<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
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
PROSPECTUS -- APRIL 28, 1995; REVISED SEPTEMBER 15, 1995
--------------------------------------------------------------------------------
NEW ACCOUNT INFORMATION: INVESTOR INFORMATION DEPARTMENT -- 1-800-662-7447
(SHIP)
--------------------------------------------------------------------------------
SHAREHOLDER ACCOUNT SERVICES: CLIENT SERVICES DEPARTMENT -- 1-800-662-2739
(CREW)
--------------------------------------------------------------------------------
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.
--------------------------------------------------------------------------------
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."
--------------------------------------------------------------------------------
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; revised September 15, 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.
--------------------------------------------------------------------------------
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
Page Page Page
Highlights ........................ 2 Implementation of Policies ......... 16 SHAREHOLDER GUIDE
Trust Expenses .................... 4 Investment Limitations ............. 22 Opening an Account and
Financial Highlights .............. 6 Management of the Trust ............ 22 Purchasing Shares ............... 28
Yield and Total Return ............ 10 Investment Adviser ................. 23 When Your Account Will
Performance Record ................. 23 Be Credited ..................... 31
TRUST INFORMATION Dividends, Capital Gains Selling Your Shares ................ 32
Investment Objectives ............. 10 and Taxes ....................... 24 Exchanging Your Shares ............. 34
Investment Policies ............... 12 The Share Price of Each Portfolio .. 26 Important Information About
Investment Risks .................. 14 General Information ................ 27 Telephone Transactions .......... 35
Who Should Invest ................. 15 Transferring Registration .......... 35
Other Vanguard Services ............ 36
</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> 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
--------------------------------------------------------------------------------
SIX SEPARATE
PORTFOLIOS Investors may choose to invest in any of six Portfolios of
the Trust:
500 PORTFOLIO -- seeks to match the investment performance
of the Standard & Poor's 500 Composite Stock Price Index,
an index emphasizing large-capitalization stocks.
EXTENDED MARKET PORTFOLIO -- seeks to match the investment
performance of the Wilshire 4500 Index, an index
consisting of medium- and small-capitalization stocks.
TOTAL STOCK MARKET PORTFOLIO -- seeks to match the
investment performance of the Wilshire 5000 Index, an
index consisting of all regularly and publicly traded U.S.
stocks.
SMALL CAPITALIZATION STOCK PORTFOLIO -- seeks to match the
investment performance of the Russell 2000 Small Stock
Index, an index consisting of 2,000 small-capitalization
common stocks.
VALUE PORTFOLIO -- seeks to match the investment
performance of the S&P/BARRA Value Index, an index
consisting of stocks selected from the Standard & Poor's
500 Index with lower than average ratios of market price
to book value.
GROWTH PORTFOLIO -- seeks to match the investment
performance of the S&P/BARRA Growth Index, an index
consisting of stocks selected from the Standard & Poor's
500 Index with higher than average ratios of market price
to book value. PAGE 12
--------------------------------------------------------------------------------
RISK
CHARACTERISTICS As mutual funds investing in common stocks, all six
Portfolios of the Trust are subject to market risk, which
is the possibility that common stock prices will decline,
sometimes substantially, over short or extended periods.
Due to differences in the securities they hold, the six
Portfolios may exhibit varying levels of volatility.
PAGE 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
--------------------------------------------------------------------------------
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
--------------------------------------------------------------------------------
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
--------------------------------------------------------------------------------
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
--------------------------------------------------------------------------------
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
--------------------------------------------------------------------------------
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
--------------------------------------------------------------------------------
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
--------------------------------------------------------------------------------
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
--------------------------------------------------------------------------------
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.
500 PORTFOLIO The Portfolio reserves the right to deduct a portfolio
transaction fee, ranging from 0.10% to 0.25%, from
purchases of shares of the Portfolio, if such purchase or
cumulative purchases are of a size that is reasonably
deemed to be disruptive to efficient portfolio management.
The fee will be paid to the Portfolio to offset
transaction costs of buying securities. The fee is not
paid to Vanguard and is not a sales charge. It is not
expected that the 500 Portfolio would deduct a portfolio
transaction fee on amounts of less than $10 million.
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
5
<PAGE> 8
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.
<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.
--------------------------------------------------------------------------------
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>
<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.
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%
<CAPTION>
-------------------------------------
SMALL CAPITALIZATION STOCK PORTFOLIO*
-------------------------------------
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:
Total U.S. Equity Market/Wilshire 5000 Index*
as of December 31, 1994
Total Stock Market Portfolio
[PIE CHART]
500 Portfolio S&P 500 INDEX 70%
Extended Market Portfolio WILSHIRE 4500 INDEX 30%
Small Capitalization Stock Portfolio RUSSELL 2000 INDEX (9%)
*Wilshire 500 excludes Royal Dutch Shell and Unilever,
N.V. which make up approximately 2.3% of the S&P 500
Index.
- 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.
S&P 500 Index
as of December 31, 1994
500 Portfolio
[PIE CHART]
Growth Portfolio S&P/BARRA GROWTH INDEX 50%
Value Portfolio S&P/BARRA VALUE INDEX 50%
- 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 Nemours, 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.
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. 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.
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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 Small
Capitalization Stock Portfolio are subject to a portfolio
transaction fee of 1%, purchases of the Extended Market
Portfolio are subject to a 0.5% portfolio transaction fee,
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.
--------------------------------------------------------------------------------
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>
PURCHASING BY WIRE --------------------------------
Money should be CORESTATES BANK, N.A.
wired to: ABA 031000011
CORESTATES NO. 0101 9897
ATTN VANGUARD
VANGUARD INDEX TRUST
NAME OF PORTFOLIO
ACCOUNT NUMBER
BEFORE WIRING ACCOUNT REGISTRATION
Please contact our You should notify our Client Services Department of your intended wire
Client Services purchase, including the federal wire number to be used, by 12:00 noon (Eastern
Department time). To assure proper receipt, please be sure your bank includes the Portfolio
(1-800-662-2739) name, the account number Vanguard has assigned to you and the eight digit CoreStates
number. If you are opening a new account, please complete the Account
Registration Form and mail it to the "New Account" address after completing your
wire arrangement. NOTE: Federal Funds wire purchase orders will be accepted
only when the Trust and Custodian Banks are open for business.
</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).
--------------------------------------------------------------------------------
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.)
--------------------------------------------------------------------------------
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).
--------------------------------------------------------------------------------
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.
--------------------------------------------------------------------------------
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).
--------------------------------------------------------------------------------
36
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<TABLE>
<S> <C> <C>
[VANGUARD INDEX TRUST LOGO] [VANGUARD INDEX TRUST LOGO]
--------------------------- P R O S P E C T U S
THE VANGUARD GROUP APRIL 28, 1995; REVISED SEPTEMBER 15, 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
[THE VANGUARD GROUP LOGO]
P040
</TABLE>
--------------------------------------------------------------------------------
<PAGE> 43
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
[VANGUARD INDEX TRUST LOGO]
A Member of The Vanguard Group
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
PROSPECTUS -- APRIL 28, 1995; REVISED SEPTEMBER 15, 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; revised September 15, 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.
--------------------------------------------------------------------------------
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
Page Page Page
Highlights ....................... 2 Investment Risks ................. 14 Performance Record ............... 23
Trust Expenses ................... 4 Who Should Invest ................ 15 Dividends, Capital Gains
Financial Highlights ............. 6 Implementation of Policies ....... 16 and Taxes ..................... 24
Yield and Total Return ........... 10 Investment Limitations ........... 21 The Share Price of Each
Investment Objectives ............ 10 Management of the Trust .......... 22 Portfolio ..................... 25
Investment Policies .............. 12 Investment Adviser ............... 22 General Information .............. 25
Service Guide .................... 26
</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> 44
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 14
--------------------------------------------------------------------------------
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
--------------------------------------------------------------------------------
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> 45
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 20
(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> 46
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> <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> <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> 47
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.
500 PORTFOLIO The Portfolio reserves the right to deduct a portfolio
transaction fee, ranging from 0.10% to 0.25%, from
purchases of shares of the Portfolio, if such purchase or
cumulative purchases are of a size that is reasonably
deemed to be disruptive to efficient portfolio management.
The fee will be paid to the Portfolio to offset
transaction costs of buying securities. The fee is not
paid to Vanguard and is not a sales charge. It is not
expected that the 500 Portfolio would deduct a portfolio
transaction fee on amounts of less than $10 million.
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.
5
<PAGE> 48
<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.
--------------------------------------------------------------------------------
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.
6
<PAGE> 49
<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>
<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.
7
<PAGE> 50
<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> 51
<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%
<CAPTION>
----------------------------------------
SMALL CAPITALIZATION STOCK PORTFOLIO*
----------------------------------------
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> 52
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 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.
10
<PAGE> 53
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:
Total U.S. Equity Market / Wilshire 5000 Index*
as of December 31, 1994
Total Stock Market Portfolio
[PIE CHART]
Extended Market Portfolio WILSHIRE 4500 INDEX 30%
500 Portfolio S&P 500 INDEX 70%
Small Capitalization Stock Portfolio RUSSELL 2000 INDEX 9%
* Wilshire 500 excludes Royal Dutch Shell and Unilever, N.V. which make up
approximately 2.3% of the S&P 500 index.
- 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> 54
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.
S&P 500 Index
as of December 31, 1994
500 Portfolio
[PIE CHART]
Growth Portfolio S&P/BARRA GROWTH INDEX 50%
Value Portfolio S&P/BARRA VALUE INDEX 50%
- 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.
--------------------------------------------------------------------------------
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> 55
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.
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.
--------------------------------------------------------------------------------
13
<PAGE> 56
INVESTMENT RISKS
EACH PORTFOLIO IS
SUBJECT TO MARKET As mutual funds investing primarily in common stocks, the
RISK 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 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
14
<PAGE> 57
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 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
15
<PAGE> 58
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.
--------------------------------------------------------------------------------
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%),
16
<PAGE> 59
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.
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
17
<PAGE> 60
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 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.
18
<PAGE> 61
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 Nemours, 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.
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
19
<PAGE> 62
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 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
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<PAGE> 63
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 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%
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<PAGE> 64
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.
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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 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, a portion of Vanguard/Morgan Growth Fund, and a
portion of Vanguard/ Windsor II, as well as to several
indexed separate accounts. Total assets under
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<PAGE> 65
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 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.
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<PAGE> 66
<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.
--------------------------------------------------------------------------------
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.
--------------------------------------------------------------------------------
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<PAGE> 67
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, 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.
--------------------------------------------------------------------------------
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.
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<PAGE> 68
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.
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<TABLE>
<S> <C> <C>
[VANGUARD INDEX TRUST LOGO] [LOGO]
--------------------------- [VANGUARD INDEX TRUST 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; REVISED SEPTEMBER 15, 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 [THE VANGUARD GROUP LOGO]
</TABLE>
--------------------------------------------------------------------------------
