Account" address after completing your
BEFORE WIRING
Please contact our
Client Services
Department wire
(1-800-662-2739) arrangement. NOTE: Federal Funds wire purchase orders will be accepted
only when
the Trust and Custodian Banks are open for business.
</TABLE>
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29
<PAGE> 32
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. 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.
30
<PAGE> 33
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 and the Small
Capitalization Stock Portfolios in December. 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 request has
been received.
ELECTRONIC PROSPECTUS
DELIVERY If you would prefer to receive a prospectus for the Fund
or any of the Vanguard Funds in an electronic format,
please call 1-800-231-7870 for additional information. If
you elect to do so, you may also receive a paper copy of
the prospectus, by calling 1-800-662-7447.
- --------------------------------------------------------------------------------
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.") Vanguard will not
accept third-party checks to open an account. Please be
sure your purchase check is made payable to the Vanguard
Group.
31
<PAGE> 34
In order to prevent lengthy processing delays caused by
the clearing of foreign checks, Vanguard will only accept
a foreign check which has been drawn in U.S. dollars and
has been issued by a foreign bank with a U.S.
correspondent bank. The name of the U.S. correspondent
bank must be printed on the face of the foreign check.
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
32
<PAGE> 35
IMPORTANT REDEMPTION
INFORMATION Shares purchased by check or Fund Express may be redeemed
at any time. However, your redemption proceeds will not be
paid until payment for the purchase is collected, which
may take up to ten calendar days.
- --------------------------------------------------------------------------------
DELIVERY OF
REDEMPTION
PROCEEDS Redemption requests received by telephone prior to the
close of the New York Stock Exchange (generally 4:00 p.m.
Eastern time) are processed on the day of receipt and the
redemption proceeds are normally sent on the following
business day.
Redemption requests received by telephone after the close
of the Exchange are processed on the business day
following receipt and the proceeds are normally sent on
the second business day following receipt.
Redemption proceeds must be sent to you within seven days
of receipt of your request in Good Order.
If you experience difficulty in making a telephone
redemption during periods of drastic economic or market
changes, your redemption request may be made by regular or
express mail. It will be implemented at the net asset
value next determined after your request has been received
by Vanguard in Good Order. The 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 $3,000 ($250 with respect to
the 500 Portfolio), you may be notified that 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 registered
shareholder. (These minimums do not apply to IRAs, other
retirement accounts, and Uniform Gifts/Transfers to Minors
Act accounts).
The Trust minimum account balance requirement will not
apply if your account falls below $3,000 ($250 with
respect to the 500 Portfolio) solely as a result of
declining markets (i.e., a decline in a Portfolio's net
asset value).
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33
<PAGE> 36
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
BETWEEN NON-RETIREMENT ACCOUNTS 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. (For express or registered mail, send your
request to Vanguard Financial Center, Vanguard Index
Trust, 455 Devon Park Drive, Wayne, PA 19087.)
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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 or Vanguard/ PRIMECap 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
34
<PAGE> 37
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) 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
and address used in the registration; and (iv) the
Social Security or Employer 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.
- --------------------------------------------------------------------------------
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).
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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.
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35
<PAGE> 38
OTHER VANGUARD
SERVICES For more information about any of these services, please
call our Investor Information Department at
1-800-662-7447.
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. Please
contact our Client Services Department at 1-800-662-2739
for additional information.
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) system. 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 service also lets you obtain information
about your account balance, your last transaction, and
your most recent dividend or capital gains payment. To
contact Vanguard's Tele-Account service, dial
1-800-ON-BOARD (1-800-662-6273). A brochure offering
detailed operating instructions is available from our
Investor Information Department (1-800-662-7447).
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36
<PAGE> 39
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE> 40
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE> 41
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<TABLE>
<S> <C> <C>
P040 --------------------------- P R O S P E C T U S
THE VANGUARD GROUP APRIL 28, 1995
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
</TABLE>
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<PAGE> 42
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[VANGUARD INDEX TRUST LOGO]
A Member of The Vanguard Group
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PROSPECTUS -- APRIL 28, 1995
- --------------------------------------------------------------------------------
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 28, 1995 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 OF CONTENTS
<TABLE>
<S> <C> <C>
Page Page Page
Highlights ....................... 2 Investment Risks ................. 13 Performance Record ................ 22
Trust Expenses ................... 4 Who Should Invest ................ 14 Dividends, Capital Gains
Financial Highlights ............. 6 Implementation of and Taxes ....................... 24
Yield and Total Return ........... 9 Policies ......................... 16 The Share Price of Each
Investment Objectives ............ 10 Investment Limitations ........... 21 Portfolio ....................... 24
Investment Management of the Trust .......... 21 General Information ............... 25
Policies ....................... 12 Investment Adviser ............... 22 Service Guide ..................... 26
</TABLE>
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
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<PAGE> 43
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 10
- --------------------------------------------------------------------------------
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 more than 30 investment companies
with more than 80 distinct investment portfolios and total
assets in excess of $130 billion. The Vanguard Group, Inc.
("Vanguard"), a subsidiary jointly owned by the Vanguard
Funds, provides all corporate management, administrative,
distribution and shareholder accounting services on an
at-cost basis to the Funds in the Group. PAGE 21
- --------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------
2
<PAGE> 44
FEES AND EXPENSES A portfolio transaction fee of 1% is deducted from
purchases of the Small Capitalization Stock Portfolio; a
0.5% portfolio transaction fee is deducted from purchases
of the Extended Market Portfolio; and 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 21
(4) Each Portfolio may borrow money. PAGE 21
- --------------------------------------------------------------------------------
3
<PAGE> 45
TRUST EXPENSES The following table illustrates all expenses and fees that
you would incur as a shareholder of the Trust. The
expenses and fees are for the fiscal year ended December
31, 1994.
<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
</TABLE>
* Shareholders are charged a 1% portfolio transaction
fee, payable directly to the Portfolio, on each
purchase of shares.
** Shareholders are charged a 0.25% portfolio transaction
fee, payable directly to the Portfolio, on each
purchase of shares.
*** Shareholders are charged a 0.5% portfolio transaction
fee, payable directly to the Portfolio, on each
purchase of shares.
+ Formerly Vanguard Small Capitalization Stock Fund,
Inc.
<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++... 0.16% 0.15% 0.14% 0.14% 0.07% 0.12%
Investment
Advisory
Fees........ 0.00 0.01 0.01 0.01 0.06 0.01
12b-1 Fees.... None None None None None None
Other Expenses
Distribution
Costs....... 0.02 0.02 0.02 0.02 0.02 0.02
Miscellaneous
Expenses... 0.01 0.02 0.03 0.03 0.05 0.03
----- ----- ----- ----- ----- -----
Total Other
Expenses.... 0.03 0.04 0.05 0.05 0.07 0.04
----- ----- ----- ----- ----- -----
Total
Operating
Expenses... 0.19% 0.20% 0.20% 0.20% 0.20% 0.17%
----- ----- ----- ----- ----- -----
----- ----- ----- ----- ----- -----
</TABLE>
+ Formerly Vanguard Small Capitalization Stock Fund, Inc.
++ In addition to these costs, each Portfolio assesses an
annual account maintenance fee of $10. This fee will be
waived for shareholders with an account balance of
$10,000 or more.
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 Small Capitalization Stock Portfolio assesses a
portfolio transaction fee on purchases of Portfolio shares
equal to 1% of the dollar amount invested; the Extended
Market Portfolio assesses a portfolio transaction fee
equal to 0.5% of the dollar amount invested; and 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.
4
<PAGE> 46
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%, 0.5% and 0.25% fees represent Vanguard's estimate
of the brokerage and other transaction costs incurred by
the Small Capitalization Stock, Extended Market 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 Small Capitalization
Stock Portfolio; the 0.5% portfolio transaction fee for
the Extended Market Portfolio; 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............. $ 17 $41 $66 $129
Total Stock Market Portfolio.......... $ 15 $39 $63 $127
Growth Portfolio...................... $ 12 $36 $61 $124
Value Portfolio....................... $ 12 $36 $61 $124
Small Capitalization Stock
Portfolio........................... $ 22 $45 $69 $131
</TABLE>
Included in these estimates are account maintenance fees
of $10, $30, $50 and $100 for the respective periods
shown. Accordingly, for investments larger than
5
<PAGE> 47
$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, 1994, have been audited
by Price Waterhouse LLP, 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 LLP, in the
Trust's 1994 Annual Report to Shareholders and inserts
thereto. For a more complete discussion of the Trust's
performance, please see the Trust's 1994 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.
<TABLE>
------------------------------------------------------------------------------------------
500 PORTFOLIO
------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------------------
1994 1993 1992 1991 1990 1989 1988 1987 1986 1985
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF YEAR.............. $43.83 $40.97 $39.32 $31.24 $33.64 $27.18 $24.65 $24.27 $22.99 $19.52
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
INVESTMENT OPERATIONS
Net Investment Income.......... 1.18 1.13 1.12 1.15 1.17 1.20 1.08 .88 .89 .91
Net Realized and Unrealized
Gain
(Loss) on Investments........ (.67) 2.89 1.75 8.20 (2.30) 7.21 2.87 .36 3.30 5.08
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
TOTAL FROM INVESTMENT
OPERATIONS................. .51 4.02 2.87 9.35 (1.13) 8.41 3.95 1.24 4.19 5.99
- -----------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment
Income....................... (1.17) (1.13) (1.12) (1.15) (1.17) (1.20) (1.10) (.69) (.89) (.91)
Distributions from Realized
Capital Gains................ (.20) (.03) (.10) (.12) (.10) (.75) (.32) (.17) (2.02) (1.61)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
TOTAL DISTRIBUTIONS.......... (1.37) (1.16) (1.22) (1.27) (1.27) (1.95) (1.42) (.86) (2.91) (2.52)
- -----------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR..... $42.97 $43.83 $40.97 $39.32 $31.24 $33.64 $27.18 $24.65 $24.27 $22.99
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN*.................... 1.18% 9.89% 7.42% 30.22% (3.32)% 31.36% 16.22% 4.71% 18.06% 31.23%
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year
(Millions)..................... $9,356 $8,273 $6,547 $4,345 $2,173 $1,804 $1,055 $826 $485 $394
Ratio of Expenses to Average
Net Assets..................... .19% .19% .19% .20% .22% .21% .22% .26% .28% .28%
Ratio of Net Investment Income to
Average Net Assets............. 2.72% 2.65% 2.81% 3.07% 3.60% 3.62% 4.08% 3.15% 3.40% 4.09%
Portfolio Turnover Rate.......... 6%+ 6%+ 4%+ 5%+ 23%+ 8% 10% 15% 29% 36%
</TABLE>
* Total return figures do not reflect the annual account maintenance fee of $10.
+ Portfolio turnover rates excluding in-kind redemptions were 4%, 2%, 1%, 1% and
6%, respectively.
6
<PAGE> 48
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------
EXTENDED MARKET PORTFOLIO
---------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------ DEC. 21+,
1994 1993 1992 1991 1990 1989 1988 TO 31, 1987
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD.......... $19.43 $17.35 $15.82 $11.48 $13.92 $11.60 $9.99 $10.00
------ ------ ------ ------ ------ ------ ------ ---------
INVESTMENT OPERATIONS
Net Investment Income....................... .28 .23 .24 .25 .30 .26 .34 .03
Net Realized and Unrealized Gain
(Loss) on Investments..................... (.62) 2.28 1.72 4.54 (2.25) 2.52 1.63 (.04)
------ ------ ------ ------ ------ ------ ------ --------
TOTAL FROM INVESTMENT OPERATIONS.......... (.34) 2.51 1.96 4.79 (1.95) 2.78 1.97 (.01)
- ---------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income........ (.28) (.23) (.25) (.25) (.33) (.23) (.20) --
Distributions from Realized Capital Gains... (.29) (.20) (.18) (.20) (.16) (.23) (.16) --
------ ------ ------ ------ ------ ------ ------ --------
TOTAL DISTRIBUTIONS....................... (.57) (.43) (.43) (.45) (.49) (.46) (.36) --
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD................ $18.52 $19.43 $17.35 $15.82 $11.48 $13.92 $11.60 $9.99
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN*................................. (1.76)% 14.49% 12.47% 41.85% (14.05)% 24.10% 19.75% (0.10)%
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions).......... $967 $928 $585 $372 $179 $147 $35 $5
Ratio of Expenses to Average Net Assets....... .20% .20% .20% .19% .23% .23% .24% 0%
Ratio of Net Investment Income to Average
Net Assets.................................. 1.51% 1.48% 1.73% 2.14% 2.68% 2.92% 2.90% 0%
Portfolio Turnover Rate....................... 19% 13% 9% 11% 9% 14% 26% 3%
</TABLE>
* Total return figures do not reflect the annual account maintenance fee of $10
or applicable portfolio transaction fees.
+ Commencement of operations.
<TABLE>
<CAPTION>
--------------------------------------------------
TOTAL STOCK MARKET PORTFOLIO
--------------------------------------------------
YEAR ENDED DECEMBER 31, MARCH 16+, 1992,
1994 1993 TO DECEMBER 31, 1992
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD.............................. $11.69 $10.84 $10.00
------ ------ -------------
INVESTMENT OPERATIONS
Net Investment Income........................................... .27 .26 .23
Net Realized and Unrealized Gain (Loss) on Investments.......... (.29) .88 .84
------ ------ -------------
TOTAL FROM INVESTMENT OPERATIONS.............................. (.02) 1.14 1.07
- ------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income............................ (.27) (.26) (.23)
Distributions from Realized Capital Gains....................... (.03) (.03) --
------ ------ -------------
TOTAL DISTRIBUTIONS........................................... (.30) (.29) (.23)
- ------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD.................................... $11.37 $11.69 $10.84
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN**.................................................... (0.17)% 10.62% 10.41%
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions).............................. $786 $512 $275
Ratio of Expenses to Average Net Assets........................... .20% .20% .21%*
Ratio of Net Investment Income to Average Net Assets.............. 2.35% 2.31% 2.42%*
Portfolio Turnover Rate........................................... 2% 1% 3%
</TABLE>
* Annualized.
** Total return figures do not reflect the annual account maintenance fee of $10
or applicable portfolio transaction fees.
+ Commencement of operations.
7
<PAGE> 49
<TABLE>
<CAPTION>
--------------------------------------------------
GROWTH PORTFOLIO
--------------------------------------------------
YEAR ENDED DECEMBER 31, NOVEMBER 2+, 1992,
1994 1993 TO DECEMBER 31, 1992
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD.............................. $10.20 $10.26 $10.00
------ ------ -------------
INVESTMENT OPERATIONS
Net Investment Income........................................... .21 .21 .06
Net Realized and Unrealized Gain (Loss) on Investments.......... .08 (.06) .26
------ ------ -------------
TOTAL FROM INVESTMENT OPERATIONS.............................. .29 .15 .32
- ------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income............................ (.21) (.21) (.06)
Distributions from Realized Capital Gains....................... -- -- --
------ ------ -------------
TOTAL DISTRIBUTIONS........................................... (.21) (.21) (.06)
- ------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD.................................... $10.28 $10.20 $10.26
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN**.................................................... 2.89% 1.53% 3.19%
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions).............................. $86 $51 $21
Ratio of Expenses to Average Net Assets........................... .20% .20% 0%*
Ratio of Net Investment Income to Average Net Assets.............. 2.08% 2.10% 2.85%*
Portfolio Turnover Rate........................................... 28% 36% 2%
</TABLE>
* Annualized.
** Total return figures do not reflect the annual account maintenance fee of
$10.
+ Commencement of operations.
<TABLE>
<CAPTION>
--------------------------------------------------
VALUE PORTFOLIO
--------------------------------------------------
YEAR ENDED DECEMBER 31, NOVEMBER 2+, 1992,
1994 1993 TO DECEMBER 31, 1992
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD.............................. $11.74 $10.30 $10.00
------ ------ -------------
INVESTMENT OPERATIONS
Net Investment Income........................................... .38 .38 .07
Net Realized and Unrealized Gain (Loss) on Investments.......... (.46) 1.50 .30
------ ------ -------------
TOTAL FROM INVESTMENT OPERATIONS.............................. (.08) 1.88 .37
- ------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income............................ (.38) (.38) (.07)
Distributions from Realized Capital Gains....................... (.16) (.06) --
------ ------ -------------
TOTAL DISTRIBUTIONS........................................... (.54) (.44) (.07)
- ------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD.................................... $11.12 $11.74 $10.30
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN**.................................................... (0.73)% 18.35% 3.70%
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions).............................. $297 $190 $24
Ratio of Expenses to Average Net Assets........................... .20% .20% 0%*
Ratio of Net Investment Income to Average Net Assets.............. 3.37% 3.26% 3.46%*
Portfolio Turnover Rate........................................... 32% 30% 4%
</TABLE>
* Annualized.
** Total return figures do not reflect the annual account maintenance fee of
$10.
+ Commencement of operations.
8
<PAGE> 50
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------
SMALL CAPITALIZATION STOCK PORTFOLIO*
--------------------------------------------------------------------------------------------
FEB. 1 TO OCT. 1, 1993 YEAR ENDED SEPTEMBER 30,
DEC. 31, TO JAN. 31, -----------------------------------------------------------------
1994 1994 1993 1992 1991 1990(1) 1989+ 1988 1987
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD.............................. $16.24 $16.23 $12.63 $12.03 $8.55 $11.88 $11.96 $15.73 $13.24
------- --------- ------ ------ ------ ------ ------ ------ ------
INVESTMENT OPERATIONS
Net Investment Income (Loss)........ .20 .05 .20 .19 .20 .17 .10 .03 (.04)
Net Realized and Unrealized Gain
(Loss) on Investments............. (.86) .96 3.73 .88 3.60 (3.46) 2.13 (2.59) 4.42
------ -------- ----- ----- ----- ----- ----- ----- -----
TOTAL FROM INVESTMENT
OPERATIONS...................... (.66) 1.01 3.93 1.07 3.80 (3.29) 2.23 (2.56) 4.38
- ---------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment
Income............................ (.22) (.18) (.18) (.18) (.18) (.04) (.14) -- --
Distributions from Realized
Capital Gains..................... (.37) (.82) (.15) (.29) (.14) -- (2.17) (1.21) (1.89)
------ -------- ----- ----- ----- ----- ----- ----- -----
TOTAL DISTRIBUTIONS............... (.59) (1.00) (.33) (.47) (.32) (.04) (2.31) (1.21) (1.89)
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD....... $14.99 $16.24 $16.23 $12.63 $12.03 $8.55 $11.88 $11.96 $15.73
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN++....................... (4.00)% 6.65% 31.60% 9.34% 45.91% (27.73)% 18.83% (14.30)% 38.02%
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period
(Millions).......................... $605 $533 $432 $202 $111 $40 $20 $27 $35
Ratio of Expenses to Average
Net Assets.......................... .17%** .18%** .18% .18% .21% .31% 1.00% .95% .92%
Ratio of Net Investment Income
(Loss) to Average Net Assets........ 1.50%** 1.16%** 1.47% 1.65% 2.11% 1.91% .65% .24% (.25%)
Portfolio Turnover Rate.............. 25% 5% 26% 26% 33% 40% 160% 68% 92%
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------
YEAR ENDED SEPTEMBER 30,
- --------------------------------------------------------
1986 1985
- --------------------------------------------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD.............................. $11.68 $13.15
------ ------
INVESTMENT OPERATIONS
Net Investment Income (Loss)........ (.01) (.04)
Net Realized and Unrealized Gain
(Loss) on Investments............. 1.57 (.51)
----- -----
TOTAL FROM INVESTMENT
OPERATIONS...................... 1.56 (.55)
- --------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment
Income............................ -- (.15)
Distributions from Realized
Capital Gains..................... -- (.77)
----- -----
TOTAL DISTRIBUTIONS............... -- (.92)
- --------------------------------------------------------
NET ASSET VALUE, END OF PERIOD....... $13.24 $11.68
- --------------------------------------------------------
- --------------------------------------------------------
TOTAL RETURN++....................... 13.33% (3.67)%
- --------------------------------------------------------
- --------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period
(Millions).......................... $31 $32
Ratio of Expenses to Average
Net Assets.......................... .92% 1.00%
Ratio of Net Investment Income
(Loss) to Average Net Assets........ (.06%) (.28)
Portfolio Turnover Rate.............. 92% 103%
</TABLE>
(1) Adjusted to reflect a 3-for-1 stock split as of February 3, 1990.
* Results prior to January 31, 1994, are for the former Vanguard Small
Capitalization Stock Fund.
** Annualized.
+ 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.
- --------------------------------------------------------------------------------
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.
In accordance with industry guidelines set forth by the
U.S. Securities and Exchange Commission, the "30-day
yield" of a Portfolio is calculated by dividing the net
investment income per share earned during a 30-day period
by the net asset value per share on the last day of the
period. Net investment income includes interest and
dividend income earned on a Portfolio's securities; it is
net of all expenses and all recurring and nonrecurring
charges that have been applied to all shareholder
accounts. The yield calculation assumes that net
investment income earned over 30 days is compounded
monthly for six months and then annualized. Methods used
to calculate advertised yields are standardized for all
stock and bond mutual funds. However, these methods differ
from the accounting methods used by a Portfolio to
maintain its books and records, and so the advertised
30-day yield may not fully reflect the income paid to your
own account.
9
<PAGE> 51
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 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:
[INSERT CHART]
- 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.
10
<PAGE> 52
- 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.
[INSERT CHART]
- 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.
- --------------------------------------------------------------------------------
11
<PAGE> 53
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, 1994, the S&P/BARRA Value Index included
318 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, 1994, the S&P/BARRA Growth Index
included 182 of the stocks that make up the S&P 500 Index,
and 50% of the total market value of the Index.
12
<PAGE> 54
ALL SIX PORTFOLIOS
ATTEMPT TO REMAIN
FULLY INVESTED
Each Portfolio attempts to remain fully invested in common
stocks. Under normal circumstances, each Portfolio will
invest at least 95% of its assets in the common stocks of
its respective index and futures contracts and options.
Each Portfolio may invest in certain short-term fixed
income securities as cash reserves, although cash or cash
equivalents are normally expected to represent less than
1% of each Portfolio's assets. Each Portfolio may also
invest up to 20% of its assets in stock futures contracts
and options in order to invest uncommitted cash balances,
to maintain liquidity to meet shareholder redemptions, or
to minimize trading costs. The Portfolios will not invest
in cash reserves, futures contracts or options as part of
a temporary defensive strategy, such as lowering a
Portfolio's investment in common stocks to protect against
potential stock market declines. The Portfolios intend to
remain fully invested, to the extent practicable, in a
pool of securities which will duplicate the investment
characteristics of their respective indexes. See
"Implementation of Policies" for a description of these
and other investment practices of the Trust.
These investment policies are not fundamental and so may
be changed by the Board of Trustees without shareholder
approval. However, shareholders would be notified prior to
a material change in either.
- --------------------------------------------------------------------------------
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 1994, as measured by the S&P 500 Composite Stock
Price Index:
<TABLE>
<CAPTION>
U.S. MARKET RETURNS (1926-1994)
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 +12.2 +10.2 +10.7 +10.7
</TABLE>
As shown, common stocks have provided annual total returns
(capital appreciation plus dividend income) averaging
+10.7% for all 10-year periods from 1926 to 1994. Average
return 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
13
<PAGE> 55
large company stocks rise, or rise in price as large
company stocks decline. Medium-and small-size company
stocks constitute the investments of the Extended Market
Portfolio while the Small Capitalization Stock Portfolio
is composed primarily of small-size company stocks.
Investors in the Portfolios should therefore expect that
the Extended Market and Small Capitalization Stock
Portfolios will be more volatile than, and may fluctuate
independently of, the 500 Portfolio.
Similarly, medium- and small-size company stocks
constituted approximately 31% of the net assets of the
Total Stock Market Portfolio on December 31, 1994.
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 1994. 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
14
<PAGE> 56
or the NASDAQ over-the-counter market. The Total Stock
Market Portfolio will therefore reflect the performance
of the entire U.S. stock market.
- THE SMALL CAPITALIZATION STOCK PORTFOLIO is designed for
investors seeking to replicate the total return of the
Russell 2000 Small Stock Index, an index consisting of
approximately 2,000 small-capitalization stocks.
Two Portfolios are designed for investors seeking to
emphasize certain investment characteristics while
continuing to utilize a "passive" investment approach:
- THE VALUE PORTFOLIO is designed for investors seeking to
replicate the total return of the S&P/BARRA Value Index,
an index consisting of companies of the S&P 500 Index
with lower than average market price to book value
ratios. Such a "value-oriented" Portfolio may be
appropriate for more conservative stock market investors
who are seeking higher dividend income and somewhat
below average stock market volatility.
- THE GROWTH PORTFOLIO is designed for investors seeking
to replicate the total return of the S&P/BARRA Growth
Index, an index consisting of 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. 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.
- --------------------------------------------------------------------------------
15
<PAGE> 57
IMPLEMENTATION
OF POLICIES
THE 500 PORTFOLIO
INVESTS IN ALL 500
S&P STOCKS
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 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, 1994, approximately 69% 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 46% 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, 1994, the five largest companies in the Index
were: General Electric (2.6%), American Telephone and
Telegraph (2.4%), Exxon Corporation (2.3%), Coca Cola
(2.0%), and Royal Dutch Petroleum (1.7%). The largest
industry categories were: telephone companies (8.5%),
international oil companies (6.3%), pharmaceutical
companies (5.3%), banks (5.3%), and electric power (4.0%).
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 31% 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.
16
<PAGE> 58
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 1985.
<TABLE>
<CAPTION>
WILSHIRE 5000 INDEX 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994
------------------- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
S&P 500............. 69% 70% 71% 71% 73% 72% 75% 71% 67% 69%
Wilshire 4500....... 31% 30% 29% 29% 27% 28% 25% 29% 33% 31%
--- --- --- --- --- --- --- --- --- ---
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
December 31, 1994, the average stock market capitalization
of the Russell 2000 was $211 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
17
<PAGE> 59
Market and Small Capitalization Stock Portfolio's target
benchmarks. Over time, the correlation between the
performance of the Extended Market, Total Stock Market and
Small Capitalization Stock Portfolios and their respective
indexes, the Wilshire 4500 Index, Wilshire 5000 Index and
Russell 2000 Index is expected to be at least 0.95. A
correlation of 1.00 would indicate perfect correlation,
which would be achieved when the net asset value of a
Portfolio, including the value of its dividend and capital
gains distributions, increases or decreases in exact
proportion to changes in the respective target benchmark.
Due to the use of the sampling technique, neither the
Extended Market Portfolio, Total Stock Market Portfolio
nor the Small Capitalization Stock Portfolio is expected
to track its benchmark index with the same degree of
accuracy as evidenced by the high degree of correlation
between the 500 Portfolio and its benchmark. However, the
principal advantage of this technique is to provide an
efficient means to invest in the universe of stocks. In
particular, the three Portfolios are expected to provide
broad diversification, and should operate at low costs due
both to their "passive" approach to portfolio management
and low portfolio turnover rate.
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, 1994, after the semi-annual reconstitution
of the indexes, the S&P/BARRA Value Index consisted of 318
common stocks in the S&P 500 Index, while the S&P/BARRA
Growth Index consisted of the remaining 182. 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, 1994, the five largest companies in the
S&P/BARRA Value Index were Exxon Corp., Royal Dutch
Petroleum Co., IBM, DuPont E.I. de Nemour, and Mobil; the
five largest companies in the S&P/BARRA
18
<PAGE> 60
Growth Index were General Electric Co., American Telephone
& Telegraph, Coca Cola Co., Phillip Morris Cos., Inc., and
Wal-Mart Stores.
"Standard & Poor's(R)", "S&P(R)", "S&P 500(R)", "Standard
& Poor's 500(R)", and "500" are trademarks of McGraw-Hill,
Inc. and have been licensed for use by Vanguard. 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 securities and swap agreements may be used for
several reasons: to simulate full investment in the
underlying index while retaining a cash balance for fund
management purposes, to facilitate trading, to reduce
transaction costs or to seek higher investment returns
when a futures contract, option, warrant, convertible
security or swap agreement is priced more attractively
than the underlying equity security or index. While each
of these securities can be used as leveraged investments,
the Portfolios may not use them to leverage 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,
19
<PAGE> 61
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 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 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
20
<PAGE> 62
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.
- --------------------------------------------------------------------------------
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 more than 30 investment companies
with more than 80 distinct portfolios and total assets in
excess of $130 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 1994, 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 1.05% for the mutual fund industry (data
provided by Lipper Analytical Services).
21
<PAGE> 63
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 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 $18
billion as of December 31, 1994. 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 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
22
<PAGE> 64
investing. The tables do not make any allowance for
federal, state or local income taxes, which shareholders
must pay on a current basis.
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.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL
RETURN FOR
VANGUARD INDEX
TRUST -- 500 PORTFOLIO
--------------------------
FISCAL PERIODS 500 S&P 500
ENDED 12/31/94 PORTFOLIO* INDEX
------------------ ------------ ---------
<S> <C> <C>
1 Year + 1.1% + 1.3%
5 Years + 8.5 + 8.7
10 Years +14.0 +14.3
Lifetime** +12.5 +13.0
</TABLE>
* Exclusive of $10 annual account maintenance fee.
** August 31, 1976 to December 31, 1994.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
FOR
VANGUARD INDEX TRUST --
EXTENDED MARKET PORTFOLIO
---------------------------
EXTENDED WILSHIRE
FISCAL PERIODS MARKET 4500
ENDED 12/31/94 PORTFOLIO* INDEX
------------------ ------------ ----------
<S> <C> <C>
1 Year - 2.8% - 2.7%
5 Years + 8.8 + 9.1
Lifetime** +12.3 +12.7
</TABLE>
* Includes 1% portfolio transaction fee but
exclusive of $10 annual account maintenance fee.
** December 21, 1987 to December 31, 1994.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN FOR
VANGUARD INDEX TRUST --
SMALL CAPITALIZATION STOCK
PORTFOLIO+
--------------------------------
SMALL RUSSELL
FISCAL PERIODS CAPITALIZATION 2000
ENDED 12/31/94 STOCK PORTFOLIO* INDEX
------------------------- ------------------ ---------
<S> <C> <C>
1 Year - 1.6% - 1.8%
3 Years +11.3 +11.4
5 Years +10.4 +10.2
Since September 11, 1989 + 8.2 N/A
</TABLE>
* Includes 1% portfolio transaction fee but
exclusive of $10 annual account maintenance fee.
+ Formerly Vanguard Small Capitalization Stock Fund,
Inc.
- --------------------------------------------------------------------------------
23
<PAGE> 65
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 an 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 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 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.
- --------------------------------------------------------------------------------
24
<PAGE> 66
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, and
Total Stock Market Portfolios are held by State Street
Bank and Trust Company, Boston, MA. All securities and
cash for the Small Capitalization Stock, Value and Growth
Portfolios are held by CoreStates Bank, Philadelphia, PA.
The Vanguard Group, Inc., Valley Forge, PA, serves as the
Trust's Transfer and Dividend Disbursing Agent. Price
Waterhouse LLP serves as independent accountants for the
Trust and will audit its financial statements annually.
The Trust is not involved in any litigation.
- --------------------------------------------------------------------------------
25
<PAGE> 67
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.
- --------------------------------------------------------------------------------
26
<PAGE> 68
[THIS PAGE INTENTIONALLY LEFT BLANK.]
<PAGE> 69
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
(VANGUARD LOGO) (VANGUARD LOGO)
---------------------------
THE VANGUARD GROUP I N S T I T U T I O N A L
OF INVESTMENT P R O S P E C T U S
COMPANIES APRIL 28, 1995
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
I040 (VANGUARD LOGO)
</TABLE>
- --------------------------------------------------------------------------------
<PAGE> 70
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Members of The Vanguard Group
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PROSPECTUS--APRIL 28, 1995
- --------------------------------------------------------------------------------
NEW ACCOUNT INFORMATION: INVESTOR INFORMATION DEPARTMENT--1-800-662-7447 (SHIP)
- --------------------------------------------------------------------------------
SHAREHOLDER ACCOUNT SERVICES: CLIENT SERVICES DEPARTMENT--1-800-662-2739 (CREW)
- --------------------------------------------------------------------------------
INVESTMENT
OBJECTIVES AND
POLICIES Vanguard Index Funds are four separate, individual open-end
diversified investment companies. The Funds are organized as
follows: Vanguard Bond Index Fund, Inc. including the Total
Bond Market, Short-Term Bond, Intermediate-Term Bond and
Long-Term Bond Portfolios; Vanguard Balanced Index Fund,
Inc.; Vanguard Index Trust including the 500, Extended
Market, Total Stock Market, Small Capitalization Stock,
Value and Growth Portfolios; and Vanguard International
Equity Index Fund, Inc. including the European, Pacific and
Emerging Markets Portfolios. Each of the Portfolios invests
in securities (bonds or common stocks) in order to match the
investment performance of a distinct market index.
- --------------------------------------------------------------------------------
OPENING AN
ACCOUNT To open a regular (non-retirement) account, please complete
and return the Account Registration Form. If you need
assistance in completing this Form, please call our Investor
Information Department. To open an Individual Retirement
Account (IRA), please use a Vanguard IRA Adoption Agreement.
To obtain a copy of this form, call 1-800-662-7447, Monday
through Friday, from 8:00 a.m. to 9:00 p.m. and Saturday,
from 9:00 a.m. to 4:00 p.m. (Eastern time). The minimum
initial investment is $3,000 for each Portfolio or $500 for
Uniform Gifts/Transfers to Minors Act accounts. Each of the
Vanguard Index Funds assesses a $10 annual account
maintenance fee. A portfolio transaction fee of 1% is
deducted from purchases of the Small Capitalization Stock
Portfolio of Vanguard Index Trust, a 0.5% portfolio
transaction fee is deducted from purchases of its Extended
Market Portfolio, and a 0.25% portfolio transaction fee is
deducted from purchases of its Total Stock Market Portfolio.
The European and Pacific Portfolios of Vanguard
International Equity Index Fund assess a 1% portfolio
transaction fee on purchases and its Emerging Markets
Portfolio assesses a 2% portfolio transaction fee on
purchases and a 1% portfolio transaction fee on redemptions.
Portfolio transaction fees are paid to the Portfolios to
offset transaction costs of buying and selling securities of
small- and medium-sized companies and international
companies. See "Fund Expenses."
- --------------------------------------------------------------------------------
ABOUT THIS
PROSPECTUS This Prospectus is designed to set forth concisely the
information you should know about the Vanguard Index Funds
before you invest. It should be retained for future
reference. "Statements of Additional Information" containing
additional information about each of the Vanguard Index
Funds have been filed with the Securities and Exchange
Commission. These Statements are dated April 28, 1995 and
have been incorporated by reference into this Prospectus. A
copy may be obtained without charge by writing to the Funds
or by calling our Investor Information Department.
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page Page Page
<S> <C> <C>
Highlights...................... 2 Implementation of Policies.......... 23 SHAREHOLDER GUIDE
Fund Expenses................... 4 Investment Limitations.............. 31 Opening an Account and
Financial Highlights............ 6 Management of the Funds............. 31 Purchasing Shares................ 36
Yield and Total Return.......... 10 Investment Advisers................. 32 When Your Account Will
FUND INFORMATION Dividends, Capital Gains Be Credited...................... 39
Investment Objectives.......... 11 and Taxes........................ 32 Selling Your Shares................. 39
Investment Policies............. 12 The Share Price of Exchanging Your Shares.............. 42
Investment Risks............... 17 Each Portfolio................... 34 Important Information About
Who Should Invest.............. 20 General Information................. 34 Telephone Transactions........... 43
Transferring Registration........... 43
Other Vanguard Services............. 44
</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> 71
HIGHLIGHTS
Vanguard offers four index funds consisting of a total of
fourteen separate portfolios. Unlike other mutual funds which
generally attempt to "beat" market averages with often
unpredictable results, Vanguard's index funds seek to "match"
the performance of their underlying indexes and thus are
expected to provide a highly predictable return relative to
their benchmarks. The Funds offer investors the advantages of
a "passive" approach to investing. These include low
investment costs, exceptional diversification among
securities, minimal portfolio turnover, and relative
predictability.
As with any mutual fund there is no assurance that the Funds
will meet their objectives.
- --------------------------------------------------------------------------------
INVESTMENT
OBJECTIVES AND
POLICIES Vanguard Bond Index Fund, Vanguard Balanced Index Fund,
Vanguard Index Trust and Vanguard International Equity Index
Fund are each open-end diversified investment companies
designed as "index" funds.
VANGUARD BOND
INDEX FUND The Fund consists of four Portfolios each of which invests in
bonds.
- The TOTAL BOND MARKET PORTFOLIO seeks to replicate the
performance of the Lehman Brothers Aggregate Bond Index.
- The SHORT-TERM BOND PORTFOLIO seeks to replicate the
performance of the Lehman Brothers Mutual Fund Short (1-5)
Government/Corporate Index.
- The INTERMEDIATE-TERM BOND PORTFOLIO seeks to replicate the
performance of the Lehman Brothers Mutual Fund Intermediate
(5-10) Government/Corporate Index.
- The LONG-TERM BOND PORTFOLIO seeks to replicate the
performance of the Lehman Brothers Mutual Fund Long (10+)
Government/Corporate Index.
Each Portfolio will invest at least 80% of its assets in
securities included in its respective index. The Lehman
Brothers Indexes encompass two major classes of investment
grade fixed income securities: U.S. Treasury and agency
securities and corporate bonds. Additionally, the Lehman
Brothers Aggregate Bond Index includes mortgage-backed
securities. PAGE 11
- --------------------------------------------------------------------------------
VANGUARD BALANCED
INDEX FUND The Fund invests in U.S. common stocks and bonds. It seeks to
replicate with respect to 60% of its assets the performance
of the Wilshire 5000 Index and with respect to 40% of its
assets, the Lehman Brothers Index. Under normal circumstances
the Fund will invest primarily in securities of its
underlying indexes. PAGE 11
- --------------------------------------------------------------------------------
VANGUARD INDEX TRUST
The Trust consists of six separate Portfolios each of which
invests in U.S. common stocks.
- The 500 PORTFOLIO seeks to replicate the performance of the
S&P 500 Index.
- The EXTENDED MARKET PORTFOLIO seeks to replicate the
performance of the Wilshire 4500 Index.
- The TOTAL STOCK MARKET PORTFOLIO seeks to replicate the
performance of the Wilshire 5000 Index.
- The SMALL CAPITALIZATION STOCK PORTFOLIO seeks to replicate
the performance of the Russell 2000 Small Stock Index.
- The VALUE PORTFOLIO seeks to replicate the performance of
the S&P/BARRA Value Index.
- The GROWTH PORTFOLIO seeks to replicate the performance of
the S&P/BARRA Growth Index.
PAGE 11
- --------------------------------------------------------------------------------
VANGUARD
INTERNATIONAL
EQUITY INDEX FUND The Fund consists of three Portfolios each of which invests
in international common stocks.
- The EUROPEAN PORTFOLIO seeks to parallel the performance of
the Morgan Stanley Capital International -- Europe (Free)
Index.
- The PACIFIC PORTFOLIO seeks to parallel the performance of
the Morgan Stanley Capital International -- Pacific Index.
- The EMERGING MARKETS PORTFOLIO seeks to parallel the
performance of the Morgan Stanley Capital
International -- Select Emerging Markets Free Index.
The European Portfolio and the Pacific Portfolio invest
primarily in the common stocks included in their respective
indexes. The Emerging Markets Portfolio invests 95% of its
assets in securities which are representative of securities
in its index and 5% in cash reserves. PAGE 12
- --------------------------------------------------------------------------------
2
<PAGE> 72
INVESTMENT
RISKS The Portfolios of the Vanguard Bond Index Fund and the bond
portion of the Vanguard Balanced Fund are subject to risks
associated with fixed income investing including interest
rate, income, call and credit risks. Additionally, since the
Total Bond Market Portfolio of Vanguard Bond Index Fund
invests in mortgage-backed securities, the Portfolio is
subject to prepayment risk.
The equity portion of Vanguard Balanced Index Fund and the
Portfolios of Vanguard Index Trust and Vanguard International
Equity Index Fund are subject to stock market risk, which is
the possibility that common stock prices will decline over
short or extended periods. Both U.S. and foreign stock
markets tend to be cyclical, with periods when stock prices
generally rise and periods when stock prices generally
decline. Additionally, the Portfolios of Vanguard
International Equity Index Fund are subject to currency risk,
the risk that changes in foreign exchange rates will affect
the value of foreign securities held by the Portfolios.
Investors considering the Emerging Markets Portfolio should
be aware that emerging markets can be substantially more
volatile than both U.S. and more developed foreign markets.
Volatility in emerging markets can be exacerbated by
illiquidity in the market for emerging market stocks.
Because of the risks associated with common stocks and bonds,
the Funds are intended to be long-term investment vehicles
and are not designed to provide investors with a means of
speculating on short-term market movements. Investors should
not consider an investment in any one portfolio a complete
investment program, but should maintain holdings of
securities with different risk characteristics -- including
U.S. common stocks, bonds and money market instruments. For
further information concerning the risks associated with
investing in the Funds, see "Investment Risks". PAGE 17
- --------------------------------------------------------------------------------
THE VANGUARD
GROUP The Funds are members of The Vanguard Group of Investment
Companies, a group of more than 30 investment companies with
more than 80 distinct investment portfolios and total assets
in excess of $130 billion. The Vanguard Group, Inc.
("Vanguard"), a subsidiary jointly owned by the Vanguard
Funds, provides all corporate management, administrative,
distribution and shareholder accounting services on an
at-cost basis to the Funds in the Group. PAGE 30
- --------------------------------------------------------------------------------
INVESTMENT
ADVISERS The Vanguard Bond Index Fund and the bond portion of Vanguard
Balanced Index Fund receive investment advisory services from
Vanguard's Fixed Income Group. Vanguard Index Trust, Vanguard
International Equity Index Fund and the equity portion of
Vanguard Balanced Index Fund receive investment advisory
services from Vanguard's Core Management Group. All
investment advisory services are provided to the Index Funds
on an at-cost basis. As a result, the Funds receive
investment advisory services at a substantially lower cost
than would be possible if the Funds paid an investment
advisory fee to an external investment adviser. PAGE 31
- --------------------------------------------------------------------------------
FEES AND EXPENSES The Portfolios are subject to the following transaction fees:
<TABLE>
<CAPTION>
FEE DEDUCTED
FEE DEDUCTED FROM
FROM PURCHASES REDEMPTIONS
<S> <C> <C>
VANGUARD INDEX TRUST
Extended Market Portfolio .5% None
Total Stock Market Portfolio .25% None
Small Capitalization Stock Portfolio 1% None
VANGUARD INTERNATIONAL EQUITY INDEX FUND
European Portfolio 1% None
Pacific Portfolio 1% None
Emerging Markets Portfolio 2% 1%
</TABLE>
Portfolio transaction fees are paid directly to the
Portfolios to offset transaction costs of buying securities
of small- and medium-sized companies and international
companies.
Additionally, shareholders will also incur a $10 annual
account maintenance fee for each account in any of Vanguard's
Index Funds. This fee will be waived for shareholders with an
account balance of $10,000 or more. PAGE 35
- --------------------------------------------------------------------------------
3
<PAGE> 73
FUND EXPENSES The following table illustrates ALL expenses and fees that
you would incur as a shareholder of Vanguard Index Trust,
Vanguard Bond Index Fund, Vanguard International Equity Index
Fund and Vanguard Balanced Index Fund. The expenses and fees
set forth below are for the 1994 fiscal year.
<TABLE>
<CAPTION>
TOTAL SMALL
SHAREHOLDER EXTENDED STOCK CAPITALIZATION BALANCED
TRANSACTION 500 MARKET MARKET VALUE GROWTH STOCK INDEX
EXPENSES PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO+ FUND
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Sales
Load
Imposed
on
Purchases... None None*** None** None None None* None
Sales
Load
Imposed
on
Reinvested
Dividends... None None None None None None None
Redemption
Fees... None None None None None None None
Exchange
Fees... None None None None None None None
</TABLE>
* Shareholders are charged a 1% portfolio transaction fee,
payable directly to the Portfolio, on
each purchase of shares.
** Shareholders are charged a 0.25% portfolio transaction
fee, payable directly to the Portfolio, on
each purchase of shares.
*** Shareholders are charged a 0.5% portfolio transaction
fee, payable directly to the Portfolio, on
each purchase of shares.
+ Formerly Vanguard Small Capitalization Stock Fund, Inc.
<TABLE>
<CAPTION>
ANNUAL TOTAL SMALL
FUND EXTENDED STOCK CAPITALIZATION BALANCED
OPERATING 500 MARKET MARKET VALUE GROWTH STOCK INDEX
EXPENSES PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO+ FUND
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Management
&
Administrative
Expenses++... 0.16% 0.15% 0.14% 0.14% 0.07% 0.12% 0.09%
Investment
Advisory
Fees... 0.00 0.01 0.01 0.01 0.06 0.01 0.02
12b-1
Fees... None None None None None None None
Other
Expenses
Distribution
Costs... 0.02 0.02 0.02 0.02 0.02 0.02 0.03
Miscellaneous
Expenses... 0.01 0.02 0.03 0.03 0.05 0.02 0.06
-------- -------- -------- -------- -------- --------- --------
Total
Other
Expenses... 0.03 0.04 0.05 0.05 0.07 0.04 0.09
-------- -------- -------- -------- -------- --------- --------
TOTAL
OPERATING
EXPENSES... 0.19% 0.20% 0.20% 0.20% 0.20% 0.17% 0.20%
-------- -------- -------- -------- -------- --------- --------
-------- -------- -------- -------- -------- ---------- --------
</TABLE>
+ Formerly Vanguard Small Capitalization Stock Fund, Inc.
++ In addition to these costs, each Portfolio assesses an
annual account maintenance fee of $10. This
fee will be waived for shareholders with an account
balance of $10,000 or more.
<TABLE>
<CAPTION>
TOTAL SHORT- LONG-
SHAREHOLDER BOND TERM INTERMEDIATE- TERM EMERGING
TRANSACTION MARKET BOND TERM BOND BOND EUROPEAN PACIFIC MARKETS
EXPENSES PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Sales
Load
Imposed
on
Purchases... None None None None None* None* None+
Sales
Load
Imposed
on
Reinvested
Dividends... None None None None None None None
Redemption
Fees++... None None None None None None 1%**
Exchange
Fees... None None None None None None None
</TABLE>
* Shareholders are charged a 1% portfolio transaction fee,
payable directly to the Portfolio on each
purchase of shares.
** The 1% portfolio transaction fee withheld from redemption
proceeds is paid to the Portfolio.
+ Shareholders are charged a 2% portfolio transaction fee,
payable directly to the Portfolio on each
purchase of shares.
++ Wire redemptions of less than $5,000 are subject to a
$5 processing fee.
4
<PAGE> 74
<TABLE>
<CAPTION>
TOTAL SHORT-
ANNUAL FUND BOND TERM INTERMEDIATE- LONG-TERM EMERGING
OPERATING MARKET BOND TERM BOND BOND EUROPEAN PACIFIC MARKETS
EXPENSES PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Management &
Administrative
Expenses***... 0.12% 0.12% 0.12% 0.12% 0.22% 0.21% 0.18%
Investment
Advisory
Fees....... 0.01 0.01 0.01 0.01 0.01 0.01 0.05
12b-1 Fees... None None None None None None None
Other
Expenses
Distribution
Costs.... 0.02 0.01 0.01 0.01 0.02 0.02 0.01
Miscellaneous
Expenses... 0.03 0.04 0.04 0.04 0.07 0.08 0.36
-------- -------- ---------- -------- -------- -------- --------
Total Other
Expenses... 0.05 0.05 0.05 0.05 0.09 0.10 0.37
-------- -------- ---------- -------- -------- -------- --------
TOTAL
OPERATING
EXPENSES... 0.18% 0.18% 0.18% 0.18% 0.32% 0.32% 0.60%
-------- -------- ---------- -------- -------- -------- --------
-------- -------- ---------- -------- -------- -------- --------
***In addition to these costs, shareholders incur an annual account maintenance fee of $10. This fee
will be waived for shareholders with an account balance of $10,000 or more.
</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 Funds.
SIX PORTFOLIOS ASSESS
TRANSACTION FEES The Small Capitalization Stock Portfolio of Vanguard Index
Trust and the European and Pacific Portfolios of Vanguard
International Equity Index Fund assess a portfolio
transaction fee on purchases of Portfolio shares equal to 1%
of the dollar amount invested. The Total Stock Market
Portfolio of Vanguard Index Trust assesses a portfolio
transaction fee equal to 0.25% of the dollar amount invested.
The Extended Market Portfolio of Vanguard Index Trust
assesses a portfolio transaction fee equal to 0.5% of the
dollar amount invested. The Emerging Markets Portfolio of
Vanguard International Equity Index Fund assess a portfolio
transaction fee equal to 2% of the dollar amount invested.
The portfolio transaction fees are paid to the respective
Portfolio, not to Vanguard. They are not sales charges.
These fees apply to initial investments in the respective
Portfolios and all subsequent purchases (including purchases
made by exchange from another Vanguard Fund or from other
Portfolios within a Fund), but not to reinvested dividend or
capital gains distributions. Portfolio transaction fees are
deducted automatically from the amount invested; they cannot
be paid separately.
The purpose of these transaction fees is to allocate
transaction costs associated with new purchases to investors
making those purchases, thus insulating existing shareholders
from those transaction costs. These costs include: (1)
brokerage costs; (2) market impact costs -- i.e., the
increase in market prices which may result when the Portfolio
purchases thinly traded stocks; and, most importantly, (3)
the effect of the "bid-ask" spread in the over-the-counter
market. (Securities in the over-the-counter market are bought
at the "ask" or purchase price, but are valued in the
Portfolio at the mean of the "bid" or sale, and "ask"
prices.)
The fees represent Vanguard's estimate of the brokerage and
other transaction costs incurred by the Portfolios in
acquiring stocks in their respective markets. Without the
fees, the Portfolios, which incur these costs directly, would
experience reduced investment performance for all
shareholders in each Portfolio. With the fees, the
transaction costs of acquiring additional stocks are borne
not by all existing shareholders, but by those investors
making additional purchases. Because the purchaser, not the
Portfolios, bears these costs, the Portfolios are expected to
track their respective benchmark indexes more closely.
THE EMERGING MARKETS
PORTFOLIO CHARGES A
1% REDEMPTION
TRANSACTION FEE The Emerging Markets Portfolio of Vanguard International
Equity Index Fund also assesses a 1% redemption transaction
fee. This 1% charge applies to redemptions or exchanges from
the Portfolio. The 1% fee is deducted from redemption or
exchange proceeds and is paid directly to the Portfolio, not
to Vanguard. It is not a contingent deferred sales charge.
5
<PAGE> 75
EACH PORTFOLIO CHARGES
A $10 ACCOUNT
MAINTENANCE FEE Each Portfolio assesses an annual account maintenance fee of
$10 to allocate part of the fixed costs of maintaining
shareholder accounts equally to all accounts. This fee is
deducted from each Portfolio's dividend at a rate of $2.50
per quarter for accounts in the 500, Total Stock Market,
Value and Growth Portfolios of Vanguard Index Trust, Vanguard
Bond Index Fund and Vanguard Balanced Index Fund and $10
annually for accounts in the Extended Market Portfolio of
Vanguard Index Trust and the European, Pacific and Emerging
Markets Portfolios of Vanguard International Equity Index
Fund. See "Dividends, Capital Gains and Taxes" for more
information on this fee. The $10 fee amounts to 1.00% on a
$1,000 investment in a Portfolio, and 0.33% on a $3,000
investment. This fee will be waived for shareholders with an
account balance of $10,000 or more.
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 of Vanguard Index Trust and
the European and Pacific Portfolios of Vanguard International
Equity Index Fund; the 0.25% transaction fee for the Total
Stock Market Portfolio of Vanguard Index Trust; and the 2%
purchase transaction fee and the 1% redemption transaction
fee for the Emerging Markets Portfolio of Vanguard
International Equity Index Fund.
<TABLE>
<CAPTION>
1 3 5 10
YEAR YEARS YEARS YEARS
---- ----- ----- -----
<S> <C> <C> <C> <C>
Total Bond Market Portfolio............................ $ 12 $36 $ 60 $122
Short-Term Bond Portfolio.............................. $ 12 $36 $ 60 $122
Intermediate-Term Bond Portfolio....................... $ 12 $36 $ 60 $122
Long-Term Bond Portfolio............................... $ 12 $36 $ 60 $122
Balanced Index Fund.................................... $ 12 $36 $ 61 $124
500 Portfolio.......................................... $ 12 $36 $ 60 $123
Extended Market Portfolio.............................. $ 17 $41 $ 66 $129
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 $45 $ 69 $131
European Portfolio..................................... $ 23 $50 $ 77 $148
Pacific Portfolio...................................... $ 23 $50 $ 77 $148
Emerging Markets Portfolio............................. $ 46 $79 $ 114 $204
</TABLE>
Included in these estimates are account maintenance fees of
$10, $30, $50 and $100 for the respective periods shown. The
$10 account maintenance fee is a flat charge which does not
vary by the size of your investment. Accordingly, for
investments larger than $1,000, your total expenses will be
substantially lower in percentage terms than this
illustration implies.
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF
PAST OR FUTURE EXPENSES OR PERFORMANCE. ACTUAL EXPENSES MAY
BE HIGHER OR LOWER THAN THOSE SHOWN.
- --------------------------------------------------------------------------------
FINANCIAL
HIGHLIGHTS The following financial highlights for a share outstanding
throughout each period, insofar as they relate to each of the
five years in the period ended December 31, 1994, have been
audited by Price Waterhouse LLP, independent accountants,
whose reports thereon were unqualified. This financial
information should be read in conjunction with each Fund's
financial statements and notes thereto, which are
incorporated by reference in the Statements of Additional
Information and in this Prospectus, and which appear, along
with the reports of Price Waterhouse LLP, in each Fund's 1994
Annual Report to Shareholders and inserts thereto. For a more
complete discussion of each Fund's performance, please see
the 1994 Annual Report of each Fund, which may be obtained
free of charge by writing to the Funds or calling our
Investor Information Department at 1-800-662-7447.
6
<PAGE> 76
<TABLE>
<CAPTION>
---------------------------------------------------------
500 PORTFOLIO
---------------------------------------------------------
YEAR ENDED DECEMBER 31,
----------------------------------------------------------
1994 1993 1992 1991 1990 1989
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD.................... $43.83 $40.97 $39.32 $31.24 $33.64 $27.18
----- ----- ------ ------ ------ ------
INVESTMENT OPERATIONS
Net Investment Income.................................. 1.18 1.13 1.12 1.15 1.17 1.20
Net Realized and Unrealized Gain (Loss) on
Investments.......................................... (.67) 2.89 1.75 8.20 (2.30) 7.21
----- ----- ----- ----- ----- -----
TOTAL FROM INVESTMENT OPERATIONS..................... .51 4.02 2.87 9.35 (1.13) 8.41
- -----------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income................... (1.17) (1.13) (1.12) (1.15) (1.17) (1.20)
Distributions from Realized Capital Gains.............. (.20) (.03) (.10) (.12) (.10) (.75)
----- ----- ----- ----- ----- -----
TOTAL DISTRIBUTIONS.................................. (1.37) (1.16) (1.22) (1.27) (1.27) (1.95)
- -----------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD.......................... $42.97 $43.83 $40.97 $39.32 $31.24 $33.64
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
TOTAL RETURN*........................................... 1.18% 9.89% 7.42% 30.22% (3.32)% 31.36%
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions).................... $9,356 $8,273 $6,547 $4,345 $2,173 $1,804
Ratio of Expenses to Average Net Assets................. .19% .19% .19% .20% .22% .21%
Ratio of Net Investment Income to Average Net Assets.... 2.72% 2.65% 2.81% 3.07% 3.60% 3.62%
Portfolio Turnover Rate................................. 6%+ 6%+ 4%+ 5%+ 23%+ 8%
<CAPTION>
----------------------------------------------------
500 PORTFOLIO
-----------------------------------------------------
YEAR ENDED DECEMBER 31,
------------------------------------------------------
1988 1987 1986 1985 1984
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD.................... $24.65 $24.27 $22.99 $19.52 $19.70
------ ------ ------ ------ ------
INVESTMENT OPERATIONS
Net Investment Income.................................. 1.08 .88 .89 .91 .88
Net Realized and Unrealized Gain (Loss) on
Investments.......................................... 2.87 .36 3.30 5.08 .30
----- ----- ------ ------ ------
TOTAL FROM INVESTMENT OPERATIONS..................... 3.95 1.24 4.19 5.99 1.18
- ------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income................... (1.10) (.69) (.89) (.91) (.88)
Distributions from Realized Capital Gains.............. (.32) (.17) (2.02) (1.61) (.48)
----- ----- ------ ------ ------
TOTAL DISTRIBUTIONS..................................... (1.42) (.86) (2.91) (2.52) (1.36)
- -------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD.......................... $27.18 $24.65 $24.27 $22.99 $19.52
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
TOTAL RETURN*........................................... 16.22% 4.71% 18.06% 31.23% 6.21%
- ---------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions)...................... $1,055 $826 $485 $394 $290
Ratio of Expenses to Average Net Assets................... .22% .26% .28% .28% .27%
Ratio of Net Investment Income to Average Net Assets...... 4.08% 3.15% 3.40% 4.09% 4.53%
Portfolio Turnover Rate................................... 10% 15% 29% 36% 14%
</TABLE>
*Total return figures do not reflect the annual account maintenance fee of $10.
+Portfolio turnover rates excluding in-kind redemptions were 4%, 2%, 1%, 1%,
and 6%, respectively.
<TABLE>
<CAPTION>
--------------------------------------------------
EXTENDED MARKET PORTFOLIO
--------------------------------------------------
YEAR ENDED DECEMBER 31,
--------------------------------------------------
1994 1993 1992 1991 1990
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD.......................................... $19.43 $17.35 $15.82 $11.48 $13.92
----- ----- ------ ------ ------
INVESTMENT OPERATIONS
Net Investment Income........................................................ .28 .23 .24 .25 .30
Net Realized and Unrealized Gain (Loss) on Investments....................... (.62) 2.28 1.72 4.54 (2.25)
----- ----- ----- ----- -----
TOTAL FROM INVESTMENT OPERATIONS........................................... (.34) 2.51 1.96 4.79 (1.95)
- --------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income......................................... (.28) (.23) (.25) (.25) (.33)
Distributions from Realized Capital Gains.................................... (.29) (.20) (.18) (.20) (.16)
----- ----- ----- ----- -----
TOTAL DISTRIBUTIONS........................................................ (.57) (.43) (.43) (.45) (.49)
- --------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD................................................ $18.52 $19.43 $17.35 $15.82 $11.48
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN*................................................................. (1.76)% 14.49% 12.47% 41.85% (14.05)%
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions).......................................... $967 $928 $585 $372 $179
Ratio of Expenses to Average Net Assets....................................... .20% .20% .20% .19% .23%
Ratio of Net Investment Income to Average Net Assets.......................... 1.51% 1.48% 1.73% 2.14% 2.68%
Portfolio Turnover Rate....................................................... 19% 13% 9% 11% 9%
<CAPTION>
------------------------------------------
EXTENDED MARKET PORTFOLIO
------------------------------------------
YEAR ENDED DECEMBER 31,
------------------------------------------
DEC. 21+
1989 1988 TO 31, 1987
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD.......................................... $11.60 $9.99 $10.00
------ ------ --------
INVESTMENT OPERATIONS
Net Investment Income........................................................ .26 .34 .03
Net Realized and Unrealized Gain (Loss) on Investments....................... 2.52 1.63 (.04)
----- ----- -------
TOTAL FROM INVESTMENT OPERATIONS........................................... 2.78 1.97 (.01)
- ---------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income......................................... (.23) (.20) --
Distributions from Realized Capital Gains.................................... (.23) (.16) --
----- ----- -------
TOTAL DISTRIBUTIONS........................................................ (.46) (.36) --
- --------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD................................................ $13.92 $11.60 $9.99
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
TOTAL RETURN*................................................................. 24.10% 19.75% (0.10)%
- --------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions).......................................... $147 $35 $5
Ratio of Expenses to Average Net Assets....................................... .23% .24% 0%
Ratio of Net Investment Income to Average Net Assets.......................... 2.92% 2.90% 0%
Portfolio Turnover Rate....................................................... 14% 26% 3%
</TABLE>
*Total return figures do not reflect the 1% transaction fee on purchases or the
annual account maintenance fee of $10.
+Commencement of Operations.
7
<PAGE> 77
<TABLE>
<CAPTION>
----------------------------------------------------
TOTAL STOCK
MARKET PORTFOLIO*** GROWTH PORTFOLIO**
--------------------- -----------------------------------
YEAR YEAR MARCH 16+, YEAR YEAR NOV. 2,
ENDED ENDED 1992, TO ENDED ENDED 1992, TO
DEC. 31, DEC. 31, DEC. 31, DEC. 31, DEC. 31, DEC. 31,
1994 1993 1992 1994 1993 1992
- -------------------------------------------------------------------------------------------------------------------- ------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD............................ $11.69 $10.84 $10.00 $10.20 $10.26 $10.00
----- ------ ------- ------ ------- -------
INVESTMENT OPERATIONS
Net Investment Income.......................................... .27 .26 .23 .21 .21 .06
Net Realized and Unrealized Gain (Loss) on Investments......... (.29) .88 .84 .08 (.06) .26
----- ------ ------- ------ ------ ------
TOTAL FROM INVESTMENT OPERATIONS............................. (.02) 1.14 1.07 .29 .15 .32
- -------------------------------------------------------------------------------------------------------------------- ------------
DISTRIBUTIONS
Dividends from Net Investment Income........................... (.27) (.26) (.23) (.21) (.21) (.06)
Distributions from Realized Capital Gains...................... (.03) (.03) -- -- -- --
----- ------ ------- ------ ------ ------
TOTAL DISTRIBUTIONS.......................................... (.30) (.29) (.23) (.21) (.21) (.06)
- -------------------------------------------------------------------------------------------------------------------- ------------
NET ASSET VALUE, END OF PERIOD.................................. $11.37 $11.69 $10.84 $10.28 $10.20 $10.26
- -------------------------------------------------------------------------------------------------------------------- ------------
- -------------------------------------------------------------------------------------------------------------------- ------------
TOTAL RETURN.................................................... (0.17)% 10.62% 10.41% 2.89% 1.53% 3.19%
- -------------------------------------------------------------------------------------------------------------------- ------------
- -------------------------------------------------------------------------------------------------------------------- ------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions)............................ $786 $512 $275 $86 $51
Ratio of Expenses to Average Net Assets......................... .20% .20% .21%* .20% .20% $21
Ratio of Net Investment Income to Average Net Assets............ 2.35% 2.31% 2.42%* 2.08% 2.10% 0%*
Portfolio Turnover Rate......................................... 2% 1% 3% 28% 36% 2.85%*
2%
<CAPTION>
VALUE PORTFOLIO**
---------------------------------
YEAR YEAR NOV. 2,
ENDED ENDED 1992, TO
DEC. 31, DEC. 31, DEC. 31,
1994 1993 1992
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD........................................... $11.74 $10.30 $10.00
------- ------- -------
INVESTMENT OPERATIONS
Net Investment Income......................................................... .38 .38 .07
Net Realized and Unrealized Gain (Loss) on Investments........................ (.46) 1.50 .30
------ ------ ------
TOTAL FROM INVESTMENT OPERATIONS............................................ (.08) 1.88 .37
- -----------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income.......................................... (.38) (.38) (.07)
Distributions from Realized Capital Gains..................................... (.16) (.06) --
------ ------ ------
TOTAL DISTRIBUTIONS......................................................... (.54) (.44) (.07)
- -----------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD................................................. $11.12 $11.74 $10.30
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
TOTAL RETURN ................................................................. (0.73)% 18.35% 3.70%
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions)........................................... $297 $190 $24
Ratio of Expenses to Average Net Assets........................................ .20% .20% 0%*
Ratio of Net Investment Income to Average Net Assets........................... 3.37% 3.26% 3.46%*
Portfolio Turnover Rate........................................................ 32% 30% 4%
</TABLE>
* Annualized.
** Total return figures do not reflect the annual account maintenance fee of
$10 or applicable portfolio transaction fees.
*** Total return figures do not reflect the .25% transaction fee on purchases
or the annual account maintenance fee of $10. Subscription period for the
Portfolio was from March 16, 1992, to April 26, 1992, during which time
all assets were held in money market instruments. Performance measurement
begins on April 27, 1992.
+ Commencement of operations.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------
SMALL CAPITALIZATION STOCK PORTFOLIO(1)
-----------------------------------------------------------------------------------
-----------------------------------------------------------------------------------
OCT. 1,
FEB. 1 TO 1993 TO YEAR ENDED SEPTEMBER 30,
DEC. 31, JAN. 31, ---------------------------------------------------------
1994** 1994** 1993 1992 1991 1990(2) 1989+ 1988
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD....... $16.24 $16.23 $12.63 $12.03 $8.55 $11.88 $11.96 $15.73
-------- ------- ------ ------ ------ ------- ------ ------
INVESTMENT OPERATIONS
Net Investment Income (Loss).............. .20 .05 .20 .19 .20 .17 .10 .03
Net Realized and Unrealized Gain (Loss) on
Investments............................. (.86) .96 3.73 .88 3.60 (3.46 ) 2.13 (2.59)
------- ------ ----- ----- ----- ------ ----- -----
TOTAL FROM INVESTMENT OPERATIONS........ (.66) 1.01 3.93 1.07 3.80 (3.29 ) 2.23 (2.56)
- ------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income...... (.22) (.18) (.18) (.18) (.18) (.04 ) (.14) --
Distributions from Realized Capital
Gains................................... (.37) (.82) (.15) (.29) (.14) -- (2.17) (1.21)
------- ------ ----- ----- ----- ------ ----- -----
TOTAL DISTRIBUTIONS..................... (.59) (1.00) (.33) (.47) (.32) (.04 ) (2.31) (1.21)
- ------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD............. $14.99 $16.24 $16.23 $12.63 $12.03 $8.55 $11.88 $11.96
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN++............................. (4.00)% 6.65% 31.60% 9.34% 45.91% (27.73 )% 18.83% (14.30)%
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions)....... $605 $533 $432 $202 $111 $40 $20 $27
Ratio of Expenses to Average Net Assets.... .17%* .18%* .18% .18% .21% .31 % 1.00% .95%
Ratio of Net Investment Income (Loss) to
Average Net Assets........................ 1.50%* 1.16%* 1.47% 1.65% 2.11% 1.91 % .65% .24%
Portfolio Turnover Rate.................... 25%* 5%* 26% 26% 33% 40 % 160% 68%
<CAPTION>
-----------------------------------------------------------------------------------
SMALL CAPITALIZATION STOCK PORTFOLIO(1)
-----------------------------------------------------------------------------------
-----------------------------------------------------------------------------------
YEAR ENDED SEPTEMBER 30,
-------------------------------------
1987 1986 1985 1984
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD....... $13.24 $11.68 $13.15 $19.77
------ ------ ------ ------
INVESTMENT OPERATIONS
Net Investment Income (Loss).............. (.04) (.01) (.04) .14
Net Realized and Unrealized Gain (Loss) on
Investments............................. 4.42 1.57 (.51) (4.25)
----- ----- ----- -----
TOTAL FROM INVESTMENT OPERATIONS........ 4.38 1.56 (.55) (4.11)
- ------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income...... -- -- (.15) --
Distributions from Realized Capital
Gains................................... (1.89) -- (.77) (2.51)
----- ----- ----- -----
TOTAL DISTRIBUTIONS..................... (1.89) -- (.92) (2.51)
- ------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD............. $15.73 $13.24 $11.68 $13.15
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN++............................. 38.02% 13.33% (3.67)% (22.89)%
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions)....... $35 $31 $32 $37
Ratio of Expenses to Average Net Assets.... .92% .92% 1.00% 1.05%
Ratio of Net Investment Income (Loss) to
Average Net Assets........................ (.25)% (.06)% (.28)% 1.11%
Portfolio Turnover Rate.................... 92% 92% 103% 100%
</TABLE>
* Annualized.
** Unaudited.
(1) Results prior to January 31, 1994, are for the former Vanguard Small
Capitalization Stock Fund.
(2) Adjusted to reflect a 3-for-1 stock split as of February 3, 1990.
+ Prior to September 11, 1989, Schroder Capital Management International
provided investment advisory services to the Fund. Effective
September 11, 1989, The Vanguard Group, Inc. began providing investment
advisory services to the Fund on an at-cost basis.
++ Total return figures do not reflect the annual account maintenance fees
of $10 or applicable portfolio transaction fees.
8
<PAGE> 78
<TABLE>
<CAPTION>
---------------------------------------------------------
EMERGING EUROPEAN PORTFOLIO(1)
MARKETS ------------------------------------
PORTFOLIO
-----------
MAY 4+ TO DECEMBER 31, MAY 1+ TO
DEC. 31, -------------------------- DEC. 31,
1994 1994 1993 1992 1991 1990
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD................... $10.00 $11.88 $9.33 $9.92 $9.06 $10.00
------ ------ ------ ----- ----- -------
INVESTMENT OPERATIONS
Net Investment Income ................................ .06 .28 .17 .25 .26 .16
Net Realized and Unrealized Gain (Loss) on ........... .92 (.06) 2.55 (.58) .86 (.94)
------ ------ ------ ----- ----- -------
TOTAL FROM INVESTMENT OPERATIONS.................... .98 .22 2.72 (.33) 1.12 (.78)
- ----------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income.................. (.07) (.28) (.17) (.26) (.26) (.16)
Distributions from Realized Capital Gains............. (.04) (.06) -- -- -- --
------ ------ ------ ----- ----- -------
TOTAL DISTRIBUTIONS................................. (.11) (.34) (.17) (.26) (.26) (.16)
- -----------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD......................... $10.87 $11.76 $11.88 $9.33 $9.92 $9.06
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
TOTAL RETURN........................................... 9.81%(2) 1.88% 29.13% (3.32)% 12.40% (7.23)%
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions)................... $83 $715 $601 $256 $161 $96
Ratio of Expenses to Average Net Assets................ .60%* .32% .32% .32% .33% .40%*
Ratio of Net Investment Income to Average Net Assets... 1.32%* 2.41% 2.05% 3.05% 3.06% 3.68%*
Portfolio Turnover Rate................................ 6% 6% 4% 1% 15%** 3%
<CAPTION>
----------------------------------------------------------------------
PACIFIC PORTFOLIO (1)
-----------------------------------------------------------------------
YEAR ENDED
DECEMBER 31, MAY 1+ TO
--------------------------------------------------- DEC. 31,
1994 1993 1992 1991 1990
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD................... $10.13 $7.56 $9.42 $8.56 $10.00
------- ----- ----- ------ -------
INVESTMENT OPERATIONS
Net Investment Income................................. .08 .06 .05 .05 .05
Net Realized and Unrealized Gain (Loss) on
Investments......................................... 1.24 2.62 (1.76) .86 (1.44)
----- ----- ------- ------- --------
TOTAL FROM INVESTMENT OPERATIONS.................... 1.32 2.68 (1.71) .91 (1.39)
- ----------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income.................. (.08) (.06) (.05) (.05) (.05)
Distributions from Realized Capital Gains............. (.06) (.05) (.10) -- --
----- ----- ------- ------ ------
TOTAL DISTRIBUTIONS................................. (.14) (.11) (.15) (.05) (.05)
- ----------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD......................... $11.31 $10.13 $7.56 $9.42 $8.56
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN........................................... 13.04% 35.46% (18.17)% 10.65% (14.01)%
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions)................... $697 $493 $207 $84 $31
Ratio of Expenses to Average Net Assets................ .32% .32% .32% .32% .35%*
Ratio of Net Investment Income to Average Net Assets... .71% .75% .92% .70% 1.02%*
Portfolio Turnover Rate................................ 4% 7% 3% 21%** 2%
</TABLE>
* Annualized.
** Portfolio turnover rates for 1991 excluding in-kind redemptions were
3% for the European Portfolio and 1% for the Pacific Portfolio.
+ Commencement of operations.
(1) Total return figures do not reflect the 1% transaction fee on
purchases or the annual account maintenance fee of $10.
Subscription period for Portfolio was May 1, 1990, to June 17, 1990,
during which time all assets were held in money market
instruments. Performance measurement begins on June 18, 1990.
(2) Total return does not reflect the 2% transaction fee on purchases,
the 1% transaction fee on redemptions, or the annual
account maintenance fee of $10.
<TABLE>
<CAPTION>
------------------------------------------------
TOTAL BOND MARKET PORTFOLIO
------------------------------------------------
YEAR ENDED DECEMBER 31,
------------------------------------------------
1994 1993 1992 1991 1990
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD....................................... $10.06 $9.88 $9.99 $9.41 $9.44
------ ------ ----- ----- -----
INVESTMENT OPERATIONS
Net Investment Income..................................................... .622 .638 .699 .766 .796
Net Realized and Unrealized Gain (Loss) on Investments.................... (.888) .300 (.018) .605 (.030)
------ ------ ----- ----- -----
TOTAL FROM INVESTMENT OPERATIONS.................................... (.266) .938 .681 1.371 .766
- ---------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income...................................... (.622) (.638) (.699) (.766) (.796)
Distributions from Realized Capital Gains................................. (.002) (.120) (.092) (.025) --
------ ------ ----- ----- -----
TOTAL DISTRIBUTIONS................................................. (.624) (.758) (.791) (.791) (.796)
- ---------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD............................................. $9.17 $10.06 $9.88 $9.99 $9.41
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN(1)............................................................ (2.66)% 9.68% 7.14% 15.25% 8.65%
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions)....................................... $1,731 $1,540 $1,066 $849 $277
Ratio of Expenses to Average Net Assets.................................... .18% .18% .20% .16% .21%
Ratio of Net Investment Income to Average Net Assets....................... 6.57% 6.24% 7.06% 7.95% 8.60%
Portfolio Turnover Rate.................................................... 33% 50% 49% 31% 29%
<CAPTION>
------------------------------------------------
TOTAL BOND MARKET PORTFOLIO
------------------------------------------------
YEAR ENDED DECEMBER 31,
------------------------------------------------
DEC. 9,+
1989 1988 1987 TO 31, 1986
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD....................................... $9.05 $9.20 $9.94 $10.00
----- ----- ----- ---------
INVESTMENT OPERATIONS
Net Investment Income..................................................... .797 .807 .834 .028
Net Realized and Unrealized Gain (Loss) on Investments.................... .390 (.150) (.740) (.060)
----- ----- ----- ---------
TOTAL FROM INVESTMENT OPERATIONS.................................... 1.187 .657 .094 (.032)
- ---------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income...................................... (.797) (.807) (.834) (.028)
Distributions from Realized Capital Gains................................. -- -- -- --
----- ----- ----- ---------
TOTAL DISTRIBUTIONS................................................. (.797) (.807) (.834) (.028)
- ---------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD............................................. $9.44 $9.05 $9.20 $9.94
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN(1)............................................................ 13.65% 7.35% 1.14% (0.21)%
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions)....................................... $139 $58 $43 $3
Ratio of Expenses to Average Net Assets.................................... .24% .30% .14% 0%
Ratio of Net Investment Income to Average Net Assets....................... 8.49% 8.84% 9.01% 6.82%*
Portfolio Turnover Rate.................................................... 33% 21% 77% 0%
* Annualized.
(1) Total return figures are adjusted to reflect the annual account
maintenance fee of $10.
+ Commencement of operations.
</TABLE>
9
<PAGE> 79
<TABLE>
<CAPTION>
-----------------------------------------------------------
INTERMEDIATE-
SHORT-TERM TERM BOND LONG-TERM
BOND PORTFOLIO PORTFOLIO BOND PORTFOLIO
-----------------------------------------------------------
MARCH 1+ TO MARCH 1+ TO MARCH 1+ TO
DECEMBER 31, 1994 DECEMBER 31, 1994 DECEMBER 31, 1994
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD........................... $10.00 $10.00 $10.00
------------ ------------ ------------
INVESTMENT OPERATIONS
Net Investment Income......................................... .463 .533 .586
Net Realized and Unrealized Gain (Loss) on Investments........ (.500) (.820) (1.040)
----------- ----------- -----------
TOTAL FROM INVESTMENT OPERATIONS........................ (.037) (.287) (.454)
- ---------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income.......................... (.463) (.533) (.586)
Distributions from Realized Capital Gains..................... -- -- --
----------- ----------- -----------
TOTAL DISTRIBUTIONS..................................... (.463) (.533) (.586)
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD................................. $9.50 $9.18 $8.96
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN(1)................................................ (0.37)% (2.88)% (4.53)%
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions)........................... $77 $71 $9
Ratio of Expenses to Average Net Assets........................ .18%* .18%* .18%*
Ratio of Net Investment Income to Average Net Assets........... 5.77%* 6.88%* 7.70%*
Portfolio Turnover Rate........................................ 53%* 63%* 70%*
</TABLE>
* Annualized.
(1) Returns do not reflect the annual account maintenance fee of $10.
+ Subscription period for the Portfolio was from January 18, 1994,
through February 28, 1994, during which time all assets were
held in money market instruments.
<TABLE>
<CAPTION>
--------------------------------------------
VANGUARD BALANCED
INDEX FUND
---------------------------------------------
YEAR ENDED SEPT. 28
DECEMBER 31, TO
----------------------- DEC. 31,
1994 1993 1992
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD....................... $10.91 $10.31 $10.00
------ -------- -------
INVESTMENT OPERATIONS
Net Investment Income....................................... .41 .39 .08
Net Realized and Unrealized Gain (Loss) on Investments..... (.58) .63 .31
------ ------- -------
TOTAL FROM INVESTMENT OPERATIONS..................... (.17) 1.02 .39
- -------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income....................... (.40) (.39) (.08)
Distributions from Realized Capital Gains................... -- (.03) --
----- ------- ------
TOTAL DISTRIBUTIONS.................................. (.40) (.42) (.08)
- --------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD.............................. $10.34 $10.91 $10.31
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
TOTAL RETURN**............................................... (1.56)% 10.00% 3.69%
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions).......................... $403 $367 $109
Ratio of Expenses to Average Net Assets....................... .20% .20% .22% *
Ratio of Net Investment Income to Average Net Assets.......... 3.86% 3.53% 3.76% *
Portfolio Turnover Rate....................................... 16% 25% 17%
</TABLE>
* Annualized.
** Total return figures do not reflect the annual account maintenance fee
of $10. Subscription period for Fund was from September
28, 1992, to November 8, 1992, during which time all assets were held
in money market instruments. Performance measurement
begins on November 9, 1992.
- --------------------------------------------------------------------------------
YIELD AND TOTAL
RETURN From time to time a Portfolio of the Vanguard Index Funds may
advertise its yield and total return. Both yield and total
return figures are based on historical earnings and are not
intended to indicate future performance. The "total return"
of a Portfolio refers to the average annual compounded rates
of return over one-, five- and ten-year periods or for the
life of the Portfolio (as stated in the advertisement) that
would equate an initial amount invested at the beginning of a
stated period to the ending redeemable value of the
investment, assuming the reinvestment of all dividend and
capital gains distributions.
In accordance with industry guidelines set forth by the U.S.
Securities and Exchange Commission, the "30-day yield" of a
Portfolio is calculated by dividing the net investment income
per share earned during a 30-day period by the net asset
value per share on the last day of the period. Net investment
income includes interest and dividend income earned on a
Portfolio's securities; it is
10
<PAGE> 80
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.
- --------------------------------------------------------------------------------
INVESTMENT
OBJECTIVES Vanguard Bond Index Fund, Vanguard Balanced Index Fund,
Vanguard Index Trust and Vanguard International Equity Index
Fund are each open-end diversified investment companies
designed as "index" funds.
- --------------------------------------------------------------------------------
BOND INDEX FUND
EACH PORTFOLIO SEEKS
TO MATCH THE
INVESTMENT
PERFORMANCE OF ITS
RESPECTIVE INDEX The Fund consists of four Portfolios, each of which seeks to
match the investment results of a particular investment
grade bond index through the use of index sampling
techniques. The Total Bond Market Portfolio seeks to
replicate the performance of a broad market weighted bond
index, while the Short-Term Bond, Intermediate-Term Bond and
Long-Term Bond Portfolios attempt to replicate the
performance of market weighted bond indexes with prescribed
maturity standards. There is no assurance that any of the
Fund's Portfolios will achieve its stated objective.
- --------------------------------------------------------------------------------
BALANCED INDEX
FUND
THE FUND SEEKS
TO TRACK THE
WILSHIRE 5000 AND THE
LEHMAN BROTHERS
INDEX The objective of the Fund is to replicate, with respect to
60% of its assets, the investment performance of the Wilshire
5000 and, with respect to 40% of its assets, the investment
performance of the Lehman Brothers Index. There is no
assurance that the Fund will achieve its stated objective.
The Wilshire 5000 consists of all U.S. common stocks that
trade on a regular basis on the New York and American Stock
Exchanges and in the NASDAQ over-the-counter market. The
Lehman Brothers Index measures the total return (capital
change plus income) provided by a universe of fixed-income
securities, weighted by market value. The securities included
in the index generally have an outstanding market value of at
least $25 million, are of investment grade quality and are
readily available in the marketplace.
- --------------------------------------------------------------------------------
INDEX TRUST
EACH PORTFOLIO SEEKS
TO MATCH THE
INVESTMENT
PERFORMANCE OF A
PARTICULAR STOCK
MARKET INDEX 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 500 PORTFOLIO seeks to replicate the aggregate price
and yield performance of the Standard & Poor's 500
Composite Stock Price Index (the "S&P 500 Index"), an index
which emphasizes large-capitalization companies.
- The EXTENDED MARKET PORTFOLIO seeks to replicate the
aggregate price and yield performance of the Wilshire 4500
Index, an index which consists of more than 5,000 medium-
and small-capitalization companies that are not included in
the S&P 500 Index.
- The TOTAL STOCK MARKET PORTFOLIO seeks to replicate the
aggregate price and yield performance of the Wilshire 5000
Index, an index 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.
11
<PAGE> 81
- The VALUE PORTFOLIO seeks to replicate the aggregate price
and yield performance of the S&P/BARRA Value Index, an
index which includes stocks in the S&P 500 Index with lower
than average ratios of market price to book value. These
types of stocks are often referred to as "value" stocks.
- The GROWTH PORTFOLIO seeks to replicate the aggregate price
AND yield performance of the S&P/BARRA Growth Index, an
index which includes stocks in the S&P 500 Index with
higher than average ratios of market price to book value.
These types of stocks are often referred to as "growth"
stocks.
There is no assurance that the Portfolios will achieve their
stated objectives.
- --------------------------------------------------------------------------------
INTERNATIONAL
EQUITY INDEX FUND
EACH PORTFOLIO SEEKS
TO MATCH THE
INVESTMENT
PERFORMANCE OF ITS
RESPECTIVE INDEX The Fund consists of three Portfolios, each of which seeks to
match the investment results of a Morgan Stanley Capital
International Index. The European Portfolio seeks to
replicate the aggregate price and yield performance of the
Morgan Stanley Capital International-Europe (Free) Index
("MSCI-Europe (Free)"), a diversified, capitalization
weighted index comprised of companies located in fourteen
European countries. The Pacific Portfolio seeks to replicate
the aggregate price and yield performance of the Morgan
Stanley Capital International-Pacific (Free) Index
("MSCI-Pacific"), a diversified, capitalization weighted
index consisting of companies located in Australia, Japan,
Hong Kong, New Zealand, Singapore and Malaysia. There is no
assurance that either Portfolio will achieve its stated
objective.
By holding both the European and Pacific Portfolios in
appropriate proportions, an investor may create an aggregate
portfolio designed to approximate the total return (income
plus capital change) of the Morgan Stanley Capital
International-Europe, Australia and Far East (Free) Index
("EAFE Free"), a broadly diversified international index
consisting of more than 1,000 equity securities of companies
located outside of the United States. As of December, 31,
1994, the MSCI-Pacific (Free) Index represented approximately
55% of the market capitalization of EAFE (Free), while the
MSCI-Europe (Free) Index represented the remaining 45%.
The Emerging Markets Portfolio seeks, with respect to 95% of
assets, to provide investment results that parallel the
Morgan Stanley Capital International ("MSCI")-Select Emerging
Markets Free Index ("Index"). The MSCI-Select Emerging
Markets Free Index is a diversified index consisting of
common stocks located in 12 countries. This Index provides
broader diversification and more liquidity than other
"published" emerging markets indexes and also takes into
consideration the trading capabilities of foreigners in
emerging stock market countries.
The Fund is neither sponsored by nor affiliated with Morgan
Stanley Capital International.
The investment objectives of each Portfolio of Vanguard Bond
Index Fund and Vanguard Index Trust are fundamental and so
cannot be changed without the approval of a majority of a
Portfolio's shareholders.
The investment objectives of Vanguard Balanced Index Fund and
each Portfolio of Vanguard International Equity Index Fund
are not fundamental and may be changed by the Board of
Directors without shareholder approval. However, shareholders
would be notified prior to a material change.
- --------------------------------------------------------------------------------
INVESTMENT
POLICIES
EACH FUND USES
A "PASSIVE"
INVESTMENT
APPROACH The Funds 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 Funds,
utilizing a "passive" or indexing investment approach,
attempt to approximate the investment performance of their
respective indexes through statistical procedures. The Funds
are managed without regard to tax ramifications.
The investment policies of the Funds are not fundamental and
so may be changed by the Board of Directors without
shareholder approval. However, shareholders would be notified
prior to a material change.
- --------------------------------------------------------------------------------
12
<PAGE> 82
BOND INDEX FUND
EACH PORTFOLIO INVESTS
IN FIXED INCOME
SECURITIES Each Portfolio will invest in a group of fixed-income
securities selected from its respective index which, when
taken together, are expected to perform similarly to the
index as a whole. This sampling technique is expected to
enable each Portfolio to track the dividend income and price
movements of its respective index, while minimizing
brokerage, custodial and accounting costs.
The TOTAL BOND MARKET PORTFOLIO will invest in a portfolio of
fixed-income securities selected to match the Lehman Brothers
Aggregate Bond Index (the "Aggregate Bond Index"). The
Aggregate Bond Index is a broad market weighted index which
encompasses four major classes of investment grade
fixed-income securities in the United States: U.S. Treasury
and agency securities, corporate bonds, international
(dollar-denominated) bonds, and mortgage-backed securities,
with maturities greater than one year.
The SHORT-TERM BOND PORTFOLIO will invest in a portfolio of
fixed-income securities selected to match the Lehman Brothers
Mutual Fund Short (1-5) Government/Corporate Index (the
"Short-Term Index"). The Short-Term Index is a market
weighted index which encompasses three major classes of
investment grade fixed-income securities: U.S. Treasury,
agency securities and corporate bonds, and international
(dollar-denominated) bonds, all with maturities between 1 and
5 years.
The INTERMEDIATE-TERM BOND PORTFOLIO will invest in a
portfolio of fixed-income securities selected to match the
Lehman Brothers Mutual Fund Intermediate (5-10)
Government/Corporate Index (the "Intermediate-Term Index").
The Intermediate-Term Index is a market weighted index which
encompasses three major classes of investment grade
fixed-income securities: U.S. Treasury and agency securities,
corporate bonds, and international (dollar-denominated)
bonds, all with maturities between 5 and 10 years.
The LONG-TERM BOND PORTFOLIO will invest in a portfolio of
fixed-income securities selected to match the Lehman Brothers
Mutual Fund Long (10+) Government/Corporate Index (the "Long-
Term Index"). The Long-Term Index is a market weighted index
which encompasses three major classes of investment grade
fixed-income securities: U.S. Treasury and agency securities,
corporate bonds, and international (dollar-denominated)
bonds, all with maturities greater than 10 years.
Each Portfolio will invest 80% or more of its assets in
securities included in its respective index. As of December
31, 1994, the major classes of fixed-income securities
represented the following proportions of the respective
indexes total market values:
<TABLE>
<CAPTION>
AGGREGATE SHORT-TERM INTERMEDIATE- LONG-TERM
BOND INDEX INDEX TERM INDEX INDEX
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury and agency securities 54% 88% 62% 68%
Corporate bonds 14% 10% 29% 26%
International (dollar-denominated) bonds 3% 2% 9% 6%
Mortgage-backed securities 29% 0% 0% 0%
Dollar-weighted Average Maturity (Years) 8.8 yrs 2.7 yrs 7.6 yrs 23.2 yrs
</TABLE>
The Portfolios of the Fund may, from time to time, substitute
one type of investment grade bond for another. For instance,
a Portfolio may hold more short-term corporate bonds (fewer
short U.S. Treasury bonds) than represented in the Index so
as to increase income. This corporate substitution strategy
will entail the assumption of additional credit risk;
however, substantial diversification within the corporate
sector should moderate issue-specific credit risk. In
addition, current investment policy restricts corporate
substitutions to issues with less than 4 years remaining to
maturity and in aggregate no more than 15% of net assets.
Overall, credit risk is expected to be very low for each of
the Portfolios.
Fixed-income securities will be primarily of investment grade
quality-- i.e., those rated at least Baa3 by Moody's
Investors Service, Inc. or BBB- by Standard & Poor's
Corporation. Securities rated Baa or BBB are considered as
medium grade obligations. Interest payments and principal are
regarded as adequate for the present but certain protective
elements found in higher rated
13
<PAGE> 83
bonds may be lacking. Such bonds lack outstanding investment
characteristics and, in fact, have speculative
characteristics as well.
In its efforts to duplicate the investment performance of the
Index, each Portfolio will invest in fixed-income securities
approximating its relative proportion of the Index's total
market value. For the Total Bond Market Portfolio, these
investments will include U.S. Treasury and agency securities,
mortgage-backed securities and corporate and international
(dollar-denominated) bonds. For the Short-Term Bond,
Intermediate-Term Bond and Long-Term Bond Portfolios, these
investments include U.S. Treasury and agency securities,
corporate debt and international (dollar- denominated) debt.
The Portfolios may invest in U.S. Treasury bills, notes and
bonds and other "full faith and credit" obligations of the
U.S. Government. The Portfolios may also invest in U.S.
Government agency securities, which are debt obligations
issued or guaranteed by agencies or instrumentalities of the
U.S. Government. Such "agency" securities may not be backed
by the "full faith and credit" of the U.S. Government. Such
U.S. Government agencies may include the Federal Farm Credit
Banks, the Resolution Trust Corporation and in the case of
the Total Bond Market Portfolio, the Government National
Mortgage Association. Even though they all carry top (AAA)
credit ratings, "agency" obligations are not explicitly
guaranteed by the U.S. Government and so are perceived as
somewhat riskier than comparable Treasury bonds.
Each Portfolio may also invest up to 20% of its assets in
short-term money market instruments, and may invest in bond
(interest rate) futures contracts and options to a limited
extent. Such securities will be held only to invest
uncommitted cash balances, to maintain liquidity to meet
shareholder redemptions, or to minimize trading costs. The
Portfolios will not invest in such securities as part of a
temporary defensive strategy (such as altering the aggregate
maturity of a Portfolio) to protect the Fund against
potential bond market declines. Each Portfolio intends to
remain fully invested, to the extent practicable, in a pool
of securities which will duplicate the investment
characteristics of the respective index. See "Implementation
of Policies" for a description of other investment practices
of the Fund.
- --------------------------------------------------------------------------------
BALANCED INDEX
FUND
THE FUND INVESTS IN
STOCKS AND BONDS Under normal circumstances, the Fund will invest 60% of its
net assets in a portfolio of common stocks selected to track
the Wilshire 5000 and 40% of its net assets in a portfolio of
investment-grade bonds designed to track the Lehman Brothers
Index. The Fund may also invest in certain short-term fixed
income securities as cash reserves, although cash and cash
equivalents are normally expected to represent less than 1%
of the Fund's assets.
The Fund's common stock portfolio will invest in a portfolio
of common stock selected to match the Wilshire 5000. The Fund
is expected to invest in approximately 500 of the largest
securities in the Wilshire 5000 as measured by market
capitalization and a representative sample of the remainder.
Typically, the Fund will hold between 950 and 1,050 stocks,
which are selected primarily on the basis of market
capitalization and industry weightings.
The Fund's bond portfolio will invest in a portfolio of fixed
income securities selected to match the Lehman Brothers
Index. The Fund will invest in a representative sample of
fixed-income securities in the Lehman Brothers Index, which,
taken together, are expected to perform similarly to the
Index.
The Fund may also invest up to 30% of its assets in stock or
bond futures contracts and options in order to invest
uncommitted cash balances, to maintain liquidity to meet
shareholder redemptions, or to minimize trading costs. The
Fund will not invest in futures contracts, options, or cash
reserves as part of a temporary defensive strategy, such as
lowering the Fund's investment allocation in common stocks to
protect against potential stock market declines. The Fund
intends to remain fully invested, to the extent practicable,
in a pool of securities which will duplicate the investment
characteristics of the Wilshire 5000 and Lehman Brothers
Indexes. See "Implementation of Policies" for a description
of these and other investment practices of the Fund.
- --------------------------------------------------------------------------------
14
<PAGE> 84
INDEX TRUST
ALL SIX PORTFOLIOS
INVEST IN
COMMON STOCKS The 500, Value, and Growth Portfolios each invest in all the
stocks included in each of their respective indexes in
approximately the same proportion as they are represented in
the index. The Extended Market, Total Stock Market, and Small
Capitalization Stock Portfolios invest in statistically
selected samples of the stocks included in each of their
respective indexes. This sampling technique is expected to
enable each portfolio to track the price movements of its
respective index, while minimizing the brokerage, custodial,
and accounting costs.
The 500 PORTFOLIO invests in all 500 stocks in the S&P 500
Index in approximately the same proportions as they are
represented in the Index.
The EXTENDED MARKET PORTFOLIO invests in a statistically
selected sample of the more than 5,000 stocks included in the
Wilshire 4500 Index. Typically, the Portfolio invests in
1,400 to 1,700 stocks. Stocks are selected for inclusion in
the Portfolio based primarily on market capitalization and
industry weightings. The Portfolio is constructed to have
aggregate investment characteristics similar to those of the
Wilshire 4500 Index.
The TOTAL STOCK MARKET PORTFOLIO invests in a statistically
selected sample of the more than 6,000 stocks included in the
Wilshire 5000 Index. Typically, the Portfolio invests in
approximately 1,700 stocks. Stocks are selected for inclusion
in the Portfolio based primarily on market capitalization and
industry weightings. The Portfolio is constructed to have
aggregate investment characteristics similar to those of the
Wilshire 5000 Index.
The SMALL CAPITALIZATION STOCK PORTFOLIO invests in a
statistically selected sample of the approximately 2,000
stocks included in the 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, 1994, the S&P/BARRA Value Index included 318 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, 1994, the S&P/BARRA Growth Index included 182 of
the stocks that make up the S&P 500 Index, and 50% of the
total market value of the Index.
ALL SIX PORTFOLIOS
ATTEMPT TO REMAIN
FULLY INVESTED Each Portfolio attempts to remain fully invested in common
stocks. Under normal circumstances each Portfolio will invest
at least 95% of its assets in the common stocks of its
respective index and futures contracts and options. Each
Portfolio may invest in certain short-term fixed income
securities as cash reserves, although cash or cash
equivalents are normally expected to represent less than 1%
of each Portfolio's assets. Each Portfolio may also invest up
to 20% of its assets in stock futures contracts and options
in order to invest uncommitted cash balances, to maintain
liquidity to meet shareholder redemptions, or to minimize
trading costs. The Portfolios will not invest in cash
reserves, futures contracts or options as part of a temporary
defensive strategy, such as lowering a Portfolio's investment
in common stocks to protect against potential stock market
declines. The Portfolios intend to remain fully invested, to
the extent practicable, in a pool of securities which will
duplicate the investment characteristics of their respective
indexes. See "Implementation of Policies" for a description
of these and other investment practices of the Trust.
- --------------------------------------------------------------------------------
15
<PAGE> 85
INTERNATIONAL
EQUITY INDEX FUND
EACH PORTFOLIO
INVESTS IN
INTERNATIONAL STOCKS
Each of the three Portfolios invest in statistically selected
samples of the stocks included in each of their respective
indexes. This sampling technique is expected to enable each
portfolio to track the price movements of its respective
index, while minimizing the brokerage, custodial, and
accounting costs.
The EUROPEAN PORTFOLIO invests in a statistically selected
sample of approximately 545 stocks included in the
MSCI-Europe (Free) Index, an index of equity securities of
companies located in fourteen European countries. Three
countries, the United Kingdom, Germany and France, dominate
MSCI-Europe (Free), with 35%, 14%, and 13% of the market
capitalization of the Index, respectively, as of December 31,
1994. The 11 other countries are individually much less
significant to the Index and, consequently, the Portfolio.
The "Free" Index includes only shares that U.S. investors are
"free" to purchase.
The PACIFIC PORTFOLIO invests in a statistically selected
sample of the more than 440 stocks included in the
MSCI-Pacific (Free) Index, an index of equity securities of
Pacific Basin companies. The MSCI-Pacific (Free) Index is
dominated by the Japanese stock market, which represented 83%
of the market capitalization of the Index as of December 31,
1994.
The European and Pacific Portfolios are each expected to
invest in approximately 250 stocks or more. Stocks are
selected for inclusion in each Portfolio based on country,
market capitalization, industry weightings, and fundamental
characteristics such as return variability, earnings
valuation, and yield. Each of the two Portfolios is
constructed to have aggregate investment characteristics
similar to those of its respective index. In order to
parallel the performance of its respective index, each
Portfolio will invest in each country in approximately the
same percentage as the country's weight in the index.
Each of the two Portfolio's policy is to remain fully
invested in common stocks. Under normal circumstances at
least 80% of the assets of each Portfolio will be invested
in stocks that are represented in its respective index. Each
Portfolio may invest in certain short-term fixed income
securities such as cash reserves, although cash or cash
equivalents are normally expected to represent less than 1%
of each Portfolio's assets. Each Portfolio may also invest
up to 50% of its assets in stock futures contracts, options,
and warrants in order to invest uncommitted cash balances,
maintain liquidity to meet shareholder redemptions, or
minimize trading costs. Any investment in futures contracts,
options, warrants, convertible securities or swap agreements
over 20% of each Portfolio's assets would be made in
emergency situations, for short-term purposes.
The European and Pacific Portfolios will not invest in cash
reserves, futures contracts, options or warrants as part of a
temporary defensive strategy, such as lowering a Portfolio's
investment in common stocks, to protect against potential
stock market declines. The Portfolios intend to remain fully
invested, to the extent practicable, in a pool of securities
which will approximate the investment characteristics of
their respective indexes. The Portfolios may also enter into
forward foreign currency exchange contracts in order to
maintain the same currency exposure as their respective
indexes, but not as part of a defensive strategy to protect
against fluctuations in exchange rates.
The EMERGING MARKETS PORTFOLIO invests in a statistically
selected sample of approximately 300 stocks included in the
MSCI-Select Emerging Markets Free Index, an index of equity
securities of companies located in the countries of 12
emerging markets. Three countries, Malaysia, Brazil and Hong
Kong represent a majority of the MSCI-Select Emerging Markets
Free Index, with 19%, 18% and 13% of the market
capitalization of the Index, respectively, as of December 31,
1994.
The Index includes only shares that U.S. investors are "free"
or allowed by law, to purchase and sell and that have
sufficient trading liquidity.
The Portfolio is expected to invest in approximately 300
stocks. Stocks are selected for inclusion in the Portfolio in
order to form a statistically representative sample
corresponding to the MSCI-Select Emerging Markets Free Index.
The Portfolio is constructed to have aggregate investment
16
<PAGE> 86
characteristics (based on country, market capitalization and
industry weightings), fundamental characteristics (such as
return variability, earnings valuation and yield) and
liquidity measures, similar to those of its Index.
The Portfolio's policy is to remain 95% invested in common
stocks. The remaining 5% of the Portfolio will be invested in
cash reserves in order to maintain a higher degree of
portfolio liquidity to meet daily redemption requests.
Under normal circumstances at least 80% of the assets of the
Portfolio will be invested in stocks that are represented in
the Index and futures contracts and options thereon. The
Portfolio may also invest up to 50% of its assets in stock
futures contracts, options, warrants, convertible securities
or swap agreements in order to invest uncommitted cash
balances, maintain liquidity to meet shareholder redemptions,
or minimize trading costs. Any investment in futures
contracts, options, warrants, convertible securities or swap
agreements over 20% of the Portfolio's assets would be made
in emergency situations, for short-term purposes.
See "Implementation of Policies" for a description of these
and other investment practices of the Portfolios.
- --------------------------------------------------------------------------------
INVESTMENT
RISKS
EACH PORTFOLIO IS
SUBJECT TO MARKET RISK
As mutual funds investing primarily in common stocks,
Vanguard Balanced Index Fund and the Portfolios of Vanguard
Index Trust and Vanguard International Equity Index Fund are
subject to market risk--i.e., the possibility that common
stock prices will decline over short or even extended
periods. Both U.S. and foreign stock markets tend to be
cyclical, with periods when stock prices generally rise and
periods when prices generally decline.
Common stocks, as measured by the S&P 500 Index, have
provided annual total returns (capital appreciation plus
dividend income), averaging +10.7% for all 10-year periods
from 1926 to 1994. Average return may not be useful for
forecasting future returns in any particular period, as stock
returns are quite volatile from year to year.
- --------------------------------------------------------------------------------
INDEX TRUST
THE EXTENDED MARKET,
TOTAL STOCK MARKET
AND SMALL
CAPITALIZATION STOCK
PORTFOLIOS MAY
EXHIBIT GREATER
VOLATILITY Historically, medium- and small-capitalization stocks have
been more volatile in price than the larger-capitalization
stocks included in the S&P 500 Index. Among the reasons for
the greater price volatility of these securities are the less
certain growth prospects of smaller firms, the lower degree
of liquidity in the markets for such stocks, and the greater
sensitivity of medium- and small-size companies to changing
economic conditions. Besides exhibiting greater volatility,
medium- and small-size company stocks may, to a degree,
fluctuate independently of larger company stocks. Medium- and
small-size company stocks may decline in price as large
company stocks rise, or rise in price as large company stocks
decline. Medium- and small-size company stocks constitute the
investments of the Extended Market Portfolio while the Small
Capitalization Stock Portfolio is composed primarily of
small-size company stocks. Investors in the Portfolios should
therefore expect that the Extended Market and Small
Capitalization Stock Portfolios will be more volatile than,
and may fluctuate independently of, the 500 Portfolio.
Similarly, medium- and small-size company stocks constituted
approximately 31% of the net assets of the Total Stock Market
Portfolio on December 31, 1994. 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
17
<PAGE> 87
volatility than the S&P 500 Index from 1975 through 1994.
However, as stated above, both Indexes may be more volatile
than the S&P 500 Index over short or extended periods. The
Indexes have been in existence since May, 1992. Historical
performance data was generated by BARRA by constructing the
S&P/BARRA Value and Growth Indexes from actual S&P 500 Index
holdings.
- --------------------------------------------------------------------------------
INTERNATIONAL
EQUITY INDEX FUND
INTERNATIONAL STOCKS
MAY EXHIBIT GREATER
VOLATILITY THAN
U.S. STOCKS Investments in foreign stock markets can be as volatile, if
not more volatile, than investments in U.S. markets.
The MSCI-Europe Index has provided annual total returns,
averaging +14.2% for all 10-year periods from 1970-1994, and
the MSCI-Pacific Index has provided annual total returns,
averaging +18.0% during the same periods. By comparison, the
average annual total return of U.S. stocks during this same
period was +10.7% (as measured by the Standard & Poor's 500
Composite Stock Price Index). Note, however, that the period
from 1970 to 1994 was a very favorable one for foreign stock
market investing. The figures on total return and stock
market volatility are provided here only as a guide to
potential market risk, and may not be useful for forecasting
future returns in any particular period.
THE JAPANESE STOCK
MARKET IS A MAJOR
COMPONENT OF THE
PACIFIC INDEX Investors should realize that Japanese securities comprised
83% of the MSCI-Pacific Index as of December 31, 1994, and
that therefore stocks of Japanese companies will represent a
correspondingly large component of the Pacific Portfolio's
investment assets. Such a large investment in the Japanese
stock market may entail a higher degree of risk than with
more diversified international portfolios, especially
considering that by fundamental measures of corporate
valuation, such as its high price-earnings ratios and low
dividend yields, the Japanese market as a whole may appear
expensive relative to other world stock markets.
STOCKS FROM THREE
COUNTRIES DOMINATE
THE EUROPE (FREE)
INDEX Stocks from the United Kingdom, Germany and France comprised
35%, 14% and 13% of the MSCI-Europe (Free) Index,
respectively, as of December 31, 1994. The remaining 11
countries in the MSCI-Europe (Free) Index have much less
significant capitalization weightings in the Index and will
therefore have much less impact on the total return of the
Index and the European Portfolio.
EMERGING MARKETS
MAY EXHIBIT GREATER
VOLATILITY THAN
DEVELOPED MARKETS Emerging markets, such as those invested in by the Emerging
Markets Portfolio, are associated with substantial investment
risks. These risks include market volatility, investment
illiquidity, currency risk, political instability and
unexpected changes in economic policy including capital
controls, expropriation, taxes and hyper-inflation.
Investors should be aware that emerging markets can be
substantially more volatile than both U.S. and more developed
foreign markets. For example, from 1989-1994, the average
positive monthly return for the Wilshire 5000 Index, a broad
measure of the U.S. equity market was +2.9%. The average
negative monthly return for the Wilshire 5000 Index was
-2.7%. In contrast, from 1989-1994, the average positive
monthly return of the Morgan Stanley Capital International
Emerging Markets Free Index, a widely quoted emerging market
benchmark, was +5.3%; while the average negative monthly
return was -5.3%.
INVESTMENT ILLIQUIDITY
RISK Volatility in emerging markets may be exacerbated by
illiquidity. Average daily trading volume in all of the
emerging markets combined is a small fraction of the average
daily volume of the U.S. market. Small trading volumes may
result in investors being forced to purchase securities at
substantially higher prices than the current market, or sell
securities at much lower prices than the current market.
18
<PAGE> 88
INTERNATIONAL STOCKS
ALSO EXPOSE INVESTORS
TO CURRENCY AND OTHER
RISKS For U.S investors, the returns of foreign investments, such
as those held by the three Portfolios are influenced by not
only the returns on foreign common stocks themselves, but
also by the returns on the currencies in which the stocks
are denominated. Currency risk is the risk that changes in
foreign exchange rates will affect, favorably or
unfavorably, the value of foreign securities held by a
Portfolio. In a period when the U.S. dollar generally rises
against foreign currencies, the returns on foreign stocks
for a U.S. investor will be diminished. By contrast, in a
period when the U.S. dollar generally declines, the returns
on foreign stocks will be enhanced. Currency risk in
emerging markets may be exacerbated by unexpected exchange
rate devaluations.
Other risks and considerations of international investing
include: differences in accounting, auditing and financial
reporting standards; generally higher transaction costs on
foreign portfolio transactions; small trading volumes and
generally lower liquidity of foreign stock markets, which may
result in greater price volatility; foreign withholding taxes
payable on a Portfolio's foreign securities, which may reduce
dividend income payable to shareholders; the possibility of
expropriation or confiscatory taxation; adverse change in
investment or exchange control regulations; difficulty in
obtaining a judgement from a foreign court; political
instability which could affect U.S. investment in foreign
countries; and potential restriction on the flow of
international capital.
- --------------------------------------------------------------------------------
BOND INDEX FUND
THE PORTFOLIOS ARE
SUBJECT TO INTEREST
RATE RISK INTEREST RATE RISK is the potential for fluctuations in bond
prices due to changing interest rates. As a rule, bond prices
vary inversely with interest rates. If interest rates rise,
bond prices generally decline; if interest rates fall, bond
prices generally rise. In addition, for a given change in
interest rates, longer-maturity bonds fluctuate more in price
than shorter-maturity bonds. To compensate investors for
these larger fluctuations, longer-maturity bonds usually
offer higher yields than shorter-maturity bonds, other
factors, including credit quality, being equal.
These basic principles of bond prices also apply to U.S.
Government securities. A security backed by the "full faith
and credit" of the U.S. Government is guaranteed only as to
its stated interest rate and face value at maturity, not its
current market price. Just like other fixed-income
securities, government-guaranteed securities will fluctuate
in value when interest rates change.
The TOTAL BOND MARKET and INTERMEDIATE-TERM BOND PORTFOLIOS
maintain an intermediate-term average weighted maturity, and
are therefore subject to a moderate to high level of interest
rate risk. Interest rate risk for the SHORT-TERM BOND
PORTFOLIO should be modest. Because of the short-term average
weighted maturities, the Portfolio is expected to exhibit low
to moderate price fluctuations as interest rates change. The
LONG-TERM BOND PORTFOLIO is exposed to substantial interest
rate risk. The Portfolio is expected to have an average
maturity in excess of 15 years which exposes it to high to
very high price fluctuations due to changing interest rates.
THE PORTFOLIOS ARE
SUBJECT TO INCOME RISK
INCOME RISK is the potential for a decline in a Portfolio's
income due to falling market interest rates. In relative
terms, income risk will be higher for the Fund's shorter-term
Portfolios and lower for the Fund's longer-term Portfolios.
THE LONG-TERM BOND
PORTFOLIO IS SUBJECT TO
CALL RISK An additional risk associated with long-term corporate bonds
is call risk. CALL RISK is the possibility that corporate
bonds held by the Portfolio will be repaid prior to maturity.
Call provisions, common in many corporate bonds, allow bond
issuers to redeem bonds prior to maturity (at a specific
price). When interest rates are falling, bond issuers often
exercise these call provisions, paying off bonds that carry
high stated interest rates and often issuing new bonds at
lower rates. For the Portfolio, the result would be that
bonds with high interest rates are "called" and must be
replaced with lower-yielding instruments. In these
circumstances, the income of the Portfolio would decline.
Reflecting these additional credit and call risks, the
corporate portion of the portfolio will generally offer
higher yields than the government portion.
19
<PAGE> 89
THE TOTAL BOND
MARKET PORTFOLIO IS
SUBJECT TO
PREPAYMENT RISK As a mutual fund investing a portion of its assets in
mortgage-backed securities (see chart on page 13), the Total
Bond Market Portfolio is subject to prepayment risk to a
limited extent. PREPAYMENT RISK is the possibility that,
during periods of declining interest rates, the principal
invested in high-yielding mortgage-backed securities will be
repaid earlier than scheduled, and the Fund will be forced to
reinvest the unanticipated payments at generally lower
interest rates.
Prepayment risk has two important effects on the Portfolio.
First, when interest rates fall and principal prepayments are
reinvested at lower interest rates, the income that the
Portfolio derives from mortgage-backed securities is reduced.
Second, like other fixed-income securities, mortgage-backed
securities generally decline in price when interest rates
rise. However, because of prepayment risk, mortgage-backed
securities (and thus in part the share price of the Portfolio
and the value of the Index) will not enjoy as large a gain in
market value as ordinary bonds when interest rates fall. In
part to compensate for prepayment risk, mortgage-backed
securities generally offer higher yields than bonds of
comparable credit quality and maturity.
CREDIT RISK IS EXPECTED
TO BE LOW CREDIT RISK is the possibility that an issuer of securities
held by a Portfolio will be unable to make payments of either
interest or principal. The credit risk of a Portfolio is a
function of the credit quality of its underlying securities.
The credit quality of each Portfolio is expected to be very
high, and thus credit risk should be low. As of December 31,
1994, the average quality, as rated by Moody's Investors
Service, Inc., of each Portfolio's benchmark index was as
follows:
<TABLE>
<S> <C>
Aggregate Bond Index.................................................... AAA
Short-Term Bond Index................................................... AAA
Intermediate-Term Bond Index............................................ AA2
Long-Term Bond Index.................................................... AA1
</TABLE>
To a limited extent, the Portfolios are also exposed to event
risk, the possibility that corporate fixed-income securities
held by the Portfolios may suffer a substantial decline in
credit quality and market value due to a corporate
restructuring. Corporate restructurings, such as mergers,
leveraged buyouts, takeovers or similar events, are often
financed by a significant expansion of corporate debt. As a
result of the added debt burden, the credit quality and
market value of a firm's existing debt securities may decline
significantly. While event risk may be high for certain
corporate and international (dollar-denominated) securities
held by the Portfolios, event risk for each Portfolio in the
aggregate should be low because of each Portfolios
diversified holdings and the small percentage of the
Portfolio assets invested in these securities.
The corporate substitution strategy used by the Fund (see
discussion on page 13) will increase credit risk somewhat, as
short-term investment grade corporate bonds are substituted
for U.S. Treasury bonds and notes; however, owing to the
diversified nature of the Portfolios, and policies limiting
the maturity and maximum amount of substitutions, the overall
credit and event risk of the Portfolio is expected to be low.
NO CURRENCY RISK IN
ANY PORTFOLIO While each of the chosen Lehman Index benchmarks do have
limited exposure to international bonds, there is no
currency risk associated with the investments since they are
all dollar-denominated.
- --------------------------------------------------------------------------------
WHO SHOULD
INVEST The Funds offer investors the advantage of a "passive"
approach to investing. These include low investment costs,
exceptional diversification among a wide range of stocks and
bonds, minimal portfolio turnover, and relative
predictability. Unlike other mutual funds, which generally
attempt to "beat" market averages with often unpredictable
results, the Portfolios of the Funds seek to "match" the
performance of their underlying indexes and thus are expected
to provide a highly predictable return relative to these
benchmarks.
However, shareholders should expect to be fully exposed to
the market risks inherent in investing in stocks and bonds.
As the prices of stocks and bonds may be volatile, only
investors able to tolerate
20
<PAGE> 90
short-term, possibly substantial fluctuations in the value of
their investment, brought about by generally declining stock
or bond prices, should contemplate an investment in the
Funds.
Investors may wish to reduce the potential risk of investing
in a Portfolio by purchasing shares on a regular, periodic
basis (dollar-cost averaging) rather than making an
investment in one lump sum.
The Funds are intended to be a long-term investment vehicle
and not designed to provide investors with a means of
speculating on short-term market movements. Investors who
engage in excessive account activity generate additional
costs which are borne by all shareholders. In order to
minimize such costs the Funds have adopted the following
policies. The Funds reserve the right to reject any purchase
request (including exchange purchases from other Vanguard
portfolios) that is reasonably deemed to be disruptive to
efficient portfolio management, either because of the timing
of the investment or previous excessive trading by the
investor. Additionally, the Funds have adopted exchange
privilege limitations as described in the section "Exchange
Privilege Limitations." Finally, the Funds reserve the right
to suspend the offering of their shares.
Investors should not consider an investment in any one Fund a
complete investment program, but should maintain holdings of
securities with different risk characteristics -- including
common stocks, bonds and money market instruments.
- --------------------------------------------------------------------------------
BOND INDEX FUND
INVESTORS SEEKING TO
PARTICIPATE IN THE
"BOND MARKET" AS A
WHOLE OR ITS VARIOUS
MATURITY SEGMENTS The Portfolios are designed for individual and institutional
investors seeking well-diversified, low-cost ways to
participate in the U.S. fixed-income markets. The Portfolios
will be essentially fully invested at all times. Because the
Total Bond Market Portfolio will represent all major sectors
of the investment grade fixed-income securities market, the
Portfolio is a suitable vehicle for those investors seeking
ownership in the "bond market" as a whole, without regard to
particular sectors. The Short-Term Bond, Intermediate-Term
Bond and Long-Term Bond Portfolios are suitable vehicles for
those investors seeking ownership in specific maturity
segments of the "bond market." Each Portfolio concentrates on
bonds of various maturities as illustrated in the chart on
page 13. Because of the risks associated with bond
investments, each Portfolio is intended to be a long-term
investment vehicle and is not designed to provide investors
with a means of speculating on short-term bond market
movements.
As with all longer-term, fixed-income investments, the share
price of the Total Bond Market, Intermediate-Term Bond and
Long-Term Bond Portfolios will vary, with the Long-Term Bond
Portfolio expected to exhibit the greatest volatility. Share
price volatility should be significantly less for the
Short-Term Bond Portfolio. Credit risk should be minimal for
each Portfolio. The investment risks are described on page
19.
The Portfolios are also suitable for those investors with
common stock holdings who are seeking a complementary
fixed-income investment to create a more balanced asset mix.
Because of potential share price fluctuations, the Portfolios
may be inappropriate for investors who have short-term
objectives or who require stability of principal.
- --------------------------------------------------------------------------------
BALANCED INDEX
FUND
INVESTORS SEEKING A
BALANCE BETWEEN
CURRENT INCOME AND
CAPITAL GROWTH The Fund is designed for conservative investors seeking a
long-term investment offering both current income and the
potential for capital growth. By balancing its investments
among common stocks and bonds, the Fund is expected to
provide lower investment risk and share price volatility than
a mutual fund which invests exclusively in common stocks. The
balanced investment approach of the Fund tends to reduce
exposure to stock and bond market risks; it does not
eliminate them. The Fund is thus suitable for investors who
wish to gain exposure to the potential capital growth
provided by the stock market, while limiting investment risk.
Such a balanced investment program might be particularly
well-suited to long-term investment objectives such as
retirement savings.
- --------------------------------------------------------------------------------
21
<PAGE> 91
INDEX TRUST
LONG-TERM INVESTORS
SEEKING A "PASSIVE"
APPROACH FOR INVESTING
IN COMMON STOCKS All six Portfolios of the Trust are designed for long-term
investors seeking the advantages of investing in a
diversified portfolio of common stocks.
Four Portfolios of the Trust provide a vehicle for investing
in a broad market index:
- The 500 PORTFOLIO is designed for investors seeking to
replicate the total return of the S&P 500 Index, an index
emphasizing large capitalization common stocks.
- The EXTENDED MARKET PORTFOLIO is designed for investors
seeking to replicate the total return of the Wilshire 4500
Index, an index consisting of small- and
medium-capitalization companies.
- The TOTAL STOCK MARKET PORTFOLIO is designed for investors
seeking to replicate the total return of the Wilshire 5000
Index, an index consisting of all U.S. stocks that trade on
a regular basis on either the New York or American Stock
Exchange or the NASDAQ over-the-counter market. The Total
Stock Market Portfolio will therefore reflect the
performance of the entire U.S. stock market.
- The SMALL CAPITALIZATION STOCK PORTFOLIO is designed for
investors seeking to replicate the total return of the
Russell 2000 Small Stock Index, an index consisting of
approximately 2,000 small-capitalization stocks.
Two Portfolios are designed for investors seeking to
emphasize certain investment characteristics while continuing
to utilize a "passive" investment approach:
- The VALUE PORTFOLIO is designed for investors seeking to
replicate the total return of the S&P/BARRA Value Index, an
index consisting of companies of the S&P 500 Index with
lower than average market price to book value ratios. Such
a "value-oriented" Portfolio may be appropriate for more
conservative stock market investors who are seeking higher
dividend income and somewhat below average stock market
volatility.
- The GROWTH PORTFOLIO is designed for investors seeking to
replicate the total return of the S&P/BARRA Growth Index,
an index consisting of companies of the S&P 500 Index with
higher than average market price to book value ratios. Such
a "growth-oriented" Portfolio may be appropriate for
investors who have little need for current dividend income
and who can tolerate somewhat above average stock market
volatility.
Taken together in appropriate proportions, the Value and
Growth Portfolios are expected to approximate the total
returns achieved by the 500 Portfolio.
- --------------------------------------------------------------------------------
INTERNATIONAL
EQUITY INDEX FUND
LONG-TERM INVESTORS
SEEKING TO INVEST
IN INTERNATIONAL
COMMON STOCKS The Portfolios are designed for investors who seek a low-cost
"passive" approach for investing in a broadly diversified
portfolio of international common stocks. Unlike other equity
mutual funds, which generally seek to "beat" market averages
with often unpredictable results, the Portfolios of the Fund
seek to "match" their respective indexes and thus are
expected to provide a predictable return relative to their
respective benchmarks. In particular, the European Portfolio
is designed for investors seeking to approximate the total
investment results (before fund expenses and withholding
taxes) of the MSCI-Europe (Free) Index, a diversified index
of European common stocks. The Pacific Portfolio is designed
for investors seeking to approximate the total investment
results (before fund expenses and withholding taxes) of the
MSCI-Pacific (Free) Index, a diversified index of Pacific
Basin common stocks.
The European and Pacific Portfolios are also suitable for
investors seeking to create a portfolio which parallels the
performance of the MSCI-EAFE (Free) Index, a broadly
diversified index consisting of over 1,000 international
equity securities. By investing in the two portfolios in the
appropriate percentages (55% in the Pacific Portfolio and 45%
in the European Portfolio as of December 31, 1994), a
portfolio approximating the investment characteristics of
EAFE (Free) may be created.
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<PAGE> 92
The Emerging Markets Portfolio is designed for investors
seeking to approximate the total investment results (before
fund expenses and withholding taxes) of the MSCI-Select
Emerging Markets Free Index, a diversified index of common
stocks of emerging market countries.
- --------------------------------------------------------------------------------
IMPLEMENTATION
OF POLICIES The Portfolios follow a variety of investment practices in an
effort to duplicate the total return of their respective
indexes.
- --------------------------------------------------------------------------------
BOND INDEX FUND
THE PORTFOLIOS INVEST
IN FIXED INCOME
SECURITIES Each Portfolio will invest at least 80% or more of its assets
in securities included in its benchmark Index. The Indexes
measure the total investment return (capital change plus
income) provided by a universe of fixed-income securities,
weighted by the market value outstanding of each security.
The securities included in each Index generally meet the
following criteria, as defined by Lehman Brothers: an
outstanding market value of at least $100 million; and
investment grade quality -- i.e., rated a minimum of Baa by
Moody's Investors Service, Inc. or BBB by Standard & Poor's
Corporation. The maturities of securities included in each
index will vary as described on page 13.
THE PORTFOLIOS USE A
"SAMPLING" TECHNIQUE
The Portfolios will be unable to hold all of the individual
issues which comprise the Indexes because of the large number
of securities involved. Instead, each Portfolio will hold a
representative sample of the securities in its respective
Index, selecting one or two issues to represent entire
"classes" or types of securities in the Index. Each Portfolio
will be constructed so as to match the composition of its
benchmark index as described below.
At the broadest level, each Portfolio will seek to hold
securities which reflect the weighting of the major asset
classes in its respective index. For the Total Bond Market
Portfolio, these classes include U.S. Treasury and agency
securities, corporate bonds, and mortgage-backed securities.
For the Short-Term Bond, Intermediate-Term Bond and Long-Term
Bond Portfolios, the two major classes of securities include
U.S. Treasury and agency securities and corporate bonds.
Such a sampling technique is expected to be an effective
means of substantially duplicating the income and capital
returns provided by each Index. Over time, the correlation
between the performance of the Fund and the Index is expected
to be 0.95 or higher. A correlation of 1.00 would indicate
perfect correlation, which would be achieved when the net
asset value of a Portfolio, including the value of its
dividend and capital gain distributions, increases or
decreases in exact proportion to changes in the Index.
Because the Portfolios of the Fund incur operating expenses,
as opposed to their respective indexes, which do not, a
perfect correlation of 1.00 is unlikely to be achieved.
THE TOTAL BOND
MARKET PORTFOLIO MAY
INVEST IN MORTGAGE-
BACKED SECURITIES As part of its effort to duplicate the investment performance
of its Index, the Total Bond Market Portfolio may invest in
mortgage-backed securities. Mortgage-backed securities
represent an interest in an underlying pool of mortgages.
Unlike ordinary fixed-income securities, which generally pay
a fixed rate of interest and return principal upon maturity,
mortgage-backed securities repay both interest income and
principal as part of their periodic payments. Because the
mortgages underlying mortgage-backed certificates can be
prepaid at any time by homeowners or corporate borrowers,
mortgage-backed securities give rise to certain unique
"prepayment" risks. See "Investment Risks."
The Total Bond Market Portfolio may purchase mortgage-backed
securities issued by the Government National Mortgage
Association (GNMA), the Federal Home Loan Mortgage
Corporation (FHLMC), the Federal National Mortgage
Association (FNMA), and the Federal Housing Authority (FHA).
GNMA securities are guaranteed by the U.S. Government as to
the timely payment of principal and interest; securities from
other Government-sponsored entities are generally not secured
by an explicit pledge of the U.S. Government. The Portfolio
may also invest in conventional mortgage securities, which
are packaged by private corporations and are not guaranteed
by the U.S. Government. Mortgage securities that are
guaranteed by the U.S. Government are guaranteed only as to
the timely payment of principal and interest. The market
value of such securities is not guaranteed and may fluctuate.
- --------------------------------------------------------------------------------
23
<PAGE> 93
BALANCED INDEX
FUND
THE FUND INVESTS IN
A SAMPLE OF ALL U.S.
COMMON STOCKS The Fund's common stock investments will be selected from
securities included in the Wilshire 5000, an index of all
regularly and publicly traded U.S. common stocks that trade
on the New York and American Stock Exchanges and in the
NASDAQ over-the-counter market. Approximately 6,000 stocks,
including large-, medium-, and small-capitalization
companies, are included in the Wilshire 5000, which serves as
a proxy for the complete U.S. stock market.
Under normal circumstances, the Fund will invest 60% of its
net assets in common stocks included in the Wilshire 5000. In
an effort to replicate the investment performance of the
Wilshire 5000, the Fund's common stock holdings will include
approximately 500 of the largest market capitalization stocks
in the Index and an additional representative sample of the
remaining stocks. The high transaction costs and illiquidity
of many of the smaller stocks in the Wilshire 5000 make
complete replication of the Index's holding impractical.
COMMON STOCKS ARE
SELECTED USING
OPTIMIZATION
TECHNIQUES ("PORTFOLIO
OPTIMIZATION") The stocks of the Wilshire 5000 included in the Fund are
selected using a statistical technique known as
"optimization." This process selects stocks for the Fund so
that various industry weightings, market capitalizations, and
fundamental characteristics (e.g., price-to-book, price-to-
earnings, and debt-to-asset ratios, as well as dividend
yields) match those of the Wilshire 5000. For instance, if
10% of the capitalization of the Wilshire 5000 consists of
utility companies with relatively large market
capitalizations, then the Fund's stock holdings are
constructed so that approximately 10% of the Fund's stocks
represent utilities with relatively large capitalizations.
The Fund is not sponsored, endorsed, sold or promoted by
Wilshire Associates. Wilshire(R) and Wilshire 5000(R) are
registered service marks of Wilshire Associates.
THE FUND INVESTS IN A
SAMPLE OF ALL U.S.
INVESTMENT GRADE DEBT
Under normal circumstances, the Fund will invest 40% of its
net assets in fixed income securities included in the Lehman
Brothers Index, an index of U.S. investment-grade,
fixed-income securities. More than 4,500 individual bond
issues, including U.S. Treasury and Government agency
securities, corporate debt obligations, and mortgage-backed
securities are included in the Lehman Brothers Index.
The securities included in the Lehman Brothers Index in which
the Fund may invest generally meet the following criteria, as
defined by Lehman Brothers: an effective maturity of not less
than one year; an outstanding market value of at least $50
million; investment grade quality--i.e., rated a minimum of
Baa by Moody's Investors Service, Inc. or BBB by Standard &
Poor's Corporation; and general availability in the
marketplace. If a security held in the Fund's portfolio is
downgraded to a rating below these minimum standards, the
Fund may continue to hold it until such time as the adviser
deems it most advantageous to dispose of the security.
BONDS ARE SELECTED
USING A STRATIFIED
SAMPLING TECHNIQUE The large number of issues in the Index makes it impractical
for the Fund to hold all of the individual issues which
comprise the Index. Instead, the Fund will attempt to
replicate the investment performance of the Lehman Brothers
Index by holding a representative sample of the securities in
the Index. In choosing a representative sample of bond
investments from the Lehman Brothers Index, the Fund utilizes
a "stratified sampling" technique, which means that, the Fund
will select one or two individual bond issues to represent
entire "classes" or types of fixed-income investments in the
Index.
At the broadest level, the Fund will seek to hold securities
reflecting the three major classes of fixed-income
investments in the Lehman Brothers Index -- U.S. Treasury and
Government agency securities, corporate debt obligations, and
mortgage-backed securities. For example, if corporate debt
obligations represent 25% of the Index, then 25% of the
Fund's bond holdings will also be invested in such
securities. As the Fund's assets grow, these classes of
investments will be further delineated along the lines of
sector, term to maturity, coupon, and credit rating. For
example, within the corporate debt class, all long-term, low
coupon AA-rated utility bonds might be represented in the
Fund by one or two individual utility securities, which would
result in less diversification and greater security specific
risk in the Fund compared to the Index.
24
<PAGE> 94
The Lehman Brothers Index is a trademark of Lehman Brothers,
Inc. Inclusion of a security in the Index in no way implies
an opinion by Lehman Brothers, Inc. as to the attractiveness
or appropriateness of a security as an investment. Lehman
Brothers, Inc. is neither a sponsor of nor in any way
affiliated with the Fund.
THE FUND'S RETURNS
SHOULD BE CLOSELY
CORRELATED WITH ITS
UNDERLYING INDEXES The sampling techniques utilized by the Fund are expected to
be an effective means of substantially duplicating the
investment performance (dividend income plus capital change)
of the Fund's underlying indexes: the Wilshire 5000 (for the
60% of net assets invested in common stocks) and the Lehman
Brothers Index (for the 40% of net assets invested in bonds).
The correlation between the performance of the Fund's stock
and bond investments and the Wilshire 5000 and Lehman
Brothers Indexes, respectively, is expected to be at least
0.95.
Due to the use of sampling techniques, however, neither the
stock nor bond holdings of the Fund are expected to track
their target benchmarks with the degree of accuracy that
complete replication of the indexes would have provided. The
principal advantage of this sampling approach is to provide
an efficient means of investing in a large universe of stocks
and bonds. In particular, the Fund is expected to provide
exceptionally broad diversification, and should operate at
low costs due to both its "passive" approach to portfolio
management and expected low portfolio turnover rate.
- --------------------------------------------------------------------------------
INDEX TRUST
THE 500 PORTFOLIO
INVESTS IN ALL 500 S&P
STOCKS The 500 Portfolio attempts to duplicate the investment
results of the S&P 500 Index by holding all 500 stocks in
approximately the same proportions as they are represented in
the Index. This indexing technique is known as "complete
replication."
The S&P 500 Index is composed of 500 common stocks, which are
chosen by Standard & Poor's Corporation on a statistical
basis to be included in the Index. The inclusion of a stock
in the S&P 500 Index in no way implies that Standard & Poor's
Corporation believes the stock to be an attractive
investment. The 500 securities, most of which trade on the
New York Stock Exchange, represented, as of December 31,
1994, approximately 69% 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 46% 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, 1994, the
five largest companies in the Index were: General Electric
(2.6%), American Telephone and Telegraph (2.4%), Exxon
Corporation (2.3%), Coca-Cola (2.0%), and Royal Dutch
Petroleum (1.7%). The largest industry categories were:
telephone companies (8.5%), international oil companies
(6.3%), pharmaceutical companies (5.3%), banks (5.3%), and
electric power (4.0%).
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 31% of
the capitalization of the U.S. stock market. The Wilshire
4500 Index consists of all U.S. stocks that are not in the
S&P 500 Index and that trade regularly on the New York and
American Stock Exchanges as well as in the NASDAQ
over-the-counter market. More than 5,000 stocks of medium-
and small-capitalization companies are included in the
Wilshire 4500 Index.
The Extended Market Portfolio will be unable to hold all of
the more than 5,000 issues which comprise the Wilshire 4500
Index because of the costs involved and the illiquidity of
many of the securities. Instead, the Portfolio will hold a
representative sample of the securities in the Wilshire 4500
Index.
THE TOTAL STOCK
MARKET PORTFOLIO
INVESTS IN A SAMPLE OF
ALL U.S. STOCKS Neither the S&P 500 Index nor the Wilshire 4500 Index
independently represents the U.S. stock market as a whole.
The Wilshire 5000 Index, which consists of all regularly and
publicly traded U.S. stocks, provides a complete proxy for
the U.S. stock market. More than 6,000 stocks, including
large-, medium-, and small-capitalization companies are
included in the Wilshire 5000 Index.
In an effort to replicate the investment performance of the
Wilshire 5000 Index, the Total Stock Market Portfolio will
invest in approximately 1,000 of the largest stocks in the
index and an
25
<PAGE> 95
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 December 31,
1994, the average stock market capitalization of the Russell
2000 was $211 million. As in the case of the Extended Market
Portfolio, the high transaction costs and illiquidity of many
of the small stocks contained in the Russell 2000 Index make
complete replication of the holdings impractical.
The Portfolio is neither sponsored by nor affiliated with the
Frank Russell Company. Frank Russell's only relationship to
the Portfolio is the licensing of the use of the Russell 2000
Small Stock Index. Frank Russell Company is the owner of the
trademarks and copyrights relating to the Russell indexes.
THE EXTENDED MARKET,
TOTAL STOCK MARKET
AND SMALL
CAPITALIZATION
STOCK PORTFOLIOS
USE SAMPLING
TECHNIQUES The stocks of the Wilshire 4500 Index to be included in the
Extended Market, Total Stock Market and Small Capitalization
Stock Portfolios will be selected utilizing a statistical
sampling technique known as "optimization."
This sampling technique, which is described on page 23, is
expected to be an effective means of substantially
duplicating the income and capital returns of the Extended
Market, Total Stock Market and Small Capitalization Stock
Portfolios' target benchmarks. Over time, the correlation
between the performance of the Extended Market, Total Stock
Market and Small Capitalization Stock Portfolios and their
respective indexes, the Wilshire 4500 Index, Wilshire 5000
Index and Russell 2000 Index, is expected to be at least
0.95. A correlation of 1.00 would indicate perfect
correlation, which would be achieved when the net asset value
of a Portfolio, including the value of its dividend and
capital gains distributions, increases or decreases in exact
proportion to changes in the respective target benchmark.
Due to the use of the sampling technique, neither the
Extended Market Portfolio, Total Stock Market Portfolio nor
the Small Capitalization Stock Portfolio is expected to track
its benchmark index with the same degree of accuracy as
evidenced by the high degree of correlation between the 500
Portfolio and its benchmark. However, the principal advantage
of this technique is to provide an efficient means to invest
in the universe of stocks. In particular, the three
Portfolios are expected to provide broad diversification, and
should operate at low costs due both to their "passive"
approach to portfolio management and low portfolio turnover
rate.
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, 1994, after the
semi-annual reconstitution of the indexes, the S&P/BARRA
Value Index consisted of 318 common stocks in the
26
<PAGE> 96
S&P 500 Index, while the S&P/BARRA Growth Index consisted of
the remaining 182. 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, 1994, the five
largest companies in the S&P/BARRA Value Index were Exxon
Corp., Royal Dutch Petroleum Co., IBM, DuPont E.I. de Nemour,
and Mobil, the five largest companies in the S&P/BARRA Growth
Index were General Electric Co., American Telephone &
Telegraph, Coca Cola Co., Phillip Morris Cos., Inc., and
Wal-Mart Stores.
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.
THE S&P MAKES NO WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS
TO BE OBTAINED BY LICENSEE, OWNERS OF THE TRUST, ANY PERSON
OR ENTITY FROM THE USE OF THE S&P 500 OR ANY DATA INCLUDED
THEREIN IN CONNECTION WITH THE USE LICENSED HEREUNDER, OR FOR
ANY OTHER USE. S&P MAKES NO EXPRESS OR IMPLIED WARRANTIES,
AND HEREBY EXPRESSLY DISCLAIMS ALL SUCH WARRANTIES OF
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE FOR USE
WITH RESPECT TO THE S&P 500 OR ANY DATA INCLUDED THEREIN.
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.
- --------------------------------------------------------------------------------
INTERNATIONAL
EQUITY INDEX FUND
EUROPEAN PORTFOLIO
AND PACIFIC PORTFOLIO
THE PORTFOLIOS INVEST
IN INTERNATIONAL
COMMON STOCKS USING
SAMPLING TECHNIQUES
("PORTFOLIO
OPTIMIZATION") The MCSI-Europe (Free) Index consists of approximately 590
equity securities from Europe, and the MSCI-Pacific (Free)
Index consists of more than 520 equity securities from
Australia and the Far East. The stocks included in each index
are chosen by Morgan Stanley Capital International on a
statistical basis. Each stock in MSCI-Europe (Free) and
MSCI-Pacific (Free) is weighted according to its market value
as a percentage of the total market value of all stocks in
the index. (A stock's market value equals the number of
shares outstanding times the most recent price of the
security.) The inclusion of a stock in the index in no way
implies the Morgan Stanley Capital International believes the
stock to be an attractive investment.
The Portfolios will be unable to hold all of the issues that
comprise their respective indexes because of the costs
involved and the illiquidity of many of the securities.
Instead, each Portfolio will attempt to hold a representative
sample of approximately 250 or more of the securities in its
respective Index, which will be selected utilizing the
statistical technique, "portfolio optimization." (See page 23
for a general explanation of "portfolio optimization".)
Due to the use of this sampling or "portfolio optimization"
technique, the Portfolios are not expected to track their
benchmark indexes with the same degree of accuracy as large
capitalization domestic index funds. Over time, the
correlation between the performance of each Portfolio and its
respective index is expected to be greater than 0.95. A
correlation of 1.00 would indicate perfect correlation, which
would be achieved when the net asset value of each Portfolio,
including
27
<PAGE> 97
the value of its dividend and capital gains distributions,
increases or decreases in exact proportion to changes in its
respective index.
- --------------------------------------------------------------------------------
EMERGING MARKETS
PORTFOLIO
THE PORTFOLIO INVESTS
IN INTERNATIONAL
COMMON STOCKS USING
SAMPLING TECHNIQUES
("PORTFOLIO
OPTIMIZATION") The MSCI -- Select Emerging Markets Free Index consists of
approximately 490 equity securities from emerging market
countries in Europe, Latin America and Southeast Asia. The
stocks included in the Index are chosen on a statistical
basis. The companies based in Hong Kong and Singapore are
included in the Index to provide participation in more liquid
emerging markets; their combined weight is limited to 20% of
the Index. Each stock within Hong Kong and Singapore will be
weighted according to its market value as a percentage of the
total market value of all of the Hong Kong and Singapore
stocks included in the index. (A stock's market value equals
the number of shares outstanding times the most recent price
of the security). The remaining portion of the Index will be
comprised of common stocks from 10 other emerging market
countries -- Indonesia, Malaysia, the Philippines, Thailand,
Argentina, Brazil, Mexico, Greece, Portugal and Turkey. Each
stock in these countries will be weighted according to its
market value as a percentage of the total market value of the
companies in the 10 countries multiplied by the percentage of
the index that these countries represent. From time to time,
additional emerging markets will be analyzed for inclusion in
the Index, based on liquidity and tradeability. The inclusion
of a country or stock in the Index in no way implies that the
country or stock is an attractive investment.
The Portfolio will be unable to hold all of the issues that
comprise its Index, because of the transaction costs involved
and the illiquidity of many of the securities. Instead, the
Portfolio will attempt to hold a representative sample of
approximately 300 or more of the securities in its Index by
selecting stocks utilizing the statistical technique,
"portfolio optimization." (See page 23 for a general
explanation of "portfolio optimization".)
Due to the use of this sampling or "portfolio optimization"
technique, the Portfolio is not expected to track its
benchmark with the same degree of accuracy as large
capitalization domestic index funds. Over time, the
correlation between the performance of the Portfolio and the
Index is expected to be greater than 0.95. A correlation of
0.95 or higher is expected to be achieved when the Portfolio
exceeds $100 million in assets.
THE THREE PORTFOLIOS
MAY ENTER INTO
FORWARD CURRENCY
CONTRACTS Each Portfolio may enter into foreign currency forward and
foreign currency futures contracts in order to maintain the
same currency exposure as their respective indexes. A
Portfolio may not enter into such contracts for speculative
purposes, or as a way of protecting against anticipated
adverse changes in exchange rates between foreign currencies
and the U.S. dollar. Specifically, a Portfolio may invest up
to 25% of its assets in foreign currency forward contracts. A
foreign currency forward contract is an obligation to
purchase or sell a specific currency at a future date, which
may be any fixed number of days from the date of the contract
agreed upon by the parties, at a price set at the time of the
contract. These contracts may be bought or sold to protect
the Portfolio to a limited extent against adverse changes in
exchange rates between foreign currencies and the U.S.
dollar. Such contracts, which protect the value of a
Portfolio's investment securities against a decline in the
value of a currency, do not eliminate fluctuations in the
underlying prices of the securities. They simply establish an
exchange rate at a future date. Also, although such contracts
tend to minimize the risk of loss due to a decline in the
value of the hedged currency, at the same time they tend to
limit any potential gain that might be realized should the
value of such currency increase.
THE THREE PORTFOLIOS
MAY BORROW MONEY Each Portfolio may borrow money from a bank up to a limit of
15% of the market value of its assets, but only for temporary
or emergency purposes. A Portfolio may borrow money only to
meet redemption requests prior to the settlement of
securities already sold or in the process of being sold by
the Portfolio. To the extent that a Portfolio borrows money
prior to selling securities, the Portfolio may be leveraged;
at such times, the Portfolio may appreciate or depreciate in
value more rapidly than its benchmark index. Both Portfolios
will repay any money borrowed in excess of 5% of the market
value of their total assets prior to purchasing additional
portfolio securities.
28
<PAGE> 98
ALL PORTFOLIOS MAY
INVEST IN SHORT-TERM
MONEY MARKET
INSTRUMENTS Although they normally seek to remain substantially fully
invested in securities in the respective indexes, all
Portfolios of the Funds may invest temporarily in certain
short-term money market instruments. Such securities may be
used to invest uncommitted cash balances or to maintain
liquidity to meet shareholder redemptions. These securities
include: obligations of the United States Government and its
agencies or instrumentalities; commercial paper, bank
certificates of deposit, and bankers' acceptances; and
repurchase agreements collateralized by these securities.
- --------------------------------------------------------------------------------
The Funds may use futures contracts, options, warrants,
convertible securities and swap agreements.
BOND INDEX FUND The Portfolios of the Fund may utilize bond (interest rate)
futures contracts and options to a limited extent.
Specifically, each Portfolio may enter into futures contracts
provided that not more than 5% of its assets are required as
a futures contract deposit. In addition, the Portfolios may
enter into futures contracts and options transactions only to
the extent that obligations under such contracts or
transactions represent not more than 20% of a Portfolio's
assets.
- --------------------------------------------------------------------------------
BALANCED INDEX
FUND The Fund may utilize stock and bond (interest rate) futures
contracts, options, warrants, convertible securities and swap
agreements to a limited extent. Specifically, the Fund may
enter into futures contracts and options provided that not
more than 5% of its assets are required as a margin deposit
for futures contracts or options. Additionally, the Fund's
investment in warrants will not exceed more than 5% of its
assets (2% with respect to warrants not listed on the New
York or American Stock Exchanges). The Fund does not intend
to invest more than 5% of its assets in convertible
securities.
- --------------------------------------------------------------------------------
INDEX TRUST Each Portfolio of the Trust may utilize stock futures
contracts, options, warrants, convertible securities and swap
agreements to a limited extent. Specifically, each Portfolio
may enter into futures contracts and options provided that
not more than 5% of its assets are required as a margin
deposit for futures contracts or options and provided that
not more than 20% of a Portfolio's assets are invested in
futures and options at any time. Additionally, the Trust's
investment in warrants will not exceed more than 5% of its
assets (2% with respect to warrants not listed on the New
York or American Stock Exchanges). The Trust does not intend
to invest more than 5% of its assets in convertible
securities.
- --------------------------------------------------------------------------------
INTERNATIONAL
EQUITY INDEX FUND The Portfolios of the Fund 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. Additionally, the
Fund's investment in warrants will not exceed more than 5% of
its assets (for the European Portfolio and the Pacific
Portfolio 2% with respect to warrants not listed on the New
York or American Stock Exchanges).
Futures contracts, options, warrants, convertible securities
and swap agreements may be used for several reasons: to
simulate full investment in the underlying index while
retaining a cash balance for fund management purposes, to
facilitate trading, to reduce transaction costs or to seek
higher investment returns when a futures contract, option,
warrant, convertible security or swap agreement is priced
more attractively than the underlying equity security or
index. While each of these securities can be used as
leveraged investments, the Portfolios may not use them to
leverage their net assets.
FUTURES CONTRACTS,
OPTIONS, WARRANTS,
CONVERTIBLE SECURITIES
AND SWAP AGREEMENTS
POSE CERTAIN RISKS The risk of loss associated with futures contracts in some
strategies can be substantial due both to the low margin
deposits required and the extremely high degree of leverage
involved in futures pricing. As a result, a relatively small
price movement in a futures contract may result in an
immediate and substantial loss or gain. When investing in
futures contracts, Portfolios of the Vanguard Bond Index Fund
will segregate cash or cash equivalents in the amount of the
underlying obligation. The Portfolios of the Vanguard
Balanced Index Fund, Vanguard Index Trust and Vanguard
International Equity Index Fund will not use futures
contracts, options, warrants, convertible securities or swap
agreements for speculative purposes or to leverage its net
assets. Accordingly, the primary risks associated with the
use of futures contracts, options,
29
<PAGE> 99
warrants, convertible securities or swap agreements by the
Portfolio are: (i) imperfect correlation between the change
in market value of the stocks held by the Portfolio and the
prices of futures contracts, options, warrants, convertible
securities or swap agreements; (ii) possible lack of a liquid
secondary market for a futures contract and the resulting
inability to close a futures position prior to its maturity
date; and (iii) the risk of the counterparty or guaranteeing
agent defaulting. The risk of imperfect correlation will be
minimized by investing only in those contracts whose behavior
is expected to resemble that of the Portfolio's underlying
securities. The risk that the Portfolio will be unable to
close out a futures position will be minimized by entering
into such transactions on an exchange with an active and
liquid secondary market. However, options, warrants,
convertible securities or swap agreements purchased or sold
over-the-counter may be less liquid than exchange-traded
securities. Illiquid securities, in general, including swap
agreements, may not represent more than 15% of the net assets
of the Portfolio.
Since there are no futures traded on the S&P/BARRA Value and
Growth Indexes, MSCI-Europe (Free), Pacific Index or the
MSCI-Select Emerging Markets Free Index, it will be necessary
for the Vanguard Index Trust Value and Growth Portfolios and
the Portfolios of Vanguard International Equity Index Fund to
utilize a composite of other futures contracts to simulate
the performance of the Indexes. This process may magnify the
"tracking error" of a Portfolio's performance compared to
that of its Index, due to lower correlation of the selected
futures with its Index. The investment adviser will attempt
to reduce this tracking error by investing in futures
contracts whose behavior is expected to resemble that of the
underlying securities, although there can be no assurance
that these selected futures will perfectly correlate with the
performance of either Index.
SWAP AGREEMENTS Swap agreements are contracts between parties in which one
party agrees to make payments to the other party based on the
change in market value of a specified index or asset. In
return, the other party agrees to make payments to the first
party based on the return of a different specified index or
asset. Although swap agreements entail the risk that a party
will default on its payment obligations thereunder, the
Portfolios will minimize this risk by entering into
agreements that mark to market no less frequently than
quarterly. However, the Portfolios' daily share price will
take into effect the daily price movement of any swap
agreement entered into by the Portfolios. Swap agreements
also bear the risk that the Portfolios will not be able to
meet its obligation to the counterparty. This risk will be
mitigated by investing the Portfolios in the specific asset
for which it is obligated to pay a return.
ALL PORTFOLIOS MAY
LEND THEIR SECURITIES
All Portfolios may lend their investment securities to
qualified institutional investors for either short-term or
long-term purposes of realizing additional income. Loans of
securities by the Portfolio will be collateralized by cash,
letters of credit, or securities issued or guaranteed by the
U.S. Government or its agencies. The collateral will equal at
least 100% of the current market value of the loaned
securities.
PORTFOLIO TURNOVER FOR
ALL PORTFOLIOS IS
EXPECTED TO BE LOW Although they generally seek to invest for the long term,
each Portfolio of Vanguard Bond Index Fund, Vanguard Balanced
Index Fund, Vanguard Index Trust, and Vanguard International
Equity Index Fund retains the right to sell securities
irrespective of how long they have been held. It is
anticipated that the annual portfolio turnover of each
Portfolio of the Funds (except Vanguard Balanced Index Fund)
will not exceed 50%. The annual portfolio turnover rate for
the Vanguard Balanced Index Fund is not expected to exceed
100%. A turnover rate of 50% would occur, for example, if one
half of the securities of a Portfolio were replaced within
one year.
- --------------------------------------------------------------------------------
30
<PAGE> 100
INVESTMENT
LIMITATIONS
EACH PORTFOLIO HAS
ADOPTED CERTAIN
FUNDAMENTAL
LIMITATIONS Each portfolio of the Funds has adopted certain limitations
on its investment practices. Specifically, each Portfolio
will not:
(a) invest more than 25% of its assets in any one industry;
(b) borrow money, except that the Funds may borrow from
banks (or through reverse repurchase agreements), for
temporary or emergency (not leveraging) purposes,
including the meeting of redemption requests which
might otherwise require the untimely disposition of
securities, in an amount not exceeding 15% of the value
of the Funds' net assets. Whenever borrowing exceeds 5%
of the value of the Funds' net assets, the Funds will
not make any additional investments.
Each Portfolio of Vanguard Bond Index will not:
(a) invest more than 5% of its assets in the securities of
any single issuer except obligations of the United
States Government;
(b) purchase more than 5% of the voting securities of any
issuer;
(c) pledge, mortgage or hypothecate its assets to an extent
greater than 5% of the value of its total assets.
Each Portfolio of Vanguard Balanced Index Fund, Vanguard
Index Trust, and Vanguard International Equity Index Fund
will not:
(a) with respect to 75% of its assets, purchase securities
of any issuer (except obligations of the U.S. Government
and its instrumentalities) if, as a result, more than 5%
of the value of the Fund's assets would be invested in
the securities of each issuer; and
(b) with respect to 75% of its assets, purchase more than
10% of the voting securities of any issuer.
These investment limitations are considered at the time
investment securities are purchased. The limitations
described here and in the Statement of Additional Information
may be changed for a specific Fund only with the approval of
a majority of the shareholders.
- --------------------------------------------------------------------------------
MANAGEMENT OF
THE FUNDS
VANGUARD ADMINISTERS
AND DISTRIBUTES
THE FUNDS The Funds are members of The Vanguard Group of Investment
Companies, a family of more than 30 investment companies with
more than 80 distinct portfolios and total assets in excess
of $130 billion. Through their jointly owned subsidiary, The
Vanguard Group, Inc. ("Vanguard"), they and the other funds
in the Group obtain at cost virtually all of their corporate
management, administrative, shareholder accounting and
distribution services. Vanguard also provides investment
advisory services on an at-cost basis to certain Vanguard
funds. As a result of Vanguard's unique corporate structure,
the Vanguard funds have costs substantially lower than those
of most competing mutual funds. In 1994, 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 1.05% for the mutual fund
industry (data provided by Lipper Analytical Services).
The Officers of the Funds manage its day to day operations
and are responsible to the Funds Board of Directors
(Trustees). The Directors (Trustees) set broad policies for
the Funds and choose its officers. A list of the Directors
(Trustees) and Officers of the Funds and a statement of their
present positions and principal occupations during the past
five years can be found in each of the Funds Statements 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 net expenses, which are
allocated among the funds under methods approved by the Board
of Directors (Trustees) of each fund. In addition, each fund
bears its own direct expenses, such as legal, auditing and
custodian fees.
31
<PAGE> 101
Vanguard also provides distribution and marketing services to
the Vanguard funds. The funds are available on a no-load
basis (i.e., there are no sales commissions or 12b-1 fees).
However, each fund bears it share of the Group's distribution
costs.
- --------------------------------------------------------------------------------
INVESTMENT
ADVISERS
VANGUARD'S FIXED
INCOME GROUP
MANAGES SOME OF THE
FUNDS' INVESTMENTS Each Portfolio of Vanguard Bond Index Fund and the bond
portion of Vanguard Balanced Index Fund receive all
investment advisory services from Vanguard's Fixed Income
Group. The Fixed Income Group provides investment advisory
services to more than 40 Vanguard money market and bond
portfolios, both taxable and tax-exempt. Total assets under
management by Vanguard's Fixed Income Group were $55 billion
as of December 31, 1994. The Portfolios are not actively
managed, but are instead administered by the Fixed Income
Group using computerized, quantitative techniques. The Fixed
Income Group is supervised by the Officers of the Fund. Ian
A. MacKinnon, Senior Vice President of Vanguard, has been in
charge of the Group since its inception in 1981.
Mr. MacKinnon is responsible for setting the broad investment
strategies employed by the Fund, and for overseeing the
portfolio manager who implements those strategies on a
day-to-day basis.
The portfolio manager for Vanguard Bond Index Fund and the
bond portion of Vanguard Balanced Index Fund is Kenneth E.
Volpert, Assistant Vice President of Vanguard, who serves as
portfolio manager of the Vanguard Variable Insurance
Fund -- High-Grade Portfolio and the bond portion of the
Balanced Portfolio. Mr. Volpert began managing the Vanguard
Bond Index fund in 1992. For six years prior to joining
Vanguard, Mr. Volpert was associated with Mellon Bond
Associates.
The Fixed Income Group places all orders for purchases and
sales of portfolio securities. Purchases of portfolio
securities are made either directly from the issuer or from
securities dealers. The Fixed Income Group may sell portfolio
securities prior to their maturity if circumstances and
considerations warrant and if it believes such dispositions
advisable. The Group seeks to obtain the best available net
price and most favorable execution for all portfolio
transactions.
VANGUARD'S CORE
MANAGEMENT GROUP
MANAGES SOME OF THE
FUNDS, ON AN AT-COST
BASIS Each Portfolio of Index Trust, International Equity Index
Fund and the equity portion of Balanced Index Fund receive
their investment advisory services on an at-cost basis from
Vanguard's Core Management Group, which also provides
investment advisory services to Vanguard Institutional Index
Fund, a portion of the assets of Vanguard/Windsor II and
Vanguard Morgan Growth Fund, the Equity Index Portfolio of
Vanguard Variable Insurance Fund, Vanguard Tax-Managed Fund,
and several indexed separate accounts. Total indexed assets
under management as of December 31, 1994 were $18 billion.
The Portfolios of the Fund are not actively managed, but are
instead administered by the Core Management Group using
computerized, quantitative techniques. The Group is
supervised by the Officers of the Fund.
In placing portfolio transactions, Vanguard's Core Management
Group uses its best judgment to choose the broker most
capable of providing the brokerage services necessary to
obtain the best available price and most favorable execution
at the lowest commission rate. The full range and quality of
brokerage services available are considered in making these
determinations. In those instances where it is reasonably
determined that more than one broker can offer the services
needed to obtain the best available price and most favorable
execution, consideration may be given to those brokers which
supply statistical information and provide other services in
addition to execution services to the Fund.
- --------------------------------------------------------------------------------
DIVIDENDS,
CAPITAL GAINS
AND TAXES
FOUR PORTFOLIOS PAY
QUARTERLY DIVIDENDS;
TWO PAY DIVIDENDS
ONCE A YEAR Vanguard Index 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.
Each Portfolio of the International Equity Index Fund intends
to distribute substantially all of its ordinary income in the
form of dividends. The Portfolios pay annual dividends.
Capital gains distributions, if any, are also made annually.
32
<PAGE> 102
The Balanced Index Fund will distribute substantially all of
its net investment income in the form of quarterly dividends.
Dividends consisting of virtually all of the ordinary income
of each Portfolio of Bond Index Fund are declared daily and
are payable to shareholders of record at the time of
declaration. Such dividends are paid on the first business
day of each month. Capital gains distributions, if any, are
made annually.
A Portfolio's dividend and capital gains distributions may be
reinvested in additional shares or received in cash. See
"Choosing a Distribution Option" for a description of these
distribution methods. Shareholders of Bond Index Fund who
choose to reinvest their dividend distributions will receive
a quarterly (not monthly) confirmation statement.
Pursuant to the Internal Revenue Code, certain dividend and
capital gains distributions declared by each Portfolio during
December, if received by shareholders by January 31, are
deemed to have been paid by the Funds and received by
shareholders on December 31 of the prior year.
Each Portfolio of the Funds intends to continue to qualify
for taxation as a "regulated investment company" under the
Internal Revenue Code so that each Portfolio will not be
subject to federal income tax to the extent its income is
distributed to shareholders. Dividends paid by each Portfolio
from net investment income, whether received in cash or
reinvested in additional shares, will be taxable to
shareholders as ordinary income. For corporate investors,
dividends from net investment income will generally qualify
in part for the intercorporate dividends-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 by-product of portfolio management
activities. Consequently, capital gains distributions may be
expected to vary considerably from year to year; there will
be no capital gains distributions in years when a Portfolio
realizes net capital losses.
Note that if you elect to receive capital gains distributions
in cash, instead of reinvesting them in additional shares,
you are in effect reducing the capital at work for you in a
Portfolio. Also, keep in mind that if you purchase shares in
a Portfolio shortly before the record date for a dividend or
capital gains distribution, a portion of your investment will
be returned to you as a taxable distribution, regardless of
whether you are reinvesting your distributions or receiving
them in cash.
The Funds will notify you annually as to the tax status of
dividend and capital gains distributions paid by each
Portfolio.
EACH PORTFOLIO OF
INTERNATIONAL EQUITY
INDEX FUND MAY
"PASS THROUGH"
FOREIGN TAXES Each Portfolio may elect to "pass through" to its
shareholders the amount of foreign income taxes paid by a
Portfolio. The Portfolios will make such an election only if
it is deemed to be in the best interests of the shareholders.
If this election is made, shareholders of a Portfolio will be
required to include in their gross income their pro rata
share of foreign taxes paid by the Portfolio. However,
shareholders will be able to treat their pro rata share of
foreign taxes as either an itemized deduction or a foreign
tax credit against U.S. income taxes (but not both) on their
federal income tax return.
A CAPITAL GAIN OR LOSS
MAY BE REALIZED UPON
EXCHANGE OR
REDEMPTION A sale of shares of a Portfolio is a taxable event, and may
result in a capital gain or loss. A capital gain or loss may
be realized from an ordinary redemption of shares or an
exchange of shares between two mutual funds (or two
portfolios of the same fund).
Dividend distributions, capital gain distributions, and
capital gains or losses from redemptions and exchanges may be
subject to state and local taxes.
33
<PAGE> 103
Each Portfolio of the Funds is required to withhold 31% of
taxable dividends, capital gains distributions, and
redemptions paid to shareholders who have not complied with
IRS taxpayer identification regulations. You may avoid this
withholding requirement by certifying on your Account
Registration Form your proper Social Security or Employer
Identification number and by certifying that you are not
subject to backup withholding.
Vanguard Index Trust is organized as a Pennsylvania business
trust and, in the opinion of counsel, is not liable for any
income or franchise tax in the Commonwealth of Pennsylvania.
The Trust will be subject to Pennsylvania county personal
property tax in the county which is the site of its principal
office. Shareholders who are Pennsylvania residents will not
be subject to county personal property taxes, with the
exception of non-exempt holders who are residents of the City
and School District of Pittsburgh.
The International Equity Index, Balanced Index and Bond Index
Funds have obtained Certificates of Authority to do business
as foreign corporations in Pennsylvania and do business and
maintain offices in that state. In the opinion of counsel,
the shares of each of the Funds are exempt from Pennsylvania
personal property taxes.
The tax discussion set forth above is included for general
information only. Prospective investors should consult their
own tax advisers concerning the tax consequences of an
investment in the Funds.
- --------------------------------------------------------------------------------
THE SHARE
PRICE OF
EACH PORTFOLIO The share price or "net asset value" per share of each
Portfolio is determined by dividing the total market value of
the Portfolio's investments and other assets, less any
liabilities, by the number of outstanding shares of the
Portfolio. Net asset value per share is determined once daily
at the close of regular trading on the New York Stock
Exchange (generally 4:00 p.m. Eastern time).
Portfolio securities that are listed on a securities exchange
are valued at the last quoted sales price on the day the
valuation is made. Price information on listed securities is
taken from the exchange where the security is primarily
traded. Securities which are listed on an exchange and which
are not traded on the valuation date are valued at the mean
of the bid and ask prices. For the 500, Value and Growth
Portfolios of Vanguard Index Trust, Vanguard International
Equity Index Fund, and each Portfolio of Vanguard Bond Index
Fund, unlisted securities for which market quotations are
readily available are valued at the latest quoted bid price.
For the Extended Market, Total Stock Market and Small
Capitalization Stock Portfolios, and Vanguard Balanced Index
Fund, unlisted securities for which market quotations are not
readily available are valued at the mean of the bid and ask
prices. Temporary cash investments are valued at amortized
cost which approximates market value. For all Funds,
securities for which no current quotations are readily
available are valued at fair market value as determined in
good faith by the Directors (Trustees). Securities may be
valued on the basis of prices provided by a pricing service
when such prices are believed to reflect the fair market
value of such securities.
Each Portfolios's share price can be found daily in the
mutual fund listings of most major newspapers under the
heading of The Vanguard Group.
- --------------------------------------------------------------------------------
GENERAL
INFORMATION Vanguard Bond Index, Vanguard Balanced Index and Vanguard
International Equity Index Funds are organized as Maryland
corporations. The Articles of Incorporation permit the
Directors to issue 1,000,000,000 shares of common stock of
each Fund, with a $.001 par value. The Board of Directors has
the power to designate one or more classes ("series") of
shares of common stock and to classify or reclassify any
unissued shares with respect to such series. Currently,
Vanguard Bond Index Fund is offering shares of four series,
Vanguard Balanced Index Fund is offering shares of one series
and Vanguard International Equity Index is offering shares of
three series.
Vanguard Index Trust is a Pennsylvania business trust. The
Declaration of Trust permits the Trustees to issue an
unlimited number of shares of beneficial interest with no par
value. The Board of Trustees has the power to designate one
or more classes or series of shares of common stock and to
classify or reclassify any unissued shares with respect to
such series. Currently, the Trust is offering shares of six
series.
34
<PAGE> 104
The shares of each series of the Funds are fully paid and
non-assessable; have no preference as to conversion,
exchange, dividends, retirement or other features; and have
no preemptive rights. Such shares have non-cumulative voting
rights, meaning that the holders of more than 50% of the
shares voting for the election of Directors (Trustees) can
elect 100% of the Directors (Trustees) if they so choose.
Annual meetings of shareholders will not be held except as
required by the Investment Company Act of 1940 and other
applicable law. An annual meeting will be held to vote on the
removal of a Director (Trustee) or Directors (Trustees) of a
Fund if requested in writing by the holders of not less than
10% of the outstanding shares of such Fund.
All securities and cash for the Total Bond Market Portfolio
of Vanguard Bond Index Fund are held by Morgan Guaranty Trust
Company, New York, NY. All securities and cash for the
Short-Term Bond, Intermediate-Term Bond and Long-Term Bond
Portfolios are held by State Street Bank and Trust Company
("State Street Bank"), Boston, MA. All securities and cash
for Vanguard Balanced Index Fund are held by CoreStates Bank,
N.A. ("CoreStates"), Philadelphia, PA. All Securities and
cash for Vanguard International Equity Index Fund are held by
Morgan Stanley Trust Company. All securities and cash for the
500, Extended Market, and Total Stock Market Portfolios of
Vanguard Index Trust are held by State Street Bank and Trust
Company. All securities and cash for the Small Capitalization
Stock and the Value and Growth Portfolios are held by
CoreStates Bank.
The Vanguard Group, Inc., Valley Forge, PA, serves as the
Funds' Transfer and Dividend Disbursing Agent. Price
Waterhouse LLP, serves as independent accountants for the
Funds and will audit their financial statements annually. The
Funds are not involved in any litigation.
- --------------------------------------------------------------------------------
35
<PAGE> 105
SHAREHOLDER GUIDE
OPENING AN
ACCOUNT AND
PURCHASING
SHARES You may open a regular (non-retirement) account, either by
mail or wire. Simply complete and return an Account
Registration Form and any required legal documentation,
indicating the Portfolio you have chosen and amount you wish
to invest. Your purchase must be equal to or greater than the
$3,000 minimum initial investment requirement in any
Portfolio ($500 for Uniform Gifts/Transfers to Minors Act
accounts). You must open a new Individual Retirement Account
by mail (IRAs may not be opened by wire) using a Vanguard IRA
Adoption Agreement. Your purchase must be equal to or greater
than the $500 minimum initial investment requirement, but no
more than $2,000 if you are making a regular IRA
contribution. Rollover contributions are generally limited to
the amount withdrawn within the past 60 days from an IRA or
other qualified Retirement Plan. If you need assistance with
the Account Registration Form or have any questions about the
Fund, please call our Investor Information Department
(1-800-662-7447). NOTE: For other types of account
registrations (e.g., corporations, associations, other
organizations, trusts or powers of attorney), please call us
to determine which additional forms you may need.
Because of the risks associated with bond and stock
investments, each Portfolio is intended to be a long-term
investment vehicle and is not designed to provide investors
with a means of speculating on short-term bond market
movements. Consequently, the Fund reserves the right to
reject any specific purchase (and exchange purchase) request.
The Fund also reserves the right to suspend the offering of
shares for a period of time.
Each Portfolio's shares are purchased at the next-determined
net asset value after your investment has been received in
the form of Federal Funds. See "When Your Account Will Be
Credited". The Fund is offered on a no-load basis (i.e.,
there are no sales commissions or 12b-1 fees).
IMPORTANT NOTE
ON EXPENSES Transaction fees are charged by Portfolios as follows:
<TABLE>
<CAPTION>
FEES ON FEES ON
PURCHASES REDEMPTIONS
--------- -----------
<S> <C> <C>
Vanguard Bond Index Fund................................. None None
Vanguard Balanced Fund................................... None None
Vanguard Index Trust
500 Portfolio.......................................... None None
Extended Market Portfolio.............................. .5% None
Total Stock Market Portfolio........................... .25% None
Small Capitalization Stock Portfolio................... 1% None
Value Portfolio........................................ None None
Growth Portfolio....................................... None None
Vanguard International Equity Index Fund
European Portfolio..................................... 1% None
Pacific Portfolio...................................... 1% None
Emerging Markets Portfolio............................. 2% 1%
</TABLE>
Additionally, each Portfolio of all of the Funds and the
Trust assesses a $10 annual account maintenance fee. The $10
annual account maintenance fee will be waived for
shareholders with an account balance of $10,000 or more. See
"Portfolio Expenses" for more information.
ADDITIONAL
INVESTMENTS Subsequent investments may be made by mail ($100 minimum per
Portfolio), wire ($1,000 minimum), written exchange from
another Vanguard Fund account ($100 minimum per Portfolio),
or Vanguard Fund Express. Subsequent investments to
Individual Retirement Accounts may be made by mail ($100
minimum) or exchange from another Vanguard Fund account. In
some instances, contributions may be made by wire or Vanguard
Fund Express. Please call us for more information on these
options.
- --------------------------------------------------------------------------------
36
<PAGE> 106
<TABLE>
<S> <C> <C>
ADDITIONAL INVESTMENTS
NEW ACCOUNT TO EXISTING ACCOUNTS
PURCHASING BY MAIL Please include the amount of your Additional investments should include
initial investment and the name of the the Invest-by-Mail remittance form
Complete and sign the Portfolios you have selected on the attached to your Fund confirmation
enclosed Account registration form, make your check statements. Please make your check
Registration Form payable to The Vanguard Group payable to The Vanguard Group
(Portfolio Number), see below for the (Portfolio Number), write your account
appropriate number and mail to: number on your check, and using the
return envelope provided, mail to the
VANGUARD FINANCIAL CENTER address indicated on the
P.O. BOX 2600 Invest-by-Mail Form. See below for the
VALLEY FORGE, PA 19482 appropriate Portfolio number.
For express or VANGUARD FINANCIAL CENTER All written requests should be mailed
registered mail, 455 DEVON PARK DRIVE to one of the addresses indicated for
send to: WAYNE, PA 19087 new accounts. Do not send registered
or express mail to the post office box
address.
PORTFOLIO NUMBERS
VANGUARD BOND INDEX FUND VANGUARD BALANCED
Total Bond Market Portfolio -- 84 INDEX FUND -- 02
Short-Term Bond Portfolio -- 132
Intermediate-Term Bond VANGUARD INDEX TRUST
Portfolio -- 314 500 Portfolio -- 40
Long-Term Bond Portfolio -- 522 Extended Market Portfolio -- 98
Total Stock Market Portfolio -- 85
VANGUARD INTERNATIONAL Small Capitalization Stock
EQUITY INDEX FUND Portfolio -- 48
European Portfolio -- 79 Value Portfolio -- 06
Pacific Portfolio -- 72 Growth Portfolio -- 09
Emerging Markets Portfolio -- 533
</TABLE>
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PURCHASING BY WIRE CORESTATES BANK, N.A.
ABA 031000011
Money should be CORESTATES ACCT NO 0101 9897
wired to: ATTN VANGUARD
NAME OF FUND OR TRUST
BEFORE WIRING NAME OF PORTFOLIO
ACCOUNT NUMBER
Please contact ACCOUNT REGISTRATION
Client Services
(1-800-662-2739) To assure proper receipt, please be sure your bank
includes the name of the Portfolio, the account
number Vanguard has assigned to you and the eight
digit CoreStates number. If you are opening a new
account, please complete the Account Registration
Form and mail it to the "New Account" address above
after completing your wire arrangement. NOTE:
Federal Funds wire purchase orders will be accepted
only when the Fund and Custodian Bank are open for
business.
- --------------------------------------------------------------------------------
PURCHASING BY
EXCHANGE (from a
Vanguard account) You may open an account or purchase additional shares by
making an exchange from an existing Vanguard Fund account.
However, the Funds reserve the right to refuse any exchange
purchase request. Call our Client Services Department
(1-800-662-2739) for assistance. The new account will have
the same registration as the existing account.
Telephone exchanges are not accepted for the Portfolios of
Vanguard Balanced Index Fund, Vanguard Index Trust, and
Vanguard International Equity Index Fund. You may, however,
open an account by exchange by providing the appropriate
information on the Account Registration Form.
- --------------------------------------------------------------------------------
37
<PAGE> 107
PURCHASING BY
FUND EXPRESS
Automatic Investment
and Special Purchase
The Fund Express Automatic Investment option lets you move
money from your bank account to your Vanguard account on the
schedule (monthly, bimonthly [every other month], quarterly
or yearly) you select. Additionally, the Fund Express Special
Purchase option which is only available for Portfolios of the
Vanguard Bond Index Fund lets you move money from your bank
account to your Vanguard account on an "as needed" basis. To
establish this option, please provide the appropriate
information on the Account Registration Form. We will send
you a confirmation of your Fund Express enrollment; please
wait three weeks before using the service.
- --------------------------------------------------------------------------------
CHOOSING A
DISTRIBUTION
OPTION You must select one of three distribution options:
1. AUTOMATIC REINVESTMENT OPTION -- Both dividends and
capital gains distributions will be reinvested in
additional Fund shares. This option will be selected for
you automatically unless you specify one of the other
options.
2. CASH DIVIDEND OPTION -- Your dividends will be paid in
cash and your capital gains will be reinvested in
additional Fund shares.
3. ALL CASH OPTION -- Both dividend and capital gains
distributions will be paid in cash.
You may change your option by calling our Client Services
Department (1-800-662-2739).
In addition, an option to invest your cash dividends and/or
capital gains distributions in another Vanguard Fund account
is available. Please call our Client Services Department
(1-800-662-2739) for information. You may also elect Vanguard
Dividend Express which allows you to transfer your cash
dividends and/or capital gains distributions automatically to
your bank account. Please see "Other Vanguard Services" for
more information.
- --------------------------------------------------------------------------------
TAX CAUTION
INVESTORS SHOULD ASK
ABOUT THE TIMING OF
CAPITAL GAINS AND
DIVIDEND DISTRIBUTIONS
BEFORE INVESTING Under Federal tax laws, the Fund is required to distribute
net capital gains and dividend income to Fund shareholders.
These distributions are made to all shareholders who own Fund
shares as of the distribution's record date, regardless of
how long the shares have been owned. Purchasing shares just
prior to the record date could have a significant impact on
your tax liability for the year. For example, if you purchase
shares immediately prior to the record date of a sizable
capital gain distribution, you will be assessed taxes on the
amount of the capital gain distribution later paid even
though you owned the Fund shares for just a short period of
time. (Taxes are due on the distributions even if the
dividend or gain is reinvested in additional Fund shares.)
While the total value of your investment will be the same
after the capital gain distribution -- the amount of the
capital gain 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.
Prospective investors should, therefore, inquire about
potential distributions before investing. Each Fund's annual
capital gains distributions normally occurs in December.
Income dividends are generally paid on the first day of each
month for the four Portfolios of Vanguard Bond Index Fund,
annually in December for the three Portfolios of Vanguard
International Equity Index Fund, and the Extended Market and
Small Capitalization Stock Portfolio of Vanguard Index Trust,
and quarterly in March, June, September and December for
Vanguard Balanced Index Fund, and the 500, Total Stock
Market, and the Value and Growth Portfolios of Vanguard Index
Trust. For additional information on distributions and taxes,
see the section titled "Dividends, Capital Gains, and Taxes."
- --------------------------------------------------------------------------------
IMPORTANT
INFORMATION
ESTABLISHING OPTIONAL
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
38
<PAGE> 108
from banks, brokers and any other guarantor that Vanguard
deems acceptable. A SIGNATURE GUARANTEE CANNOT BE PROVIDED BY
A NOTARY PUBLIC.
CERTIFICATES Share certificates will be issued upon request for Portfolios
of Vanguard Bond Index Fund, Vanguard Index Trust, and the
European and Pacific Portfolios of Vanguard International
Equity Index Fund. If a certificate is lost, you may incur an
expense to replace it. Share certificates will not be
available for Vanguard Balanced Index Fund and the Emerging
Markets Portfolio of Vanguard International Equity Index
Fund.
BROKER-DEALER
PURCHASES If you purchase shares in Vanguard Funds through a registered
broker-dealer or investment adviser, the broker-dealer or
adviser may charge a service fee.
CANCELLING
TRADES The Fund will not cancel any trade (e.g., a purchase,
exchange or redemption) believed to be authentic, received in
writing or by telephone, once the trade request has been
received.
ELECTRONIC
PROSPECTUS
DELIVERY If you would prefer to receive a prospectus for the Fund or
any of the Vanguard Funds in an electronic format, please
call 1-800-231-7870 for additional information. If you elect
to do so, you may also receive a paper copy of the
prospectus, by calling 1-800-662-7447.
- --------------------------------------------------------------------------------
WHEN YOUR
ACCOUNT WILL
BE CREDITED The trade date is the date on which your account is credited.
For the Vanguard Bond Index Fund, the trade date is generally
the day on which the Fund receives your investment in the
form of Federal Funds (monies credited to the Fund's
Custodian Bank by a Federal Reserve Bank). Your trade date
varies according to your method of payment for your shares.
Purchases of Fund shares by check will receive a trade date
the day the funds are received in good order by Vanguard.
Thus, if your purchase by check is received by the close of
regular trading on the New York Stock Exchange (generally
4:00 p.m. Eastern time), your trade date is the business day
your check is received in good order. If your purchase is
received after the close of the Exchange your trade date is
the business day following receipt of your check. Vanguard
will not accept third-party checks to open an account. Please
be sure your purchase check is made payable to the Vanguard
Group.
For purchases by Federal Funds wire or exchange, the Fund is
credited immediately with Federal Funds. Thus, if your
purchase by Federal Funds wire or exchange is received by the
close of the Exchange, your trade date is the day of receipt.
If your purchase is received after the close of the Exchange,
your trade date is the business day following receipt of your
wire or exchange.
For Vanguard Balanced Fund, Vanguard Index Trust and Vanguard
International Equity Index Fund, if your purchase is made by
check, Federal Funds wire or exchange, and is received by the
close of regular trading the New York Stock Exchange
(generally 4:00 p.m. Eastern time), your trade date is the
day of receipt. If your purchase is received after the close
of the Exchange, your trade date is the next business day.
Shares of the Funds are purchased at the net asset value
determined on your trade date. Shares of the Extended Market
and Small Capitalization Stock Portfolios are also subject to
a 1% portfolio transaction fee, shares of the Total Stock
Market Portfolio are subject to a 0.25% portfolio transaction
fee. Shares of Vanguard International Equity Index
Fund-Pacific Portfolio and European Portfolio are subject to
a 1% transaction fee while shares of the Emerging Markets
Portfolio are subject to a 2% transaction fee on purchases.
See "Fund Expenses" for additional information.
In order to prevent lengthy processing delays caused by the
clearing of foreign checks, Vanguard will only accept a
foreign check which has been drawn in U.S. dollars and has
been issued by a foreign bank with a U.S. correspondent bank.
The name of the U.S. correspondent bank must be printed on
the face of the foreign check.
Your shares are purchased at the next-determined net asset
value after your investment has been received in the form of
Federal Funds. You will begin to earn dividends on the
calendar day following the trade date. (For a Friday trade
date, you will begin earning dividends on Saturday.)
- --------------------------------------------------------------------------------
39
<PAGE> 109
SELLING YOUR
SHARES You may withdraw any portion of the funds in your account by
redeeming shares at any time. You may initiate a request by
writing or by telephoning. Your redemption proceeds are
normally mailed, credited or wired -- depending upon the
method of withdrawal you have PREVIOUSLY chosen -- within two
business days after the receipt of the request in Good Order.
- --------------------------------------------------------------------------------
SELLING BY WRITING
A CHECK Redemption by check is only available to shareholders of
Vanguard Bond Index Fund. You may withdraw funds from your
Vanguard Bond Index account by writing a check payable in the
amount of $250 or more. When a check is presented for payment
to the Fund's agent, CoreStates Bank, the Fund will redeem
sufficient shares in your account at the next-determined net
asset value to cover the amount of the check.
In order to establish the checkwriting option on your
account, all registered shareholders must sign a signature
card. After your completed signature card is received by the
Fund, an initial supply of checks will be mailed within 10
business days. There is no charge for checks or for their
clearance. CORPORATIONS, TRUSTS AND OTHER ORGANIZATIONS
SHOULD CALL OR WRITE OUR CLIENT SERVICES DEPARTMENT
(1-800-662-2739) BEFORE SUBMITTING SIGNATURE CARDS, AS
ADDITIONAL DOCUMENTS MAY BE REQUIRED TO ESTABLISH THE
CHECKWRITING SERVICE.
Before establishing the checkwriting option, you should be
aware that:
1. Writing a check (a redemption of shares) is a taxable
event.
2. The Fund does not allow an account to be closed through
the checkwriting option.
3. Vanguard cannot guarantee a stop payment on any check. If
you wish to reverse a stop payment order, you must do so
in writing.
4. Shares held in certificate form cannot be redeemed using
the checkwriting option.
5. The Fund reserves the right to terminate or alter this
service at any time.
- --------------------------------------------------------------------------------
SELLING BY MAIL Requests should be mailed to VANGUARD FINANCIAL CENTER,
VANGUARD INDEX FUNDS, P.O. BOX 1120, VALLEY FORGE, PA 19482.
(For express or registered mail, send your request to
Vanguard Financial Center, Vanguard Index Funds, 455 Devon
Park Drive, Wayne, PA 19087.)
The redemption price of shares will be the Portfolio's net
asset value next determined after Vanguard has received all
required documents in Good Order.
- --------------------------------------------------------------------------------
DEFINITION OF
GOOD ORDER GOOD ORDER means that the request includes the following:
1. The account number and Portfolio name.
2. The amount of the transaction (specified in dollars or
shares).
3. The signatures of all owners EXACTLY as they are
registered on the account.
4. Any required signature guarantees.
5. Other supporting legal documentation that might be
required, in the case of estates, corporations, trusts,
and certain other accounts.
6. Any certificates you are holding for the account.
IF YOU HAVE QUESTIONS ABOUT THIS DEFINITION AS IT PERTAINS TO
YOUR REQUEST, PLEASE CALL OUR CLIENT SERVICES
(1-800-662-2739).
- --------------------------------------------------------------------------------
SELLING BY
TELEPHONE To sell shares by telephone, you or your pre-authorized
representative may call our Client Services Department at
1-800-662-2739. For telephone redemptions, you may have the
proceeds sent to you either by mail or by wire. In addition
to the details below, please see "Important Information About
Telephone Transactions."
BY MAIL: Telephone mail redemption is automatically
established on your account unless you indicate otherwise on
your Account Registration Form. You may redeem any amount by
calling Vanguard. The proceeds will be paid to the
registered shareholders and mailed to the address of record.
40
<PAGE> 110
BY WIRE: Telephone wire redemption must be specifically
elected for your account. The best time to elect telephone
wire redemption is at the time you complete your Account
Registration Form. If you do not presently have telephone
wire redemption and wish to establish it, please contact
Client Services.
With the wire redemption option, you may withdraw a minimum
of $1,000 and have the amount wired directly to your bank
account. Wire redemptions less than $5,000 are subject to a
$5 charge deducted by Vanguard. There is no Vanguard charge
for wire redemptions of $5,000 or more. However, your bank
may assess a separate fee to accept incoming wires.
A request to change the bank associated with your wire
redemption option must be received in writing, signed by each
registered shareholder, and accompanied by a voided check or
preprinted deposit slip. A signature guarantee is required if
your bank registration is not identical to your Vanguard Fund
account registration.
- --------------------------------------------------------------------------------
SELLING BY FUND
EXPRESS
Automatic Withdrawal
& Special Redemption
If you select the Fund Express Automatic Withdrawal option,
money will be automatically moved from your Vanguard Fund
account to your bank account according to the schedule you
have selected. The Special Redemption option (only available
to Vanguard Bond Index Fund Shareholders) lets you move money
from your Vanguard account to your bank account on an "as
needed" basis. To establish these Fund Express options,
please provide the appropriate information on the Account
Registration Form. We will send you a confirmation of your
Fund Express service; please wait three weeks before using
the service.
- --------------------------------------------------------------------------------
SELLING BY
EXCHANGE You may sell shares of the Portfolio by making an exchange
into another Vanguard Fund account. Exchanges to and from
Vanguard Balanced Fund, Vanguard Index Trust and Vanguard
International Equity Index Fund may be made only by mail.
Send your exchange request to Vanguard Financial Center,
Vanguard (insert Fund name), P.O. Box 1120, Valley Forge, PA
19482. Please see "Exchanging Your Shares" for details.
- --------------------------------------------------------------------------------
IMPORTANT REDEMPTION
INFORMATION Shares purchased by check or Fund Express may be redeemed at
any time. However, your redemption proceeds will not be paid
until payment for the purchase is collected, which may take
up to ten calendar days.
- --------------------------------------------------------------------------------
DELIVERY OF
REDEMPTION
PROCEEDS Redemption requests received by telephone prior to the close
of the New York Stock Exchange (generally 4:00 p.m. Eastern
time), are processed on the day of receipt and the redemption
proceeds are normally sent on the following business day.
Redemption requests received by telephone after the close of
the Exchange are processed on the business day following
receipt and the proceeds are normally sent on the second
business day following receipt.
Redemption proceeds must be sent to you within seven days of
receipt of your request in Good Order.
If you experience difficulty in making a telephone redemption
during periods of drastic economic or market changes, your
redemption request may be made by regular or express mail. It
will be implemented at the net asset value next determined
after your request has been received by Vanguard in Good
Order. The Fund reserves the right to revise or terminate the
telephone redemption privilege at any time.
The Fund may suspend the redemption right or postpone payment
at times when the New York Stock Exchange is closed or under
any emergency circumstances as determined by the United
States Securities and Exchange Commission.
If the Board of Directors determines that it would be
detrimental to the best interests of the Fund's remaining
shareholders to make payment in cash, the Fund may pay
redemption proceeds in whole or in part by a distribution in
kind of readily marketable securities.
- --------------------------------------------------------------------------------
41
<PAGE> 111
VANGUARD'S AVERAGE
COST STATEMENT If you make a redemption from a qualifying account, Vanguard
will send you an Average Cost Statement which provides you
with the tax basis of the shares you redeemed. Please see
"Other Vanguard Services" for additional information.
- --------------------------------------------------------------------------------
MINIMUM ACCOUNT
BALANCE
REQUIREMENT Due to the relatively high cost of maintaining smaller
accounts, the Fund reserves the right to redeem shares in any
account that is below the minimum initial investment amount
of $3,000. If at any time the total investment does not have
a value of at least $3,000, you may be notified that your
account is below the Fund's minimum account balance
requirement. You would then be allowed 60 days to make an
additional investment before the account is liquidated.
Proceeds would be promptly paid to the registered
shareholder. (This minimum requirement does not apply to
IRAs, other retirement accounts, and Uniform Gifts/Transfers
to Minors Act accounts.)
The Fund's minimum account balance requirement will not apply
if your account falls below $3,000 solely as a result of
declining markets (i.e., a decline in a Portfolio's net asset
value).
- --------------------------------------------------------------------------------
EXCHANGING
YOUR SHARES
EXCHANGING BY
TELEPHONE
Call Client Services
(1-800-662-2739) Should your investment goals change, you may exchange your
shares for those of other available Vanguard Funds.
Vanguard Bond Index Fund is the only Vanguard Index Fund that
allows telephone exchange. When exchanging shares by
telephone, please have ready the Portfolio name, account
number, Social Security Number or Employer Identification
number listed on the account, and exact name and address in
which the account is registered. Only the registered
shareholder may complete such an exchange. Requests for
telephone exchanges received prior to the close of the New
York Stock Exchange (generally 4:00 p.m. Eastern time) are
processed at the close of business that same day. Requests
received after the close of the Exchange are processed the
next business day. TELEPHONE EXCHANGES ARE NOT ACCEPTED INTO
OR FROM VANGUARD BALANCED INDEX FUND, VANGUARD INDEX TRUST,
VANGUARD INTERNATIONAL EQUITY INDEX FUND, AND VANGUARD
QUANTITATIVE PORTFOLIOS. If you experience difficulty in
making a telephone exchange, your exchange request may be
made by regular or express mail, and it will be implemented
at the closing net asset value on the date received by
Vanguard provided the request is received in Good Order.
Neither the Funds nor Vanguard is responsible for the
authenticity of exchange instructions received by telephone.
Investors bear the full risk of any loss arising from
unauthorized telephone exchanges. To prohibit telephone
exchanges on your account, please notify the Fund in writing.
Otherwise, the telephone exchange privilege will be
automatically established for your account.
- --------------------------------------------------------------------------------
EXCHANGING BY MAIL Please be sure to include on your exchange request the name
and account number of your current Portfolio, the name of the
Fund you wish to exchange into, the amount you wish to
exchange, and the signatures of all registered account
holders. Send your request to VANGUARD FINANCIAL CENTER,
VANGUARD INDEX FUNDS, P.O. BOX 1120, VALLEY FORGE, PA 19482.
(For express or registered mail, send your request to
Vanguard Financial Center, Vanguard Index Funds, 455 Devon
Park Drive, Wayne, PA 19087.)
- --------------------------------------------------------------------------------
IMPORTANT EXCHANGE
INFORMATION Before you make an exchange, you should consider the
following:
- Please read the Fund's prospectus before making an
exchange. For a copy and for answers to any questions you
may have, call our Investor Information Department
(1-800-662-7447).
- An exchange is treated as a redemption and a purchase.
Therefore, you could realize a taxable gain or loss on the
transaction.
- Exchanges are accepted only if the registrations and the
Taxpayer Identification numbers of the two accounts are
identical.
- New accounts are not currently accepted in Vanguard/Windsor
Fund or Vanguard/PRIMECAP 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.
42
<PAGE> 112
- 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 Fund reserves the right to revise or terminate
its provisions, limit the amount of or reject any exchange,
as deemed necessary, at any time.
The exchange privilege is only available in states in which
the shares of the Funds are registered for sale. The Funds
shares are currently registered for sale in all 50 states and
each Fund intends to maintain such registration.
- --------------------------------------------------------------------------------
EXCHANGE
PRIVILEGE
LIMITATIONS The Fund's exchange privilege is not intended to afford
shareholders a way to speculate on short-term movements in
the market. Accordingly, in order to prevent excessive use of
the exchange privilege that may potentially disrupt the
management of the Fund and increase transaction costs, the
Fund has established a policy of limiting excessive exchange
activity.
Exchange activity generally will not be deemed excessive if
limited to TWO SUBSTANTIVE EXCHANGE REDEMPTIONS (AT LEAST 30
DAYS APART) from a Portfolio of the Fund during any twelve
month period. Notwithstanding these limitations, the Fund
reserves the right to reject any purchase request (including
exchange purchases from other Vanguard portfolios) that is
reasonably deemed to be disruptive to efficient portfolio
management.
- --------------------------------------------------------------------------------
IMPORTANT
INFORMATION
ABOUT TELEPHONE
TRANSACTIONS The ability to initiate redemptions (except wire redemptions)
and exchanges by telephone is automatically established on
your account unless you request in writing that telephone
transactions on your account not be permitted. The ability to
initiate wire redemptions by telephone will be established on
your account only if you specifically elect this option in
writing.
To protect your account from losses resulting from
unauthorized or fraudulent telephone instructions, Vanguard
adheres to the following security procedures:
1. SECURITY CHECK. To request a transaction by telephone,
the caller must know (i) the name of the Portfolio; (ii)
the 10-digit account number; (iii) the exact name and
address used in the registration; and (iv) the Social
Security or Employer Identification number listed on the
account.
2. PAYMENT POLICY. The proceeds of any telephone redemption
by mail will be made payable to the registered shareowner
and mailed to the address of record, only. In the case of
a telephone redemption by wire, the wire transfer will be
made only in accordance with the shareowner's prior
written instructions.
Neither the Fund nor Vanguard will be responsible for the
authenticity of transaction instructions received by
telephone, provided that reasonable security procedures have
been followed. Vanguard believes that the security procedures
described above are reasonable, and that if such procedures
are followed, you will bear the risk of any losses resulting
from unauthorized or fraudulent telephone transactions on
your account.
- --------------------------------------------------------------------------------
TRANSFERRING
REGISTRATION You may transfer the registration of any of your Fund shares
to another person by completing a transfer form and sending
it to: VANGUARD FINANCIAL CENTER, P.O. BOX 1110, VALLEY
FORGE, PA 19482, ATTENTION: TRANSFER DEPARTMENT. The request
must be in Good Order. To obtain a transfer form, please call
our Client Services Department (1-800-662-2739).
- --------------------------------------------------------------------------------
STATEMENTS AND
REPORTS Vanguard will send you a confirmation statement each time you
initiate a transaction in your account. You will also receive
a comprehensive account statement at the end of each calendar
quarter. The fourth-quarter statement will be a year-end
statement, listing all transaction activity for the entire
calendar year.
Vanguard's Average Cost Statement provides you with the
average cost of shares redeemed from your account, using the
average cost single category method. This service is
available for most taxable accounts opened since January 1,
1986. In general, investors who redeemed shares from a
43
<PAGE> 113
qualifying Vanguard account may expect to receive their
Average Cost Statement in February of the following year.
Please call our Client Services Department (1-800-662-2739)
for information.
Financial reports on the Fund will be mailed to you
semi-annually, according to the Fund's fiscal year-end.
- --------------------------------------------------------------------------------
OTHER VANGUARD
SERVICES For more information about any of these services, please call
our Investor Information Department at 1-800-662-7447.
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. Please contact
our Client Services Department at 1-800-662-2739 for
additional information.
VANGUARD FUND
EXPRESS Vanguard's Fund Express allows you to transfer money between
your Fund account and your account at a bank, savings and
loan association, or a credit union that is a member of the
Automated Clearing House (ACH) system. You may elect this
service on the Account Registration Form or call our Investor
Information Department (1-800-662-7447) for a Fund Express
application.
The minimum amount that can be transferred by telephone is
$100. However, if you have established one of the automatic
options, the minimum amount is $50. The maximum amount that
can be transferred using any of the options is $100,000.
Special rules govern how your Fund Express purchases or
redemptions are credited to your account. In addition, some
services of Fund Express cannot be used with specific
Vanguard Funds. For more information, please refer to the
Vanguard Fund Express brochure.
VANGUARD DIVIDEND
EXPRESS Vanguard's Dividend Express allows you to transfer your
dividends and/or capital gains distributions automatically
from your Fund account, one business day after the Fund's
payable date, to your account at a bank, savings and loan
association, or a credit union that is a member of the
Automated Clearing House (ACH) system. You may elect this
service on the Account Registration Form or call our Investor
Information Department (1-800-662-7447) for a Vanguard
Dividend Express application.
VANGUARD
TELE-ACCOUNT Vanguard Tele-Account is a convenient, automated service that
provides share price, price change and yield quotations on
Vanguard Funds through any TouchToneTM telephone. This
service also lets you obtain information about your account
balance, your last transaction, and your most recent dividend
or capital gains payment. To contact Vanguard's Tele-Account
service, dial 1-800-ON-BOARD (1-800-662-6273). A brochure
offering detailed operating instructions is available from
our Investor Information Department (1-800-662-7447).
- --------------------------------------------------------------------------------
44
<PAGE> 114
- --------------------------------------------------------------------------------
[LOGO]
---------------------------
THE VANGUARD GROUP
OF INVESTMENT
COMPANIES
Vanguard Financial Center
P.O. Box 2600
Valley Forge, PA 19482
INVESTOR INFORMATION
DEPARTMENT:
1-800-662-7447 (SHIP)
CLIENT SERVICES
DEPARTMENT:
1-800-662-2739 (CREW)
TELE-ACCOUNT FOR
24-HOUR ACCESS:
1-800-662-6273 (ON BOARD)
TELECOMMUNICATION SERVICE
FOR THE HEARING-IMPAIRED:
1-800-662-2738
TRANSFER AGENT:
The Vanguard Group, Inc.
Vanguard Financial Center
Valley Forge, PA 19482
P0----
- --------------------------------------------------------------------------------
<PAGE> 115
PART B
VANGUARD INDEX TRUST
STATEMENT OF ADDITIONAL INFORMATION
APRIL 28, 1995
This Statement is not a prospectus but should be read in conjunction with
the Trust's current Prospectus (dated April 28, 1995). To obtain the Prospectus
please call:
VANGUARD INVESTOR INFORMATION CENTER
1-800-662-7447
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Objectives and Policies........................................................ 1
Investment Limitations.................................................................... 5
Purchase of Shares........................................................................ 6
Redemption of Shares...................................................................... 7
Yield and Total Return.................................................................... 7
Management of the Trust................................................................... 8
Portfolio Transactions.................................................................... 10
Description of Shares and Voting Rights................................................... 11
Performance Measures...................................................................... 12
Financial Statements...................................................................... 13
</TABLE>
INVESTMENT OBJECTIVES AND POLICIES
REPURCHASE AGREEMENTS Each Portfolio of the Trust may invest in repurchase
agreements with commercial banks, brokers or dealers either for defensive
purposes due to market conditions or to generate income from its excess cash
balances. A repurchase agreement is an agreement under which the Portfolio
acquires a money market instrument (generally a security issued by the U.S.
Government or an agency thereof, a banker's acceptance or a certificate of
deposit) from a commercial bank, broker or dealer, subject to resale to the
seller at an agreed upon price and date (normally, the next business day). A
repurchase agreement may be considered a loan collateralized by securities. The
resale price reflects an agreed upon interest rate effective for the period the
instrument is held by the Portfolio and is unrelated to the interest rate on the
underlying instrument. In these transactions, the securities acquired by the
Portfolio (including accrued interest earned thereon) must have a total value in
excess of the value of the repurchase agreement and are held by the Trust's
custodian banks until repurchased. In addition, the Board of Trustees will
monitor the Trust's repurchase agreement transactions generally and will
establish guidelines and standards for review of the creditworthiness of any
bank, broker or dealer party to a repurchase agreement with the Trust. No more
than an aggregate of 15% of a Portfolio's assets at the time of investment, will
be invested in repurchase agreements having maturities longer than seven days
and securities subject to legal or contractual restrictions on resale, or for
which there are no readily available market quotations.
The use of repurchase agreements involves certain risks. For example, if
the other party to the agreement defaults on its obligation to repurchase the
underlying security at a time when the value of the security has declined, the
Portfolio may incur a loss upon disposition of the security. If the other party
to the agreement becomes insolvent and subject to liquidation or reorganization
under the Bankruptcy Code or other laws, a court may determine that the
underlying security is collateral for a loan by the Portfolio not within the
control of the Portfolio and therefore the Portfolio may not be able to
substantiate its interest in the underlying security and may be deemed an
unsecured creditor of the other party to the agreement. While the Trust's
management acknowledges these risks, it is expected that they can be controlled
through careful monitoring procedures.
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LENDING OF SECURITIES Each Portfolio of the Trust may lend its securities
to qualified institutional investors who need to borrow securities in order to
complete certain transactions, such as covering short sales, avoiding failures
to deliver securities or completing arbitrage operations. By lending its
portfolio securities, a Portfolio attempts to increase its net investment income
through the receipt of interest on the loan. Any gain or loss in the market
price of the securities loaned that might occur during the term of the loan
would be for the account of the Portfolio. The Portfolio may lend its portfolio
securities to qualified brokers, dealers, banks or other financial institutions,
so long as the terms, the structure and the aggregate amount of such loans are
not inconsistent with the Investment Company Act of 1940, or the Rules and
Regulations or interpretations of the Securities and Exchange Commission (the
"Commission") thereunder, which currently require that (a) the borrower pledge
and maintain with the Trust collateral consisting of cash, a letter of credit
issued by a domestic U.S. bank, or securities issued or guaranteed by the United
States Government having at all times not less than 100% of the value of the
securities loaned, (b) the borrower add to such collateral whenever the price of
the securities loaned rises (i.e. the borrower "marks to the market" on a daily
basis), (c) the loan be made subject to termination by the Trust at any time and
(d) the Portfolio receive reasonable interest on the loan (which may include the
Portfolio's investing any cash collateral in interest bearing short-term
investments), any distribution on the loaned securities and any increase in
their market value. Loan arrangements made by the Trust will comply with all
other applicable regulatory requirements, including the rules of the New York
Stock Exchange, which rules presently require the borrower, after notice, to
redeliver the securities within the normal settlement time of five business
days. All relevant facts and circumstances, including the creditworthiness of
the broker, dealer or institution, will be considered in making decisions with
respect to the lending of securities, subject to review by the Board of
Trustees.
At the present time, the Staff of the Commission does not object if an
investment company pays reasonable negotiated fees in connection with loaned
securities, so long as such fees are set forth in a written contract and
approved by the investment company's trustees. In addition, voting rights may
pass with the loaned securities, but if a material event will occur affecting an
investment on loan, the loan must be called and the securities voted.
FUTURES CONTRACTS Each Portfolio of the Trust may enter into futures
contracts, options, warrants, options on futures contracts, convertible
securities and swap agreements for the purpose of simulating full investment and
reducing transactions costs. The Trust does not use futures or options for
speculative purposes. Each Portfolio will only use futures and options to
simulate full investment in the underlying index while retaining a cash balance
for fund management purposes. Futures contracts provide for the future sale by
one party and purchase by another party of a specified amount of a specific
security at a specified future time and at a specified price. Futures contracts
which are standardized as to maturity date and underlying financial instrument
are traded on national futures exchanges. Futures exchanges and trading are
regulated under the Commodity Exchange Act by the Commodity Futures Trading
Commission ("CFTC"), a U.S. Government Agency.
Although futures contracts by their terms call for actual delivery or
acceptance of the underlying securities, in most cases the contracts are closed
out before the settlement date without the making or taking of delivery. Closing
out an open futures position is done by taking an opposite position ("buying" a
contract which has previously been "sold," or "selling" a contract previously
purchased) in an identical contract to terminate the position. Brokerage
commissions are incurred when a futures contract is bought or sold.
Futures traders are required to make a good faith margin deposit in cash or
government securities with a broker or custodian to initiate and maintain open
positions in futures contracts. A margin deposit is intended to assure
completion of the contract (delivery or acceptance of the underlying security)
if it is not terminated prior to the specified delivery date. Minimal initial
margin requirements are established by the futures exchange and may be changed.
Brokers may establish deposit requirements which are higher than the exchange
minimums. Futures contracts are customarily purchased and sold on deposits which
may range upward from less than 5% of the value of the contract being traded.
After a futures contract position is opened, the value of the contract is
marked to market daily. If the futures contract price changes to the extent that
the margin on deposit does not satisfy margin requirements, payment of
additional "variation" margin will be required. Conversely, change in the
contract value may
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reduce the required margin, resulting in a repayment of excess margin to the
contract holder. Variation margin payments are made to and from the futures
broker for as long as the contract remains open. A Portfolio of the Trust
expects to earn interest income on its margin deposits.
Traders in futures contracts may be broadly classified as either "hedgers"
or "speculators." Hedgers use the futures markets primarily to offset
unfavorable changes in the value of securities otherwise held for investment
purposes or expected to be acquired by them. Speculators are less inclined to
own the securities underlying the futures contracts which they trade, and use
futures contracts with the expectation of realizing profits from fluctuations in
the prices of underlying securities. The Trust's Portfolios intend to use
futures contracts only for bonafide hedging purposes.
Regulations of the CFTC applicable to the Trust require that all of its
futures transactions constitute bonafide hedging transactions. A Portfolio will
only sell futures contracts to protect against a decrease in the price of
securities it intends to sell or purchase contracts to protect against an
increase in the price of securities it intends to purchase. As evidence of this
hedging interest, the Portfolio expects that approximately 75% of its futures
contract purchases will be "completed," that is, equivalent amounts of related
securities will have been purchased or are being purchased by the Portfolio upon
sale of open futures contracts.
Although techniques other than the sale and purchase of futures contracts
could be used to control the Portfolio's exposure to market fluctuations, the
use of futures contracts may be a more effective means of hedging this exposure.
While a Portfolio will incur commission expenses in both opening and closing out
futures positions, these costs are lower than transaction costs incurred in the
purchase and sale of the underlying securities.
RESTRICTIONS ON THE USE OF FUTURES CONTRACTS A Portfolio will not enter
into futures contract transactions to the extent that, immediately thereafter,
the sum of its initial margin deposits on open contracts exceeds 5% of the
market value of the Portfolio's total assets. In addition, a Portfolio will not
enter into futures contracts to the extent that its outstanding obligations to
purchase securities under these contracts would exceed 20% of the Portfolio's
total assets.
RISK FACTORS IN FUTURES TRANSACTIONS Positions in futures contracts may be
closed out only on an Exchange which provides a secondary market for such
futures. However, there can be no assurance that a liquid secondary market will
exist for any particular futures contract at any specific time. Thus, it may not
be possible to close a futures position. In the event of adverse price
movements, the Portfolio would continue to be required to make daily cash
payments to maintain its required margin. In such situations, if the Portfolio
has insufficient cash, it may have to sell portfolio securities to meet daily
margin requirements at a time when it may be disadvantageous to do so. In
addition, the Portfolio may be required to make delivery of the instruments
underlying futures contracts it holds. The inability to close options and
futures positions also could have an adverse impact on the ability to
effectively hedge it.
Each Portfolio will minimize the risk that it will be unable to close out a
futures contract by only entering into futures which are traded on national
futures exchanges and for which there appears to be a liquid secondary market.
The risk of loss in trading futures contracts in some strategies can be
substantial, due both to the low margin deposits required, and the extremely
high degree of leverage involved in futures pricing. As a result, a relatively
small price movement in a futures contract may result in immediate and
substantial loss (as well as gain) to the investor. For example, if at the time
of purchase, 10% of the value of the futures contract is deposited as margin, a
subsequent 10% decrease in the value of the futures contract would result in a
total loss of the margin deposit, before any deduction for the transaction
costs, if the account were then closed out. A 15% decrease would result in a
loss equal to 150% of the original margin deposit if the contract were closed
out. Thus, a purchase or sale of a futures contract may result in losses in
excess of the amount invested in the contract. The Trust also bears the risk
that the adviser will incorrectly predict future stock market trends. However,
because the futures strategies of the Trust are engaged in only for hedging
purposes, the Trust's officers do not believe that the Portfolios are subject to
the risks of loss frequently associated with futures
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transactions. A Portfolio would presumably have sustained comparable losses if,
instead of the futures contract, it had invested in the underlying financial
instrument and sold it after the decline.
Utilization of futures transactions by the Trust does involve the risk of
imperfect or no correlation where the securities underlying futures contracts
have different maturities than the portfolio securities being hedged.
It is also possible that the Portfolio could both lose money on futures
contracts and also experience a decline in value of its portfolio securities.
There is also the risk of loss by the Portfolio of margin deposits in the event
of bankruptcy of a broker with whom the Portfolio has an open position in a
futures contract or related option.
Most futures exchanges limit the amount of fluctuation permitted in futures
contract prices during a single trading day. The daily limit establishes the
maximum amount that the price of a futures contract may vary either up or down
from the previous day's settlement price at the end of a trading session. Once
the daily limit has been reached in a particular type of contract, no trades may
be made on that day at a price beyond that limit. The daily limit governs only
price movement during a particular trading day and therefore does not limit
potential losses, because the limit may prevent the liquidation of unfavorable
positions. Futures contract prices have occasionally moved to the daily limit
for several consecutive trading days with little or no trading, thereby
preventing prompt liquidation of future positions and subjecting some futures
traders to substantial losses.
FEDERAL TAX TREATMENT OF FUTURES CONTRACTS 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. A Portfolio may be required to defer the recognition of losses
on futures contracts to the extent of any unrecognized gains on related
positions held by the Portfolio.
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 or 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 distributions.
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INVESTMENT LIMITATIONS
The following restrictions and fundamental policies cannot be changed
without approval of the holders of a majority of the outstanding shares of each
Portfolio (as defined in the Investment Company Act of 1940). Each Portfolio may
not under any circumstances:
1) change its investment objective, which is to provide investment results
that correspond to the performance of a particular stock index as set
forth in (2) below;
2) change its investment policy, which is, in the case of the 500
Portfolio, is to attempt to duplicate the performance of Standard &
Poor's 500 Composite Stock Price Index by owning as many of the 500
stocks contained in the index as is feasible; in the case of the
Extended Market Portfolio, is to attempt to duplicate the performance
of common stocks traded on the New York Stock Exchange, American Stock
Exchange and NASDAQ not included in the S&P 500 Index as represented by
the Wilshire 4500 Index; in the case of the Total Stock Market
Portfolio to match the investment performance of the Wilshire 5000
Index, an index consisting of all regularly traded U.S. stocks; in the
case of the Value Portfolio to attempt to duplicate the performance of
the Standard & Poor's/BARRA Value Index by owning as many of the stocks
contained in the index as is feasible; in the case of the Growth
Portfolio to attempt to duplicate the performance of the Standard &
Poor's/BARRA Growth Index by owning as many of the stocks contained in
the index as is feasible; and, in the case of the Small Capitalization
Stock Portfolio to duplicate the investment performance of the Russell
2000 Small Stock Index;
3) invest in commodities or purchase real estate, although it may purchase
securities of companies which deal in real estate or interests therein,
and that each Portfolio may invest in stock index futures contracts,
stock options and options on stock index futures contracts to that
extent that not more than 5% of the Portfolio's assets are required as
margin deposit for futures contracts and not more than 20% of a
Portfolio's assets are invested in futures and options at any time;
4) lend money to any person except (i) by purchasing a portion of an issue
of short-term debt securities or similar obligations (including
repurchase agreements) which are publicly distributed or customarily
purchased by institutional investors, and (ii) as provided under
"Lending of Securities";
5) purchase securities on margin or sell securities short, except as set
forth in paragraph 3 above;
6) with respect to 75% of net assets, purchase more than 10% of the
outstanding voting securities of any company;
7) with respect to 75% of its assets, purchase securities of any issuer
(except obligations of the United States Government and its
instrumentalities), if, as a result, more than 5% of the value of the
Portfolio's total assets would be invested in the securities of such
issuer;
8) borrow money, except from banks (or through reverse repurchase
agreements) for temporary or emergency (not leveraging) purposes,
including the meeting of redemption requests which might otherwise
require the untimely disposition of securities, in an amount not
exceeding 15% of its net assets (including the amount borrowed and the
value of any outstanding reverse repurchase agreements) at the time the
borrowing is made. Whenever a borrowing exceeds 5% of a Portfolio's net
assets, the Portfolio will not make any additional investments;
9) pledge, mortgage, or hypothecate any of its assets to an extent greater
than 5% of the value of its total assets;
10) engage in the business of underwriting securities issued by other
persons except to the extent that a Portfolio may technically be deemed
an underwriter under the Securities Act of 1933, as amended, in
disposing of portfolio securities;
11) purchase or otherwise acquire any security if, as a result, more than
15% of its net assets would be invested in securities that are illiquid
(included in this limitation is the Trust's investment in The Vanguard
Group, Inc.);
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12) invest for the purpose of controlling management of any company;
13) invest in securities of other investment companies, except as may be
acquired as a part of a merger, consolidation or acquisition of assets
approved by the Portfolio's shareholders, or otherwise to the extent
permitted by Section 12 of the Investment Company Act of 1940. The
Portfolio will invest only in investment companies which have
investment objectives and investment policies consistent with those of
the Portfolio;
14) invest more than 25% of the value of its total assets in any one
industry; or
15) invest in put, call, straddle or spread options or in interests in oil,
gas or other mineral exploration or development programs, except as set
forth in limitation number "3", above.
The above-mentioned investment limitations are considered at the time
investment securities are purchased. Notwithstanding these limitations, the
Trust may own all or any portion of the securities of, or make loans to, or
contribute to the costs or other financial requirements of any company which
will be wholly owned by the Trust and one or more other investment companies and
is primarily engaged in the business of providing, at-cost, management,
administrative, distribution or related services to the Trust and other
investment companies. See "The Vanguard Group". Each Portfolio of the Trust may
not invest more than 5% of its total assets in securities of companies which
have (with predecessors) a record of less than three years' of continuous
operation. Additionally, each Portfolio of the Trust will not purchase or retain
securities of an issuer if those Officers and Trustees of the Trust owning more
than 1/2 of 1% of such securities together own more than 5% of such securities.
These are non-fundamental policies which may be changed by the vote of a
majority of the Trustees.
PURCHASE OF SHARES
The Trust reserves the right in its sole discretion (i) to suspend the
offerings of its shares, (ii) to reject purchase or exchange purchase orders
when in the judgment of management such rejection is in the best interest of the
Trust, and (iii) to reduce or waive the minimum for initial and subsequent
investments as well as redemption fees 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 SMALL
CAPITALIZATION STOCK, EXTENDED MARKET PORTFOLIO AND THE TOTAL STOCK MARKET
PORTFOLIO WILL NOT BE SUBJECT TO THE 1%, 0.5% AND 0.25% TRANSACTION FEES. All
dividends, subscription, or other rights which are reflected in the market price
of accepted securities at the time of valuation become the property of the
Portfolio and must be delivered to the Portfolio by the investor upon receipt
from the issuer. A gain or loss for Federal income tax purposes would be
realized by the investor upon the exchange depending upon the cost of the
securities tendered.
The Portfolio will not accept securities in exchange unless: (1) such
securities are, at the time of the exchange, included in the Portfolio; (2) such
an exchange will not cause the Portfolio's weightings to come imbalanced with
respect to the weightings of the stocks included in the Index; (3) the investor
represents and agrees that all securities offered to the Portfolio are not
subject to any restrictions upon their sale by the Portfolio under the
Securities Act of 1933, or otherwise; (4) such securities are traded in an
unrelated transaction with a quoted sales price on the same day the exchange
valuation is made; (5) the quoted sales price used as a basis of valuation is
representative (i.e., one that does not involve a trade of substantial size
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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 commitment is irrevocable without the
prior approval of the Commission. Redemptions in excess of the above limits may
be paid in whole or in part, in investment securities or in cash, as the
Trustees may deem advisable; however, payment will be made wholly in cash unless
the Trustees believe that economic or market conditions exist which would make
such a practice detrimental to the best interests of the Trust. If redemptions
are paid in investment securities, such securities will be valued as set forth
in the Prospectus under "The Share Price of Each Portfolio" and a redeeming
shareholder would normally incur brokerage expenses if he converted these
securities to cash.
YIELD AND TOTAL RETURN
The yield of the 500 Portfolio of the Trust for the 30 day period ended
December 31, 1994 was 2.88%. The yield of the Extended Market Portfolio of the
Trust for the 30 day period ended December 31, 1994 was 1.65%. The yield of the
Total Stock Market Portfolio of the Trust for the 30 day period ended December
31, 1994 was 2.45%. The yield of the Value Portfolio for the 30 day period ended
December 31, 1994 was 3.63%. The yield of the Growth Portfolio for the 30 day
period ended December 31, 1994 was 1.98%. The yield of the Small Capitalization
Stock Portfolio+ for the 30 day period ended December 31, 1994 was 1.59%.
The average annual total return of the 500 Portfolio* for the one, five and
ten year periods ended December 31, 1994 was +1.13%, +8.45% and +14.00%,
respectively. The average annual total return for the Extended Market
Portfolio** for the one and five year periods ended December 31, 1994 and since
the Portfolio's inception on December 21, 1987 was -2.79%, +8.77% and +12.29%,
respectively. The average annual total return of the Total Stock Market
Portfolio*** for the period ended December 31, 1994, and since the Portfolio's
inception on April 27, 1992 was -0.46% and +7.53%++. The average annual total
return of the Value Portfolio* for the period ended December 31, 1994 and since
inception on November 2, 1992 was -0.79% and +9.51%++. The average annual total
return of the Growth Portfolio* for the period ended December 31, 1994 and since
inception on November 2, 1992 was +2.80% and +3.44%++. The average annual return
of the Small Capitalization Stock Portfolio** for the one, five and ten year
periods ended December 31, 1994 was -1.56%, +10.37% and +9.93%, 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.
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* Total return figures are adjusted to reflect the $10 annual account
maintenance fee.
** Total return figures for the Extended Market and the Small Capitalization
Stock Portfolios reflect the 1% portfolio transaction fee and the $10 annual
account maintenance fee.
*** Total return figures for the Total Stock Market Portfolio reflect the 0.25%
portfolio transaction fee and the $10 annual account maintenance fee.
+ Formerly Vanguard Small Capitalization Stock Fund, Inc.
++ Annualized.
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MANAGEMENT OF THE TRUST
TRUSTEES AND OFFICERS
The Officers of the Trust manage its day-to-day operations and are
responsible to the Trust's Board of Trustees. The Trustees set broad policies
for the Trust and choose its Officers. The following is a list of the Trustees
and Officers of the Trust and a statement of their present positions and
principal occupations during the past five years. The mailing address of the
Trustees and Officers of the Trust is Post Office Box 876, Valley Forge, PA
19482.
JOHN C. BOGLE, Chairman, Chief Executive Officer and Trustee*
Chairman, Chief Executive Officer, and Director of The Vanguard Group,
Inc., and of each of the investment companies in The Vanguard Group.
Director of The Mead Corporation and General Accident Insurance.
JOHN J. BRENNAN, President & Trustee*
President and Director of The Vanguard Group, Inc. and of each of the
investment companies in The Vanguard Group.
ROBERT E. CAWTHORN, Trustee
Chairman of Rhone-Poulenc Rorer, Inc.; Director of Sun Company.
BARBARA BARNES HAUPTFUHRER, Trustee
Director of The Great Atlantic and Pacific Tea Company. Alco Standard
Corp., Raytheon Company, Knight-Ridder Inc., and Massachusetts Mutual Life
Insurance Co. and Trustee Emerita of Wellesley College.
BRUCE K. MACLAURY, Trustee
President, The Brookings Institution; Director of American Express Bank,
Ltd., The St. Paul Companies, Inc., and Scott Paper Co.
BURTON G. MALKIEL, Trustee
Chemical Bank Chairman's Professor of Economics, Princeton University;
Director of Prudential Insurance Co. of America, Amdahl Corporation, Baker
Fentress & Co., The Jeffrey Co., and Southern New England Communications
Company.
ALFRED M. RANKIN, JR., Trustee
Chairman, President, and Chief Executive Officer of NACCO Industries, Inc.;
Director of The BFGoodrich Company, The Standard Products Company and The
Reliance Electric Company.
JOHN C. SAWHILL, Trustee
President and Chief Executive Officer, The Nature Conservancy; formerly,
Director and Senior Partner, McKinsey & Co.; President, New York
University; Director of Pacific Gas and Electric Company and NACCO
Industries.
JAMES O. WELCH, JR., Trustee
Retired Chairman of Nabisco Brands, Inc. retired Vice Chairman and Director
of RJR Nabisco; Director of TECO Energy, Inc.
J. LAWRENCE WILSON, Trustee
Chairman and Chief Executive Officer of Rohm & Haas Company; Director of
Cummins Engine Company; Trustee of Vanderbilt University and the Culver
Educational Foundation.
RAYMOND J. KLAPINSKY, Secretary*
Senior Vice President and Secretary of The Vanguard Group, Inc.; Secretary
of each of the investment companies in The Vanguard Group.
RICHARD F. HYLAND, Treasurer*
Treasurer of The Vanguard Group, Inc. and of each of the investment
companies in The Vanguard Group.
KAREN E. WEST, Controller*
Vice President of The Vanguard Group, Inc.; Controller of each of the
investment companies in The Vanguard Group.
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*Officers of the Trust are "interested persons" as defined in the Investment
Company Act of 1940.
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THE VANGUARD GROUP, INC.
Vanguard Index Trust is a member of the Vanguard Group of Investment
companies which consists of more than 30 investment companies. Through their
jointly-owned subsidiary, The Vanguard Group, Inc. ("Vanguard"), the Trust and
the other Funds in the Group obtain at cost virtually all of their corporate
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 adheres to a Code of Ethics established pursuant to Rule
17j-1 under the Investment Company Act of 1940. The Code is designed to prevent
unlawful practices in connection with the purchase or sale of securities by
persons associated with Vanguard. Under Vanguard's Code of Ethics certain
officers and employees of Vanguard who are considered access persons are
permitted to engage in personal securities transactions. However, such
transactions are subject to procedures and guidelines substantially similar to
those recommended by the mutual fund industry and approved by the U.S.
Securities and Exchange Commission.
The Vanguard Group was established and operates under a Funds' Service
Agreement which was approved by the shareholders of each of the Funds. The
Funds' Service Agreement provides as follows: (a) each aggregate Vanguard Fund
may invest up to .40% of its current assets in Vanguard, and (b) there is no
limitation on the amount that the Vanguard Funds may contribute to Vanguard's
capitalization. The amounts which each of the Funds have invested are adjusted
from time to time in order to maintain the proportionate relationship between
each Fund's relative net assets and its contribution to Vanguard's capital. At
December 31, 1994 the Trust had contributed capital of $1,851,000 to Vanguard,
representing 9.3% 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, 1994 the Trust's share of Vanguard's actual net
costs of operation relating to management and administrative services (including
transfer agency) totaled approximately $17,169,000.
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 spent on each Fund, and whether to
organize new investment companies.
One half of the distribution expenses of a marketing and promotional nature
is allocated among the Funds based upon relative net assets. The remaining one
half of those expenses is allocated among the Funds based upon each Fund's sales
for the preceding 24 months relative to the total sales of the Funds as a Group,
provided, however, that no Fund's aggregate quarterly rate of contribution for
distribution expenses of a marketing and promotional nature shall exceed 125% of
average distribution expense rate for the Group, and that no Fund shall incur
annual distribution expenses in excess of 20/100 of 1% of its average month-end
net
9
<PAGE> 124
assets. During the fiscal year ended December 31, 1994 the Trust paid
approximately $2,339,000 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
Money Market Portfolio, several Portfolios of Vanguard Fixed Income Securities
Fund, Vanguard Tax-Managed Fund, Vanguard California Tax-Free Fund, Florida
Insured Tax-Free Fund, New Jersey Tax-Free Fund, New York Insured Tax-Free Fund,
Ohio Tax-Free Fund, Pennsylvania Tax-Free Fund, a portion of the assets of
Vanguard/Windsor II, a portion of Vanguard/Morgan Growth Fund and several
indexed separate accounts. 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. During
the fiscal year ended December 31, 1994, and the period February 1, 1994 to
December 31, 1994 for the Small Capitalization Stock Portfolio, the Fund paid
approximately $311,000 of Vanguard's expenses relating to investment advisory
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, 1994, the Trust
paid approximately $57,000 in Trustees' fees and expenses.
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 following table provides detailed information with respect to the
amounts paid or accrued for the Trustees and Officers of the Trust for whom the
Trust's proportionate share of remuneration exceeded $60,000 for the fiscal year
ended December 31, 1994.
VANGUARD INDEX TRUST
COMPENSATION TABLE
<TABLE>
<CAPTION>
AGGREGATE PENSION OR RETIREMENT ESTIMATED TOTAL COMPENSATION
COMPENSATION BENEFITS ACCRUED AS ANNUAL BENEFITS FROM ALL VANGUARD FUNDS
NAMES OF TRUSTEES FROM TRUST PART OF TRUST EXPENSES UPON RETIREMENT PAID TO TRUSTEES(2)
- --------------------------- ------------ ---------------------- --------------- -----------------------
<S> <C> <C> <C> <C>
John C. Bogle(1) $ -- $ -- -- --
John J. Brennan(1) $ -- $ -- -- --
Barbara Barnes Hauptfuhrer $5,093 $1,060 $15,000 $50,000
Robert E. Cawthorn $5,093 $ 871 $13,000 $50,000
Bruce K. MacLaury $6,157 $1,077 $12,000 $45,000
Burton G. Malkiel $5,093 $ 681 $15,000 $50,000
Alfred M. Rankin, Jr. $5,093 $ 522 $15,000 $50,000
John C. Sawhill $5,093 $ 634 $15,000 $50,000
James O. Welch, Jr. $4,889 $ 801 $15,000 $48,000
J. Lawrence Wilson $4,991 $ 556 $15,000 $49,000
</TABLE>
(1) As "Interested Trustees," Messrs. Bogle and Brennan receive no compensation
for their service as Trustees. Compensation amounts reported for Messrs.
Bogle and Brennan relate to their respective positions as Chief Executive
Officer and President of the Trust.
(2) The amounts reported in this column reflect the total compensation paid to
each Trustee for their service as Director or Trustee of 33 Vanguard Funds
(26 in the case of Mr. MacLaury).
10
<PAGE> 125
PORTFOLIO TRANSACTIONS
In placing portfolio transactions, the Trust uses its best judgment to
choose the broker most capable of providing the brokerage services necessary to
obtain best available price and most favorable execution. The full range and
quality of brokerage services available are considered in making these
determinations. In those instances where it is reasonably determined that more
than one broker can offer the brokerage services needed to obtain the best
available price and most favorable execution, consideration will be given to
those brokers which supply statistical information and provide other services in
addition to execution services to the Trust.
Since the Trust does not market its shares through intermediary brokers or
dealers, it is not the Trust's practice to allocate brokerage or principal
business on the basis of sales of its shares which may be made through such
firms. However, the Trust may place portfolio orders with qualified
broker-dealers who recommend the Trust to clients, and may, when a number of
brokers and dealers can provide best price and execution on a particular
transaction, consider the sale of Trust shares by a broker or dealer in
selecting among broker-dealers.
During the years ended December 31, 1992, 1993 and 1994 the Trust paid
brokerage commissions of $1,239,271*, $1,454,492* and $2,092,196, 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.
11
<PAGE> 126
SHAREHOLDER AND TRUSTEE LIABILITY Under Pennsylvania law, shareholders of
such a Trust may, under certain circumstances, be held personally liable as
partners for the obligations of the Trust. Therefore, the Declaration of Trust
contains an express disclaimer of shareholder liability for acts or obligations
of the Trust and requires that notice of such disclaimer be given in each
agreement, obligation, or instrument entered into or executed by the Trust or
the Trustees. The Declaration of Trust provides for indemnification out of the
Trust property of any shareholder held personally liable for the obligations of
the Trust. The Declaration of Trust also provides that the Trust shall, upon
request, assume the defense of any claim against any shareholder for any act or
obligation of the Trust and satisfy any judgment thereon. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which the Trust itself would be unable to meet its
obligations.
The Declaration of Trust further provides that the Trustees will not be
liable for errors of judgment or mistakes of fact or law, but nothing in the
Declaration of Trust protects a Trustee against any liability to which he would
otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties involved in the conduct of his
office.
PERFORMANCE MEASURES
Each of the investment company members of the Vanguard Group, including
Vanguard Index Trust, may from time to time, use one or more of the following
unmanaged indices for comparative performance purposes.
STANDARD & POOR'S 500 COMPOSITE STOCK PRICE INDEX -- is a well diversified list
of 500 companies representing the U.S. Stock Market.
STANDARD & POOR'S/BARRA VALUE INDEX -- contains common stocks of the S&P 500
Index which have lower than average price-to-book ratios.
STANDARD & POOR'S/BARRA GROWTH INDEX -- contains common stocks of the S&P 500
Index which have higher than average price-to-book ratios.
WILSHIRE 5000 EQUITY INDEXES -- consists of more than 6,000 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
preferred. The original list of names was generated by screening for convertible
issues of 100 million or greater in market capitalization. The index is priced
monthly.
SALOMON BROTHERS GNMA INDEX -- includes pools of mortgages originated by private
lenders and guaranteed by the mortgage pools of the Government National Mortgage
Association.
SALOMON BROTHERS HIGH-GRADE CORPORATE BOND INDEX -- consists of publicly issued,
non-convertible corporate bonds rated AA or AAA. It is a value-weighted, total
return index, including approximately 800 issues with maturities of 12 years or
greater.
SALOMON BROTHERS BROAD INVESTMENT-GRADE BOND -- is a market-weighted index that
contains approximately 4700 individually priced investment-grade corporate bonds
rated BBB or better, U.S. Treasury/agency issues and mortgage passthrough
securities.
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.
12
<PAGE> 127
COMPOSITE INDEX -- 65% Standard & Poor's 500 Index and 35% Salomon Brothers High
Grade Bond Index.
LEHMAN BROTHERS AGGREGATE BOND INDEX -- is a market weighted index that contains
individually priced U.S. Treasury, agency, corporate, and mortgage pass-through
securities corporate rated BBB- or better. The Index has a market value of over
$4 trillion.
LEHMAN BROTHERS MUTUAL FUND SHORT (1-5) GOVERNMENT/CORPORATE INDEX -- is a
market weighted index that contains individually priced U.S. Treasury, agency,
and corporate investment grade bonds rated BBB- or better with maturities
between 1 and 5 years. The index has a market value of over $1.3 trillion.
LEHMAN BROTHERS MUTUAL FUND INTERMEDIATE (5-10+) GOVERNMENT/CORPORATE
INDEX -- is a market weighted index that contains individually priced U.S.
Treasury, agency, and corporate securities rated BBB- or better with maturities
between 5 and 10 years. The index has a market value of over $600 billion.
LEHMAN BROTHERS MUTUAL FUND LONG (10+) GOVERNMENT/CORPORATE INDEX -- is a market
weighted index that contains individually priced U.S. Treasury, agency, and
corporate securities rated BBB- or better with maturities greater than 10 years.
The index has a market value of over $900 billion.
FINANCIAL STATEMENTS
The Trust's Financial Statements for the year ended December 31, 1994,
including the financial highlights for each of the respective periods presented,
appearing in the Vanguard Index Trust 1994 Annual Report to Shareholders and
inserts thereto, and the reports thereon of Price Waterhouse LLP, independent
accountants, also appearing therein, are incorporated by reference in this
Statement of Additional Information. The Trust's 1994 Annual Report to
Shareholders and inserts thereto, are enclosed with this Statement of Additional
Information.
13
<PAGE> 128
PART C
VANGUARD INDEX TRUST
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(A) FINANCIAL STATEMENTS
The Trust's Financial Statements for the year ended December 31, 1994,
including the financial highlights for each of the respective periods presented,
appearing in the Vanguard Index Trust 1994 Annual Report to Shareholders and
inserts thereto, and the reports thereon of Price Waterhouse LLP, independent
accountants, also appearing therein, are incorporated by reference in this
Statement of Additional Information. The Financial Statements included in the
Annual Report:
1. Statement of Net Assets as of December 31, 1994.
2.Statement of Operations for the year ended December 31, 1994.
3. Statement of Changes in Net Assets for the years ended December 31, 1993
and December 31, 1994.
4. Financial Highlights for each of the five years in the period ended
December 31, 1994.
5. Notes to Financial Statements.
6. Reports of Independent Accountants.
(B) EXHIBITS
1. Articles of Declaration of Trust**
2. By-Laws of Registrant**
3. Not Applicable
4. Not Applicable
5. Not Applicable
6. Not Applicable
7. Reference is made to the section entitled "Management of the Fund" in
the Registrant's Statement of Additional Information
8. Form of Custody Agreement**
9. Form of Vanguard Service Agreement**
10. Opinion of Counsel**
11. Consent of Independent Accountants*
12. Financial Statements -- reference is made to (a) above
13. Not Applicable
14. Not Applicable
15. Not Applicable
16. Schedule for Computation of Performance Quotations*
27. Financial Data Schedule*.
- ---------------
* Filed herewith
** Previously filed.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
Registrant is not controlled by or under common control with any person.
The Officers of the Registrant, the investment companies in The Vanguard Group
of Investment Companies and The Vanguard Group, Inc. are identical. Reference is
made to the caption "Management of the Fund" in the Prospectus constituting Part
A and in the Statement of Additional Information constituting Part B of this
Registration Statement.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES
As of December 31, 1994 there were 449,680 shareholders of the 500
Portfolio, 40,916 shareholders of the Extended Market Portfolio, 28,036
shareholders of the Total Stock Market Portfolio, 17,392 shareholders
<PAGE> 129
of the Value Portfolio, 6,639 shareholders of the Growth Portfolio and 34,255
shareholders of Vanguard Small Capitalization Stock Portfolio.
ITEM 27. INDEMNIFICATION
Reference is made to Article XI of Registrant's Declaration of Trust.
Insofar as indemnification for liability arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
Investment advisory services are provided to the Registrant on an at-cost
basis by The Vanguard Group, Inc., a jointly-owned subsidiary of the Registrant
and the other Funds in the Group. See the information concerning The Vanguard
Group set forth in Parts A and B.
ITEM 29. PRINCIPAL UNDERWRITERS
(a) None
(b) Not Applicable
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
The books, accounts and other documents required by Section 31(a) under the
Investment Company Act and the rules promulgated thereunder will be maintained
in the physical possession of Registrant; Registrant's Transfer Agent, The
Vanguard Group, Inc. c/o The Vanguard Financial Center, Valley Forge,
Pennsylvania 19482; and the Registrant's Custodians, State Street Bank and Trust
Company, 225 Franklin Street, Boston, Massachusetts 02105, and CoreStates Bank,
N.A., Broad and Market Sts., Philadelphia, PA 19103.
ITEM 31. MANAGEMENT SERVICES
Other than the Amended and Restated Funds' Service Agreement with The
Vanguard Group, Inc. which was previously filed as Exhibit 9(c) and described
Registrant is not a party of any management-related service contract.
ITEM 32. UNDERTAKINGS
Registrant hereby undertakes to comply with the provisions of Section 16(c)
of the Investment Company Act of 1940 in regard to shareholder's rights to call
a meeting of shareholders for the purpose of voting on the removal of trustees
and to assist in shareholder communications in such matters to the extent
required by law.
Registrant hereby undertakes to provide an Annual Report to Shareholders of
prospective investors, free of charge, upon request.
<PAGE> 130
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all the
requirements for effectiveness of this Registration Statement pursuant to Rule
485(b) under the Securities Act of 1933 and has duly caused this Post-Effective
Amendment to this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the Town of Valley Forge and the
Commonwealth of Pennsylvania, on the 27th day of April, 1995.
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment to the Registration Statement has been signed below by
the following persons in the capacities and on the date indicated:
BY: John C. Bogle*, Chairman of the Board, Trustee,
and Chief Executive Officer
April 27, 1995
BY: John J. Brennan*, Trustee and President
April 27, 1995
BY: Robert E. Cawthorn*, Trustee
April 27, 1995
BY: Barbara B. Hauptfuhrer*, Trustee
April 27, 1995
BY: Bruce K. MacLaury*, Trustee
April 27, 1995
BY: Burton G. Malkiel*, Trustee
April 27, 1995
BY: Alfred M. Rankin, Jr.*, Trustee
April 27, 1995
BY: John C. Sawhill*, Trustee
April 27, 1995
BY: James O. Welch, Jr.*, Trustee
April 27, 1995
BY: J. Lawrence Wilson*, Trustee
April 27, 1995
BY: Richard F. Hyland*, Treasurer and Principal
Financial Officer and Accounting Officer
April 27, 1995
*By Power of Attorney. See File Number 2-14336, January 23, 1990. Incorporated
by Reference.
<PAGE> 131
INDEX TO EXHIBITS
<TABLE>
<S> <C>
Consent of Independent Accountants................................................... EX-99.B11
Schedule for Computation of Performance Quotations................................... EX-99.B16
Financial Data Schedules............................................................. EX-27
</TABLE>
<PAGE> 1
EX-99.B11
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to incorporation by reference in the Prospectuses and the
Statement of Additional Information, constituting parts of this amended
Registration Statement on Form N-1A, of our reports dated January 31, 1995
relating to the financial statements and the financial highlights appearing in
the 1994 Annual Reports to Shareholders of Vanguard Index Trust. We also consent
to the references to us under the headings "Financial Highlights" and "General
Information" in Prospectuses and "Financial Statements" in the Statement of
Additional Information.
PRICE WATERHOUSE LLP
Philadelphia, PA
April 26, 1995
<PAGE> 1
EX-99.B16
SCHEDULE FOR COMPUTATION OF PERFORMANCE QUOTATIONS
VANGUARD INDEX TRUST -- 500 PORTFOLIO
1. Average Annual Total Return (As of December 31, 1994)
P (1 + T)n = ERV
<TABLE>
<S> <C> <C>
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
N = number of years
ERV = ending redeemable value at the end of the period
</TABLE>
<TABLE>
<C> <S>
EXAMPLE:
One Year
P = $1,000
T = 1.13%
N = 1
ERV = $1,011.28*
Five Year
P = $1,000
T = 8.45%
N = 5
ERV = $1,500.26*
Ten Year
P = $1,000
T = 14.00%
N = 10
ERV = $3,708.64*
</TABLE>
*Adjusted for $10 account maintenance fee.
2. YIELD (30 Days Ended December 31, 1994)
Yield = 2[(a - b +1)6-1]
----------------------------
c x d
<TABLE>
<C> <S>
Where: a = dividends and interest paid during the period
b = expense dollars during the period (net of reimbursements)
c = the average daily number of shares outstanding during the period
d = the maximum offering price per share on the last day of the period
Example a = $23,451,927.71
b = $1,445,591.56
c = 214,870,101.822
d = $42.97
Yield = 2.88%
</TABLE>
<PAGE> 2
VANGUARD INDEX TRUST -- EXTENDED MARKET PORTFOLIO
1. Average Annual Total Return (As of December 31, 1994)
P (1 + T)n = ERV
<TABLE>
<S> <C> <C>
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
N = number of years
ERV = ending redeemable value at the end of the period
</TABLE>
<TABLE>
<C> <S>
EXAMPLE:
One Year
-------
P = $1,000
T = -2.79%
N = 1
ERV = $972.12*
Five Year
--------
P = $1,000
T = 8.77%
N = 5
ERV = $1,522.75*
Ten Year
-------
P = $1,000
T = 12.29%
N = since inception 12/21/87
ERV = $2,257.94*
</TABLE>
*Adjusted for $10 account maintenance fee and 1% portfolio transaction fee.
2. YIELD (30 Days Ended December 31, 1994)
Yield = 2[(a - b +1)6-1]
----------------------------
c x d
<TABLE>
<C> <S>
Where: a = dividends and interest paid during the period
b = expense dollars during the period (net of reimbursements)
c = the average daily number of shares outstanding during the period
d = the maximum offering price per share on the last day of the period
Example a = $1,457,282.55
b = $155,344.74
c = 51,189,266.719
d = $18.52
Yield = 1.65%
</TABLE>
<PAGE> 3
VANGUARD INDEX TRUST -- TOTAL STOCK MARKET PORTFOLIO
1. Average Annual Total Return (As of December 31, 1994)
P (1 + T)n = ERV
<TABLE>
<S> <C> <C>
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
N = number of years
ERV = ending redeemable value at the end of the period
</TABLE>
<TABLE>
<C> <S>
EXAMPLE:
----------
One Year
-------
P = $1,000
T = -0.46%
N = 1
ERV = $995.41**
Five Year
--------
P = $1,000
T = 7.53%
N = *
ERV = $1,214.64**
</TABLE>
* Since inception March 16, 1992.
** Adjusted for $10 account maintenance fee and .25% portfolio transaction
fee.
2. YIELD (30 Days Ended December 31, 1994)
Yield = 2[(a - b +1)6-1]
----------------------------
c x d
<TABLE>
<C> <S>
Where: a = dividends and interest paid during the period
b = expense dollars during the period (net of reimbursements)
c = the average daily number of shares outstanding during the period
d = the maximum offering price per share on the last day of the period
Example a = $1,693,326.94
b = $126,026.39
c = 67,772,515.539
d = $11.37
Yield = 2.45%
</TABLE>
<PAGE> 4
VANGUARD INDEX TRUST -- VALUE PORTFOLIO
1. Average Annual Total Return (As of December 31, 1994)
P (1 + T)n = ERV
<TABLE>
<S> <C> <C>
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
N = number of years
ERV = ending redeemable value at the end of the period
</TABLE>
<TABLE>
<C> <S>
EXAMPLE:
----------
One Year
-------
P = $1,000
T = -0.79%
N = 1
ERV = $992.10**
Five Year
--------
P = $1,000
T = 9.51%
N = *
ERV = $1,216.86**
</TABLE>
* Since inception November 2, 1992.
** Adjusted for $10 account maintenance fee.
2. YIELD (30 Days Ended December 31, 1994)
Yield = 2[(a - b +1)6-1]
----------------------------
c x d
<TABLE>
<C> <S>
Where: a = dividends and interest paid during the period
b = expense dollars during the period (net of reimbursements)
c = the average daily number of shares outstanding during the period
d = the maximum offering price per share on the last day of the period
Example a = $934,179.45
b = $48,924.32
c = 26,516,313.690
d = $11.12
Yield = 3.63%
</TABLE>
<PAGE> 5
VANGUARD INDEX TRUST -- GROWTH PORTFOLIO
1. Average Annual Total Return (As of December 31, 1994)
P (1 + T)n = ERV
<TABLE>
<S> <C> <C>
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
N = number of years
ERV = ending redeemable value at the end of the period
</TABLE>
<TABLE>
<C> <S>
EXAMPLE:
----------
One Year
-------
P = $1,000
T = 2.80%
N = 1
ERV = $1,027.99**
Five Year
--------
P = $1,000
T = 3.44%
N = *
ERV = $1,075.82**
</TABLE>
* Since inception November 2, 1992.
** Adjusted for $10 account maintenance fee.
2. YIELD (30 Days Ended December 31, 1994)
Yield = 2[(a - b +1)6-1]
----------------------------
c x d
<TABLE>
<C> <S>
Where: a = dividends and interest paid during the period
b = expense dollars during the period (net of reimbursements)
c = the average daily number of shares outstanding during the period
d = the maximum offering price per share on the last day of the period
Example a = $148,327.22
b = $13,388.61
c = 7,993,034.386
d = $10.28
Yield = 1.98%
</TABLE>
<PAGE> 6
SMALL CAPITALIZATION STOCK PORTFOLIO
(FORMERLY VANGUARD SMALL CAPITALIZATION STOCK FUND, INC.)
1. Average Annual Total Return (As of December 31, 1994)
P (1 + T)n = ERV
<TABLE>
<S> <C> <C>
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
N = number of years
ERV = ending redeemable value at the end of the period
</TABLE>
<TABLE>
<C> <S>
EXAMPLE:
----------
One Year
-------
P = $1,000
T = -1.56%
N = 1
ERV = $984.40*
Five Year
--------
P = $1,000
T = +10.37%
N = 5
ERV = $1,637.89*
Ten Year
-------
P = $1,000
T = +9.93%
N = 10
ERV = $2,576.76*
</TABLE>
*Adjusted for $10 account maintenance fee and 1% portfolio transaction fee.
2. YIELD (30 Days Ended December 31, 1994)
Yield = 2[(a - b +1)6-1]
----------------------------
c x d
<TABLE>
<C> <S>
Where: a = dividends and interest paid during the period
b = expense dollars during the period (net of reimbursements)
c = the average daily number of shares outstanding during the period
d = the maximum offering price per share on the last day of the period
Example a = $855,255.71
b = $85,895.85
c = 38,755,324.854
d = $14.99
Yield = 1.59%
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<RESTATED>
<CIK> 0000036405
<NAME> VANGUARD INDEX TRUST
<SERIES>
<NUMBER> 1
<NAME> 500 PORTFOLIO
<MULTIPLIER> 1,000
<CURRENCY> US
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> DEC-31-1994
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 8317385
<INVESTMENTS-AT-VALUE> 9350154
<RECEIVABLES> 61435
<ASSETS-OTHER> 1434
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 9413023
<PAYABLE-FOR-SECURITIES> 21938
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 34784
<TOTAL-LIABILITIES> 56722
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 8331452
<SHARES-COMMON-STOCK> 217721
<SHARES-COMMON-PRIOR> 188758
<ACCUMULATED-NII-CURRENT> 11128
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (19003)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1032724
<NET-ASSETS> 9356301
<DIVIDEND-INCOME> 244931
<INTEREST-INCOME> 10205
<OTHER-INCOME> 0
<EXPENSES-NET> 16662
<NET-INVESTMENT-INCOME> 238474
<REALIZED-GAINS-CURRENT> 75156
<APPREC-INCREASE-CURRENT> (203909)
<NET-CHANGE-FROM-OPS> 109721
<EQUALIZATION> 6612
<DISTRIBUTIONS-OF-INCOME> 241914
<DISTRIBUTIONS-OF-GAINS> 41182
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 63748
<NUMBER-OF-SHARES-REDEEMED> 40646
<SHARES-REINVESTED> 5861
<NET-CHANGE-IN-ASSETS> 1083604
<ACCUMULATED-NII-PRIOR> 7956
<ACCUMULATED-GAINS-PRIOR> 14958
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 36
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 16662
<AVERAGE-NET-ASSETS> 8781322
<PER-SHARE-NAV-BEGIN> 43.83
<PER-SHARE-NII> 1.18
<PER-SHARE-GAIN-APPREC> (0.67)
<PER-SHARE-DIVIDEND> 1.17
<PER-SHARE-DISTRIBUTIONS> 0.20
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 42.97
<EXPENSE-RATIO> 0.002
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<RESTATED>
<CIK> 0000036405
<NAME> VANGUARD INDEX TRUST
<SERIES>
<NUMBER> 2
<NAME> EXTENDED MARKET PORTFOLIO
<MULTIPLIER> 1,000
<CURRENCY> US
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> DEC-31-1994
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 843887
<INVESTMENTS-AT-VALUE> 965703
<RECEIVABLES> 37735
<ASSETS-OTHER> 149
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1003587
<PAYABLE-FOR-SECURITIES> 2112
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 34180
<TOTAL-LIABILITIES> 36292
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 845662
<SHARES-COMMON-STOCK> 52238
<SHARES-COMMON-PRIOR> 47768
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 8
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 645
<ACCUM-APPREC-OR-DEPREC> 122286
<NET-ASSETS> 967295
<DIVIDEND-INCOME> 15431
<INTEREST-INCOME> 929
<OTHER-INCOME> 0
<EXPENSES-NET> 1915
<NET-INVESTMENT-INCOME> 14445
<REALIZED-GAINS-CURRENT> 7145
<APPREC-INCREASE-CURRENT> (40984)
<NET-CHANGE-FROM-OPS> (19394)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 14306
<DISTRIBUTIONS-OF-GAINS> 14532
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 11027
<NUMBER-OF-SHARES-REDEEMED> 7918
<SHARES-REINVESTED> 1361
<NET-CHANGE-IN-ASSETS> 39324
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 6754
<OVERDISTRIB-NII-PRIOR> 147
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 73
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1915
<AVERAGE-NET-ASSETS> 957901
<PER-SHARE-NAV-BEGIN> 19.43
<PER-SHARE-NII> 0.28
<PER-SHARE-GAIN-APPREC> (0.62)
<PER-SHARE-DIVIDEND> 0.28
<PER-SHARE-DISTRIBUTIONS> 0.29
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 18.52
<EXPENSE-RATIO> 0.002
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<RESTATED>
<CIK> 0000036405
<NAME> VANGUARD INDEX TRUST
<SERIES>
<NUMBER> 3
<NAME> TOTAL STOCK MARKET PORTFOLIO
<MULTIPLIER> 1,000
<CURRENCY> US
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> DEC-31-1994
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 756053
<INVESTMENTS-AT-VALUE> 786868
<RECEIVABLES> 9727
<ASSETS-OTHER> 119
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 796714
<PAYABLE-FOR-SECURITIES> 3653
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 7377
<TOTAL-LIABILITIES> 11030
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 754858
<SHARES-COMMON-STOCK> 69079
<SHARES-COMMON-PRIOR> 43825
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 140
<ACCUMULATED-NET-GAINS> 35
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 30931
<NET-ASSETS> 785684
<DIVIDEND-INCOME> 16015
<INTEREST-INCOME> 693
<OTHER-INCOME> 0
<EXPENSES-NET> 1314
<NET-INVESTMENT-INCOME> 15394
<REALIZED-GAINS-CURRENT> 2020
<APPREC-INCREASE-CURRENT> (17224)
<NET-CHANGE-FROM-OPS> 190
<EQUALIZATION> 765
<DISTRIBUTIONS-OF-INCOME> 16257
<DISTRIBUTIONS-OF-GAINS> 2045
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 30586
<NUMBER-OF-SHARES-REDEEMED> 6692
<SHARES-REINVESTED> 1360
<NET-CHANGE-IN-ASSETS> 273402
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 60
<OVERDISTRIB-NII-PRIOR> 42
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 73
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1314
<AVERAGE-NET-ASSETS> 655452
<PER-SHARE-NAV-BEGIN> 11.69
<PER-SHARE-NII> 0.27
<PER-SHARE-GAIN-APPREC> (0.29)
<PER-SHARE-DIVIDEND> 0.27
<PER-SHARE-DISTRIBUTIONS> 0.03
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.37
<EXPENSE-RATIO> 0.002
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<RESTATED>
<CIK> 0000036405
<NAME> VANGUARD INDEX TRUST
<SERIES>
<NUMBER> 4
<NAME> VALUE PORTFOLIO
<MULTIPLIER> 1,000
<CURRENCY> US
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> DEC-31-1994
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 302539
<INVESTMENTS-AT-VALUE> 297946
<RECEIVABLES> 25443
<ASSETS-OTHER> 46
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 323435
<PAYABLE-FOR-SECURITIES> 22595
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 3911
<TOTAL-LIABILITIES> 26506
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 303548
<SHARES-COMMON-STOCK> 26698
<SHARES-COMMON-PRIOR> 16198
<ACCUMULATED-NII-CURRENT> 40
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (2066)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (4593)
<NET-ASSETS> 296929
<DIVIDEND-INCOME> 9926
<INTEREST-INCOME> 84
<OTHER-INCOME> 0
<EXPENSES-NET> 567
<NET-INVESTMENT-INCOME> 9443
<REALIZED-GAINS-CURRENT> (656)
<APPREC-INCREASE-CURRENT> (12580)
<NET-CHANGE-FROM-OPS> (3793)
<EQUALIZATION> 439
<DISTRIBUTIONS-OF-INCOME> 9813
<DISTRIBUTIONS-OF-GAINS> 3804
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 19012
<NUMBER-OF-SHARES-REDEEMED> 9604
<SHARES-REINVESTED> 1092
<NET-CHANGE-IN-ASSETS> 106818
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 2394
<OVERDISTRIB-NII-PRIOR> 29
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 36
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 567
<AVERAGE-NET-ASSETS> 280271
<PER-SHARE-NAV-BEGIN> 11.74
<PER-SHARE-NII> 0.38
<PER-SHARE-GAIN-APPREC> (0.46)
<PER-SHARE-DIVIDEND> 0.38
<PER-SHARE-DISTRIBUTIONS> 0.16
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 11.12
<EXPENSE-RATIO> 0.002
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<RESTATED>
<CIK> 0000036405
<NAME> VANGUARD INDEX TRUST
<SERIES>
<NUMBER> 5
<NAME> GROWTH PORTFOLIO
<MULTIPLIER> 1,000
<CURRENCY> US
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> DEC-31-1994
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 85007
<INVESTMENTS-AT-VALUE> 87271
<RECEIVABLES> 7148
<ASSETS-OTHER> 12
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 94431
<PAYABLE-FOR-SECURITIES> 8053
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 208
<TOTAL-LIABILITIES> 8261
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 85122
<SHARES-COMMON-STOCK> 8380
<SHARES-COMMON-PRIOR> 4964
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 9
<ACCUMULATED-NET-GAINS> (1207)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 2264
<NET-ASSETS> 86170
<DIVIDEND-INCOME> 1404
<INTEREST-INCOME> 29
<OTHER-INCOME> 0
<EXPENSES-NET> 124
<NET-INVESTMENT-INCOME> 1309
<REALIZED-GAINS-CURRENT> (605)
<APPREC-INCREASE-CURRENT> 1364
<NET-CHANGE-FROM-OPS> 2068
<EQUALIZATION> 72
<DISTRIBUTIONS-OF-INCOME> 1375
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 5100
<NUMBER-OF-SHARES-REDEEMED> 1805
<SHARES-REINVESTED> 121
<NET-CHANGE-IN-ASSETS> 35546
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (602)
<OVERDISTRIB-NII-PRIOR> 15
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 36
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 124
<AVERAGE-NET-ASSETS> 62825
<PER-SHARE-NAV-BEGIN> 10.20
<PER-SHARE-NII> 0.21
<PER-SHARE-GAIN-APPREC> 0.08
<PER-SHARE-DIVIDEND> 0.21
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 10.28
<EXPENSE-RATIO> 0.002
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<RESTATED>
<CIK> 0000036405
<NAME> VANGUARD INDEX TRUST
<SERIES>
<NUMBER> 6
<NAME> SMALL CAPITALIZATION STOCK PORTFOLIO
<MULTIPLIER> 1,000
<CURRENCY> US
<S> <C>
<PERIOD-TYPE> 11-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> FEB-01-1994
<PERIOD-END> DEC-31-1994
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 563622
<INVESTMENTS-AT-VALUE> 604920
<RECEIVABLES> 28943
<ASSETS-OTHER> 91
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 633554
<PAYABLE-FOR-SECURITIES> 1877
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 26301
<TOTAL-LIABILITIES> 28178
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 567290
<SHARES-COMMON-STOCK> 40390
<SHARES-COMMON-PRIOR> 32846
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 566
<ACCUMULATED-NET-GAINS> (2931)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 41583
<NET-ASSETS> 605376
<DIVIDEND-INCOME> 8155
<INTEREST-INCOME> 491
<OTHER-INCOME> 0
<EXPENSES-NET> 899
<NET-INVESTMENT-INCOME> 7747
<REALIZED-GAINS-CURRENT> 11761
<APPREC-INCREASE-CURRENT> (43795)
<NET-CHANGE-FROM-OPS> (24287)
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 8533
<DISTRIBUTIONS-OF-GAINS> 14353
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 11690
<NUMBER-OF-SHARES-REDEEMED> 5550
<SHARES-REINVESTED> 1405
<NET-CHANGE-IN-ASSETS> 71987
<ACCUMULATED-NII-PRIOR> 220
<ACCUMULATED-GAINS-PRIOR> (340)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 57
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 899
<AVERAGE-NET-ASSETS> 563961
<PER-SHARE-NAV-BEGIN> 16.24
<PER-SHARE-NII> 0.20
<PER-SHARE-GAIN-APPREC> (0.86)
<PER-SHARE-DIVIDEND> 0.22
<PER-SHARE-DISTRIBUTIONS> 0.37
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 14.99
<EXPENSE-RATIO> 0.002
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
