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[FLAG LOGO]
P R O S P E C T U S
JULY 1, 1996
VANGUARD BOND INDEX FUND
VANGUARD BALANCED INDEX FUND
VANGUARD INDEX TRUST
VANGUARD INTERNATIONAL EQUITY INDEX FUND
VANGUARD TOTAL INTERNATIONAL PORTFOLIO
[VANGUARD GROUP LOGO]
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PROSPECTUS -- JULY 1, 1996 Members of The Vanguard Group
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NEW ACCOUNT INFORMATION: INVESTOR INFORMATION DEPARTMENT -- 1-800-662-7447
(SHIP)
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SHAREHOLDER ACCOUNT SERVICES: CLIENT SERVICES DEPARTMENT -- 1-800-662-2739
(CREW)
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INVESTMENT
OBJECTIVES AND
POLICIES The Vanguard index funds offered in this prospectus are four
separate, individual open-end diversified investment
companies. The funds include: Vanguard Bond Index Fund, Inc.
(the Total Bond Market, Short-Term Bond, Intermediate-Term
Bond and Long-Term Bond Portfolios); Vanguard Balanced Index
Fund, Inc.; Vanguard Index Trust (the 500, Extended Market,
Total Stock Market, Small Capitalization Stock, Value and
Growth Portfolios); and Vanguard International Equity Index
Fund, Inc. (the European, Pacific and Emerging Markets
Portfolios). The Total International Portfolio, which is also
discussed in this prospectus, is part of Vanguard STAR Fund.
Each of the Portfolios invests in securities (bonds or common
stocks) in order to match the investment performance of a
distinct market index.
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OPENING AN
ACCOUNT To open a regular (non-retirement) account, please complete
and return the Account Registration Form. If you need
assistance in completing this Form, please call our Investor
Information Department. To open an Individual Retirement
Account (IRA), please use a Vanguard IRA Adoption Agreement.
To obtain a copy of this form, call 1-800-662-7447, Monday
through Friday, from 8:00 a.m. to 9:00 p.m. and Saturday, from
9:00 a.m. to 4:00 p.m. (Eastern time). The minimum initial
investment is $3,000 for each Portfolio or $1,000 for Uniform
Gifts/Transfers to Minors Act accounts. Each of the Funds
assesses a $10 annual account maintenance fee. A portfolio
transaction fee of 1% is deducted from purchases of the Small
Capitalization Stock Portfolio of Vanguard Index Trust and a
0.5% portfolio transaction fee is deducted from purchases of
its Extended Market Portfolio. The European and Pacific
Portfolios of Vanguard International Equity Index Fund and the
Total International Portfolio assess a 1% portfolio
transaction fee on purchases and its Emerging Markets
Portfolio assesses a 2% portfolio transaction fee on purchases
and a 1% portfolio transaction fee on redemptions. Portfolio
transaction fees are paid to the Portfolios to offset
transaction costs of buying and selling securities of small-
and medium-sized companies and international companies. See
"Fund Expenses."
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ABOUT THIS
PROSPECTUS This Prospectus is designed to set forth concisely the
information you should know about the Funds before you invest.
It should be retained for future reference. "Statements of
Additional Information" containing additional information
about each of the Vanguard Index Funds have been filed with
the Securities and Exchange Commission. These Statements have
been incorporated by reference into this Prospectus. A copy
may be obtained without charge by writing to the Funds or by
calling our Investor Information Department.
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TABLE OF CONTENTS
<TABLE>
<S> <C> <C> <C> <C> <C>
Highlights................... 2 Implementation of Policies... 32 SHAREHOLDER GUIDE
Fund Expenses................ 5 Investment Limitations....... 44 Opening an Account and
Financial Highlights......... 8 Management of the Funds...... 45 Purchasing Shares.......... 51
Yield and Total Return....... 14 Investment Advisers.......... 45 When Your Account Will
FUND INFORMATION Dividends, Capital Gains Be Credited................ 56
Investment Objectives........ 15 and Taxes................ 46 Selling Your Shares.......... 57
Investment Policies.......... 17 The Share Price of Exchanging Your Shares....... 60
Investment Risks............. 24 Each Portfolio.............. 49 Important Information About
Who Should Invest............ 29 General Information.......... 49 Telephone Transactions..... 62
Transferring Registration.... 62
</TABLE>
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
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HIGHLIGHTS
Vanguard offers four index funds consisting of a total
of fifteen separate portfolios. Unlike other mutual
funds which generally attempt to "beat" market averages
with often unpredictable results, Vanguard's index funds
seek to "match" the performance of their underlying
indexes and thus are expected to provide a highly
predictable return relative to their benchmarks. The
Funds offer investors the advantages of a "passive"
approach to investing. These include low investment
costs, exceptional diversification among securities,
minimal portfolio turnover, and relative predictability.
As with any mutual fund there is no assurance that the
Funds will meet their objectives.
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INVESTMENT
OBJECTIVES AND
POLICIES Vanguard Bond Index Fund, Vanguard Balanced Index Fund,
Vanguard Index Trust and Vanguard International Equity
Index Fund are each open-end diversified investment
companies designed as "index" funds.
VANGUARD BOND
INDEX FUND The Fund consists of four Portfolios each of which
invests in bonds.
- The TOTAL BOND MARKET PORTFOLIO seeks to replicate the
performance of the Lehman Brothers Aggregate Bond
Index.
- The SHORT-TERM BOND PORTFOLIO seeks to replicate the
performance of the Lehman Brothers Mutual Fund Short
(1-5) Government/Corporate Index.
- The INTERMEDIATE-TERM BOND PORTFOLIO seeks to
replicate the performance of the Lehman Brothers
Mutual Fund Intermediate (5-10) Government/Corporate
Index.
- The LONG-TERM BOND PORTFOLIO seeks to replicate the
performance of the Lehman Brothers Mutual Fund Long
(10+) Government/Corporate Index.
Each Portfolio will invest at least 80% of its assets in
securities included in its respective index. The Lehman
Brothers Indexes encompass two major classes of
investment grade fixed income securities: U.S. Treasury
and agency securities and corporate bonds. Additionally,
the Lehman Brothers Aggregate Bond Index includes
mortgage-backed securities. PAGE 15
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VANGUARD BALANCED
INDEX FUND The Fund invests in U.S. common stocks and bonds. It
seeks to replicate with respect to 60% of its assets the
performance of the Wilshire 5000 Index and with respect
to 40% of its assets, the Lehman Brothers Index. Under
normal circumstances the Fund will invest primarily in
securities of its underlying indexes. PAGE 15
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VANGUARD INDEX TRUST The Trust consists of six separate Portfolios each of
which invests in U.S. common stocks.
- The 500 PORTFOLIO seeks to replicate the performance
of the S&P 500 Index.
- The EXTENDED MARKET PORTFOLIO seeks to replicate the
performance of the Wilshire 4500 Index.
2
<PAGE> 4
- The TOTAL STOCK MARKET PORTFOLIO seeks to replicate
the performance of the Wilshire 5000 Index.
- The SMALL CAPITALIZATION STOCK PORTFOLIO seeks to
replicate the performance of the Russell 2000 Small
Stock Index.
- The VALUE PORTFOLIO seeks to replicate the performance
of the S&P/BARRA Value Index.
- The GROWTH PORTFOLIO seeks to replicate the
performance of the S&P/BARRA Growth Index. PAGE 15
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VANGUARD
INTERNATIONAL
EQUITY INDEX FUND The Fund consists of three Portfolios each of which
invests in international common stocks.
- The EUROPEAN PORTFOLIO seeks to parallel the
performance of the Morgan Stanley Capital
International -- Europe (Free) Index.
- The PACIFIC PORTFOLIO seeks to parallel the
performance of the Morgan Stanley Capital
International -- Pacific Index.
- The EMERGING MARKETS PORTFOLIO seeks to parallel the
performance of the Morgan Stanley Capital
International -- Select Emerging Markets Free Index.
The European Portfolio and the Pacific Portfolio invest
primarily in the common stocks included in their
respective indexes. The Emerging Markets Portfolio
invests 95% of its assets in securities which are
representative of securities in its index and 5% in cash
reserves. PAGE 16
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VANGUARD
TOTAL INTERNATIONAL
PORTFOLIO The Total International Portfolio seeks to match the
performance of the Morgan Stanley Capital
International -- Europe, Australia, and Far East +
Select Emerging Markets (Free) Index. PAGE 17
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INVESTMENT
RISKS The Portfolios of the Vanguard Bond Index Fund and the
bond portion of the Vanguard Balanced Fund are subject
to risks associated with fixed income investing
including interest rate, income, call and credit risks.
Additionally, since the Total Bond Market Portfolio of
Vanguard Bond Index Fund invests in mortgage-backed
securities, the Portfolio is subject to prepayment risk.
The equity portion of Vanguard Balanced Index Fund and
the Portfolios of Vanguard Index Trust and Vanguard
International Equity Index Fund are subject to stock
market risk, which is the possibility that common stock
prices will decline over short or extended periods. Both
U.S. and foreign stock markets tend to be cyclical, with
periods when stock prices generally rise and periods
when stock prices generally decline. Additionally, the
Portfolios of Vanguard International Equity Index Fund
and the Total International Portfolio are subject to
currency risk, the risk that changes in foreign exchange
rates will affect the value of foreign securities held
by the Portfolios.
Investors considering the Emerging Markets Portfolio
should be aware that emerging markets can be
substantially more volatile than both U.S. and more
developed foreign markets. Volatility in emerging
markets can be exacerbated by illiquidity in the market
for emerging market stocks.
3
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Because of the risks associated with common stocks and
bonds, the Funds are intended to be long-term investment
vehicles and are not designed to provide investors with
a means of speculating on short-term market movements.
Investors should not consider an investment in any one
portfolio a complete investment program, but should
maintain holdings of securities with different risk
characteristics -- including U.S. common stocks, bonds
and money market instruments. For further information
concerning the risks associated with investing in the
Funds, see "Investment Risks". PAGE 24
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THE VANGUARD
GROUP The Funds are members of The Vanguard Group of
Investment Companies, a group of more than 30 investment
companies with more than 90 distinct investment
portfolios and total assets in excess of $190 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 45
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INVESTMENT
ADVISERS The Vanguard Bond Index Fund and the bond portion of
Vanguard Balanced Index Fund receive investment advisory
services from Vanguard's Fixed Income Group. Vanguard
Index Trust, Vanguard International Equity Index Fund,
Vanguard Total International Portfolio, and the equity
portion of Vanguard Balanced Index Fund receive
investment advisory services from Vanguard's Core
Management Group. All investment advisory services are
provided to the Index Funds on an at-cost basis. As a
result, the Funds receive investment advisory services
at a substantially lower cost than would be possible if
the Funds paid an investment advisory fee to an external
investment adviser. PAGE 45
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FEES AND EXPENSES The Portfolios are subject to the following transaction
fees:
<TABLE>
<CAPTION>
FEE DEDUCTED
FEE DEDUCTED FROM
FROM PURCHASES REDEMPTIONS
<S> <C> <C>
VANGUARD INDEX TRUST
Extended Market Portfolio .5% None
Small Capitalization Stock Portfolio 1% None
VANGUARD INTERNATIONAL EQUITY INDEX
FUND
European Portfolio 1% None
Pacific Portfolio 1% None
Emerging Markets Portfolio 2% 1%
TOTAL INTERNATIONAL PORTFOLIO 1% None
</TABLE>
Portfolio transaction fees are paid directly to the
Portfolios to offset transaction costs of buying
securities of small- and medium-sized companies and
international companies.
Additionally, shareholders will also incur a $10 annual
account maintenance fee for each account in any of
Vanguard's Index Funds. This fee will be waived for
shareholders with an account balance of $10,000 or
more. PAGE 52
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4
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FUND EXPENSES The following table illustrates ALL expenses and fees
that you would incur as a shareholder of Vanguard Index
Trust, Vanguard Bond Index Fund, Vanguard International
Equity Index Fund and Vanguard Balanced Index Fund. The
expenses and fees set forth below are for the 1995
fiscal year.
<TABLE>
<CAPTION>
TOTAL SMALL
SHAREHOLDER EXTENDED STOCK CAPITALIZATION BALANCED
TRANSACTION 500 MARKET MARKET VALUE GROWTH STOCK INDEX
EXPENSES PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO+ FUND
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Sales Load
Imposed on
Purchases..... None None** None None None None* None
Sales Load
Imposed on
Reinvested
Dividends..... None None None None None None None
Redemption
Fees.......... None None None None None None None
Exchange
Fees.......... None None None None None None None
* Shareholders are charged a 1% 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>
<TABLE>
<CAPTION>
TOTAL SMALL
ANNUAL FUND EXTENDED STOCK CAPITALIZATION BALANCED
OPERATING 500 MARKET MARKET VALUE GROWTH STOCK INDEX
EXPENSES PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO+ FUND
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Management &
Administrative
Expenses++.... 0.17% 0.21% 0.21% 0.15% 0.14% 0.21% 0.12%
Investment
Advisory
Fees.......... 0.00 0.00 0.00 0.01 0.01 0.01 0.01
12b-1 Fees..... None None None None None None None
Other Expenses
Distribution
Costs....... 0.02 0.02 0.02 0.02 0.02 0.02 0.02
Miscellaneous
Expenses.... 0.01 0.02 0.02 0.02 0.03 0.01 0.05
------- ------- ------- ------- ------- ---------- -------
Total Other
Expenses...... 0.03 0.04 0.04 0.04 0.05 0.03 0.07
------- ------- ------- ------- ------- ---------- -------
TOTAL
OPERATING
EXPENSES... 0.20% 0.25% 0.25% 0.20% 0.20% 0.25% 0.20%
------- ------- ------- ------- ------- ---------- -------
------- ------- ------- ------- ------- ---------- -------
+ Formerly Vanguard Small Capitalization Stock Fund, Inc.
++ In addition to these costs, each Portfolio assesses an annual account maintenance fee
of $10. This fee will be waived for shareholders with an account balance of $10,000 or
more.
</TABLE>
<TABLE>
<CAPTION>
TOTAL SHORT- LONG-
SHAREHOLDER BOND TERM INTERMEDIATE- TERM
TRANSACTION MARKET BOND TERM BOND BOND EUROPEAN PACIFIC
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
<CAPTION>
SHAREHOLDER EMERGING TOTAL
TRANSACTION MARKETS INTERNATIONAL
EXPENSES PORTFOLIO PORTFOLIO
----------------------------------------
<S> <C> <C>
Sales Load
Imposed on
Purchases.... None+ None*
Sales Load
Imposed on
Reinvested
Dividends.... None None
Redemption
Fees++....... 1%** None
Exchange
Fees......... None None
* Shareholders are charged a 1% portfolio transaction fee, payable directly to the
Portfolio on each purchase of shares.
** The 1% portfolio transaction fee withheld from redemption proceeds is paid to the
Portfolio.
+ Shareholders are charged a 2% portfolio transaction fee, payable directly to the
Portfolio on each purchase of shares.
++ Wire redemptions of less than $5,000 are subject to a $5 processing fee.
</TABLE>
5
<PAGE> 7
<TABLE>
<CAPTION>
TOTAL SHORT-
ANNUAL FUND BOND TERM INTERMEDIATE- LONG-TERM
OPERATING MARKET BOND TERM BOND BOND EUROPEAN
EXPENSES PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
<S> <C> <C> <C> <C> <C>
-------------------------------------------------------------------------------------
Management & Administrative
Expenses***............... 0.14% 0.14% 0.15% 0.01% 0.26%
Investment Advisory
Fees...................... 0.01 0.01 0.01 0.01 0.01
12b-1 Fees................. None None None None None
Other Expenses
Distribution Costs........ 0.03 0.02 0.02 0.01 0.02
Miscellaneous Expenses.... 0.02 0.03 0.02 0.17 0.06
------ ------ -------- ------ ------
Total Other Expenses....... 0.05 0.05 0.04 0.18 0.08
------ ------ -------- ------ ------
TOTAL OPERATING
EXPENSES............... 0.20%(1) 0.20% 0.20% 0.20% 0.35%
====== ====== ======== ====== ======
*** In addition to these costs, shareholders incur an annual account maintenance fee
of $10. This fee will be waived for shareholders with an account balance of
$10,000 or more.
(1) The Portfolio's Institutional Class of shares are offered at an estimated
expense ratio of 0.10% per year.
<CAPTION>
ANNUAL FUND EMERGING TOTAL
OPERATING PACIFIC MARKETS INTERNATIONAL
EXPENSES PORTFOLIO PORTFOLIO PORTFOLIO
<S> <C> <C> <C>
---------------------------------------------------------------
Management & Administrative
Expenses***............... 0.25% 0.09% 0.24%
Investment Advisory
Fees...................... 0.01 0.03 0.01
12b-1 Fees................. None None None
Other Expenses
Distribution Costs........ 0.02 0.02 0.02
Miscellaneous Expenses.... 0.07 0.46 0.11
------ ------ --------
Total Other Expenses....... 0.09 0.48 0.13
------ ------ --------
TOTAL OPERATING
EXPENSES............... 0.35% 0.60% 0.38%
====== ====== ========
*** In addition to these costs, shareholders incur an annual account maintenance fee
of $10. This fee will be waived for shareholders with an account balance of
$10,000 or more.
(1) The Portfolio's Institutional Class of shares are offered at an estimated
expense ratio of 0.10% per year.
</TABLE>
The purpose of this table is to assist you in
understanding the various costs and expenses that you
would bear directly or indirectly as an investor in the
Funds.
SIX PORTFOLIOS ASSESS
TRANSACTION FEES The Small Capitalization Stock Portfolio of Vanguard
Index Trust, the European and Pacific Portfolios of
Vanguard International Equity Index Fund, and Vanguard
Total International Portfolio assess a portfolio
transaction fee on purchases of Portfolio shares equal
to 1% of the dollar amount invested. The Extended Market
Portfolio of Vanguard Index Trust assesses a portfolio
transaction fee equal to 0.5% of the dollar amount
invested. The Emerging Markets Portfolio of Vanguard
International Equity Index Fund assess a portfolio
transaction fee equal to 2% of the dollar amount
invested. The portfolio transaction fees are paid to the
respective Portfolio, not to Vanguard. They are not
sales charges.
These fees apply to initial investments in the
respective Portfolios and all subsequent purchases
(including purchases made by exchange from another
Vanguard Fund or from other Portfolios within a Fund),
but not to reinvested dividend or capital gains
distributions. Portfolio transaction fees are deducted
automatically from the amount invested; they cannot be
paid separately.
The purpose of these transaction fees is to allocate
transaction costs associated with new purchases to
investors making those purchases, thus insulating
existing shareholders from those transaction costs.
These costs include: (1) brokerage costs; (2) market
impact costs -- i.e., the increase in market prices
which may result when the Portfolio purchases thinly
traded stocks; and, most importantly, (3) the effect of
the "bid-ask" spread in the over-the-counter market.
(Securities in the over-the-counter market are bought at
the "ask" or purchase price, but are valued in the
Portfolio at the mean of the "bid" or sale, and "ask"
prices).
The fees represent Vanguard's estimate of the brokerage
and other transaction costs incurred by the Portfolios
in acquiring stocks in their
6
<PAGE> 8
respective markets. Without the fees, the Portfolios,
which incur these costs directly, would experience
reduced investment performance for all shareholders in
each Portfolio. With the fees, the transaction costs of
acquiring additional stocks are borne not by all
existing shareholders, but by those investors making
additional purchases. Because the purchaser, not the
Portfolios, bears these costs, the Portfolios are
expected to track their respective benchmark indexes
more closely.
THE EMERGING MARKETS
PORTFOLIO CHARGES A
1% REDEMPTION
TRANSACTION FEE The Emerging Markets Portfolio of Vanguard International
Equity Index Fund also assesses a 1% redemption
transaction fee. This 1% charge applies to redemptions
or exchanges from the Portfolio. The 1% fee is deducted
from redemption or exchange proceeds and is paid
directly to the Portfolio, not to Vanguard. It is not a
contingent deferred sales charge.
EACH PORTFOLIO CHARGES
A $10 ACCOUNT
MAINTENANCE FEE Each Portfolio assesses an annual account maintenance
fee of $10 to allocate part of the fixed costs of
maintaining shareholder accounts equally to all
accounts. This fee is deducted from each Portfolio's
dividend at a rate of $2.50 per quarter for accounts in
the 500, Total Stock Market, Value and Growth Portfolios
of Vanguard Index Trust, Vanguard Bond Index Fund and
Vanguard Balanced Index Fund and $10 annually for
accounts in the Extended Market Portfolio of Vanguard
Index Trust, the European, Pacific and Emerging Markets
Portfolios of Vanguard International Equity Index Fund,
and Vanguard Total International Portfolio. See
"Dividends, Capital Gains and Taxes" for more
information on this fee. The $10 fee amounts to 1.00% on
a $1,000 investment in a Portfolio, and 0.33% on a
$3,000 investment. This fee will be waived for
shareholders with an account balance of $10,000 or more.
The following example illustrates the expenses that you
would incur on a $1,000 investment over various time
periods, assuming (1) a 5% annual rate of return and (2)
redemption at the end of each period. The example
includes the $10 account maintenance fee for each
Portfolio; the 1% portfolio transaction fee for the
Extended Market and Small Capitalization Stock
Portfolios of Vanguard Index Trust, the European and
Pacific Portfolios of Vanguard International Equity
Index Fund and the Total International Portfolio; the
0.25% transaction fee for the Total Stock Market
Portfolio of Vanguard Index Trust; and the 2% purchase
transaction fee and the 1% redemption transaction fee
for the Emerging Markets Portfolio of Vanguard
International Equity Index Fund.
7
<PAGE> 9
<TABLE>
<CAPTION>
1 3 5 10
YEAR YEARS YEARS YEARS
--- ---- ---- ----
<S> <C> <C> <C> <C>
Total Bond Market Portfolio...... $ 12 $36 $ 61 $124
Short-Term Bond Portfolio........ $ 12 $36 $ 61 $124
Intermediate-Term Bond
Portfolio...................... $ 12 $36 $ 61 $124
Long-Term Bond Portfolio......... $ 12 $36 $ 61 $124
Balanced Index Fund.............. $ 12 $36 $ 61 $124
500 Portfolio.................... $ 12 $36 $ 61 $124
Extended Market Portfolio........ $ 15 $40 $ 66 $133
Total Stock Market Portfolio..... $ 13 $38 $ 64 $130
Value Portfolio.................. $ 12 $36 $ 61 $124
Growth Portfolio................. $ 12 $36 $ 61 $124
Small Capitalization Stock
Portfolio...................... $ 23 $48 $ 74 $140
European Portfolio............... $ 24 $51 $ 79 $152
Pacific Portfolio................ $ 24 $51 $ 78 $152
Emerging Markets Portfolio....... $ 46 $79 $ 114 $204
Total International Portfolio.... $ 24 $52 $ 81 $155
</TABLE>
Included in these estimates are account maintenance fees
of $10, $30, $50 and $100 for the respective periods
shown. The $10 account maintenance fee is a flat charge
which does not vary by the size of your investment.
Accordingly, for investments larger than $1,000, your
total expenses will be substantially lower in percentage
terms than this illustration implies.
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION
OF PAST OR FUTURE EXPENSES OR PERFORMANCE. ACTUAL
EXPENSES MAY BE HIGHER OR LOWER THAN THOSE SHOWN.
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FINANCIAL
HIGHLIGHTS The following financial highlights for a share
outstanding throughout each period, insofar as they
relate to each of the respective periods in the period
ended December 31, 1995, have been audited by Price
Waterhouse LLP, independent accountants, whose reports
thereon were unqualified. (Please note that Vanguard
Total International Portfolio began operations on April
29, 1996.) This financial information should be read in
conjunction with each Fund's financial statements and
notes thereto, which, together with the remaining
portions of each Fund's 1995 Annual Report to
Shareholders, are incorporated by reference in the
Statements of Additional Information and in this
Prospectus, and which appear, along with the reports of
Price Waterhouse LLP, in each Fund's 1995 Annual Report
to Shareholders and inserts thereto. For a more complete
discussion of each Fund's performance, please see the
1995 Annual Report of each Fund, which may be obtained
free of charge by writing to the Funds or calling our
Investor Information Department at 1-800-662-7447.
8
<PAGE> 10
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------
TOTAL BOND MARKET PORTFOLIO
-------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------------------- DEC. 9,+
1995 1994 1993 1992 1991 1990 1989 1988 1987 TO 31, 1986
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING
OF PERIOD................ $9.17 $10.06 $9.88 $9.99 $9.41 $9.44 $9.05 $9.20 $9.94 $10.00
------ ------ ------ ----- ----- ----- ----- ----- ----- -------
INVESTMENT OPERATIONS
Net Investment Income.... .650 .622 .638 .699 .766 .796 .797 .807 .834 .028
Net Realized and
Unrealized Gain (Loss)
on Investments......... .970 (.888) .300 (.018) .605 (.030) .390 (.150) (.740) (.060)
------ ------ ------ ----- ----- ----- ----- ----- ----- -------
TOTAL FROM
INVESTMENT
OPERATIONS........ 1.620 (.266) .938 .681 1.371 .766 1.187 .657 .094 (.032)
- ---------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net
Investment Income...... (.650) (.622) (.638) (.699) (.766) (.796) (.797) (.807) (.834) (.028)
Distributions from
Realized Capital
Gains.................. -- (.002) (.120) (.092) (.025) -- -- -- -- --
------ ------ ------ ----- ----- ----- ----- ----- ----- -------
TOTAL
DISTRIBUTIONS..... (.650) (.624) (.758) (.791) (.791) (.796) (.797) (.807) (.834) (.028)
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF
PERIOD................... $10.14 $9.17 $10.06 $9.88 $9.99 $9.41 $9.44 $9.05 $9.20 $9.94
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN(1)........... 18.18% (2.66)% 9.68% 7.14% 15.25% 8.65% 13.65% 7.35% 1.14% (0.21)%
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period
(Millions)............... $2,405 $1,731 $1,540 $1,066 $849 $277 $139 $58 $43 $3
Ratio of Expenses to
Average Net Assets....... .20% .18% .18% .20% .16% .21% .24% .30% .14% 0%
Ratio of Net Investment
Income to Average Net
Assets................... 6.66% 6.57% 6.24% 7.06% 7.95% 8.60% 8.49% 8.84% 9.01% 6.82%*
Portfolio Turnover Rate... 36% 33% 50% 49% 31% 29% 33% 21% 77% 0%
</TABLE>
* Annualized.
(1) Total return figures are adjusted to reflect the annual account maintenance
fee of $10.
+ Commencement of operations.
<TABLE>
<CAPTION>
----------------------------------------------------------------
SHORT-TERM INTERMEDIATE-TERM LONG-TERM
BOND PORTFOLIO BOND PORTFOLIO BOND PORTFOLIO
----------------------------------------------------------------
MAR. 1+ TO MAR. 1+ TO MAR. 1+ TO
1995 DEC. 31, 1994 1995 DEC. 31, 1994 1995 DEC. 31, 1994
<S> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD......................... $9.50 $ 10.00 $8.96 $ 10.00 $9.18 $ 10.00
------ --------- ------ --------- ------ ---------
INVESTMENT OPERATIONS
Net Investment Income....................................... .623 .463 .692 .533 .661 .586
Net Realized and Unrealized Gain (Loss) on Investments...... .570 (.500) 1.884 (.820) 1.217 (1.040)
----- -------- ----- -------- ----- --------
TOTAL FROM INVESTMENT OPERATIONS...................... 1.193 (.037) 2.576 (.287) 1.878 (.454)
- ---------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income........................ (.623) (.463) (.692) (.533) (.661) (.586)
Distributions from Realized Capital Gains................... -- -- (.024) -- (.027) --
----- -------- ----- -------- ----- --------
TOTAL DISTRIBUTIONS................................... (.623) (.463) (.716) (.533) (.688) (.586)
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD............................... $10.07 $9.50 $10.82 $9.18 $10.37 $8.96
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN(1).............................................. 12.88% (0.37)% 29.72% (2.88)% 21.07% (4.53)%
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions)......................... $208 $77 $24 $71 $346 $9
Ratio of Expenses to Average Net Assets...................... .20% .18%* .20% .18%* .20% .18%*
Ratio of Net Investment Income to Average Net Assets......... 6.28% 5.77%* 6.90% 6.88%* 6.55% 7.70%*
Portfolio Turnover Rate...................................... 65% 53%* 45% 63%* 71% 70%*
</TABLE>
* Annualized.
(1) Returns do not reflect the annual account maintenance fee of $10.
+ Subscription period for the Portfolio was from January 18, 1994, through
February 28, 1994, during which time all assets were held in money market
instruments.
9
<PAGE> 11
<TABLE>
<CAPTION>
--------------------------------------------
VANGUARD BALANCED
INDEX FUND
--------------------------------------------
YEAR ENDED
DECEMBER 31, SEPT. 28, TO
--------------------------- DEC. 31,
1995 1994 1993 1992
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD............................................. $10.34 $10.91 $10.31 $10.00
------ ------ ------ ---------
INVESTMENT OPERATIONS
Net Investment Income........................................................... .45 .41 .39 .08
Net Realized and Unrealized Gain (Loss) on Investments.......................... 2.48 (.58) .63 .31
----- ----- ----- --------
TOTAL FROM INVESTMENT OPERATIONS.......................................... 2.98 (.17) 1.02 .39
- ------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income............................................ (.45) (.40) (.39) (.08)
Distributions from Realized Capital Gains....................................... (.05) -- (.03) --
----- ----- ----- --------
TOTAL DISTRIBUTIONS....................................................... (.50) (.40) (.42) (.08)
- ------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD................................................... $12.77 $10.34 $10.91 $10.31
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN**................................................................... 28.64% (1.56)% 10.00% 3.69%
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions)............................................. $590 $403 $367 $109
Ratio of Expenses to Average Net Assets.......................................... .20% .20% .20% .22%*
Ratio of Net Investment Income to Average Net Assets............................. 3.85% 3.86% 3.53% 3.76%*
Portfolio Turnover Rate.......................................................... 16% 16% 25% 17%
</TABLE>
* Annualized.
**Total return figures do not reflect the annual account maintenance fee of
$10. Subscription period for Fund was from September 28, 1992, to
November 8, 1992, during which time all assets were held in money
market instruments. Performance measurement begins on November 9, 1992.
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------
500 PORTFOLIO
------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF
PERIOD.............................. $42.97 $43.83 $40.97 $39.32 $31.24 $33.64 $27.18 $24.65 $24.27 $22.99
------ ----- ----- ------ ------ ------ ------ ------ ------ ------
INVESTMENT OPERATIONS
Net Investment Income............... 1.22 1.18 1.13 1.12 1.15 1.17 1.20 1.08 .88 .89
Net Realized and Unrealized Gain
(Loss) on Investments............. 14.76 (.67) 2.89 1.75 8.20 (2.30) 7.21 2.87 .36 3.30
------ ----- ----- ----- ----- ----- ----- ----- ----- -----
TOTAL FROM INVESTMENT
OPERATIONS................... 15.98 .51 4.02 2.87 9.35 (1.13) 8.41 3.95 1.24 4.19
- ---------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment
Income............................ (1.22) (1.17) (1.13) (1.12) (1.15) (1.17) (1.20) (1.10) (.69) (.89)
Distributions from Realized Capital
Gains............................. (.13) (.20) (.03) (.10) (.12) (.10) (.75) (.32) (.17) (2.02)
------ ----- ----- ----- ----- ----- ----- ----- ----- -----
TOTAL DISTRIBUTIONS........... (1.35) (1.37) (1.16) (1.22) (1.27) (1.27) (1.95) (1.42) (.86) (2.91)
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD....... $57.60 $42.97 $43.83 $40.97 $39.32 $31.24 $33.64 $27.18 $24.65 $24.27
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN*........................ 37.45% 1.18% 9.89% 7.42% 30.22% (3.32)% 31.36% 16.22% 4.71% 18.06%
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period
(Millions).......................... $17,372 $9,356 $8,273 $6,547 $4,345 $2,173 $1,804 $1,055 $826 $485
Ratio of Expenses to Average
Net Assets.......................... .20% .19% .19% .19% .20% .22% .21% .22% .26% .28%
Ratio of Net Investment Income to
Average Net Assets.................. 2.38% 2.72% 2.65% 2.81% 3.07% 3.60% 3.62% 4.08% 3.15% 3.40%
Portfolio Turnover Rate.............. 4%+ 6%+ 6%+ 4%+ 5%+ 23%+ 8% 10% 15% 29%
</TABLE>
*Total return figures do not reflect the annual account maintenance fee of $10.
+Portfolio turnover rates excluding in-kind redemptions were 2%, 4%, 2%, 1%,
1%, and 6%, respectively.
10
<PAGE> 12
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------
EXTENDED MARKET PORTFOLIO
-------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------------- DEC. 21, +
1995 1994 1993 1992 1991 1990 1989 1988 TO 31, 1987
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE,
BEGINNING OF PERIOD.... $18.52 $19.43 $17.35 $15.82 $11.48 $13.92 $11.60 $9.99 $10.00
----- ----- ------ ------ ------ ------ ------ ------ --------
INVESTMENT OPERATIONS
Net Investment
Income............... .30 .28 .23 .24 .25 .30 .26 .34 .03
Net Realized and
Unrealized Gain
(Loss) on
Investments.......... 5.95 (.62) 2.28 1.72 4.54 (2.25) 2.52 1.63 (.04)
----- ----- ----- ----- ----- ----- ----- ----- -------
TOTAL FROM INVESTMENT
OPERATIONS......... 6.25 (.34) 2.51 1.96 4.79 (1.95) 2.78 1.97 (.01)
- ------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net
Investment Income.... (.30) (.28) (.23) (.25) (.25) (.33) (.23) (.20) --
Distributions from
Realized Capital
Gains................ (.40) (.29) (.20) (.18) (.20) (.16) (.23) (.16) --
----- ----- ----- ----- ----- ----- ----- ----- -------
TOTAL
DISTRIBUTIONS...... (.70) (.57) (.43) (.43) (.45) (.49) (.46) (.36) --
- ------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF
PERIOD................. $24.07 $18.52 $19.43 $17.35 $15.82 $11.48 $13.92 $11.60 $9.99
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN*........... 33.80% (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)...... $1,523 $967 $928 $585 $372 $179 $147 $35 $5
Ratio of Expenses to
Average Net Assets..... .25% .20% .20% .20% .19% .23% .23% .24% 0%
Ratio of Net Investment
Income to Average Net
Assets................. 1.51% 1.51% 1.48% 1.73% 2.14% 2.68% 2.92% 2.90% 0%
Portfolio Turnover
Rate................... 15% 19% 13% 9% 11% 9% 14% 26% 3%
</TABLE>
* Total return figures do not reflect the 1% transaction fee on purchases or
the annual account maintenance fee of $10.
+ Commencement of Operations.
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------
TOTAL STOCK
MARKET PORTFOLIO*** GROWTH PORTFOLIO** VALUE PORTFOLIO**
-------------------------------------- ------------------------------------ ------------------------------------
MARCH 16+, NOV. 2, NOV. 2,
YEAR ENDED DEC. 31, 1992, TO YEAR ENDED DEC. 31, 1992, TO YEAR ENDED DEC. 31, 1992, TO
------------------------ DEC. 31, ------------------------ DEC. 31, ------------------------ DEC. 31,
1995 1994 1993 1992 1995 1994 1993 1992 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
NET ASSET
VALUE,
BEGINNING
OF
PERIOD... $11.37 $11.69 $10.84 $10.00 $10.28 $10.20 $10.26 $10.00 $11.12 $11.74 $10.30 $10.00
----- ----- ----- ------- ------ ------ ------ ------- ------ ------ ------ -------
INVESTMENT
OPERATIONS
Net
Investment
Income... .29 .27 .26 .23 .21 .21 .21 .06 .41 .38 .38 .07
Net
Realized
and
Unrealized
Gain
(Loss)
on
Invest-
ments... 3.75 (.29) .88 .84 3.68 .08 (.06) .26 3.66 (.46) 1.50 .30
----- ----- ----- ------- ----- ----- ----- ------ ----- ----- ----- ------
TOTAL
FROM
INVESTMENT
OPERA-
TIONS... 4.04 (.02) 1.14 1.07 3.89 .29 .15 .32 4.07 (.08) 1.88 .37
- ------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends
from
Net
Investment
Income... (.28) (.27) (.26) (.23) (.20) (.21) (.21) (.06) (.40) (.38) (.38) (.07)
Distribu-
tions
from
Realized
Capital
Gains... (.09) (.03) (.03) -- -- -- -- -- -- (.16) (.06) --
----- ----- ----- ------- ----- ----- ----- ------ ----- ----- ----- ------
TOTAL
DISTRIBU-
TIONS... (.37) (.30) (.29) (.23) (.20) (.21) (.21) (.06) (.40) (.54) (.44) (.07)
- ------------------------------------------------------------------------------------------------------------------------------
NET ASSET
VALUE,
END OF
PERIOD... $15.04 $11.37 $11.69 $10.84 $13.97 $10.28 $10.20 $10.26 $14.79 $11.12 $11.74 $10.30
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL
RETURN... 35.79% (0.17)% 10.62% 10.41% 38.06% 2.89% 1.53% 3.19% 36.94% (0.73)% 18.35% 3.70%
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
RATIOS/SUP-
PLEMENTAL
DATA
Net
Assets,
End of
Period
(Mil-
lions)... $1,571 $786 $512 $275 $271 $86 $51 $21 $496 $297 $190 $24
Ratio of
Expenses
to
Average
Net
Assets... .25% .20% .20% .21%* .20% .20% .20% 0%* .20% .20% .20% 0%*
Ratio of
Net
Investment
Income to
Average
Net
Assets... 2.14% 2.35% 2.31% 2.42%* 1.71% 2.08% 2.10% 2.85%* 3.06% 3.37% 3.26% 3.46%*
Portfolio
Turnover
Rate..... 3% 2% 1% 3% 24% 28% 36% 2% 27% 32% 30% 4%
</TABLE>
* Annualized.
** Total return figures do not reflect the annual account maintenance fee
of $10 or applicable portfolio transaction fees.
*** Total return figures do not reflect the .25% transaction fee on purchases
or the annual account maintenance fee of $10. Subscription period for
the Portfolio was from March 16, 1992, to April 26, 1992, during which
time all assets were held in money market instruments. Performance
measurement begins on April 27, 1992.
+ Commencement of operations.
11
<PAGE> 13
<TABLE>
<CAPTION>
--------------------------------------------------------------------------
SMALL CAPITALIZATION STOCK PORTFOLIO(1)
--------------------------------------------------------------------------
OCT. 1,
FEB. 1 TO 1993 TO YEAR ENDED SEPTEMBER 30,
DEC. 31, JAN. 31, --------------------------------------
1995 1994** 1994** 1993 1992 1991 1990(2)
<S> <C> <C> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD............... $14.99 $16.24 $16.23 $12.63 $12.03 $8.55 $11.88
------ -------- ------- ------ ------ ------ -------
INVESTMENT OPERATIONS
Net Investment Income (Loss)...................... .24 .20 .05 .20 .19 .20 .17
Net Realized and Unrealized Gain (Loss) on
Investments..................................... 4.06 (.86) .96 3.73 .88 3.60 (3.46 )
----- ------- ------ ----- ----- ----- ------
TOTAL FROM INVESTMENT OPERATIONS................ 4.30 (.66) 1.01 3.93 1.07 3.80 (3.29 )
- -------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income.............. (.23) (.22) (.18) (.18) (.18) (.18) (.04 )
Distributions from Realized Capital Gains......... (.45) (.37) (.82) (.15) (.29) (.14) --
----- ------- ------ ----- ----- ----- ------
TOTAL DISTRIBUTIONS............................. (.68) (.59) (1.00) (.33) (.47) (.32) (.04 )
- -------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD..................... $18.61 $14.99 $16.24 $16.23 $12.63 $12.03 $8.55
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN++..................................... 28.74% (4.00)% 6.65% 31.60% 9.34% 45.91% (27.73 )%
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions)............... $971 $605 $533 $432 $202 $111 $40
Ratio of Expenses to Average Net Assets............ .25% .17%* .18%* .18% .18% .21% .31 %
Ratio of Net Investment Income (Loss) to
Average Net Assets................................ 1.58% 1.50%* 1.16%* 1.47% 1.65% 2.11% 1.91 %
Portfolio Turnover Rate............................ 28% 25%* 5%* 26% 26% 33% 40 %
</TABLE>
<TABLE>
<CAPTION>
-----------------------------------------
SMALL CAPITALIZATION STOCK PORTFOLIO(1)
-----------------------------------------
YEAR ENDED SEPTEMBER 30,
-----------------------------------------
1989+ 1988 1987 1986
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD............................................... $11.96 $15.73 $13.24 $11.68
------ ------ ------ ------
INVESTMENT OPERATIONS
Net Investment Income (Loss)...................................................... .10 .03 (.04) (.01)
Net Realized and Unrealized Gain (Loss) on Investments............................ 2.13 (2.59) 4.42 1.57
----- ----- ----- -----
TOTAL FROM INVESTMENT OPERATIONS................................................ 2.23 (2.56) 4.38 1.56
- ------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income.............................................. (.14) -- -- --
Distributions from Realized Capital Gains......................................... (2.17) (1.21) (1.89) --
----- ----- ----- -----
TOTAL DISTRIBUTIONS............................................................. (2.31) (1.21) (1.89) --
- ------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD..................................................... $11.88 $11.96 $15.73 $13.24
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN++..................................................................... 18.83% (14.30)% 38.02% 13.33%
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions)............................................... $20 $27 $35 $31
Ratio of Expenses to Average Net Assets............................................ 1.00% .95% .92% .92%
Ratio of Net Investment Income (Loss) to Average Net Assets........................ .65% .24% (.25)% (.06)%
Portfolio Turnover Rate............................................................ 160% 68% 92% 92%
</TABLE>
* Annualized.
** Unaudited.
(1) Results prior to January 31, 1994, are for the former Vanguard Small
Capitalization Stock Fund.
(2) Adjusted to reflect a 3-for-1 stock split as of February 3, 1990.
+ Prior to September 11, 1989, Schroder Capital Management International
provided investment advisory services to the Fund. Effective September 11,
1989, The Vanguard Group, Inc. began providing investment advisory
services to the Fund on an at-cost basis.
++ Total return figures do not reflect the annual account maintenance fees
of $10 or applicable portfolio transaction fees.
12
<PAGE> 14
<TABLE>
<CAPTION>
----------------------------------------------------------------
EUROPEAN PORTFOLIO(1)
----------------------------------------------------------------
YEAR ENDED DECEMBER 31, MAY 1+ TO
------------------------------------------------- DEC. 31,
1995 1994 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD......................... $11.76 $11.88 $9.33 $9.92 $9.06 $10.00
----- ------ ------ ----- ----- ------
INVESTMENT OPERATIONS
Net Investment Income....................................... .32 .28 .17 .25 .26 .16
Net Realized and Unrealized Gain (Loss) on Investments...... 2.30 (.06) 2.55 (.58) .86 (.94)
----- ------ ------ ----- ----- ------
TOTAL FROM INVESTMENT OPERATIONS.......................... 2.62 .22 2.72 (.33) 1.12 (.78)
- -------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income........................ (.32) (.28) (.17) (.26) (.26) (.16)
Distributions from Realized Capital Gains................... (.04) (.06) -- -- -- --
----- ------ ------ ----- ----- ------
TOTAL DISTRIBUTIONS....................................... (.36) (.34) (.17) (.26) (.26) (.16)
- -------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD............................... $14.02 $11.76 $11.88 $9.33 $9.92 $9.06
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN................................................. 22.28% 1.88% 29.13% (3.32)% 12.40% (7.23)%
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions)......................... $1,017 $715 $601 $256 $161 $96
Ratio of Expenses to Average Net Assets...................... .35% .32% .32% .32% .33% .40%*
Ratio of Net Investment Income to Average Net Assets......... 2.66% 2.41% 2.05% 3.05% 3.06% 3.68%*
Portfolio Turnover Rate...................................... 2% 6% 4% 1% 15%** 3%
</TABLE>
* Annualized.
** Portfolio turnover rates for 1991 excluding in-kind redemptions was 3%
for the European Portfolio.
+ Commencement of operations.
(1) Total return figures do not reflect the 1% transaction fee on purchases
or the annual account maintenance fee of $10. Subscription period for
Portfolio was May 1, 1990, to June 17, 1990, during which time all assets
were held in money market instruments. Performance measurement begins on
June 18, 1990.
<TABLE>
<CAPTION>
-----------------------------------------------------------------
PACIFIC PORTFOLIO(1)
-----------------------------------------------------------------
YEAR ENDED DECEMBER 31, MAY 1+ TO
------------------------------------------------- DEC. 31,
1995 1994 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD......................... $11.31 $10.13 $7.56 $9.42 $8.56 $10.00
------ ----- ------ ------ ----- ------
INVESTMENT OPERATIONS
Net Investment Income....................................... .10 .08 .06 .05 .05 .05
Net Realized and Unrealized Gain (Loss) on Investments...... .21 1.24 2.62 (1.76) .86 (1.44)
------ ----- ------ ------ ----- ------
TOTAL FROM INVESTMENT OPERATIONS.......................... .31 1.32 2.68 (1.71) .91 (1.39)
- --------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income........................ (.12) (.08) (.06) (.05) (.05) (.05)
Distributions from Realized Capital Gains................... -- (.06) (.05) (.10) -- --
------ ----- ------ ------ ----- ------
TOTAL DISTRIBUTIONS....................................... (.12) (.14) (.11) (.15) (.05) (.05)
- --------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD............................... $11.50 $11.31 $10.13 $7.56 $9.42 $8.56
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN................................................. (2.75)% 13.04% 35.46% (18.17)% 10.65% (14.01)%
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions)......................... $31 $697 $493 $207 $84 $31
Ratio of Expenses to Average Net Assets...................... .35% .32% .32% .32% .32% .35%*
Ratio of Net Investment Income to Average Net Assets......... .97% .71% .75% .92% .70% 1.02%*
Portfolio Turnover Rate...................................... 1% 4% 7% 3% 21%** 2%
</TABLE>
* Annualized.
** Portfolio turnover rates for 1991 excluding in-kind redemptions was 1%
for the Pacific Portfolio.
+ Commencement of operations.
(1) Total return figures do not reflect the 1% transaction fee on purchases
or the annual account maintenance fee of $10. Subscription period for
Portfolio was May 1, 1990, to June 17, 1990, during which time all assets
were held in money market instruments. Performance measurement begins on
June 18, 1990.
13
<PAGE> 15
<TABLE>
<CAPTION>
-------------------------------
EMERGING MARKETS PORTFOLIO
-------------------------------
YEAR ENDED
DECEMBER 31, MAY 4+ TO
----------- DEC. 31,
1995 1994
<S> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD......................................................... $10.37 $10.00
--------- -----
INVESTMENT OPERATIONS
Net Investment Income....................................................................... .15 .06
Net Realized and Unrealized Gain (Loss) on Investments...................................... (.09) .92
--------- -----
TOTAL FROM INVESTMENT OPERATIONS.......................................................... .06 .98
- ------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income........................................................ (.18) (.07)
Distributions from Realized Capital Gains................................................... -- (.04)
Total DISTRIBUTIONS....................................................................... (.18) (.11)
- ------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD............................................................... $10.75 $10.87
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN(1).............................................................................. .56% 9.81%
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions)......................................................... $234 $83
Ratio of Expenses to Average Net Assets...................................................... .60% .60%*
Ratio of Net Investment Income to Average Net Assets......................................... 2.00% 1.32%*
Portfolio Turnover Rate...................................................................... 3% 6%
</TABLE>
* Annualized.
+ Commencement of operations.
(1) Total return does not reflect the 2% transaction fee on purchases, the
1% transaction fee on redemptions, or the annual account maintenance fee
of $10.
- --------------------------------------------------------------------------------
YIELD AND TOTAL
RETURN From time to time a Portfolio of the Vanguard Index
Funds may advertise its yield and total return. Both
yield and total return figures are based on historical
earnings and are not intended to indicate future
performance. The "total return" of a Portfolio refers to
the average annual compounded rates of return over one-,
five- and ten-year periods or for the life of the
Portfolio (as stated in the advertisement) that would
equate an initial amount invested at the beginning of a
stated period to the ending redeemable value of the
investment, assuming the reinvestment of all dividend
and capital gains distributions.
In accordance with industry guidelines set forth by the
U.S. Securities and Exchange Commission, the "30-day
yield" of a Portfolio is calculated by dividing the net
investment income per share earned during a 30-day
period by the net asset value per share on the last day
of the period. Net investment income includes interest
and dividend income earned on a Portfolio's securities;
it is net of all expenses and all recurring and
nonrecurring charges that have been applied to all
shareholder accounts. The yield calculation assumes that
net investment income earned over 30 days is compounded
monthly for six months and then annualized. Methods used
to calculate advertised yields are standardized for all
stock and bond mutual funds. However, these methods
differ from the accounting methods used by a Portfolio
to maintain its books and records, and so the advertised
30-day yield may not fully reflect the income paid to an
investor's account.
- --------------------------------------------------------------------------------
14
<PAGE> 16
INVESTMENT
OBJECTIVES Vanguard Bond Index Fund, Vanguard Balanced Index Fund,
Vanguard Index Trust and Vanguard International Equity
Index Fund are each open-end diversified investment
companies designed as "index" funds.
--------------------------------------------------------
BOND INDEX FUND
EACH PORTFOLIO SEEKS
TO MATCH THE
INVESTMENT
PERFORMANCE OF ITS
RESPECTIVE INDEX The Fund consists of four Portfolios, each of which
seeks to match the investment results of a particular
investment grade bond index through the use of index
sampling techniques. The Total Bond Market Portfolio
seeks to replicate the performance of a broad market
weighted bond index, while the Short-Term Bond,
Intermediate-Term Bond and Long-Term Bond Portfolios
attempt to replicate the performance of market weighted
bond indexes with prescribed maturity standards. There
is no assurance that any of the Fund's Portfolios will
achieve its stated objective.
--------------------------------------------------------
BALANCED INDEX
FUND
THE FUND SEEKS
TO TRACK THE
WILSHIRE 5000 AND THE
LEHMAN BROTHERS
INDEX The objective of the Fund is to replicate, with respect
to 60% of its assets, the investment performance of the
Wilshire 5000 and, with respect to 40% of its assets,
the investment performance of the Lehman Brothers Index.
There is no assurance that the Fund will achieve its
stated objective.
The Wilshire 5000 consists of all U.S. common stocks
that trade on a regular basis on the New York and
American Stock Exchanges and in the NASDAQ
over-the-counter market. The Lehman Brothers Index
measures the total return (capital change plus income)
provided by a universe of fixed-income securities,
weighted by market value. The securities included in the
index generally have an outstanding market value of at
least $25 million, are of investment grade quality and
are readily available in the marketplace.
--------------------------------------------------------
INDEX TRUST
EACH PORTFOLIO SEEKS
TO MATCH THE
INVESTMENT
PERFORMANCE OF A
PARTICULAR STOCK
MARKET INDEX The Trust consists of six Portfolios, each of which
seeks to provide investment results that correspond to a
particular stock market index. The correlation between
the performance of each of the Trust's Portfolios and
the respective index that each Portfolio attempts to
match is expected to be at least 0.95. The 500, Extended
Market, Total Stock Market and Small Capitalization
Stock Portfolios attempt to replicate the investment
performance of broad market indexes, while the Value and
Growth Portfolios attempt to replicate indexes which
possess certain "value" and "growth" investment
characteristics.
- The 500 PORTFOLIO seeks to replicate the aggregate
price and yield performance of the Standard & Poor's
500 Composite Stock Price Index (the "S&P 500 Index"),
an index which emphasizes large-capitalization
companies.
- The EXTENDED MARKET PORTFOLIO seeks to replicate the
aggregate price and yield performance of the Wilshire
4500 Index, an index which consists of more than 5,000
medium- and small-capitalization companies that are
not included in the S&P 500 Index.
- The TOTAL STOCK MARKET PORTFOLIO seeks to replicate
the aggregate price and yield performance of the
Wilshire 5000 Index, an index
15
<PAGE> 17
which consists of all U.S. stocks that trade on a
regular basis on either the New York or American
Stock Exchange or the NASDAQ over-the-counter
market. These stocks include the
large-capitalization companies of the S&P 500 Index,
with the exception of Royal Dutch and Unilever, N.V.,
which trade on the New York Stock Exchange as ADR's,
as well as the medium- and small-capitalization
companies of the Wilshire 4500 Index.
- The SMALL CAPITALIZATION STOCK PORTFOLIO seeks to
replicate the aggregate price and yield performance of
the Russell 2000 Small Stock Index (the "Russell
2000"), a broadly diversified small-capitalization
stock index consisting of approximately 2,000 common
stocks.
- The VALUE PORTFOLIO seeks to replicate the aggregate
price and yield performance of the S&P/BARRA Value
Index, an index which includes stocks in the S&P 500
Index with lower than average ratios of market price
to book value. These types of stocks are often
referred to as "value" stocks.
- The GROWTH PORTFOLIO seeks to replicate the aggregate
price AND yield performance of the S&P/BARRA Growth
Index, an index which includes stocks in the S&P 500
Index with higher than average ratios of market price
to book value. These types of stocks are often
referred to as "growth" stocks.
There is no assurance that the Portfolios will achieve
their stated objectives.
------------------------------------------------------------------------------
INTERNATIONAL
EQUITY INDEX FUND
EACH PORTFOLIO SEEKS
TO MATCH THE
INVESTMENT
PERFORMANCE OF ITS
RESPECTIVE INDEX The Fund consists of three Portfolios, each of which
seeks to match the investment results of a Morgan
Stanley Capital International Index. The European
Portfolio seeks to replicate the aggregate price and
yield performance of the Morgan Stanley Capital
International-Europe (Free) Index ("MSCI-Europe
(Free)"), a diversified, capitalization weighted index
comprised of companies located in fourteen European
countries. The Pacific Portfolio seeks to replicate the
aggregate price and yield performance of the Morgan
Stanley Capital International-Pacific (Free) Index
("MSCI-Pacific"), a diversified, capitalization weighted
index consisting of companies located in Australia,
Japan, Hong Kong, New Zealand, Singapore and Malaysia.
There is no assurance that either Portfolio will achieve
its stated objective.
By holding both the European and Pacific Portfolios in
appropriate proportions, an investor may create an
aggregate portfolio designed to approximate the total
return (income plus capital change) of the Morgan
Stanley Capital International-Europe, Australia and Far
East (Free) Index ("EAFE Free"), a broadly diversified
international index consisting of more than 1,000 equity
securities of companies located outside of the United
States. As of December, 31, 1995, the MSCI-Pacific
(Free) Index represented approximately 51% of the market
capitalization of EAFE (Free), while the MSCI-Europe
(Free) Index represented the remaining 49%.
16
<PAGE> 18
The Emerging Markets Portfolio seeks, with respect to
95% of assets, to provide investment results that
parallel the Morgan Stanley Capital International
("MSCI")-Select Emerging Markets Free Index ("Index").
The MSCI-Select Emerging Markets Free Index is a
diversified index consisting of common stocks located in
12 countries. This Index provides broader
diversification and more liquidity than other
"published" emerging markets indexes and also takes into
consideration the trading capabilities of foreigners in
emerging stock market countries.
The Fund is neither sponsored by nor affiliated with
Morgan Stanley Capital International.
--------------------------------------------------------
VANGUARD TOTAL
INTERNATIONAL
PORTFOLIO The Total International Portfolio seeks to match the
performance of the Morgan Stanley Capital International
(MSCI) -- Europe, Australia, and Far East + Select
Emerging Markets (Free) Index (the MSCI -- EAFE + Select
EMF Index) by investing in a combination of the
European, Pacific, and Emerging Markets Portfolios of
Vanguard International Equity Index Fund.
The investment objectives of each Portfolio of Vanguard
Bond Index Fund and Vanguard Index Trust are fundamental
and so cannot be changed without the approval of a
majority of a Portfolio's shareholders.
The investment objectives of Vanguard Balanced Index
Fund, each Portfolio of Vanguard International Equity
Index Fund and Vanguard Total International Portfolio
are not fundamental and may be changed by the Board of
Directors without shareholder approval. However,
shareholders would be notified prior to a material
change.
- --------------------------------------------------------------------------------
INVESTMENT
POLICIES
EACH FUND USES
A "PASSIVE"
INVESTMENT APPROACH The Funds are not managed according to traditional
methods of "active" investment management, which involve
the buying and selling of securities based upon
economic, financial and market analysis and investment
judgment. Instead, the Funds, utilizing a "passive" or
indexing investment approach, attempt to approximate the
investment performance of their respective indexes
through statistical procedures. The Funds are managed
without regard to tax ramifications.
Each Fund is responsible for voting the shares of all
securities it holds.
The investment policies of the Funds are not fundamental
and so may be changed by the Board of Directors without
shareholder approval. However, shareholders would be
notified prior to a material change.
--------------------------------------------------------
BOND INDEX FUND
EACH PORTFOLIO INVESTS
IN FIXED INCOME
SECURITIES Each Portfolio will invest in a group of fixed-income
securities selected from its respective index which,
when taken together, are expected to perform similarly
to the index as a whole. This sampling technique is
expected to enable each Portfolio to track the dividend
income and price movements of its respective index,
while minimizing brokerage, custodial and accounting
costs.
The TOTAL BOND MARKET PORTFOLIO will invest in a
portfolio of fixed-income securities selected to match
the Lehman Brothers Aggregate
17
<PAGE> 19
Bond Index (the "Aggregate Bond Index"). The Aggregate
Bond Index is a broad market weighted index which
encompasses four major classes of investment grade
fixed-income securities in the United States: U.S.
Treasury and agency securities, corporate bonds,
international (dollar-denominated) bonds, and
mortgage-backed securities, with maturities greater than
one year.
The SHORT-TERM BOND PORTFOLIO will invest in a portfolio
of fixed-income securities selected to match the Lehman
Brothers Mutual Fund Short (1-5) Government/Corporate
Index (the "Short-Term Index"). The Short-Term Index is
a market weighted index which encompasses three major
classes of investment grade fixed-income securities:
U.S. Treasury, agency securities and corporate bonds,
and international (dollar-denominated) bonds, all with
maturities between 1 and 5 years.
The INTERMEDIATE-TERM BOND PORTFOLIO will invest in a
portfolio of fixed-income securities selected to match
the Lehman Brothers Mutual Fund Intermediate (5-10)
Government/Corporate Index (the "Intermediate-Term
Index"). The Intermediate-Term Index is a market
weighted index which encompasses three major classes of
investment grade fixed-income securities: U.S. Treasury
and agency securities, corporate bonds, and
international (dollar-denominated) bonds, all with
maturities between 5 and 10 years.
The LONG-TERM BOND PORTFOLIO will invest in a portfolio
of fixed-income securities selected to match the Lehman
Brothers Mutual Fund Long (10+) Government/Corporate
Index (the "Long-Term Index"). The Long-Term Index is a
market weighted index which encompasses three major
classes of investment grade fixed-income securities:
U.S. Treasury and agency securities, corporate bonds,
and international (dollar-denominated) bonds, all with
maturities greater than 10 years.
Each Portfolio will invest 80% or more of its assets in
securities included in its respective index. As of
December 31, 1995, the major classes of fixed-income
securities represented the following proportions of the
respective indexes total market values:
<TABLE>
<CAPTION>
AGGREGATE SHORT-TERM INTERMEDIATE- LONG-TERM
BOND INDEX INDEX TERM INDEX INDEX
<S> <C> <C> <C> <C>
--------------------------------------------------------------------------
U.S. Treasury and
agency securities 53% 86% 60% 68%
Corporate bonds 16% 13% 29% 26%
International
(dollar-
denominated) bonds 3% 1% 11% 6%
Mortgage-backed
securities 28% 0% 0% 0%
Dollar-weighted
Average Maturity
(Years) 8.5 yrs 2.7 yrs 7.6 yrs 23.3 yrs
</TABLE>
The Portfolios of the Fund may, from time to time,
substitute one type of investment grade bond for
another. For instance, a Portfolio may hold more
short-term corporate bonds (fewer short U.S. Treasury
bonds) than
18
<PAGE> 20
represented in the Index so as to increase income. This
corporate substitution strategy will entail the
assumption of additional credit risk; however,
substantial diversification within the corporate sector
should moderate issue-specific credit risk. In addition,
current investment policy restricts corporate
substitutions to issues with less than 4 years remaining
to maturity and in aggregate no more than 15% of net
assets. Overall, credit risk is expected to be very low
for each of the Portfolios.
Fixed-income securities will be primarily of investment
grade quality -- i.e., those rated at least Baa3 by
Moody's Investors Service, Inc. or BBB- by Standard &
Poor's Corporation. Securities rated Baa or BBB are
considered as medium grade obligations. Interest
payments and principal are regarded as adequate for the
present but certain protective elements found in higher
rated bonds may be lacking. Such bonds lack outstanding
investment characteristics and, in fact, have
speculative characteristics as well.
In its efforts to duplicate the investment performance
of the Index, each Portfolio will invest in fixed-income
securities approximating its relative proportion of the
Index's total market value. For the Total Bond Market
Portfolio, these investments will include U.S. Treasury
and agency securities, mortgage-backed securities and
corporate and international (dollar-denominated) bonds.
For the Short-Term Bond, Intermediate-Term Bond and
Long-Term Bond Portfolios, these investments include
U.S. Treasury and agency securities, corporate debt and
international (dollar- denominated) debt. The Portfolios
may invest in U.S. Treasury bills, notes and bonds and
other "full faith and credit" obligations of the U.S.
Government. The Portfolios may also invest in U.S.
Government agency securities, which are debt obligations
issued or guaranteed by agencies or instrumentalities of
the U.S. Government. Such "agency" securities may not be
backed by the "full faith and credit" of the U.S.
Government. Such U.S. Government agencies may include
the Federal Farm Credit Banks, the Resolution Trust
Corporation and in the case of the Total Bond Market
Portfolio, the Government National Mortgage Association.
Even though they all carry top (AAA) credit ratings,
"agency" obligations are not explicitly guaranteed by
the U.S. Government and so are perceived as somewhat
riskier than comparable Treasury bonds.
Each Portfolio may also invest up to 20% of its assets
in short-term money market instruments, and may invest
in bond (interest rate) futures contracts and options to
a limited extent. Such securities will be held only to
invest uncommitted cash balances, to maintain liquidity
to meet shareholder redemptions, or to minimize trading
costs. The Portfolios will not invest in such securities
as part of a temporary defensive strategy (such as
altering the aggregate maturity of a Portfolio) to
protect the Fund against potential bond market declines.
Each Portfolio intends to remain fully invested, to the
extent practicable, in a pool of securities which will
duplicate the investment characteristics of
19
<PAGE> 21
the respective index. See "Implementation of Policies"
for a description of other investment practices of the
Fund.
------------------------------------------------------------------------------
BALANCED INDEX
FUND
THE FUND INVESTS IN
STOCKS AND BONDS Under normal circumstances, the Fund will invest 60% of
its net assets in a portfolio of common stocks selected
to track the Wilshire 5000 and 40% of its net assets in
a portfolio of investment-grade bonds designed to track
the Lehman Brothers Index. The Fund may also invest in
certain short-term fixed income securities as cash
reserves, although cash and cash equivalents are
normally expected to represent less than 1% of the
Fund's assets.
The Fund's common stock portfolio will invest in a
portfolio of common stock selected to match the Wilshire
5000. The Fund is expected to invest in approximately
500 of the largest securities in the Wilshire 5000 as
measured by market capitalization and a representative
sample of the remainder. Typically, the Fund will hold
between 1,600 and 1,800 stocks, which are selected
primarily on the basis of market capitalization and
industry weightings.
The Fund's bond portfolio will invest in a portfolio of
fixed income securities selected to match the Lehman
Brothers Index. The Fund will invest in a representative
sample of fixed-income securities in the Lehman Brothers
Index, which, taken together, are expected to perform
similarly to the Index.
The Fund may also invest up to 30% of its assets in
stock or bond futures contracts and options in order to
invest uncommitted cash balances, to maintain liquidity
to meet shareholder redemptions, or to minimize trading
costs. The Fund will not invest in futures contracts,
options, or cash reserves as part of a temporary
defensive strategy, such as lowering the Fund's
investment allocation in common stocks to protect
against potential stock market declines. The Fund
intends to remain fully invested, to the extent
practicable, in a pool of securities which will
duplicate the investment characteristics of the Wilshire
5000 and Lehman Brothers Indexes. See "Implementation of
Policies" for a description of these and other
investment practices of the Fund.
------------------------------------------------------------------------------
INDEX TRUST
ALL SIX PORTFOLIOS
INVEST IN
COMMON STOCKS The 500, Value, and Growth Portfolios each invest in all
the stocks included in each of their respective indexes
in approximately the same proportion as they are
represented in the index. The Extended Market, Total
Stock Market, and Small Capitalization Stock Portfolios
invest in statistically selected samples of the stocks
included in each of their respective indexes. This
sampling technique is expected to enable each portfolio
to track the price movements of its respective index,
while minimizing the brokerage, custodial, and
accounting costs.
The 500 PORTFOLIO invests in all 500 stocks in the S&P
500 Index in approximately the same proportions as they
are represented in the Index.
The EXTENDED MARKET PORTFOLIO invests in a statistically
selected sample of the more than 5,000 stocks included
in the Wilshire 4500 Index.
20
<PAGE> 22
Typically, the Portfolio invests in approximately 1,900
stocks. Stocks are selected for inclusion in the
Portfolio based primarily on market capitalization and
industry weightings. The Portfolio is constructed to
have aggregate investment characteristics similar to
those of the Wilshire 4500 Index.
The TOTAL STOCK MARKET PORTFOLIO invests in a
statistically selected sample of the more than 7,000
stocks included in the Wilshire 5000 Index. Typically,
the Portfolio invests in approximately 1,900 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 1,400 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, 1995, the S&P/BARRA Value
Index included 315 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, 1995, the S&P/BARRA Growth
Index included 185 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
21
<PAGE> 23
duplicate the investment characteristics of their
respective indexes. See "Implementation of Policies" for
a description of these and other investment practices of
the Trust.
------------------------------------------------------------------------------
INTERNATIONAL
EQUITY INDEX FUND
EACH PORTFOLIO
INVESTS IN
INTERNATIONAL STOCKS Each of the three Portfolios invest in statistically
selected samples of the stocks included in each of their
respective indexes. This sampling technique is expected
to enable each portfolio to track the price movements of
its respective index, while minimizing the brokerage,
custodial, and accounting costs.
The EUROPEAN PORTFOLIO invests in a statistically
selected sample of approximately 600 stocks included in
the MSCI-Europe (Free) Index, an index of equity
securities of companies located in fourteen European
countries. Three countries, the United Kingdom, Germany
and France, dominate MSCI-Europe (Free), with 34%, 14%,
and 13% of the market capitalization of the Index,
respectively, as of December 31, 1995. The 11 other
countries are individually much less significant to the
Index and, consequently, the Portfolio. The "Free" Index
includes only shares that U.S. investors are "free" to
purchase.
The PACIFIC PORTFOLIO invests in a statistically
selected sample of the more than 500 stocks included in
the MSCI-Pacific (Free) Index, an index of equity
securities of Pacific Basin companies. The MSCI-Pacific
(Free) Index is dominated by the Japanese stock market,
which represented 81% of the market capitalization of
the Index as of December 31, 1995.
The European and Pacific Portfolios are each expected to
invest in approximately 400 stocks or more. Stocks are
selected for inclusion in each Portfolio based on
country, market capitalization, industry weightings, and
fundamental characteristics such as return variability,
earnings valuation, and yield. Each of the two
Portfolios is constructed to have aggregate investment
characteristics similar to those of its respective
index. In order to parallel the performance of its
respective index, each Portfolio will invest in each
country in approximately the same percentage as the
country's weight in the index.
Each of the two Portfolio's policy is to remain fully
invested in common stocks. Under normal circumstances at
least 80% of the assets of each Portfolio will be
invested in stocks that are represented in its
respective index. Each Portfolio may invest in certain
short-term fixed income securities such as cash
reserves, although cash or cash equivalents are normally
expected to represent less than 1% of each Portfolio's
assets. Each Portfolio may also invest up to 50% of its
assets in stock futures contracts, options, and warrants
in order to invest uncommitted cash balances, maintain
liquidity to meet shareholder redemptions, or minimize
trading costs. Any investment in futures contracts,
options, warrants, convertible securities or swap
agreements over 20% of each Portfolio's assets would be
made in emergency situations, for short-term purposes.
22
<PAGE> 24
The European and Pacific Portfolios will not invest in
cash reserves, futures contracts, options or warrants as
part of a temporary defensive strategy, such as lowering
a Portfolio's investment in common stocks, to protect
against potential stock market declines. The Portfolios
intend to remain fully invested, to the extent
practicable, in a pool of securities which will
approximate the investment characteristics of their
respective indexes. The Portfolios may also enter into
forward foreign currency exchange contracts in order to
maintain the same currency exposure as their respective
indexes, but not as part of a defensive strategy to
protect against fluctuations in exchange rates.
The EMERGING MARKETS PORTFOLIO invests in a
statistically selected sample of approximately 500
stocks included in the MSCI-Select Emerging Markets Free
Index, an index of equity securities of companies
located in the countries of 14 emerging markets. Four
countries, Malaysia, South Africa, Hong Kong and Brazil
represent a majority of the MSCI-Select Emerging Markets
Free Index, with 17%, 15%, 14% and 11% of the market
capitalization of the Index, respectively, as of March
31, 1996.
The Index includes only shares that U.S. investors are
"free" or allowed by law, to purchase and sell and that
have sufficient trading liquidity.
The Portfolio is expected to invest in approximately 500
stocks. Stocks are selected for inclusion in the
Portfolio in order to form a statistically
representative sample corresponding to the MSCI-Select
Emerging Markets Free Index. The Portfolio is
constructed to have aggregate investment characteristics
(based on country, market capitalization and industry
weightings), fundamental characteristics (such as return
variability, earnings valuation and yield) and liquidity
measures, similar to those of its Index.
The Portfolio's policy is to remain 95% invested in
common stocks. The remaining 5% of the Portfolio will be
invested in cash reserves in order to maintain a higher
degree of portfolio liquidity to meet daily redemption
requests.
Under normal circumstances at least 80% of the assets of
the Portfolio will be invested in stocks that are
represented in the Index and futures contracts and
options thereon. The Portfolio may also invest up to 50%
of its assets in stock futures contracts, options,
warrants, convertible securities or swap agreements in
order to invest uncommitted cash balances, maintain
liquidity to meet shareholder redemptions, or minimize
trading costs. Any investment in futures contracts,
options, warrants, convertible securities or swap
agreements over 20% of the Portfolio's assets would be
made in emergency situations, for short-term purposes.
See "Implementation of Policies" for a description of
these and other investment practices of the Portfolios.
------------------------------------------------------------------------------
23
<PAGE> 25
VANGUARD TOTAL
INTERNATIONAL
PORTFOLIO The TOTAL INTERNATIONAL PORTFOLIO allocates its assets
among the European, Pacific and Emerging Markets
Portfolios of Vanguard International Equity Index Fund
based on each market segment's contribution to the
market capitalization of the Morgan Stanley Capital
International -- Europe, Australia, and Far East +
Select Emerging Markets (Free) Index. As of December 31,
1995, the European and Pacific markets each contributed
approximately 45%, and the Emerging Markets contributed
10% to the Index's market capitalization.
See "Implementation of Policies" for a description of
these and other investment practices of the Portfolio.
- --------------------------------------------------------------------------------
INVESTMENT
RISKS
EACH PORTFOLIO IS
SUBJECT TO MARKET RISK As mutual funds investing primarily in common stocks,
Vanguard Balanced Index Fund and the Portfolios of
Vanguard Index Trust and Vanguard International Equity
Index Fund are subject to MARKET RISK -- i.e., the
possibility that common stock prices will decline over
short or even extended periods. Both U.S. and foreign
stock markets tend to be cyclical, with periods when
stock prices generally rise and periods when prices
generally decline.
Common stocks, as measured by the S&P 500 Index, have
provided annual total returns (capital appreciation plus
dividend income), averaging +10.7% for all 10-year
periods from 1926 to 1995. Average return may not be
useful for forecasting future returns in any particular
period, as stock returns are quite volatile from year to
year.
------------------------------------------------------------------------------
INDEX TRUST
THE EXTENDED MARKET,
TOTAL STOCK MARKET
AND SMALL
CAPITALIZATION STOCK
PORTFOLIOS MAY EXHIBIT
GREATER VOLATILITY Historically, medium- and small-capitalization stocks
have been more volatile in price than the
larger-capitalization stocks included in the S&P 500
Index. Among the reasons for the greater price
volatility of these securities are the less certain
growth prospects of smaller firms, the lower degree of
liquidity in the markets for such stocks, and the
greater sensitivity of medium- and small-size companies
to changing economic conditions. Besides exhibiting
greater volatility, medium- and small-size company
stocks may, to a degree, fluctuate independently of
larger company stocks. Medium- and small-size company
stocks may decline in price as large company stocks
rise, or rise in price as large company stocks decline.
Medium- and small-size company stocks constitute the
investments of the Extended Market Portfolio while the
Small Capitalization Stock Portfolio is composed
primarily of small-size company stocks. Investors in the
Portfolios should therefore expect that the Extended
Market and Small Capitalization Stock Portfolios will be
more volatile than, and may fluctuate independently of,
the 500 Portfolio.
Similarly, medium- and small-size company stocks
constituted approximately 30% of the net assets of the
Total Stock Market Portfolio on December 31, 1995.
Investors in the Portfolio should therefore anticipate
somewhat greater price volatility in the Total Stock
Market Portfolio relative to the 500 Portfolio.
24
<PAGE> 26
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 1995. However,
as stated above, both Indexes may be more volatile than
the S&P 500 Index over short or extended periods. The
Indexes have been in existence since May, 1992.
Historical performance data was generated by BARRA by
constructing the S&P/BARRA Value and Growth Indexes from
actual S&P 500 Index holdings.
------------------------------------------------------------------------------
INTERNATIONAL
EQUITY INDEX FUND
INTERNATIONAL STOCKS
MAY EXHIBIT GREATER
VOLATILITY THAN
U.S. STOCKS Investments in foreign stock markets can be as volatile,
if not more volatile, than investments in U.S. markets.
The MSCI-Europe Index has provided annual total returns,
averaging +14.2% for all 10-year periods from 1970-1995,
and the MSCI-Pacific Index has provided annual total
returns, averaging +17.8% during the same periods. By
comparison, the average annual total return of U.S.
stocks during this same period was +13.1% (as measured
by the Standard & Poor's 500 Composite Stock Price
Index). Note, however, that the period from 1970 to 1995
was a very favorable one for foreign stock market
investing. The figures on total return and stock market
volatility are provided here only as a guide to
potential market risk, and may not be useful for
forecasting future returns in any particular period.
THE JAPANESE STOCK
MARKET IS A MAJOR
COMPONENT OF THE
PACIFIC INDEX Investors should realize that Japanese securities
comprised 81% of the MSCI-Pacific (Free) Index as of
December 31, 1995, and that therefore stocks of Japanese
companies will represent a correspondingly large
component of the Pacific Portfolio's investment assets.
Such a large investment in the Japanese stock market may
entail a higher degree of risk than with more
diversified international portfolios, especially
considering that by fundamental measures of corporate
valuation, such as its high price-earnings ratios and
low dividend yields, the Japanese market as a whole may
appear expensive relative to other world stock markets.
STOCKS FROM THREE
COUNTRIES DOMINATE
THE EUROPE INDEX Stocks from the United Kingdom, Germany and France
comprised 34%, 14% and 13% of the MSCI-Europe Index,
respectively, as of December 31, 1995. The remaining 11
countries in the MSCI-Europe Index have much less
significant capitalization weightings in the Index and
will therefore have much less impact on the total return
of the Index and the European Portfolio.
25
<PAGE> 27
EMERGING MARKETS
MAY EXHIBIT GREATER
VOLATILITY THAN
DEVELOPED MARKETS Emerging markets, such as those invested in by the
Emerging Markets Portfolio, are associated with
substantial investment risks. These risks include market
volatility, investment illiquidity, currency risk,
political instability and unexpected changes in economic
policy including capital controls, expropriation, taxes
and hyper-inflation.
Investors should be aware that emerging markets can be
substantially more volatile than both U.S. and more
developed foreign markets. For example, from 1989-1995,
the average positive monthly return for the Wilshire
5000 Index, a broad measure of the U.S. equity market
was +3.1%. The average negative monthly return for the
Wilshire 5000 Index was -2.6%. In contrast, from
1989-1995, the average positive monthly return of the
Morgan Stanley Capital International Emerging Markets
Free Index, a widely quoted emerging market benchmark,
was +5.5%; while the average negative monthly return was
-4.9%.
INVESTMENT ILLIQUIDITY
RISK Volatility in emerging markets may be exacerbated by
illiquidity. Average daily trading volume in all of the
emerging markets combined is a small fraction of the
average daily volume of the U.S. market. Small trading
volumes may result in investors being forced to purchase
securities at substantially higher prices than the
current market, or sell securities at much lower prices
than the current market.
------------------------------------------------------------------------------
VANGUARD TOTAL
INTERNATIONAL
PORTFOLIO Because it invests its assets in the Europe, Pacific,
and Emerging Markets Portfolios of Vanguard
International Equity Index Fund, the Total International
Portfolio is subject to the same risks, in varying
degrees.
INTERNATIONAL STOCKS
ALSO EXPOSE INVESTORS
TO CURRENCY AND OTHER
RISKS For U.S investors, the returns of foreign investments,
such as those held by the three Portfolios are
influenced by not only the returns on foreign common
stocks themselves, but also by the returns on the
currencies in which the stocks are denominated. Currency
risk is the risk that changes in foreign exchange rates
will affect, favorably or unfavorably, the value of
foreign securities held by a Portfolio. In a period when
the U.S. dollar generally rises against foreign
currencies, the returns on foreign stocks for a U.S.
investor will be diminished. By contrast, in a period
when the U.S. dollar generally declines, the returns on
foreign stocks will be enhanced. Currency risk in
emerging markets may be exacerbated by unexpected
exchange rate devaluations.
Other risks and considerations of international
investing include: differences in accounting, auditing
and financial reporting standards; generally higher
transaction costs on foreign portfolio transactions;
small trading volumes and generally lower liquidity of
foreign stock markets, which may result in greater price
volatility; foreign withholding taxes payable on a
Portfolio's foreign securities, which may reduce
dividend income payable to shareholders; the possibility
of expropriation or confiscatory taxation; adverse
change in investment or exchange control regulations;
difficulty in obtaining a judgement from a foreign
court;
26
<PAGE> 28
political instability which could affect U.S. investment
in foreign countries; and potential restriction on the
flow of international capital.
------------------------------------------------------------------------------
BOND INDEX FUND
THE PORTFOLIOS ARE
SUBJECT TO INTEREST
RATE RISK INTEREST RATE RISK is the potential for fluctuations in
bond prices due to changing interest rates. As a rule,
bond prices vary inversely with interest rates. If
interest rates rise, bond prices generally decline; if
interest rates fall, bond prices generally rise. In
addition, for a given change in interest rates,
longer-maturity bonds fluctuate more in price than
shorter-maturity bonds. To compensate investors for
these larger fluctuations, longer-maturity bonds usually
offer higher yields than shorter-maturity bonds, other
factors, including credit quality, being equal.
These basic principles of bond prices also apply to U.S.
Government securities. A security backed by the "full
faith and credit" of the U.S. Government is guaranteed
only as to its stated interest rate and face value at
maturity, not its current market price. Just like other
fixed-income securities, government-guaranteed
securities will fluctuate in value when interest rates
change.
The TOTAL BOND MARKET and INTERMEDIATE-TERM BOND
PORTFOLIOS maintain an intermediate-term average
weighted maturity, and are therefore subject to a
moderate to high level of interest rate risk. Interest
rate risk for the SHORT-TERM BOND PORTFOLIO should be
modest. Because of the short-term average weighted
maturities, the Portfolio is expected to exhibit low to
moderate price fluctuations as interest rates change.
The LONG-TERM BOND PORTFOLIO is exposed to substantial
interest rate risk. The Portfolio is expected to have an
average maturity in excess of 15 years which exposes it
to high to very high price fluctuations due to changing
interest rates.
THE PORTFOLIOS ARE
SUBJECT TO INCOME RISK INCOME RISK is the potential for a decline in a
Portfolio's income due to falling market interest rates.
In relative terms, income risk will be higher for the
Fund's shorter-term Portfolios and lower for the Fund's
longer-term Portfolios.
THE LONG-TERM BOND
PORTFOLIO IS SUBJECT TO
CALL RISK An additional risk associated with long-term corporate
bonds is call risk. CALL RISK is the possibility that
corporate bonds held by the Portfolio will be repaid
prior to maturity. Call provisions, common in many
corporate bonds, allow bond issuers to redeem bonds
prior to maturity (at a specific price). When interest
rates are falling, bond issuers often exercise these
call provisions, paying off bonds that carry high stated
interest rates and often issuing new bonds at lower
rates. For the Portfolio, the result would be that bonds
with high interest rates are "called" and must be
replaced with lower-yielding instruments. In these
circumstances, the income of the Portfolio would
decline. Reflecting these additional credit and call
risks, the corporate portion of the portfolio will
generally offer higher yields than the government
portion.
27
<PAGE> 29
THE TOTAL BOND
MARKET PORTFOLIO IS
SUBJECT TO
PREPAYMENT RISK As a mutual fund investing a portion of its assets in
mortgage-backed securities (see chart on page 18), the
Total Bond Market Portfolio is subject to prepayment
risk to a limited extent. PREPAYMENT RISK is the
possibility that, during periods of declining interest
rates, the principal invested in high-yielding
mortgage-backed securities will be repaid earlier than
scheduled, and the Fund will be forced to reinvest the
unanticipated payments at generally lower interest
rates.
Prepayment risk has two important effects on the
Portfolio. First, when interest rates fall and principal
prepayments are reinvested at lower interest rates, the
income that the Portfolio derives from mortgage-backed
securities is reduced. Second, like other fixed-income
securities, mortgage-backed securities generally decline
in price when interest rates rise. However, because of
prepayment risk, mortgage-backed securities (and thus in
part the share price of the Portfolio and the value of
the Index) will not enjoy as large a gain in market
value as ordinary bonds when interest rates fall. In
part to compensate for prepayment risk, mortgage-backed
securities generally offer higher yields than bonds of
comparable credit quality and maturity.
CREDIT RISK IS EXPECTED
TO BE LOW CREDIT RISK is the possibility that an issuer of
securities held by a Portfolio will be unable to make
payments of either interest or principal. The credit
risk of a Portfolio is a function of the credit quality
of its underlying securities.
The credit quality of each Portfolio is expected to be
very high, and thus credit risk should be low. As of
December 31, 1995, the average quality, as rated by
Moody's Investors Service, Inc., of each Portfolio's
benchmark index was as follows:
<TABLE>
<S> <C>
Aggregate Bond Index.............................. Aaa
Short-Term Bond Index............................. Aaa
Intermediate-Term Bond Index...................... Aa1
Long-Term Bond Index.............................. Aa1
</TABLE>
To a limited extent, the Portfolios are also exposed to
event risk, the possibility that corporate fixed-income
securities held by the Portfolios may suffer a
substantial decline in credit quality and market value
due to a corporate restructuring. Corporate
restructurings, such as mergers, leveraged buyouts,
takeovers or similar events, are often financed by a
significant expansion of corporate debt. As a result of
the added debt burden, the credit quality and market
value of a firm's existing debt securities may decline
significantly. While event risk may be high for certain
corporate and international (dollar-denominated)
securities held by the Portfolios, event risk for each
Portfolio in the aggregate should be low because of each
Portfolios diversified holdings and the small percentage
of the Portfolio assets invested in these securities.
The corporate substitution strategy used by the Fund
(see discussion on page 18) will increase credit risk
somewhat, as short-term investment grade corporate bonds
are substituted for U.S. Treasury bonds and
28
<PAGE> 30
notes; however, owing to the diversified nature of the
Portfolios, and policies limiting the maturity and
maximum amount of substitutions, the overall credit and
event risk of the Portfolio is expected to be low.
NO CURRENCY RISK IN
ANY PORTFOLIO While each of the chosen Lehman Index benchmarks do have
limited exposure to international bonds, there is no
currency risk associated with the investments since they
are all dollar-denominated.
- --------------------------------------------------------------------------------
WHO SHOULD
INVEST The Funds offer investors the advantage of a "passive"
approach to investing. These include low investment
costs, exceptional diversification among a wide range of
stocks and bonds, minimal portfolio turnover, and
relative predictability. Unlike other mutual funds,
which generally attempt to "beat" market averages with
often unpredictable results, the Portfolios of the Funds
seek to "match" the performance of their underlying
indexes and thus are expected to provide a highly
predictable return relative to these benchmarks.
However, shareholders should expect to be fully exposed
to the market risks inherent in investing in stocks and
bonds. As the prices of stocks and bonds may be
volatile, only investors able to tolerate short-term,
possibly substantial fluctuations in the value of their
investment, brought about by generally declining stock
or bond prices, should contemplate an investment in the
Funds.
Investors may wish to reduce the potential risk of
investing in a Portfolio by purchasing shares on a
regular, periodic basis (dollar-cost averaging) rather
than making an investment in one lump sum.
The Funds are intended to be a long-term investment
vehicle and not designed to provide investors with a
means of speculating on short-term market movements.
Investors who engage in excessive account activity
generate additional costs which are borne by all
shareholders. In order to minimize such costs the Funds
have adopted the following policies. The Funds reserve
the right to reject any purchase request (including
exchange purchases from other Vanguard portfolios) that
is reasonably deemed to be disruptive to efficient
portfolio management, either because of the timing of
the investment or previous excessive trading by the
investor. Additionally, the Funds have adopted exchange
privilege limitations as described in the section
"Exchange Privilege Limitations." Finally, the Funds
reserve the right to suspend the offering of their
shares.
Investors should not consider an investment in any one
Fund a complete investment program, but should maintain
holdings of securities with different risk
characteristics -- including common stocks, bonds and
money market instruments.
------------------------------------------------------------------------------
29
<PAGE> 31
BOND INDEX FUND
INVESTORS SEEKING TO
PARTICIPATE IN THE
"BOND MARKET" AS A
WHOLE OR ITS VARIOUS
MATURITY SEGMENTS The Portfolios are designed for individual and
institutional investors seeking well-diversified,
low-cost ways to participate in the U.S. fixed-income
markets. The Portfolios will be essentially fully
invested at all times. Because the Total Bond Market
Portfolio will represent all major sectors of the
investment grade fixed-income securities market, the
Portfolio is a suitable vehicle for those investors
seeking ownership in the "bond market" as a whole,
without regard to particular sectors. The Short-Term
Bond, Intermediate-Term Bond and Long-Term Bond
Portfolios are suitable vehicles for those investors
seeking ownership in specific maturity segments of the
"bond market." Each Portfolio concentrates on bonds of
various maturities as illustrated in the chart on page
18. Because of the risks associated with bond
investments, each Portfolio is intended to be a
long-term investment vehicle and is not designed to
provide investors with a means of speculating on
short-term bond market movements.
As with all longer-term, fixed-income investments, the
share price of the Total Bond Market, Intermediate-Term
Bond and Long-Term Bond Portfolios will vary, with the
Long-Term Bond Portfolio expected to exhibit the
greatest volatility. Share price volatility should be
significantly less for the Short-Term Bond Portfolio.
Credit risk should be minimal for each Portfolio. The
investment risks are described on page 24.
The Portfolios are also suitable for those investors
with common stock holdings who are seeking a
complementary fixed-income investment to create a more
balanced asset mix. Because of potential share price
fluctuations, the Portfolios may be inappropriate for
investors who have short-term objectives or who require
stability of principal.
--------------------------------------------------------
BALANCED INDEX
FUND
INVESTORS SEEKING A
BALANCE BETWEEN
CURRENT INCOME AND
CAPITAL GROWTH The Fund is designed for conservative investors seeking
a long-term investment offering both current income and
the potential for capital growth. By balancing its
investments among common stocks and bonds, the Fund is
expected to provide lower investment risk and share
price volatility than a mutual fund which invests
exclusively in common stocks. The balanced investment
approach of the Fund tends to reduce exposure to stock
and bond market risks; it does not eliminate them. The
Fund is thus suitable for investors who wish to gain
exposure to the potential capital growth provided by the
stock market, while limiting investment risk. Such a
balanced investment program might be particularly well-
suited to long-term investment objectives such as
retirement savings.
------------------------------------------------------------------------------
30
<PAGE> 32
INDEX TRUST
LONG-TERM INVESTORS
SEEKING A "PASSIVE"
APPROACH FOR INVESTING
IN COMMON STOCKS All six Portfolios of the Trust are designed for
long-term investors seeking the advantages of investing
in a diversified portfolio of common stocks.
Four Portfolios of the Trust provide a vehicle for
investing in a broad market index:
- The 500 PORTFOLIO is designed for investors seeking to
replicate the total return of the S&P 500 Index, an
index emphasizing large capitalization common stocks.
- The EXTENDED MARKET PORTFOLIO is designed for
investors seeking to replicate the total return of the
Wilshire 4500 Index, an index consisting of small- and
medium-capitalization companies.
- The TOTAL STOCK MARKET PORTFOLIO is designed for
investors seeking to replicate the total return of the
Wilshire 5000 Index, an index consisting of all U.S.
stocks that trade on a regular basis on either the New
York or American Stock Exchange or the NASDAQ
over-the-counter market. The Total Stock Market
Portfolio will therefore reflect the performance of
the entire U.S. stock market.
- The SMALL CAPITALIZATION STOCK PORTFOLIO is designed
for investors seeking to replicate the total return of
the Russell 2000 Small Stock Index, an index
consisting of approximately 2,000 small-capitalization
stocks.
Two Portfolios are designed for investors seeking to
emphasize certain investment characteristics while
continuing to utilize a "passive" investment approach:
- The VALUE PORTFOLIO is designed for investors seeking
to replicate the total return of the S&P/BARRA Value
Index, an index consisting of companies of the S&P 500
Index with lower than average market price to book
value ratios. Such a "value-oriented" Portfolio may be
appropriate for more conservative stock market
investors who are seeking higher dividend income and
somewhat below average stock market volatility.
- The GROWTH PORTFOLIO is designed for investors seeking
to replicate the total return of the S&P/BARRA Growth
Index, an index consisting of companies of the S&P 500
Index with higher than average market price to book
value ratios. Such a "growth-oriented" Portfolio may
be appropriate for investors who have little need for
current dividend income and who can tolerate somewhat
above average stock market volatility.
Taken together in appropriate proportions, the Value and
Growth Portfolios are expected to approximate the total
returns achieved by the 500 Portfolio.
------------------------------------------------------------------------------
31
<PAGE> 33
INTERNATIONAL
EQUITY INDEX FUND
LONG-TERM INVESTORS
SEEKING TO INVEST
IN INTERNATIONAL
COMMON STOCKS The Portfolios are designed for investors who seek a
low-cost "passive" approach for investing in a broadly
diversified portfolio of international common stocks.
Unlike other equity mutual funds, which generally seek
to "beat" market averages with often unpredictable
results, the Portfolios of the Fund seek to "match"
their respective indexes and thus are expected to
provide a predictable return relative to their
respective benchmarks. In particular, the European
Portfolio is designed for investors seeking to
approximate the total investment results (before fund
expenses and withholding taxes) of the MSCI-Europe
(Free) Index, a diversified index of European common
stocks. The Pacific Portfolio is designed for investors
seeking to approximate the total investment results
(before fund expenses and withholding taxes) of the
MSCI-Pacific (Free) Index, a diversified index of
Pacific Basin common stocks.
The European and Pacific Portfolios are also suitable
for investors seeking to create a portfolio which
parallels the performance of the MSCI-EAFE (Free) Index,
a broadly diversified index consisting of over 1,000
international equity securities. By investing in the two
portfolios in the appropriate percentages (51% in the
Pacific Portfolio and 49% in the European Portfolio as
of December 31, 1995), a portfolio approximating the
investment characteristics of EAFE (Free) may be
created.
The Emerging Markets Portfolio is designed for investors
seeking to approximate the total investment results
(before fund expenses and withholding taxes) of the
MSCI-Select Emerging Markets Free Index, a diversified
index of common stocks of emerging market countries.
--------------------------------------------------------
TOTAL
INTERNATIONAL
PORTFOLIO The Total International Portfolio is designed for
investors seeking to approximate investment results that
parallel those of the MSCI-EAFE + Select EMF Index
through a combination of the Europe, Pacific, and
Emerging Markets Portfolio of Vanguard International
Equity Index Fund.
- --------------------------------------------------------------------------------
IMPLEMENTATION
OF POLICIES The Portfolios follow a variety of investment practices
in an effort to duplicate the total return of their
respective indexes.
--------------------------------------------------------
BOND INDEX FUND
THE PORTFOLIOS INVEST
IN FIXED INCOME
SECURITIES Each Portfolio will invest at least 80% or more of its
assets in securities included in its benchmark Index.
The Indexes measure the total investment return (capital
change plus income) provided by a universe of
fixed-income securities, weighted by the market value
outstanding of each security. The securities included in
each Index generally meet the following criteria, as
defined by Lehman Brothers: an outstanding market value
of at least $100 million; and investment grade
quality -- i.e., rated a minimum of Baa by Moody's
Investors Service, Inc. or BBB by Standard & Poor's
Corporation. The maturities of securities included in
each index will vary as described on page 18.
THE PORTFOLIOS USE A
"SAMPLING" TECHNIQUE The Portfolios will be unable to hold all of the
individual issues which comprise the Indexes because of
the large number of securities involved. Instead, each
Portfolio will hold a representative sample of the
securities
32
<PAGE> 34
in its respective Index, selecting one or two issues to
represent entire "classes" or types of securities in the
Index. Each Portfolio will be constructed so as to match
the composition of its benchmark index as described
below.
At the broadest level, each Portfolio will seek to hold
securities which reflect the weighting of the major
asset classes in its respective index. For the Total
Bond Market Portfolio, these classes include U.S.
Treasury and agency securities, corporate bonds, and
mortgage-backed securities. For the Short-Term Bond,
Intermediate-Term Bond and Long-Term Bond Portfolios,
the two major classes of securities include U.S.
Treasury and agency securities and corporate bonds.
Such a sampling technique is expected to be an effective
means of substantially duplicating the income and
capital returns provided by each Index. Over time, the
correlation between the performance of the Fund and the
Index is expected to be 0.95 or higher. A correlation of
1.00 would indicate perfect correlation, which would be
achieved when the net asset value of a Portfolio,
including the value of its dividend and capital gain
distributions, increases or decreases in exact
proportion to changes in the Index. Because the
Portfolios of the Fund incur operating expenses, as
opposed to their respective indexes, which do not, a
perfect correlation of 1.00 is unlikely to be achieved.
THE TOTAL BOND
MARKET PORTFOLIO MAY
INVEST IN MORTGAGE-
BACKED SECURITIES As part of its effort to duplicate the investment
performance of its Index, the Total Bond Market
Portfolio may invest in mortgage-backed securities.
Mortgage-backed securities represent an interest in an
underlying pool of mortgages. Unlike ordinary
fixed-income securities, which generally pay a fixed
rate of interest and return principal upon maturity,
mortgage-backed securities repay both interest income
and principal as part of their periodic payments.
Because the mortgages underlying mortgage-backed
certificates can be prepaid at any time by homeowners or
corporate borrowers, mortgage-backed securities give
rise to certain unique "prepayment" risks. See
"Investment Risks."
The Total Bond Market Portfolio may purchase
mortgage-backed securities issued by the Government
National Mortgage Association (GNMA), the Federal Home
Loan Mortgage Corporation (FHLMC), the Federal National
Mortgage Association (FNMA), and the Federal Housing
Authority (FHA). GNMA securities are guaranteed by the
U.S. Government as to the timely payment of principal
and interest; securities from other Government-sponsored
entities are generally not secured by an explicit pledge
of the U.S. Government. The Portfolio may also invest in
conventional mortgage securities, which are packaged by
private corporations and are not guaranteed by the U.S.
Government. Mortgage securities that are guaranteed by
the U.S. Government are guaranteed only as to the timely
payment of principal and interest. The market value of
such securities is not guaranteed and may fluctuate.
------------------------------------------------------------------------------
33
<PAGE> 35
BALANCED INDEX
FUND
THE FUND INVESTS IN
A SAMPLE OF ALL U.S.
COMMON STOCKS The Fund's common stock investments will be selected
from securities included in the Wilshire 5000, an index
of all regularly and publicly traded U.S. common stocks
that trade on the New York and American Stock Exchanges
and in the NASDAQ over-the-counter market. Approximately
6,900 stocks, including large-, medium-, and
small-capitalization companies, are included in the
Wilshire 5000, which serves as a proxy for the complete
U.S. stock market.
Under normal circumstances, the Fund will invest 60% of
its net assets in common stocks included in the Wilshire
5000. In an effort to replicate the investment
performance of the Wilshire 5000, the Fund's common
stock holdings will include approximately 500 of the
largest market capitalization stocks in the Index and an
additional representative sample of the remaining
stocks. The high transaction costs and illiquidity of
many of the smaller stocks in the Wilshire 5000 make
complete replication of the Index's holding impractical.
COMMON STOCKS ARE
SELECTED USING
OPTIMIZATION
TECHNIQUES ("PORTFOLIO
OPTIMIZATION") The stocks of the Wilshire 5000 included in the Fund are
selected using a statistical technique known as
"optimization." This process selects stocks for the Fund
so that various industry weightings, market
capitalizations, and fundamental characteristics (e.g.,
price-to-book, price-to-earnings, and debt-to-asset
ratios, as well as dividend yields) match those of the
Wilshire 5000. For instance, if 10% of the
capitalization of the Wilshire 5000 consists of utility
companies with relatively large market capitalizations,
then the Fund's stock holdings are constructed so that
approximately 10% of the Fund's stocks represent
utilities with relatively large capitalizations.
The Fund is not sponsored, endorsed, sold or promoted by
Wilshire Associates. Wilshire(R) and Wilshire 5000(R)
are registered service marks of Wilshire Associates.
THE FUND INVESTS IN A
SAMPLE OF ALL U.S.
INVESTMENT GRADE DEBT Under normal circumstances, the Fund will invest 40% of
its net assets in fixed income securities included in
the Lehman Brothers Index, an index of U.S.
investment-grade, fixed-income securities. More than
5,300 individual bond issues, including U.S. Treasury
and Government agency securities, corporate debt
obligations, and mortgage-backed securities are included
in the Lehman Brothers Index.
The securities included in the Lehman Brothers Index in
which the Fund may invest generally meet the following
criteria, as defined by Lehman Brothers: an effective
maturity of not less than one year; an outstanding
market value of at least $50 million; investment grade
quality -- i.e., rated a minimum of Baa by Moody's
Investors Service, Inc. or BBB by Standard & Poor's
Corporation; and general availability in the
marketplace. If a security held in the Fund's portfolio
is downgraded to a rating below these minimum standards,
the Fund may continue to hold it until such time as the
adviser deems it most advantageous to dispose of the
security.
34
<PAGE> 36
BONDS ARE SELECTED
USING A STRATIFIED
SAMPLING TECHNIQUE The large number of issues in the Index makes it
impractical for the Fund to hold all of the individual
issues which comprise the Index. Instead, the Fund will
attempt to replicate the investment performance of the
Lehman Brothers Index by holding a representative sample
of the securities in the Index. In choosing a
representative sample of bond investments from the
Lehman Brothers Index, the Fund utilizes a "stratified
sampling" technique, which means that, the Fund will
select one or two individual bond issues to represent
entire "classes" or types of fixed-income investments in
the Index.
At the broadest level, the Fund will seek to hold
securities reflecting the three major classes of
fixed-income investments in the Lehman Brothers
Index -- U.S. Treasury and Government agency securities,
corporate debt obligations, and mortgage-backed
securities. For example, if corporate debt obligations
represent 25% of the Index, then 25% of the Fund's bond
holdings will also be invested in such securities. As
the Fund's assets grow, these classes of investments
will be further delineated along the lines of sector,
term to maturity, coupon, and credit rating. For
example, within the corporate debt class, all long-term,
low coupon AA-rated utility bonds might be represented
in the Fund by one or two individual utility securities,
which would result in less diversification and greater
security specific risk in the Fund compared to the
Index.
The Lehman Brothers Index is a trademark of Lehman
Brothers, Inc. Inclusion of a security in the Index in
no way implies an opinion by Lehman Brothers, Inc. as to
the attractiveness or appropriateness of a security as
an investment. Lehman Brothers, Inc. is neither a
sponsor of nor in any way affiliated with the Fund.
THE FUND'S RETURNS
SHOULD BE CLOSELY
CORRELATED WITH ITS
UNDERLYING INDEXES The sampling techniques utilized by the Fund are
expected to be an effective means of substantially
duplicating the investment performance (dividend income
plus capital change) of the Fund's underlying indexes:
the Wilshire 5000 (for the 60% of net assets invested in
common stocks) and the Lehman Brothers Index (for the
40% of net assets invested in bonds). The correlation
between the performance of the Fund's stock and bond
investments and the Wilshire 5000 and Lehman Brothers
Indexes, respectively, is expected to be at least 0.95.
Due to the use of sampling techniques, however, neither
the stock nor bond holdings of the Fund are expected to
track their target benchmarks with the degree of
accuracy that complete replication of the indexes would
have provided. The principal advantage of this sampling
approach is to provide an efficient means of investing
in a large universe of stocks and bonds. In particular,
the Fund is expected to provide exceptionally broad
diversification, and should operate at low costs due to
both its "passive" approach to portfolio management and
expected low portfolio turnover rate.
------------------------------------------------------------------------------
35
<PAGE> 37
INDEX TRUST
THE 500 PORTFOLIO
INVESTS IN ALL 500 S&P
STOCKS The 500 Portfolio attempts to duplicate the investment
results of the S&P 500 Index by holding all 500 stocks
in approximately the same proportions as they are
represented in the Index. This indexing technique is
known as "complete replication."
The S&P 500 Index is composed of 500 common stocks,
which are chosen by Standard & Poor's Corporation on a
statistical basis to be included in the Index. The
inclusion of a stock in the S&P 500 Index in no way
implies that Standard & Poor's Corporation believes the
stock to be an attractive investment. The 500
securities, most of which trade on the New York Stock
Exchange, represented, as of December 31, 1995,
approximately 70% 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 44% 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, 1995, the five largest companies in the
Index were: General Electric (2.6%), American Telephone
and Telegraph (2.2%), Exxon Corporation (2.2%), Coca-
Cola (2.1%), and Merck & Co. (1.8%). The largest
industry categories were: telephone companies (8.5%),
banks (6.4%), pharmaceutical companies (6.3%),
international oil companies (6.0%) and medical supplies
(4.2%).
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 30% of the capitalization of the U.S. stock
market. The Wilshire 4500 Index consists of all U.S.
stocks that are not in the S&P 500 Index and that trade
regularly on the New York and American Stock Exchanges
as well as in the NASDAQ over-the-counter market. More
than 5,000 stocks of medium- and small-capitalization
companies are included in the Wilshire 4500 Index.
The Extended Market Portfolio will be unable to hold all
of the more than 5,000 issues which comprise the
Wilshire 4500 Index because of the costs involved and
the illiquidity of many of the securities. Instead, the
Portfolio will hold a representative sample of the
securities in the Wilshire 4500 Index.
THE TOTAL STOCK
MARKET PORTFOLIO
INVESTS IN A SAMPLE OF
ALL U.S. STOCKS Neither the S&P 500 Index nor the Wilshire 4500 Index
independently represents the U.S. stock market as a
whole. The Wilshire 5000 Index, which consists of all
regularly and publicly traded U.S. stocks, provides a
complete proxy for the U.S. stock market. More than
6,000 stocks, including large-, medium-, and
small-capitalization companies are included in the
Wilshire 5000 Index.
In an effort to replicate the investment performance of
the Wilshire 5000 Index, the Total Stock Market
Portfolio will invest in approximately 900 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
36
<PAGE> 38
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 1,400 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, 1995, the average stock
market capitalization of the Russell 2000 was $360
million. As in the case of the Extended Market
Portfolio, the high transaction costs and illiquidity of
many of the small stocks contained in the Russell 2000
Index make complete replication of the holdings
impractical.
The Portfolio is neither sponsored by nor affiliated
with the Frank Russell Company. Frank Russell's only
relationship to the Portfolio is the licensing of the
use of the Russell 2000 Small Stock Index. Frank Russell
Company is the owner of the trademarks and copyrights
relating to the Russell indexes.
THE EXTENDED MARKET,
TOTAL STOCK MARKET
AND SMALL
CAPITALIZATION STOCK
PORTFOLIOS USE
SAMPLING TECHNIQUES The stocks of the Wilshire 4500 Index to be included in
the Extended Market, Total Stock Market and Small
Capitalization Stock Portfolios will be selected
utilizing a statistical sampling technique known as
"optimization."
This sampling technique, which is described on page 34,
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
37
<PAGE> 39
"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, 1995, after the semi-annual
reconstitution of the indexes, the S&P/BARRA Value Index
consisted of 315 common stocks in the S&P 500 Index,
while the S&P/BARRA Growth Index consisted of the
remaining 185. 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, 1995, the five largest companies in the
S&P/BARRA Value Index were Exxon Corp., Royal Dutch
Petroleum Co., IBM, Mobil, and Bell South Corp., the
five largest companies in the S&P/BARRA Growth Index
were General Electric Co., American Telephone &
Telegraph, Coca Cola Co., Merck & Co., Inc. and Phillip
Morris Cos., Inc.
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.
38
<PAGE> 40
THE S&P MAKES NO WARRANTY, EXPRESS OR IMPLIED, AS TO
RESULTS TO BE OBTAINED BY LICENSEE, OWNERS OF THE TRUST,
ANY PERSON OR ENTITY FROM THE USE OF THE S&P 500 OR ANY
DATA INCLUDED THEREIN IN CONNECTION WITH THE USE
LICENSED HEREUNDER, OR FOR ANY OTHER USE. S&P MAKES NO
EXPRESS OR IMPLIED WARRANTIES, AND HEREBY EXPRESSLY
DISCLAIMS ALL SUCH WARRANTIES OF MERCHANTABILITY OR
FITNESS FOR A PARTICULAR PURPOSE FOR USE WITH RESPECT TO
THE S&P 500 OR ANY DATA INCLUDED THEREIN.
S&P's only relationship to the Portfolios is the
licensing of the S&P marks and the S&P 500, S&P/BARRA
Value and S&P/BARRA Growth Indexes, which are
determined, composed and calculated by S&P without
regard to the 500, Value and Growth Portfolios.
------------------------------------------------------------------------------
INTERNATIONAL
EQUITY INDEX FUND
EUROPEAN PORTFOLIO
AND PACIFIC PORTFOLIO
THE PORTFOLIOS INVEST
IN INTERNATIONAL
COMMON STOCKS USING
SAMPLING TECHNIQUES
("PORTFOLIO
OPTIMIZATION") The MCSI-Europe (Free) Index consists of approximately
600 equity securities from Europe, and the MSCI-Pacific
(Free) Index consists of more than 500 equity securities
from Australia and the Far East. The stocks included in
each index are chosen by Morgan Stanley Capital
International on a statistical basis. Each stock in
MSCI-Europe (Free) and MSCI-Pacific (Free) is weighted
according to its market value as a percentage of the
total market value of all stocks in the index. (A
stock's market value equals the number of shares
outstanding times the most recent price of the
security). The inclusion of a stock in the index in no
way implies the Morgan Stanley Capital International
believes the stock to be an attractive investment.
The Portfolios will be unable to hold all of the issues
that comprise their respective indexes because of the
costs involved and the illiquidity of many of the
securities. Instead, each Portfolio will attempt to hold
a representative sample of approximately 400 or more of
the securities in its respective Index, which will be
selected utilizing the statistical technique, "portfolio
optimization." (See page 34 for a general explanation of
"portfolio optimization".)
Due to the use of this sampling or "portfolio
optimization" technique, the Portfolios are not expected
to track their benchmark indexes with the same degree of
accuracy as large capitalization domestic index funds.
Over time, the correlation between the performance of
each Portfolio and its respective index is expected to
be greater than 0.95. A correlation of 1.00 would
indicate perfect correlation, which would be achieved
when the net asset value of each Portfolio, including
the value of its dividend and capital gains
distributions, increases or decreases in exact
proportion to changes in its respective index.
------------------------------------------------------------------------------
39
<PAGE> 41
EMERGING MARKETS
PORTFOLIO
THE PORTFOLIO INVESTS
IN INTERNATIONAL
COMMON STOCKS USING
SAMPLING TECHNIQUES
("PORTFOLIO
OPTIMIZATION") The MSCI -- Select Emerging Markets Free Index consists
of approximately 500 equity securities from emerging
market countries in Asia, Latin America, Africa and
Europe. The stocks included in the Index are chosen on a
statistical basis. The companies based in Hong Kong and
Singapore are included in the Index to provide
participation in more liquid emerging markets; their
combined weight is limited to 20% of the Index. Each
stock within Hong Kong and Singapore will be weighted
according to its market value as a percentage of the
total market value of all of the Hong Kong and Singapore
stocks included in the index. (A stock's market value
equals the number of shares outstanding times the most
recent price of the security). The remaining portion of
the Index will be comprised of common stocks from 10
other emerging market countries -- Indonesia, Malaysia,
the Philippines, Thailand, Argentina, Brazil, Mexico,
Greece, Portugal and Turkey. Each stock in these
countries will be weighted according to its market value
as a percentage of the total market value of the
companies in the 10 countries multiplied by the
percentage of the index that these countries represent.
From time to time, additional emerging markets will be
analyzed for inclusion in the Index, based on liquidity
and tradeability. The inclusion of a country or stock in
the Index in no way implies that the country or stock is
an attractive investment.
The Portfolio will be unable to hold all of the issues
that comprise its Index, because of the transaction
costs involved and the illiquidity of many of the
securities. Instead, the Portfolio will attempt to hold
a representative sample of approximately 400 or more of
the securities in its Index by selecting stocks
utilizing the statistical technique, "portfolio
optimization." (See page 34 for a general explanation of
"portfolio optimization".)
Due to the use of this sampling or "portfolio
optimization" technique, the Portfolio is not expected
to track its benchmark with the same degree of accuracy
as large capitalization domestic index funds. Over time,
the correlation between the performance of the Portfolio
and the Index is expected to be greater than 0.95. A
correlation of 0.95 or higher is expected to be achieved
when the Portfolio exceeds $100 million in assets.
FOUR PORTFOLIOS
MAY ENTER INTO
FORWARD CURRENCY
CONTRACTS The three Portfolios of Vanguard International Equity
Index Fund and the Total International Portfolio may
enter into foreign currency forward and foreign currency
futures contracts in order to maintain the same currency
exposure as their respective index. A Portfolio may not
enter into such contracts for speculative purposes, or
as a way of protecting against anticipated adverse
changes in exchange rates between foreign currencies and
the U.S. dollar. Specifically, a Portfolio may invest up
to 25% of its assets in foreign currency forward
contracts. A foreign currency forward contract is an
obligation to purchase or sell a specific currency at a
future date, which may be any fixed number of days from
the date of the contract agreed upon by the parties, at
a price set at the
40
<PAGE> 42
time of the contract. These contracts may be bought or
sold to protect the Portfolio to a limited extent
against adverse changes in exchange rates between
foreign currencies and the U.S. dollar. Such contracts,
which protect the value of a Portfolio's investment
securities against a decline in the value of a currency,
do not eliminate fluctuations in the underlying prices
of the securities. They simply establish an exchange
rate at a future date. Also, although such contracts
tend to minimize the risk of loss due to a decline in
the value of the hedged currency, at the same time they
tend to limit any potential gain that might be realized
should the value of such currency increase.
THE THREE VANGUARD
INTERNATIONAL EQUITY
INDEX PORTFOLIOS
MAY BORROW MONEY Each Portfolio may borrow money from a bank up to a
limit of 15% of the market value of its assets, but only
for temporary or emergency purposes. A Portfolio may
borrow money only to meet redemption requests prior to
the settlement of securities already sold or in the
process of being sold by the Portfolio. To the extent
that a Portfolio borrows money prior to selling
securities, the Portfolio may be leveraged; at such
times, the Portfolio may appreciate or depreciate in
value more rapidly than its benchmark index. Both
Portfolios will repay any money borrowed in excess of 5%
of the market value of their total assets prior to
purchasing additional portfolio securities.
ALL PORTFOLIOS MAY
INVEST IN SHORT-TERM
MONEY MARKET
INSTRUMENTS Although they normally seek to remain substantially
fully invested in securities in the respective indexes,
all Portfolios of the Funds may invest temporarily in
certain short-term money market instruments. Such
securities may be used to invest uncommitted cash
balances or to maintain liquidity to meet shareholder
redemptions. These securities include: obligations of
the United States Government and its agencies or
instrumentalities; commercial paper, bank certificates
of deposit, and bankers' acceptances; and repurchase
agreements collateralized by these securities.
- --------------------------------------------------------------------------------
The Funds may use futures contracts, options, warrants,
convertible securities and swap agreements.
BOND INDEX FUND The Portfolios of the Fund may utilize bond (interest
rate) futures contracts and options to a limited extent.
Specifically, each Portfolio may enter into futures
contracts provided that not more than 5% of its assets
are required as a futures contract deposit. In addition,
the Portfolios may enter into futures contracts and
options transactions only to the extent that obligations
under such contracts or transactions represent not more
than 20% of a Portfolio's assets.
--------------------------------------------------------
BALANCED INDEX
FUND The Fund may utilize stock and bond (interest rate)
futures contracts, options, warrants, convertible
securities and swap agreements to a limited extent.
Specifically, the Fund may enter into futures contracts
and options provided that not more than 5% of its assets
are required as a margin deposit for futures contracts
or options. Additionally, the Fund's investment in
warrants will not exceed more than 5% of its assets (2%
with respect to warrants not listed on the New York or
American
41
<PAGE> 43
Stock Exchanges). The Fund does not intend to invest
more than 5% of its assets in convertible securities.
-----------------------------------------------------
INDEX TRUST Each Portfolio of the Trust may utilize stock futures
contracts, options, warrants, convertible securities and
swap agreements to a limited extent. Specifically, each
Portfolio may enter into futures contracts and options
provided that not more than 5% of its assets are
required as a margin deposit for futures contracts or
options and provided that not more than 20% of a
Portfolio's assets are invested in futures and options
at any time. Additionally, the Trust's investment in
warrants will not exceed more than 5% of its assets (2%
with respect to warrants not listed on the New York or
American Stock Exchanges). The Trust does not intend to
invest more than 5% of its assets in convertible
securities.
-------------------------------------------------------
INTERNATIONAL
EQUITY INDEX FUND
TOTAL
INTERNATIONAL
PORTFOLIO The Portfolios may utilize stock futures contracts,
options, warrants, convertible securities and swap
agreements to a limited extent. Specifically, each
Portfolio may enter into futures contracts and options
provided that not more than 5% of its assets are
required as a margin deposit for futures contracts or
options. Additionally, the Fund's investment in warrants
will not exceed more than 5% of its assets (for the
European Portfolio and the Pacific Portfolio 2% with
respect to warrants not listed on the New York or
American Stock Exchanges).
Futures contracts, options, warrants, convertible
securities and swap agreements may be used for several
reasons: to simulate full investment in the underlying
index while retaining a cash balance for fund management
purposes, to facilitate trading, to reduce transaction
costs or to seek higher investment returns when a
futures contract, option, warrant, convertible security
or swap agreement is priced more attractively than the
underlying equity security or index. While each of these
securities can be used as leveraged investments, the
Portfolios may not use them to leverage their net
assets.
FUTURES CONTRACTS,
OPTIONS, WARRANTS,
CONVERTIBLE SECURITIES
AND SWAP AGREEMENTS
POSE CERTAIN RISKS The risk of loss associated with futures contracts in
some strategies can be substantial due both to the low
margin deposits required and the extremely high degree
of leverage involved in futures pricing. As a result, a
relatively small price movement in a futures contract
may result in an immediate and substantial loss or gain.
When investing in futures contracts, Portfolios of the
Vanguard Bond Index Fund will segregate cash or cash
equivalents in the amount of the underlying obligation.
The Portfolios of the Vanguard Balanced Index Fund,
Vanguard Index Trust and Vanguard International Equity
Index Fund will not use futures contracts, options,
warrants, convertible securities or swap agreements for
speculative purposes or to leverage its net assets.
Accordingly, the primary risks associated with the use
of futures contracts, options, warrants, convertible
securities or swap agreements by the Portfolio are: (i)
imperfect correlation between the change in market value
of the stocks held by the Portfolio and the prices of
futures contracts, options, warrants, convertible
securities or swap agreements; (ii) possible lack of a
liquid secondary market for a futures contract and the
resulting
42
<PAGE> 44
inability to close a futures position prior to its
maturity date; and (iii) the risk of the counterparty or
guaranteeing agent defaulting. The risk of imperfect
correlation will be minimized by investing only in those
contracts whose behavior is expected to resemble that of
the Portfolio's underlying securities. The risk that the
Portfolio will be unable to close out a futures position
will be minimized by entering into such transactions on
an exchange with an active and liquid secondary market.
However, options, warrants, convertible securities or
swap agreements purchased or sold over-the-counter may
be less liquid than exchange-traded securities. Illiquid
securities, in general, including swap agreements, may
not represent more than 15% of the net assets of the
Portfolio.
Since there are no futures traded on the S&P/BARRA Value
and Growth Indexes, MSCI-Europe (Free), Pacific Index or
the MSCI-Select Emerging Markets Free Index, it will be
necessary for the Vanguard Index Trust Value and Growth
Portfolios and the Portfolios of Vanguard International
Equity Index Fund to utilize a composite of other
futures contracts to simulate the performance of the
Indexes. This process may magnify the "tracking error"
of a Portfolio's performance compared to that of its
Index, due to lower correlation of the selected futures
with its Index. The investment adviser will attempt to
reduce this tracking error by investing in futures
contracts whose behavior is expected to resemble that of
the underlying securities, although there can be no
assurance that these selected futures will perfectly
correlate with the performance of either Index.
SWAP AGREEMENTS Swap agreements are contracts between parties in which
one party agrees to make payments to the other party
based on the change in market value of a specified index
or asset. In return, the other party agrees to make
payments to the first party based on the return of a
different specified index or asset. Although swap
agreements entail the risk that a party will default on
its payment obligations thereunder, the Portfolios will
minimize this risk by entering into agreements that mark
to market no less frequently than quarterly. However,
the Portfolios' daily share price will take into effect
the daily price movement of any swap agreement entered
into by the Portfolios. Swap agreements also bear the
risk that the Portfolios will not be able to meet its
obligation to the counterparty. This risk will be
mitigated by investing the Portfolios in the specific
asset for which it is obligated to pay a return.
ALL PORTFOLIOS MAY
LEND THEIR SECURITIES All Portfolios may lend their investment securities to
qualified institutional investors for either short-term
or long-term purposes of realizing additional income.
Loans of securities by the Portfolio will be
collateralized by cash, letters of credit, or securities
issued or guaranteed by the U.S. Government or its
agencies. The collateral will equal at least 100% of the
current market value of the loaned securities.
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<PAGE> 45
PORTFOLIO TURNOVER FOR
ALL PORTFOLIOS IS
EXPECTED TO BE LOW Although they generally seek to invest for the long
term, each Portfolio of Vanguard Bond Index Fund,
Vanguard Balanced Index Fund, Vanguard Index Trust, and
Vanguard International Equity Index Fund retains the
right to sell securities irrespective of how long they
have been held. It is anticipated that the annual
portfolio turnover of each Portfolio of the Funds
(except Vanguard Balanced Index Fund) will not exceed
50%. The annual portfolio turnover rate for the Vanguard
Balanced Index Fund is not expected to exceed 100%. A
turnover rate of 50% would occur, for example, if one
half of the securities of a Portfolio were replaced
within one year.
- --------------------------------------------------------------------------------
INVESTMENT
LIMITATIONS
EACH PORTFOLIO HAS
ADOPTED CERTAIN
FUNDAMENTAL
LIMITATIONS Each portfolio of the Funds has adopted certain
limitations on its investment practices. Specifically,
each Portfolio will not:
(a) invest more than 25% of its assets in any one
industry;
(b) borrow money, except that the Funds may borrow from
banks (or through reverse repurchase agreements),
for temporary or emergency (not leveraging)
purposes, including the meeting of redemption
requests which might otherwise require the untimely
disposition of securities, in an amount not
exceeding 15% of the value of the Funds' net
assets. Whenever borrowing exceeds 5% of the value
of the Funds' net assets, the Funds will not make
any additional investments.
Each Portfolio of Vanguard Bond Index will not:
(a) invest more than 5% of its assets in the securities
of any single issuer except obligations of the
United States Government;
(b) purchase more than 5% of the voting securities of
any issuer;
(c) pledge, mortgage or hypothecate its assets to an
extent greater than 5% of the value of its total
assets.
Each Portfolio of Vanguard Balanced Index Fund, Vanguard
Index Trust, and Vanguard International Equity Index
Fund, and Vanguard Total International Portfolio will
not:
(a) with respect to 75% of its assets, purchase
securities of any issuer (except obligations of the
U.S. Government and its instrumentalities) if, as a
result, more than 5% of the value of the Fund's
assets would be invested in the securities of each
issuer; and
(b) with respect to 75% of its assets, purchase more
than 10% of the voting securities of any issuer.
These investment limitations are considered at the time
investment securities are purchased. The limitations
described here and in the Statement of Additional
Information may be changed for a specific Fund only with
the approval of a majority of the shareholders.
- --------------------------------------------------------------------------------
44
<PAGE> 46
MANAGEMENT OF
THE FUNDS
VANGUARD ADMINISTERS
AND DISTRIBUTES
THE FUNDS The Funds are members of The Vanguard Group of
Investment Companies, a family of more than 30
investment companies with more than 90 distinct
portfolios and total assets in excess of $190 billion.
Through their jointly owned subsidiary, The Vanguard
Group, Inc. ("Vanguard"), they and the other funds in
the Group obtain at cost virtually all of their
corporate management, administrative, shareholder
accounting and distribution services. Vanguard also
provides investment advisory services on an at-cost
basis to certain Vanguard funds. As a result of
Vanguard's unique corporate structure, the Vanguard
funds have costs substantially lower than those of most
competing mutual funds. In 1995, the average expense
ratio (annual costs including advisory fees divided by
total net assets) for the Vanguard funds amounted to
approximately .31% compared to an average of 1.11% for
the mutual fund industry (data provided by Lipper
Analytical Services).
The Officers of the Funds manage its day to day
operations and are responsible to the Funds Board of
Directors (Trustees). The Directors (Trustees) set broad
policies for the Funds and choose its officers. A list
of the Directors (Trustees) and Officers of the Funds
and a statement of their present positions and principal
occupations during the past five years can be found in
each of the Funds Statements of Additional Information.
Vanguard employs a supporting staff of management and
administrative personnel needed to provide the requisite
services to the funds and also furnishes the funds with
necessary office space, furnishings and equipment. Each
fund pays its share of Vanguard's net expenses, which
are allocated among the funds under methods approved by
the Board of Directors (Trustees) of each fund. In
addition, each fund bears its own direct expenses, such
as legal, auditing and custodian fees.
Vanguard also provides distribution and marketing
services to the Vanguard funds. The funds are available
on a no-load basis (i.e., there are no sales commissions
or 12b-1 fees). However, each fund bears it share of the
Group's distribution costs.
- --------------------------------------------------------------------------------
INVESTMENT
ADVISERS
VANGUARD'S FIXED
INCOME GROUP
MANAGES SOME OF THE
FUNDS' INVESTMENTS Each Portfolio of Vanguard Bond Index Fund and the bond
portion of Vanguard Balanced Index Fund receive all
investment advisory services from Vanguard's Fixed
Income Group. The Fixed Income Group provides investment
advisory services to more than 40 Vanguard money market
and bond portfolios, both taxable and tax-exempt. Total
assets under management by Vanguard's Fixed Income Group
were $66 billion as of December 31, 1995. The Portfolios
are not actively managed, but are instead administered
by the Fixed Income Group using computerized,
quantitative techniques. The Fixed Income Group is
supervised by the Officers of the Fund. Ian A.
MacKinnon, Senior Vice President of Vanguard, has been
in charge of the Group since its inception in 1981.
Mr. MacKinnon is responsible for setting the broad
investment strategies employed by the Fund, and for
overseeing the portfolio manager who implements those
strategies on a day-to-day basis.
45
<PAGE> 47
The portfolio manager for Vanguard Bond Index Fund and
the bond portion of Vanguard Balanced Index Fund is
Kenneth E. Volpert, a Principal of Vanguard, who serves
as portfolio manager of the Vanguard Variable Insurance
Fund -- High-Grade Portfolio and the bond portion of the
Balanced Portfolio. Mr. Volpert began managing the
Vanguard Bond Index fund in 1992. For six years prior to
joining Vanguard, Mr. Volpert was associated with Mellon
Bond Associates.
The Fixed Income Group places all orders for purchases
and sales of portfolio securities. Purchases of
portfolio securities are made either directly from the
issuer or from securities dealers. The Fixed Income
Group may sell portfolio securities prior to their
maturity if circumstances and considerations warrant and
if it believes such dispositions advisable. The Group
seeks to obtain the best available net price and most
favorable execution for all portfolio transactions.
VANGUARD'S CORE
MANAGEMENT GROUP
MANAGES SOME OF THE
FUNDS, ON AN AT-COST
BASIS Each Portfolio of Index Trust and International Equity
Index Fund, the Total International Portfolio, and the
equity portion of Balanced Index Fund receive their
investment advisory services on an at-cost basis from
Vanguard's Core Management Group, which also provides
investment advisory services to Vanguard Institutional
Index Fund, a portion of the assets of Vanguard/Windsor
II and Vanguard Morgan Growth Fund, the Equity Index
Portfolio of Vanguard Variable Insurance Fund, Vanguard
Tax-Managed Fund, and several indexed separate accounts.
Total indexed assets under management as of December 31,
1995 were $33 billion. The Portfolios of the Fund are
not actively managed, but are instead administered by
the Core Management Group using computerized,
quantitative techniques. The Group is supervised by the
Officers of the Fund.
In placing portfolio transactions, Vanguard's Core
Management Group uses its best judgment to choose the
broker most capable of providing the brokerage services
necessary to obtain the best available price and most
favorable execution at the lowest commission rate. The
full range and quality of brokerage services available
are considered in making these determinations. In those
instances where it is reasonably determined that more
than one broker can offer the services needed to obtain
the best available price and most favorable execution,
consideration may be given to those brokers which supply
statistical information and provide other services in
addition to execution services to the Fund.
- --------------------------------------------------------------------------------
DIVIDENDS,
CAPITAL GAINS
AND TAXES
FOUR PORTFOLIOS PAY
QUARTERLY DIVIDENDS;
TWO PAY DIVIDENDS
ONCE A YEAR Vanguard Index Trust distributes substantially all of
its net investment income in the form of dividends. The
500, Total Stock Market, Value and Growth Portfolios pay
quarterly dividends, while the Extended Market and Small
Capitalization Stock Portfolios pay annual dividends.
For all six Portfolios, net capital gains, if any, are
distributed annually.
The Total International Portfolio and each Portfolio of
the International Equity Index Fund intend to distribute
substantially all of their ordinary
46
<PAGE> 48
income in the form of dividends. The Portfolios pay
annual dividends. Capital gains distributions, if any,
are also made annually.
The Balanced Index Fund will distribute substantially
all of its net investment income in the form of
quarterly dividends.
Dividends consisting of virtually all of the ordinary
income of each Portfolio of Bond Index Fund are declared
daily and are payable to shareholders of record at the
time of declaration. Such dividends are paid on the
first business day of each month. Capital gains
distributions, if any, are made annually.
A Portfolio's dividend and capital gains distributions
may be reinvested in additional shares or received in
cash. See "Choosing a Distribution Option" for a
description of these distribution methods. Shareholders
of Bond Index Fund who choose to reinvest their dividend
distributions will receive a quarterly (not monthly)
confirmation statement.
Pursuant to the Internal Revenue Code, certain dividend
and capital gains distributions declared by each
Portfolio during December, if received by shareholders
by January 31, are deemed to have been paid by the Funds
and received by shareholders on December 31 of the prior
year.
Each Portfolio of the Funds intends to continue to
qualify for taxation as a "regulated investment company"
under the Internal Revenue Code so that each Portfolio
will not be subject to federal income tax to the extent
its income is distributed to shareholders. Dividends
paid by each Portfolio from net investment income,
whether received in cash or reinvested in additional
shares, will be taxable to shareholders as ordinary
income. For corporate investors, dividends from net
investment income will generally qualify in part for the
intercorporate dividends-received deduction. However,
the portion of the dividends so qualified depends on the
aggregate taxable qualifying dividend income received by
a Portfolio from domestic (U.S.) sources.
Distributions paid by a Portfolio from long-term capital
gains, whether received in cash or reinvested in
additional shares, are taxable as long-term capital
gains, regardless of the length of time you have owned
shares in the Portfolio. Capital gains distributions are
made when a Portfolio realizes net capital gains on
sales of portfolio securities during the year. A
Portfolio does not seek to realize any particular amount
of capital gains during a year; rather, realized gains
are a by-product of portfolio management activities.
Consequently, capital gains distributions may be
expected to vary considerably from year to year; there
will be no capital gains distributions in years when a
Portfolio realizes net capital losses.
Note that if you elect to receive capital gains
distributions in cash, instead of reinvesting them in
additional shares, you are in effect reducing the
capital at work for you in a Portfolio. Also, keep in
mind that if you purchase shares in a Portfolio shortly
before the record date
47
<PAGE> 49
for a dividend or capital gains distribution, a portion
of your investment will be returned to you as a taxable
distribution, regardless of whether you are reinvesting
your distributions or receiving them in cash.
The Funds will notify you annually as to the tax status
of dividend and capital gains distributions paid by each
Portfolio.
EACH PORTFOLIO OF
INTERNATIONAL EQUITY
INDEX FUND MAY
"PASS THROUGH"
FOREIGN TAXES Each Portfolio may elect to "pass through" to its
shareholders the amount of foreign income taxes paid by
a Portfolio. The Portfolios will make such an election
only if it is deemed to be in the best interests of the
shareholders. If this election is made, shareholders of
a Portfolio will be required to include in their gross
income their pro rata share of foreign taxes paid by the
Portfolio. However, shareholders will be able to treat
their pro rata share of foreign taxes as either an
itemized deduction or a foreign tax credit against U.S.
income taxes (but not both) on their federal income tax
return.
Any foreign tax credits would not "pass through" to
Total International Portfolio shareholders.
A CAPITAL GAIN OR LOSS
MAY BE REALIZED UPON
EXCHANGE OR
REDEMPTION A sale of shares of a Portfolio is a taxable event, and
may result in a capital gain or loss. A capital gain or
loss may be realized from an ordinary redemption of
shares or an exchange of shares between two mutual funds
(or two portfolios of the same fund).
Dividend distributions, capital gain distributions, and
capital gains or losses from redemptions and exchanges
may be subject to state and local taxes.
Each Portfolio of the Funds is required to withhold 31%
of taxable dividends, capital gains distributions, and
redemptions paid to shareholders who have not complied
with IRS taxpayer identification regulations. You may
avoid this withholding requirement by certifying on your
Account Registration Form your proper Social Security or
Employer Identification number and by certifying that
you are not subject to backup withholding.
Vanguard Index Trust and Vanguard Total International
Portfolio are organized as Pennsylvania business trusts
and, in the opinion of counsel, are not liable for any
income or franchise tax in the Commonwealth of
Pennsylvania. The Trust and Portfolio will be subject to
Pennsylvania county personal property tax in the county
which is the site of its principal office. Shareholders
who are Pennsylvania residents will not be subject to
county personal property taxes, with the exception of
non-exempt holders who are residents of the City and
School District of Pittsburgh.
The International Equity Index, Balanced Index and Bond
Index Funds have obtained Certificates of Authority to
do business as foreign corporations in Pennsylvania and
do business and maintain offices in that state. In the
opinion of counsel, the shares of each of the Funds are
exempt from Pennsylvania personal property taxes.
48
<PAGE> 50
The tax discussion set forth above is included for
general information only. Prospective investors should
consult their own tax advisers concerning the tax
consequences of an investment in the Funds.
- --------------------------------------------------------------------------------
THE SHARE
PRICE OF
EACH PORTFOLIO The share price or "net asset value" per share of each
Portfolio is determined by dividing the total market
value of the Portfolio's investments and other assets,
less any liabilities, by the number of outstanding
shares of the Portfolio. Net asset value per share is
determined once daily at the close of regular trading on
the New York Stock Exchange (generally 4:00 p.m. Eastern
time).
Portfolio securities that are listed on a securities
exchange are valued at the last quoted sales price on
the day the valuation is made. Price information on
listed securities is taken from the exchange where the
security is primarily traded. Securities which are
listed on an exchange and which are not traded on the
valuation date are valued at the mean of the bid and ask
prices. For the 500, Value and Growth Portfolios of
Vanguard Index Trust, Vanguard International Equity
Index Fund, and each Portfolio of Vanguard Bond Index
Fund, unlisted securities for which market quotations
are readily available are valued at the latest quoted
bid price. For the Extended Market, Total Stock Market
and Small Capitalization Stock Portfolios, and Vanguard
Balanced Index Fund, unlisted securities for which
market quotations are not readily available are valued
at the mean of the bid and ask prices. Temporary cash
investments are valued at amortized cost which
approximates market value. For all Funds, securities for
which no current quotations are readily available are
valued at fair market value as determined in good faith
by the Directors (Trustees). Securities may be valued on
the basis of prices provided by a pricing service when
such prices are believed to reflect the fair market
value of such securities.
Each Portfolios's share price can be found daily in the
mutual fund listings of most major newspapers under the
heading of Vanguard.
- --------------------------------------------------------------------------------
GENERAL
INFORMATION Vanguard Bond Index, Vanguard Balanced Index and
Vanguard International Equity Index Funds are organized
as Maryland corporations. The Articles of Incorporation
permit the Directors to issue 1,000,000,000 shares of
common stock of each Fund, with a $.001 par value. The
Board of Directors has the power to designate one or
more classes ("series") of shares of common stock and to
classify or reclassify any unissued shares with respect
to such series. Currently, Vanguard Bond Index Fund is
offering shares of four series, Vanguard Balanced Index
Fund is offering shares of one series and Vanguard
International Equity Index is offering shares of three
series.
Vanguard Index Trust is a Pennsylvania business trust.
The Declaration of Trust permits the Trustees to issue
an unlimited number of shares of beneficial interest
with no par value. The Board of Trustees has the power
to designate one or more classes or series of shares of
common
49
<PAGE> 51
stock and to classify or reclassify any unissued shares
with respect to such series. Currently, the Trust is
offering shares of six series.
The Total International Portfolio is an independent
series of Vanguard STAR Fund, a Pennsylvania business
trust.
The shares of each series of the Funds are fully paid
and non-assessable; have no preference as to conversion,
exchange, dividends, retirement or other features; and
have no preemptive rights. Such shares have non-
cumulative voting rights, meaning that the holders of
more than 50% of the shares voting for the election of
Directors (Trustees) can elect 100% of the Directors
(Trustees) if they so choose.
Annual meetings of shareholders will not be held except
as required by the Investment Company Act of 1940 and
other applicable law. An annual meeting will be held to
vote on the removal of a Director (Trustee) or Directors
(Trustees) of a Fund if requested in writing by the
holders of not less than 10% of the outstanding shares
of such Fund.
All securities and cash for the Total Bond Market
Portfolio of Vanguard Bond Index Fund are held by Morgan
Guaranty Trust Company, New York, NY. All securities and
cash for the Short-Term Bond, Intermediate-Term Bond and
Long-Term Bond Portfolios are held by State Street Bank
and Trust Company ("State Street Bank"), Boston, MA. All
securities and cash for Vanguard Balanced Index Fund and
for Vanguard Total International Portfolio are held by
CoreStates Bank, N.A. ("CoreStates"), Philadelphia, PA.
All Securities and cash for Vanguard International
Equity Index Fund are held by Morgan Stanley Trust
Company. All securities and cash for the 500, Extended
Market, and Total Stock Market Portfolios of Vanguard
Index Trust are held by State Street Bank and Trust
Company. All securities and cash for the Small
Capitalization Stock and the Value and Growth Portfolios
are held by CoreStates Bank.
The Vanguard Group, Inc., Valley Forge, PA, serves as
the Funds' Transfer and Dividend Disbursing Agent. Price
Waterhouse LLP, serves as independent accountants for
the Funds and will audit their financial statements
annually. The Funds are not involved in any litigation.
- --------------------------------------------------------------------------------
50
<PAGE> 52
SHAREHOLDER GUIDE
OPENING AN
ACCOUNT AND
PURCHASING
SHARES You may open a regular (non-retirement) account, either
by mail or wire. Simply complete and return an Account
Registration Form and any required legal documentation,
indicating the Portfolio you have chosen and amount you
wish to invest. Your purchase must be equal to or
greater than the $3,000 minimum initial investment
requirement in any Portfolio ($1,000 for Uniform
Gifts/Transfers to Minors Act accounts). You must open a
new Individual Retirement Account by mail (IRAs may not
be opened by wire) using a Vanguard IRA Adoption
Agreement. Your purchase must be equal to or greater
than the $1,000 minimum initial investment requirement,
but no more than $2,000 if you are making a regular IRA
contribution. Rollover contributions are generally
limited to the amount withdrawn within the past 60 days
from an IRA or other qualified Retirement Plan. If you
need assistance with the Account Registration Form or
have any questions about the Fund, please call our
Investor Information Department (1-800-662-7447). NOTE:
For other types of account registrations (e.g.,
corporations, associations, other organizations, trusts
or powers of attorney), please call us to determine
which additional forms you may need.
PURCHASE
RESTRICTIONS Each Portfolio's shares are purchased at the
next-determined net asset value after your investment
has been received in the form of Federal Funds. See
"When Your Account Will Be Credited". The Fund is
offered on a no-load basis (i.e., there are no sales
commissions or 12b-1 fees).
1) Because of the risks associated with bond and stock
investments, each Portfolio is intended to be a
long-term investment vehicle and is not designed to
provide investors with a means of speculating on
short-term bond market movements. Consequently, the
Fund reserves the right to reject any specific
purchase (and exchange purchase) request. The Fund
also reserves the right to suspend the offering of
shares for a period of time.
2) Vanguard will not accept third-party checks to
purchase shares of the Fund. Please be sure your
purchase check is made payable to the Vanguard Group.
51
<PAGE> 53
IMPORTANT NOTE
ON EXPENSES Transaction fees are charged by Portfolios as follows:
<TABLE>
<CAPTION>
FEES ON FEES ON
PURCHASES REDEMPTIONS
--------- -----------
<S> <C> <C>
Vanguard Bond Index Fund.............. None None
Vanguard Balanced Fund................ None None
Vanguard Index Trust
500 Portfolio....................... None None
Extended Market Portfolio........... .5% None
Small Capitalization Stock
Portfolio........................ 1% None
Value Portfolio..................... None None
Growth Portfolio.................... None None
Vanguard International Equity Index Fund
European Portfolio.................. 1% None
Pacific Portfolio................... 1% None
Emerging Markets Portfolio.......... 2% 1%
Vanguard Total International
Portfolio........................... 1% None
</TABLE>
Additionally, each Portfolio of all of the Funds and the
Trust assesses a $10 annual account maintenance fee. The
$10 annual account maintenance fee will be waived for
shareholders with an account balance of $10,000 or more.
See "Portfolio Expenses" for more information.
ADDITIONAL
INVESTMENTS Subsequent investments may be made by mail ($100 minimum
per Portfolio), wire ($1,000 minimum), written exchange
from another Vanguard Fund account ($100 minimum per
Portfolio), or Vanguard Fund Express. Subsequent
investments to Individual Retirement Accounts may be
made by mail ($100 minimum) or exchange from another
Vanguard Fund account. In some instances, contributions
may be made by wire or Vanguard Fund Express. Please
call us for more information on these options.
--------------------------------------------------------
<TABLE>
<S> <C> <C>
ADDITIONAL INVESTMENTS
NEW ACCOUNT TO EXISTING ACCOUNTS
PURCHASING BY MAIL Please include the amount Additional investments
of your initial investment should include the
Complete and sign the and the name of the Invest-by-Mail remittance
enclosed Account Portfolios you have form attached to your Fund
Registration Form selected on the registra- confirmation statements.
tion form, make your check Please make your check
payable to The Vanguard payable to The Vanguard
Group (Portfolio Number), Group (Portfolio Number),
see page 53 for the write your account number
appropriate number and mail on your check, and using
to: the return envelope pro-
vided, mail to the address
VANGUARD FINANCIAL CENTER indicated on the
P.O. BOX 2600 Invest-by-Mail Form. See
VALLEY FORGE, PA 19482 page 53 for the ap-
propriate Portfolio number.
</TABLE>
52
<PAGE> 54
<TABLE>
<S> <C> <C>
For express or VANGUARD FINANCIAL CENTER All written requests should
registered mail, 455 DEVON PARK DRIVE be mailed to one of the
send to: WAYNE, PA 19087 addresses indicated for new
accounts. Do not send
registered or express mail
to the post office box
address.
PORTFOLIO NUMBERS
--------------------------
VANGUARD BOND VANGUARD INDEX TRUST
INDEX FUND 500 Portfolio -- 40
Total Bond Market Extended Market
Portfolio -- 84 Portfolio -- 98
Short-Term Bond Total Stock Market
Portfolio -- 132 Portfolio -- 85
Intermediate-Term Bond Small Capitalization Stock
Portfolio -- 314 Portfolio -- 48
Long-Term Bond Value Portfolio -- 06
Portfolio -- 522 Growth Portfolio -- 09
VANGUARD BALANCED VANGUARD INTERNATIONAL
INDEX FUND -- 02 EQUITY INDEX FUND
VANGUARD TOTAL European Portfolio -- 79
INTERNATIONAL Pacific Portfolio -- 72
PORTFOLIO -- 113 Emerging Markets
Portfolio -- 533
----------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
PURCHASING BY WIRE CORESTATES BANK, N.A.
ABA 031000011
Money should be CORESTATES ACCT NO 0101 9897
wired to: ATTN VANGUARD
NAME OF FUND OR TRUST
BEFORE WIRING NAME OF PORTFOLIO
ACCOUNT NUMBER
Please contact ACCOUNT REGISTRATION
Client Services
(1-800-662-2739) To assure proper receipt, please be sure your bank includes the
name of the Portfolio, the account number Vanguard has assigned
to you and the eight digit CoreStates number. If you are
opening a new account, please complete the Account Registration
Form and mail it to the "New Account" address above after
completing your wire arrangement. NOTE: Federal Funds wire
purchase orders will be accepted only when the Fund and
Custodian Bank are open for business.
</TABLE>
------------------------------------------------------
PURCHASING BY
EXCHANGE (from a
Vanguard account) You may open an account or purchase additional shares by
making an exchange from an existing Vanguard Fund
account. However, the Funds reserve the right to refuse
any exchange purchase request. Call our Client Services
Department (1-800-662-2739) for assistance. The new
account will have the same registration as the existing
account.
53
<PAGE> 55
Telephone exchanges are not accepted for the Portfolios
of Vanguard Balanced Index Fund, Vanguard Index Trust,
and Vanguard International Equity Index Fund. You may,
however, open an account by exchange by providing the
appropriate information on the Account Registration
Form.
--------------------------------------------------------
PURCHASING BY
FUND EXPRESS
Automatic Investment
and Special Purchase The Fund Express Automatic Investment option lets you
move money from your bank account to your Vanguard
account on the schedule (monthly, bimonthly [every other
month], quarterly or yearly) you select. Additionally,
the Fund Express Special Purchase option which is only
available for Portfolios of the Vanguard Bond Index Fund
lets you move money from your bank account to your
Vanguard account on an "as needed" basis. To establish
this option, please provide the appropriate information
on the Account Registration Form. We will send you a
confirmation of your Fund Express enrollment; please
wait three weeks before using the service.
- --------------------------------------------------------------------------------
CHOOSING A
DISTRIBUTION
OPTION You must select one of three distribution options:
1. AUTOMATIC REINVESTMENT OPTION -- Both dividends and
capital gains distributions will be reinvested in
additional Fund shares. This option will be selected
for you automatically unless you specify one of the
other options.
2. CASH DIVIDEND OPTION -- Your dividends will be paid
in cash and your capital gains will be reinvested in
additional Fund shares.
3. ALL CASH OPTION -- Both dividend and capital gains
distributions will be paid in cash.
You may change your option by calling our Client
Services Department (1-800-662-2739).
In addition, an option to invest your cash dividends
and/or capital gains distributions in another Vanguard
Fund account is available. Please call our Client
Services Department (1-800-662-2739) for information.
You may also elect Vanguard Dividend Express which
allows you to transfer your cash dividends and/or
capital gains distributions automatically to your bank
account. Please see "Other Vanguard Services" for more
information.
- --------------------------------------------------------------------------------
TAX CAUTION
INVESTORS SHOULD ASK
ABOUT THE TIMING OF
CAPITAL GAINS AND
DIVIDEND DISTRIBUTIONS
BEFORE INVESTING Under Federal tax laws, the Fund is required to
distribute net capital gains and dividend income to Fund
shareholders. These distributions are made to all
shareholders who own Fund shares as of the
distribution's record date, regardless of how long the
shares have been owned. Purchasing shares just prior to
the record date could have a significant impact on your
tax liability for the year. For example, if you purchase
shares immediately prior to the record date of a sizable
capital gain distribution, you will be assessed taxes on
the amount of the capital gain distribution later paid
even though you owned the Fund shares for just a short
period of time. (Taxes are due on the distributions even
if the dividend or gain is reinvested in additional Fund
shares.) While the total
54
<PAGE> 56
value of your investment will be the same after the
capital gain distribution -- the amount of the capital
gain distribution will offset the drop in the net asset
value of the shares -- you should be aware of the tax
implications the timing of your purchase may have.
Prospective investors should, therefore, inquire about
potential distributions before investing. Each Fund's
annual capital gains distributions normally occurs in
December. Income dividends are generally paid on the
first day of each month for the four Portfolios of
Vanguard Bond Index Fund, annually in December for the
three Portfolios of Vanguard International Equity Index
Fund and Vanguard Total International Portfolio, and the
Extended Market and Small Capitalization Stock Portfolio
of Vanguard Index Trust, and quarterly in March, June,
September and December for Vanguard Balanced Index Fund,
and the 500, Total Stock Market, and the Value and
Growth Portfolios of Vanguard Index Trust. For
additional information on distributions and taxes, see
the section titled "Dividends, Capital Gains, and
Taxes."
- --------------------------------------------------------------------------------
IMPORTANT
INFORMATION
ESTABLISHING OPTIONAL
SERVICES The easiest way to establish optional Vanguard services
on your account is to select the options you desire when
you complete your Account Registration Form. IF YOU WISH
TO ADD OPTIONS LATER, YOU MAY NEED TO PROVIDE VANGUARD
WITH ADDITIONAL INFORMATION AND A SIGNATURE GUARANTEE.
PLEASE CALL OUR CLIENT SERVICES DEPARTMENT
(1-800-662-2739) FOR FURTHER ASSISTANCE.
SIGNATURE
GUARANTEES For our mutual protection, we may require a signature
guarantee on certain written transaction requests. A
signature guarantee verifies the authenticity of your
signature and may be obtained from banks, brokers and
any other guarantor that Vanguard deems acceptable. A
SIGNATURE GUARANTEE CANNOT BE PROVIDED BY A NOTARY
PUBLIC.
CERTIFICATES Share certificates will be issued upon request for
Portfolios of Vanguard Bond Index Fund, Vanguard Index
Trust, and the European and Pacific Portfolios of
Vanguard International Equity Index Fund. If a
certificate is lost, you may incur an expense to replace
it. Share certificates will not be available for
Vanguard Balanced Index Fund and the Emerging Markets
Portfolio of Vanguard International Equity Index Fund.
BROKER-DEALER
PURCHASES If you purchase shares in Vanguard Funds through a
registered broker-dealer or investment adviser, the
broker-dealer or adviser may charge a service fee.
CANCELLING
TRADES The Fund will not cancel any trade (e.g., a purchase,
exchange or redemption) believed to be authentic,
received in writing or by telephone, once the trade
request has been received.
ELECTRONIC
PROSPECTUS
DELIVERY If you would prefer to receive a prospectus for the Fund
or any of the Vanguard Funds in an electronic format,
please call 1-800-231-7870 for additional information.
If you elect to do so, you may also receive a paper copy
of the prospectus, by calling 1-800-662-7447.
- --------------------------------------------------------------------------------
55
<PAGE> 57
WHEN YOUR
ACCOUNT WILL
BE CREDITED The trade date is the date on which your account is
credited.
For the Vanguard Bond Index Fund, the trade date is
generally the day on which the Fund receives your
investment in the form of Federal Funds (monies credited
to the Fund's Custodian Bank by a Federal Reserve Bank).
Your trade date varies according to your method of
payment for your shares.
Purchases of Fund shares by check will receive a trade
date the day the funds are received in good order by
Vanguard. Thus, if your purchase by check is received by
the close of regular trading on the New York Stock
Exchange (generally 4:00 p.m. Eastern time), your trade
date is the business day your check is received in good
order. If your purchase is received after the close of
the Exchange your trade date is the business day
following receipt of your check.
For purchases by Federal Funds wire or exchange, the
Fund is credited immediately with Federal Funds. Thus,
if your purchase by Federal Funds wire or exchange is
received by the close of the Exchange, your trade date
is the day of receipt. If your purchase is received
after the close of the Exchange, your trade date is the
business day following receipt of your wire or exchange.
For Vanguard Balanced Fund, Vanguard Index Trust and
Vanguard International Equity Index Fund, if your
purchase is made by check, Federal Funds wire or
exchange, and is received by the close of regular
trading the New York Stock Exchange (generally 4:00 p.m.
Eastern time), your trade date is the day of receipt. If
your purchase is received after the close of the
Exchange, your trade date is the next business day.
Shares of the Funds are purchased at the net asset value
determined on your trade date. Shares of the Extended
Market and Small Capitalization Stock Portfolios are
also subject to a 1% portfolio transaction fee, shares
of the Total Stock Market Portfolio are subject to a
0.25% portfolio transaction fee. Shares of Vanguard
International Equity Index Fund-Pacific Portfolio and
European Portfolio and Vanguard Total International
Portfolio are subject to a 1% transaction fee while
shares of the Emerging Markets Portfolio are subject to
a 2% transaction fee on purchases. See "Fund Expenses"
for additional information.
In order to prevent lengthy processing delays caused by
the clearing of foreign checks, Vanguard will only
accept a foreign check which has been drawn in U.S.
dollars and has been issued by a foreign bank with a
U.S. correspondent bank. The name of the U.S.
correspondent bank must be printed on the face of the
foreign check.
Your shares are purchased at the next-determined net
asset value after your investment has been received in
the form of Federal Funds. You will begin to earn
dividends on the calendar day following the trade date.
(For a Friday trade date, you will begin earning
dividends on Saturday.)
- --------------------------------------------------------------------------------
56
<PAGE> 58
SELLING YOUR
SHARES You may withdraw any portion of the funds in your
account by redeeming shares at any time. You generally
may initiate a request by writing or by telephoning.
Your redemption proceeds are normally mailed, credited
or wired -- depending upon the method of withdrawal you
have PREVIOUSLY chosen -- within two business days after
the receipt of the request in Good Order.
-------------------------------------------------------
SELLING BY WRITING
A CHECK Redemption by check is only available to shareholders of
Vanguard Bond Index Fund. You may withdraw funds from
your Vanguard Bond Index account by writing a check
payable in the amount of $250 or more. When a check is
presented for payment to the Fund's agent, CoreStates
Bank, the Fund will redeem sufficient shares in your
account at the next-determined net asset value to cover
the amount of the check.
In order to establish the checkwriting option on your
account, all registered shareholders must sign a
signature card. After your completed signature card is
received by the Fund, an initial supply of checks will
be mailed within 10 business days. There is no charge
for checks or for their clearance. CORPORATIONS, TRUSTS
AND OTHER ORGANIZATIONS SHOULD CALL OR WRITE OUR CLIENT
SERVICES DEPARTMENT (1-800-662-2739) BEFORE SUBMITTING
SIGNATURE CARDS, AS ADDITIONAL DOCUMENTS MAY BE REQUIRED
TO ESTABLISH THE CHECKWRITING SERVICE.
Before establishing the checkwriting option, you should
be aware that:
1. Writing a check (a redemption of shares) is a taxable
event.
2. The Fund does not allow an account to be closed
through the checkwriting option.
3. Vanguard cannot guarantee a stop payment on any
check. If you wish to reverse a stop payment order,
you must do so in writing.
4. Shares held in certificate form cannot be redeemed
using the checkwriting option.
5. The Fund reserves the right to terminate or alter
this service at any time.
--------------------------------------------------------
SELLING BY MAIL Requests should be mailed to VANGUARD FINANCIAL CENTER,
VANGUARD INDEX FUNDS, P.O. BOX 1120, VALLEY FORGE, PA
19482. (For express or registered mail, send your
request to Vanguard Financial Center, Vanguard Index
Funds, 455 Devon Park Drive, Wayne, PA 19087.)
The redemption price of shares will be the Portfolio's
net asset value next determined after Vanguard has
received all required documents in Good Order.
--------------------------------------------------------
DEFINITION OF
GOOD ORDER GOOD ORDER means that the request includes the
following:
1. The account number and Portfolio name.
2. The amount of the transaction (specified in dollars
or shares).
3. The signatures of all owners EXACTLY as they are
registered on the account.
4. Any required signature guarantees.
57
<PAGE> 59
5. Other supporting legal documentation that might be
required, in the case of estates, corporations,
trusts, and certain other accounts.
6. Any certificates you are holding for the account.
IF YOU HAVE QUESTIONS ABOUT THIS DEFINITION AS IT
PERTAINS TO YOUR REQUEST, PLEASE CALL OUR CLIENT
SERVICES (1-800-662-2739).
------------------------------------------------------------------------------
SELLING BY
TELEPHONE To sell shares by telephone, you or your pre-authorized
representative may call our Client Services Department
at 1-800-662-2739. For telephone redemptions, you may
have the proceeds sent to you either by mail or by wire.
In addition to the details below, please see "Important
Information About Telephone Transactions."
BY MAIL: Telephone mail redemption is automatically
established on your account unless you indicate
otherwise on your Account Registration Form. You may
redeem any amount by calling Vanguard. The proceeds will
be paid to the registered shareholders and mailed to the
address of record. PLEASE NOTE: As a protection against
fraud, your telephone mail redemption privilege will be
suspended for 15 calendar days following any expedited
address change to your account. An expedited address
change is one that is made by telephone, by Vanguard
Online or, in writing, without the signatures of all
account owners.
BY WIRE: Telephone wire redemption must be specifically
elected for your account. The best time to elect
telephone wire redemption is at the time you complete
your Account Registration Form. If you do not presently
have telephone wire redemption and wish to establish it,
please contact Client Services.
With the wire redemption option, you may withdraw a
minimum of $1,000 and have the amount wired directly to
your bank account. Wire redemptions less than $5,000 are
subject to a $5 charge deducted by Vanguard. There is no
Vanguard charge for wire redemptions of $5,000 or more.
However, your bank may assess a separate fee to accept
incoming wires.
A request to change the bank associated with your wire
redemption option must be received in writing, signed by
each registered shareholder, and accompanied by a voided
check or preprinted deposit slip. A signature guarantee
is required if your bank registration is not identical
to your Vanguard Fund account registration.
------------------------------------------------------------------------------
SELLING BY FUND
EXPRESS
Automatic Withdrawal
& Special Redemption If you select the Fund Express Automatic Withdrawal
option, money will be automatically moved from your
Vanguard Fund account to your bank account according to
the schedule you have selected. The Special Redemption
option (only available to Vanguard Bond Index Fund
Shareholders) lets you move money from your Vanguard
account to your bank account on an "as needed" basis. To
establish these Fund Express options, please provide the
appropriate information on the Account
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<PAGE> 60
Registration Form. We will send you a confirmation of
your Fund Express service; please wait three weeks
before using the service.
--------------------------------------------------------
SELLING BY
EXCHANGE You may sell shares of the Portfolio by making an
exchange into another Vanguard Fund account. Exchanges
to and from Vanguard Balanced Fund, Vanguard Index Trust
and Vanguard International Equity Index Fund may be made
only by mail. Send your exchange request to Vanguard
Financial Center, Vanguard (insert Fund name), P.O. Box
1120, Valley Forge, PA 19482. Please see "Exchanging
Your Shares" for details.
--------------------------------------------------------
IMPORTANT REDEMPTION
INFORMATION Shares purchased by check or Fund Express may be
redeemed at any time. However, your redemption proceeds
will not be paid until payment for the purchase is
collected, which may take up to ten calendar days.
--------------------------------------------------------
DELIVERY OF
REDEMPTION
PROCEEDS Redemption requests received by telephone prior to the
close of the New York Stock Exchange (generally 4:00
p.m. Eastern time), are processed on the day of receipt
and the redemption proceeds are normally sent on the
following business day.
Redemption requests received by telephone after the
close of the Exchange are processed on the business day
following receipt and the proceeds are normally sent on
the second business day following receipt.
Redemption proceeds must be sent to you within seven
days of receipt of your request in Good Order except as
described above in "Important Redemption Information."
If you experience difficulty in making a telephone
redemption during periods of drastic economic or market
changes, your redemption request may be made by regular
or express mail. It will be implemented at the net asset
value next determined after your request has been
received by Vanguard in Good Order. The Fund reserves
the right to revise or terminate the telephone
redemption privilege at any time.
The Fund may suspend the redemption right or postpone
payment at times when the New York Stock Exchange is
closed or under any emergency circumstances as
determined by the United States Securities and Exchange
Commission.
If the Board of Directors determines that it would be
detrimental to the best interests of the Fund's
remaining shareholders to make payment in cash, the Fund
may pay redemption proceeds in whole or in part by a
distribution in kind of readily marketable securities.
--------------------------------------------------------
VANGUARD'S AVERAGE
COST STATEMENT If you make a redemption from a qualifying account,
Vanguard will send you an Average Cost Statement which
provides you with the tax basis of the shares you
redeemed. Please see "Statements and Reports" for
additional information.
--------------------------------------------------------
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<PAGE> 61
LOW BALANCE FEE AND
MINIMUM ACCOUNT
BALANCE REQUIREMENT Due to the relatively high cost of maintaining smaller
accounts, each Fund will automatically deduct a $10
annual fee from non-retirement accounts with balances
falling below $2,500 ($500 for Uniform Gifts/ Transfers
to Minors Act accounts). This fee deduction will occur
mid-year, beginning in 1996. The fee generally will be
waived for investors whose aggregate Vanguard assets
exceed $50,000.
In addition, each Fund reserves the right to liquidate
any non-retirement account that is below the minimum
initial investment amount of $3,000. If at any time the
total investment does not have a value of at least
$3,000, you may be notified that your account is below
the Fund's minimum account balance requirement. You
would then be allowed 60 days to make an additional
investment before the account is liquidated. Proceeds
would be promptly paid to the registered shareholder.
Vanguard will not liquidate your account if it has
fallen below $3,000 solely as a result of declining
markets (i.e., a decline in a Portfolio's net asset
value).
- --------------------------------------------------------------------------------
EXCHANGING
YOUR SHARES
EXCHANGING BY
TELEPHONE
Call Client Services
(1-800-662-2739) Should your investment goals change, you may exchange
your shares for those of other available Vanguard Funds.
Vanguard Bond Index Fund is the only Vanguard Index Fund
that allows telephone exchange. When exchanging shares
by telephone, please have ready the Portfolio name,
account number, Social Security Number or Employer
Identification number listed on the account, and exact
name and address in which the account is registered.
Only the registered shareholder may complete such an
exchange. Requests for telephone exchanges received
prior to the close of the New York Stock Exchange
(generally 4:00 p.m. Eastern time) are processed at the
close of business that same day. Requests received after
the close of the Exchange are processed the next
business day. TELEPHONE EXCHANGES ARE NOT ACCEPTED INTO
OR FROM VANGUARD BALANCED INDEX FUND, VANGUARD INDEX
TRUST, VANGUARD INTERNATIONAL EQUITY INDEX FUND,
VANGUARD TOTAL INTERNATIONAL PORTFOLIO, AND VANGUARD
QUANTITATIVE PORTFOLIOS. If you experience difficulty in
making a telephone exchange, your exchange request may
be made by regular or express mail, and it will be
implemented at the closing net asset value on the date
received by Vanguard provided the request is received in
Good Order.
Neither the Funds nor Vanguard is responsible for the
authenticity of exchange instructions received by
telephone. Investors bear the full risk of any loss
arising from unauthorized telephone exchanges. To
prohibit telephone exchanges on your account, please
notify the Fund in writing. Otherwise, the telephone
exchange privilege will be automatically established for
your account.
--------------------------------------------------------
EXCHANGING BY MAIL Please be sure to include on your exchange request the
name and account number of your current Portfolio, the
name of the Fund you wish to exchange into, the amount
you wish to exchange, and the signatures of all
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<PAGE> 62
registered account holders. Send your request to
VANGUARD FINANCIAL CENTER, VANGUARD INDEX FUNDS, P.O.
BOX 1120, VALLEY FORGE, PA 19482. (For express or
registered mail, send your request to Vanguard Financial
Center, Vanguard Index Funds, 455 Devon Park Drive,
Wayne, PA 19087.)
--------------------------------------------------------
IMPORTANT EXCHANGE
INFORMATION Before you make an exchange, you should consider the
following:
- Please read the Fund's prospectus before making an
exchange. For a copy and for answers to any questions
you may have, call our Investor Information Department
(1-800-662-7447).
- An exchange is treated as a redemption and a purchase.
Therefore, you could realize a taxable gain or loss on
the transaction.
- Exchanges are accepted only if the registrations and
the Taxpayer Identification numbers of the two
accounts are identical.
- New accounts are not currently accepted in
Vanguard/Windsor Fund or Vanguard/PRIMECAP Fund.
- The redemption price of shares redeemed by exchange is
the net asset value next determined after Vanguard has
received all required documentation in Good Order.
- When opening a new account by exchange, you must meet
the minimum investment requirement of the new Fund.
Every effort will be made to maintain the exchange
privilege. However, the Fund reserves the right to
revise or terminate its provisions, limit the amount of
or reject any exchange, as deemed necessary, at any
time.
The exchange privilege is only available in states in
which the shares of the Funds are registered for sale.
The Funds shares are currently registered for sale in
all 50 states and each Fund intends to maintain such
registration.
- --------------------------------------------------------------------------------
EXCHANGE
PRIVILEGE
LIMITATIONS The Fund's exchange privilege is not intended to afford
shareholders a way to speculate on short-term movements
in the market. Accordingly, in order to prevent
excessive use of the exchange privilege that may
potentially disrupt the management of the Fund and
increase transaction costs, the Fund has established a
policy of limiting excessive exchange activity.
Exchange activity generally will not be deemed excessive
if limited to TWO SUBSTANTIVE EXCHANGE REDEMPTIONS (AT
LEAST 30 DAYS APART) from a Portfolio of the Fund during
any twelve month period. Notwithstanding these
limitations, the Fund reserves the right to reject any
purchase request (including exchange purchases from
other Vanguard portfolios) that is reasonably deemed to
be disruptive to efficient portfolio management.
- --------------------------------------------------------------------------------
61
<PAGE> 63
IMPORTANT
INFORMATION
ABOUT TELEPHONE
TRANSACTIONS The ability to initiate redemptions (except wire
redemptions) and exchanges by telephone is automatically
established on your account unless you request in
writing that telephone transactions on your account not
be permitted. The ability to initiate wire redemptions
by telephone will be established on your account only if
you specifically elect this option in writing.
To protect your account from losses resulting from
unauthorized or fraudulent telephone instructions,
Vanguard adheres to the following security procedures:
1. SECURITY CHECK. To request a transaction by
telephone, the caller must know (i) the name of the
Portfolio; (ii) the 10-digit account number; (iii)
the exact name and address used in the registration;
and (iv) the Social Security or Employer
Identification number listed on the account.
2. PAYMENT POLICY. The proceeds of any telephone
redemption by mail will be made payable to the
registered shareowner and mailed to the address of
record, only. In the case of a telephone redemption
by wire, the wire transfer will be made only in
accordance with the shareowner's prior written
instructions.
Neither the Fund nor Vanguard will be responsible for
the authenticity of transaction instructions received by
telephone, provided that reasonable security procedures
have been followed. Vanguard believes that the security
procedures described above are reasonable, and that if
such procedures are followed, you will bear the risk of
any losses resulting from unauthorized or fraudulent
telephone transactions on your account. If Vanguard
fails to follow reasonable security procedures, it may
be liable for any losses resulting from unauthorized or
fraudulent telephone transactions on your account.
- --------------------------------------------------------------------------------
TRANSFERRING
REGISTRATION You may transfer the registration of any of your Fund
shares to another person by completing a transfer form
and sending it to: VANGUARD FINANCIAL CENTER, P.O. BOX
1110, VALLEY FORGE, PA 19482, ATTENTION: TRANSFER
DEPARTMENT. The request must be in Good Order. To obtain
a transfer form, please call our Client Services
Department (1-800-662-2739).
- --------------------------------------------------------------------------------
STATEMENTS AND
REPORTS Vanguard will send you a confirmation statement each
time you initiate a transaction in your account. You
will also receive a comprehensive account statement at
the end of each calendar quarter. The fourth-quarter
statement will be a year-end statement, listing all
transaction activity for the entire calendar year.
Vanguard's Average Cost Statement provides you with the
average cost of shares redeemed from your account, using
the average cost single category method. This service is
available for most taxable accounts opened since January
1, 1986. In general, investors who redeemed shares from
a qualifying Vanguard account may expect to receive
their Average
62
<PAGE> 64
Cost Statement along with their Portfolio Summary
Statement. Please call our Client Services Department
(1-800-662-2739) for information.
Financial reports on the Fund will be mailed to you
semi-annually, according to the Fund's fiscal year-end.
- --------------------------------------------------------------------------------
OTHER VANGUARD
SERVICES For more information about any of these services, please
call our Investor Information Department at
1-800-662-7447.
VANGUARD DIRECT
DEPOSIT SERVICE With Vanguard's Direct Deposit Service, most U.S.
Government checks (including Social Security and
military pension checks) and private payroll checks may
be automatically deposited into your Vanguard Fund
account. Separate brochures and forms are available for
direct deposit of U.S. Government and private payroll
checks.
VANGUARD AUTOMATIC
EXCHANGE SERVICE Vanguard's Automatic Exchange Service allows you to move
money automatically among your Vanguard Fund accounts.
For instance, the service can be used to "dollar cost
average" from a money market portfolio into a stock or
bond fund or to contribute to an IRA or other retirement
plan. Please contact our Client Services Department at
1-800-662-2739 for additional information.
VANGUARD FUND
EXPRESS Vanguard's Fund Express allows you to transfer money
between your Fund account and your account at a bank,
savings and loan association, or a credit union that is
a member of the Automated Clearing House (ACH) system.
You may elect this service on the Account Registration
Form or call our Investor Information Department
(1-800-662-7447) for a Fund Express application.
Special rules govern how your Fund Express purchases or
redemptions are credited to your account. In addition,
some services of Fund Express cannot be used with
specific Vanguard Funds. For more information, please
refer to the Vanguard Fund Express brochure.
VANGUARD DIVIDEND
EXPRESS Vanguard's Dividend Express allows you to transfer your
dividends and/or capital gains distributions
automatically from your Fund account, one business day
after the Fund's payable date, to your account at a
bank, savings and loan association, or a credit union
that is a member of the Automated Clearing House (ACH)
system. You may elect this service on the Account
Registration Form or call our Investor Information
Department (1-800-662-7447) for a Vanguard Dividend
Express application.
VANGUARD
TELE-ACCOUNT Vanguard Tele-Account is a convenient, automated service
that provides share price, price change and yield
quotations on Vanguard Funds through any TouchToneTM
telephone. This service also lets you obtain information
about your account balance, your last transaction, and
your most recent dividend or capital gains payment. To
contact Vanguard's Tele-Account service, dial
1-800-ON-BOARD (1-800-662-6273). A brochure offering
detailed operating instructions is available from our
Investor Information Department (1-800-662-7447).
- --------------------------------------------------------------------------------
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<TABLE>
<S> <C> <C>
---------------------------
THE VANGUARD GROUP
OF INVESTMENT
COMPANIES
Vanguard Financial Center
P.O. Box 2600
Valley Forge, PA 19482
INVESTOR INFORMATION
DEPARTMENT:
1-800-662-7447 (SHIP)
CLIENT SERVICES
DEPARTMENT:
1-800-662-2739 (CREW)
TELE-ACCOUNT FOR
24-HOUR ACCESS:
1-800-662-6273 (ON-BOARD)
TELECOMMUNICATION SERVICE
FOR THE HEARING-IMPAIRED:
1-800-662-2738
TRANSFER AGENT:
The Vanguard Group, Inc.
Vanguard Financial Center
Valley Forge, PA 19482
P009
</TABLE>
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