<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT (NO. 2-56846) UNDER
THE SECURITIES ACT OF 1933
PRE-EFFECTIVE AMENDMENT NO.
POST-EFFECTIVE AMENDMENT NO. 43
AND
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY
ACT OF 1940
AMENDMENT NO. 45
VANGUARD INDEX TRUST
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
P.O. BOX 2600, VALLEY FORGE, PA 19482
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)
REGISTRANT'S TELEPHONE NUMBER (610) 669-1000
RAYMOND J. KLAPINSKY, ESQUIRE
P.O. BOX 876
VALLEY FORGE, PA 19482
IT IS PROPOSED THAT THIS AMENDMENT BECOME EFFECTIVE;
on April 30, 1996, pursuant to paragraph (b) of Rule 485.
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
As soon as practicable after this Registration Statement becomes effective.
REGISTRANT ELECTS TO REGISTER AN INDEFINITE NUMBER OF SHARES PURSUANT TO
REGULATION 24F-2 UNDER THE INVESTMENT COMPANY ACT OF 1940. REGISTRANT FILED ITS
RULE 24F-2 NOTICE FOR THE YEAR ENDED DECEMBER 31, 1995 ON FEBRUARY 28, 1996.
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<PAGE> 2
VANGUARD INDEX TRUST
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
FORM N-1A
ITEM NUMBER LOCATION IN PROSPECTUS
<C> <S> <C>
Item 1. Cover Page.................................... Cover Page
Item 2. Synopsis...................................... Highlights
Item 3. Condensed Financial Information............... Financial Highlights
Item 4. General Description of Registrant............. Investment Objectives; Investment
Limitations; Investment Policies;
General Information
Item 5. Management of the Funds....................... Management of the Funds
Item 6. Capital Stock and Other Securities............ Opening an Account and Purchasing
Each Funds Shares; Selling Your
Shares; The Share Price of Each
Portfolio; Dividends, Capital Gains
and Taxes; General Information
Item 7. Purchase of Securities Being Offered.......... Cover Page; Opening an Account and
Purchasing Shares
Item 8. Redemption or Repurchase...................... Selling Your Shares
Item 9. Pending Legal Proceedings..................... Not Applicable
<CAPTION>
FORM N-1A LOCATION IN STATEMENT
ITEM NUMBER OF ADDITIONAL INFORMATION
<C> <S> <C>
Item 10. Cover Page.................................... Cover Page
Item 11. Table of Contents............................. Cover Page
Item 12. General Information and History............... Investment Objectives and Policies
Item 13. Investment Objective and Policies............. Investment Objectives and Policies;
Investment Limitations
Item 14. Management of the Fund........................ Management of the Fund
Item 15. Control Persons and Principal Holders of
Securities.................................... Management of the Fund
Item 16. Investment Advisory and Other Services........ Management of the Fund
Item 17. Brokerage Allocation.......................... Not Applicable
Item 18. Capital Stock and Other Securities............ Financial Statements
Item 19. Purchase, Redemption and Pricing of Securities
Being Offered................................. Purchase of Shares; Redemption of
Shares
Item 20. Tax Status.................................... Appendix
Item 21. Underwriters.................................. Not Applicable
Item 22. Calculations of Yield Quotations of Money
Market Fund................................... Not Applicable
Item 23. Financial Statements.......................... Financial Statements
</TABLE>
<PAGE> 3
================================================================================
[VANGUARD INDEX TRUST LOGO]
A Member of The Vanguard Group
================================================================================
PROSPECTUS -- APRIL 30, 1996
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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 Vanguard Index Trust (the "Trust") is an open-end
OBJECTIVE diversified investment company designed as an "index"
AND POLICIES fund. THE TRUST CONSISTS OF SIX PORTFOLIOS: THE 500,
EXTENDED MARKET, TOTAL STOCK MARKET, SMALL CAPITALIZATION
STOCK, VALUE AND GROWTH PORTFOLIOS. Each of the Portfolios
invests in common stocks in order to match the investment
performance of a distinct market index. There is no
assurance that the Portfolios will achieve their stated
objectives. Shares of the Trust are neither insured nor
guaranteed by any agency of the U.S. Government, including
the FDIC.
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OPENING AN To open a regular (non-retirement) account, please
ACCOUNT 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. A portfolio transaction fee of 1%
is deducted from purchases of the Small Capitalization
Stock Portfolio; and a 0.5% portfolio transaction fee is
deducted from purchases of the Extended Market Portfolio.
Portfolio transaction fees are paid to the Portfolios to
offset transaction costs of buying securities of small-and
medium-sized companies. Shareholders in each Portfolio
will also incur a $10 annual account maintenance fee,
deducted from the Portfolio's dividend. See "Trust
Expenses."
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ABOUT THIS This Prospectus is designed to set forth concisely the
PROSPECTUS information you should know about the Trust before you
invest. It should be retained for future reference. A
"Statement of Additional Information" containing
additional information about the Trust has been filed with
the Securities and Exchange Commission. This Statement is
dated April 30, 1996 and has been incorporated by
reference into this Prospectus. A copy may be obtained
without charge by writing to the Trust or by calling the
Investor Information Department.
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TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
Page Page Page
Highlights ....................... 2 Implementation of Policies ........ 16 SHAREHOLDER GUIDE
Trust Expenses ................... 4 Investment Limitations ............ 22 Opening an Account and
Financial Highlights ............. 6 Management of the Trust ........... 22 Purchasing Shares ............... 28
Yield and Total Return ........... 10 Investment Adviser ................ 23 When Your Account Will
TRUST INFORMATION Performance Record ................ 23 Be Credited ..................... 31
Investment Objectives ............ 10 Dividends, Capital Gains and Taxes. 25 Selling Your Shares ............... 32
Investment Policies .............. 12 The Share Price of Each Portfolio.. 26 Exchanging Your Shares ............ 34
Investment Risks ................. 14 General Information ............... 27 Important Information About
Who Should Invest ................ 15 Telephone Transactions .......... 35
Transferring Registration ......... 35
Other Vanguard Services ........... 36
</TABLE>
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
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<PAGE> 4
HIGHLIGHTS
OBJECTIVE AND The Trust is an open-end diversified investment company
POLICIES designed as an "index" fund. Shares of the Trust are
offered on a no-load basis, although the Trust incurs
certain distribution expenses. The Trust consists of six
separate Portfolios, each of which invests in common
stocks in order to match the performance of a selected
market index. There is no assurance, however, that the
Trust will achieve its stated objective. PAGE 10
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SIX SEPARATE Investors may choose to invest in any of six Portfolios of
PORTFOLIOS the Trust:
500 PORTFOLIO -- seeks to match the investment performance
of the Standard & Poor's 500 Composite Stock Price Index,
an index emphasizing large-capitalization stocks.
EXTENDED MARKET PORTFOLIO -- seeks to match the investment
performance of the Wilshire 4500 Index, an index
consisting of medium- and small-capitalization stocks.
TOTAL STOCK MARKET PORTFOLIO -- seeks to match the
investment performance of the Wilshire 5000 Index, an
index consisting of all regularly and publicly traded U.S.
stocks.
SMALL CAPITALIZATION STOCK PORTFOLIO -- seeks to match the
investment performance of the Russell 2000 Small Stock
Index, an index consisting of 2,000 small-capitalization
common stocks.
VALUE PORTFOLIO -- seeks to match the investment
performance of the S&P/BARRA Value Index, an index
consisting of stocks selected from the Standard & Poor's
500 Index with lower than average ratios of market price
to book value.
GROWTH PORTFOLIO -- seeks to match the investment
performance of the S&P/BARRA Growth Index, an index
consisting of stocks selected from the Standard & Poor's
500 Index with higher than average ratios of market price
to book value. PAGE 12
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RISK As mutual funds investing in common stocks, all six
CHARACTERISTICS Portfolios of the Trust are subject to market risk, which
is the possibility that common stock prices will decline,
sometimes substantially, over short or extended periods.
Due to differences in the securities they hold, the six
Portfolios may exhibit varying levels of
volatility. PAGE 14
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THE VANGUARD The Trust is a member of The Vanguard Group of Investment
GROUP 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 22
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INVESTMENT The Trust receives investment advisory services on an
ADVISER at-cost basis from Vanguard's Core Management Group. As a
result, the Trust receives its investment advisory
services at a substantially lower cost than would be
possible if the Trust paid an investment advisory fee to
an external investment adviser. PAGE 23
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2
<PAGE> 5
FEES AND EXPENSES A portfolio transaction fee of 1% is deducted from
purchases of the Small Capitalization Stock Portfolio; and
a 0.5% portfolio transaction fee is deducted from
purchases of the Extended Market Portfolio. Portfolio
transaction fees are paid to the Portfolios to offset
transaction costs of buying securities of small- and
medium-sized companies. Shareholders in each Portfolio
will also incur a $10 annual account maintenance fee
deducted from the Portfolio's dividend. This fee will be
waived for shareholders with an account balance of $10,000
or more. PAGE 4
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DIVIDEND POLICY The Trust distributes substantially all of its net
investment income in the form of dividends. The 500, Total
Stock Market, Value and Growth Portfolios distribute
dividends quarterly, whereas the Extended Market and Small
Capitalization Stock Portfolios distribute dividends
annually. In all six Portfolios, net capital gains, if
any, are distributed annually. PAGE 25
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TAXES A sale of shares of a Portfolio is a taxable event and may
result in a capital gain or loss. Dividend distributions,
capital gain distributions, and capital gains or losses
from redemptions and exchanges may be subject to federal,
state and local taxes. PAGE 25
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PURCHASING You may purchase shares by mail, wire or written exchange
SHARES request from another Vanguard Fund. The minimum initial
investment is $3,000 per Portfolio ($1,000 for Individual
Retirement Accounts and Uniform Gifts/Transfers to Minors
Act accounts); the minimum for subsequent investments is
$100. There are no sales commissions or 12b-1 fees.
Telephone exchanges from other Vanguard Funds are not
permitted. PAGE 28
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SELLING SHARES You may redeem shares of each Portfolio in writing or by
telephone; however, telephone exchanges into other
Vanguard Funds are not permitted (except for certain
retirement accounts). The share price of each Portfolio is
expected to fluctuate, and may at redemption be more or
less than at the time of initial purchase, resulting in a
gain or loss. PAGE 32
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OTHER VANGUARD The Trust offers special services: Fund Express, for
SERVICES electronic transfers between the Fund and your bank
account; and Tele-Account, for 24-hour telephone
access to your Fund account balance and certain
transactions. PAGE 36
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SPECIAL (1) Each Portfolio may invest a portion of its assets in
CONSIDERATIONS futures contracts, options, convertible securities &
swap agreements. PAGE 20
(2) Each Portfolio may invest in short-term fixed income
securities. PAGE 20
(3) Each Portfolio may lend its securities. PAGE 21
(4) Each Portfolio may borrow money. PAGE 22
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3
<PAGE> 6
TRUST EXPENSES The following table illustrates ALL expenses and fees
that you would incur as a shareholder of the Trust. The
expenses and fees are for the fiscal year ended
December 31, 1995.
<TABLE>
<CAPTION>
TOTAL SMALL
SHAREHOLDER EXTENDED STOCK CAPITALIZATION
TRANSACTION 500 MARKET MARKET VALUE GROWTH STOCK
EXPENSES PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO+
<S> <C> <C> <C> <C> <C> <C>
------------------------------------------------------------------------------------------------------
Sales Load Imposed
on Purchases...... None None** None None None None*
Sales Load Imposed
on Reinvested
Dividends......... None None None None None None
Redemption Fees..... None None None None None None
Exchange Fees....... None None None None None None
</TABLE>
* Shareholders are charged a 1% portfolio transaction
fee, payable directly to the Portfolio, on each
purchase of shares.
** Shareholders are charged a 0.5% portfolio transaction
fee, payable directly to the Portfolio, on each
purchase of shares.
+ Formerly Vanguard Small Capitalization Stock Fund,
Inc.
<TABLE>
<CAPTION>
TOTAL SMALL
ANNUAL FUND EXTENDED STOCK CAPITALIZATION
OPERATING 500 MARKET MARKET VALUE GROWTH STOCK
EXPENSES PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO+
<S> <C> <C> <C> <C> <C> <C>
------------------------------------------------------------------------------------------------------
Management &
Administrative
Expenses++...... 0.17% 0.21% 0.21% 0.15% 0.14% 0.21%
Investment
Advisory Fees... 0.00 0.00 0.00 0.01 0.01 0.01
12b-1 Fees........ None None None None None None
Other Expenses
Distribution
Costs........... 0.02 0.02 0.02 0.02 0.02 0.02
Miscellaneous
Expenses...... 0.01 0.02 0.02 0.02 0.03 0.01
----- ----- ----- ----- ----- -----
Total Other
Expenses........ 0.03 0.04 0.04 0.04 0.05 0.03
----- ----- ----- ----- ----- -----
TOTAL OPERATING
EXPENSES.... 0.20% 0.25% 0.25% 0.20% 0.20% 0.25%
===== ===== ===== ===== ===== =====
</TABLE>
+Formerly Vanguard Small Capitalization Stock Fund, Inc.
++In addition to these costs, each Portfolio assesses an
annual account maintenance fee of $10. This fee will be
waived for shareholders with an account balance of
$10,000 or more.
The purpose of this table is to assist you in
understanding the various costs and expenses that you
would bear directly or indirectly as an investor in the
Trust.
TWO PORTFOLIOS The Small Capitalization Stock Portfolio assesses a
ASSESS TRANSACTION portfolio transaction fee on purchases of Portfolio shares
FEES equal to 1% of the dollar amount invested and the Extended
Market Portfolio assesses a portfolio transaction fee
equal to 0.5% of the dollar amount invested. The portfolio
transaction fees are paid to the respective Portfolio, not
to Vanguard. They are not sales charges.
These fees apply to initial investments in the Extended
Market and Small Capitalization Stock Portfolios and all
subsequent purchases (including purchases made by exchange
from another Vanguard Fund or from the other Portfolios of
the Trust), but not to reinvested dividend or capital
gains distributions. Portfolio
4
<PAGE> 7
transaction fees are deducted automatically from the
amount invested; they cannot be paid separately.
The purpose of these transaction fees is to allocate
transaction costs associated with new purchases to
investors making those purchases, thus insulating existing
shareholders from those transaction costs. These costs
include: (1) brokerage costs; (2) market impact
costs -- i.e., the increase in market prices which may
result when the Portfolio purchases thinly traded stocks;
and, most importantly, (3) the effect of the "bid-ask"
spread in the over-the-counter market. (Securities in the
over-the-counter market are bought at the "ask" or
purchase price, but are valued in the Portfolio at the
mean of the "bid," or sale, and "ask" prices.)
The 1% and 0.5% fees represent Vanguard's estimate of the
brokerage and other transaction costs incurred by the
Small Capitalization Stock and Extended Market Portfolios
in acquiring stocks of mid- and small-capitalization
companies. Without the fees, the two Portfolios, which
incur these costs directly, would experience reduced
investment performance for all shareholders in each
Portfolio. With the fees, the transaction costs of
acquiring additional stocks are borne not by all existing
shareholders, but by those investors making additional
purchases. Because the purchaser, not the Portfolios,
bears these costs, the Portfolios are expected to track
their respective benchmark indexes more closely.
500 PORTFOLIO The Portfolio reserves the right to deduct a portfolio
transaction fee, ranging from 0.08% to 0.20%, from
purchases of shares of the Portfolio, if such purchase or
cumulative purchases are of a size that is reasonably
deemed to be disruptive to efficient portfolio management.
The fee will be paid to the Portfolio to offset
transaction costs of buying securities. The fee is not
paid to Vanguard and is not a sales charge. It is not
expected that the 500 Portfolio would deduct a portfolio
transaction fee on amounts of less than $10 million.
EACH PORTFOLIO Each Portfolio assesses an annual account maintenance fee
CHARGES A $10 of $10 to allocate part of the fixed costs of maintaining
ACCOUNT MAINTENANCE shareholder accounts equally to all accounts. This fee is
FEE deducted from each Portfolio's dividend at a rate of $2.50
per quarter for accounts in the 500, Total Stock Market,
Value and Growth Portfolios, and $10 annually for accounts
in the Extended Market and Small Capitalization Stock
Portfolios. See "Dividends, Capital Gains and Taxes" for
more information on this fee. The $10 fee amounts to 1.00%
on a $1,000 investment in a Portfolio of the Trust and
0.33% on a $3,000 investment. This fee will be waived for
shareholders with an account balance of $10,000 or more.
The following example illustrates the expenses that you
would incur on a $1,000 investment over various time
periods, assuming (1) a 5% annual rate of return and (2)
redemption at the end of each period. The example includes
the $10 account maintenance fee for each Portfolio; the 1%
portfolio transaction fee for the Small Capitalization
Stock Portfolio; and the 0.5% transaction fee for the
Extended Market Portfolio. As noted in the table on the
previous page, the Trust charges no redemption fees of any
kind.
5
<PAGE> 8
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
500 Portfolio....................... $12 $36 $61 $124
Extended Market Portfolio........... $15 $40 $66 $133
Total Stock Market Portfolio........ $13 $38 $64 $130
Growth Portfolio.................... $12 $36 $61 $124
Value Portfolio..................... $12 $36 $61 $124
Small Capitalization Stock
Portfolio......................... $23 $48 $74 $140
</TABLE>
Included in these estimates are account maintenance fees
of $10, $30, $50 and $100 for the respective periods
shown. Accordingly, for investments larger than $1,000,
your total expenses will be substantially lower in
percentage terms than this illustration implies.
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF
PAST OR FUTURE EXPENSES OR PERFORMANCE. ACTUAL EXPENSES
MAY BE HIGHER OR LOWER THAN THOSE SHOWN.
- --------------------------------------------------------------------------------
FINANCIAL The following financial highlights for a share outstanding
HIGHLIGHTS throughout each period, insofar as they relate to each of
the five years ended December 31, 1995, have been audited
by Price Waterhouse LLP, independent accountants, whose
reports thereon were unqualified. This financial
information should be read in conjunction with the Trust's
financial statements and notes thereto, which, together
with the remaining portions of the Fund's 1995 Annual
Report to Shareholders, are incorporated by reference in
the Statement of Additional Information and in this
Prospectus, and which appear, along with the reports of
Price Waterhouse LLP, in the Trust's 1995 Annual Report to
Shareholders and inserts thereto. For a more complete
discussion of the Trust's performance, please see the
Trust's 1995 Annual Report to Shareholders, which may be
obtained free of charge by writing to the Trust or calling
our Investor Information Department at 1-800-662-7447.
6
<PAGE> 9
<TABLE>
-------------------------------------------------------------------------------------------------------------
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
YEAR............ $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
YEAR............ $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 Year
(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.
<TABLE>
-------------------------------------------------------------------------------------------------
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 annual account maintenance fee of $10
or applicable portfolio transaction fees.
+ Commencement of operations.
7
<PAGE> 10
<TABLE>
<CAPTION>
----------------------------------------------------------
TOTAL STOCK MARKET PORTFOLIO
----------------------------------------------------------
YEAR ENDED DECEMBER 31, MARCH 16+, 1992,
1995 1994 1993 TO DECEMBER 31, 1992
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD........................ $11.37 $11.69 $10.84 $10.00
------ ------ ------ ------
INVESTMENT OPERATIONS
Net Investment Income..................................... .29 .27 .26 .23
Net Realized and Unrealized Gain (Loss) on Investments.... 3.75 (.29) .88 .84
------ ------ ------ ------
TOTAL FROM INVESTMENT OPERATIONS........................ 4.04 (.02) 1.14 1.07
- ------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income...................... (.28) (.27) (.26) (.23)
Distributions from Realized Capital Gains................. (.09) (.03) (.03) --
------ ------ ------ ------
TOTAL DISTRIBUTIONS..................................... (.37) (.30) (.29) (.23)
- ------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD.............................. $15.04 $11.37 $11.69 $10.84
========================================================================================================================
TOTAL RETURN**.............................................. 35.79% (0.17)% 10.62% 10.41%
========================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions)........................ $1,571 $786 $512 $275
Ratio of Expenses to Average Net Assets..................... .25% .20% .20% .21%*
Ratio of Net Investment Income to Average Net Assets........ 2.14% 2.35% 2.31% 2.42%*
Portfolio Turnover Rate..................................... 3% 2% 1% 3%
</TABLE>
* Annualized.
** Total return figures do not reflect the annual account maintenance fee of $10
or applicable portfolio transaction fees.
+ Commencement of operations.
<TABLE>
<CAPTION>
----------------------------------------------------------
GROWTH PORTFOLIO
----------------------------------------------------------
YEAR ENDED DECEMBER 31, NOVEMBER 2+, 1992,
1995 1994 1993 TO DECEMBER 31, 1992
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD........................ $10.28 $10.20 $10.26 $10.00
------ ------ ------ ------
INVESTMENT OPERATIONS
Net Investment Income..................................... .21 .21 .21 .06
Net Realized and Unrealized Gain (Loss) on Investments.... 3.68 .08 (.06) .26
------ ------ ------ ------
TOTAL FROM INVESTMENT OPERATIONS........................ 3.89 .29 .15 .32
- ------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income...................... (.20) (.21) (.21) (.06)
Distributions from Realized Capital Gains................. -- -- -- --
------ ------ ------ ------
TOTAL DISTRIBUTIONS..................................... (.20) (.21) (.21) (.06)
- ------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD.............................. $13.97 $10.28 $10.20 $10.26
========================================================================================================================
TOTAL RETURN**.............................................. 38.06% 2.89% 1.53% 3.19%
========================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions)........................ $271 $86 $51 $21
Ratio of Expenses to Average Net Assets..................... .20% .20% .20% 0%*
Ratio of Net Investment Income to Average Net Assets........ 1.71% 2.08% 2.10% 2.85%*
Portfolio Turnover Rate..................................... 24% 28% 36% 2%
</TABLE>
* Annualized.
** Total return figures do not reflect the annual account maintenance fee of
$10.
+ Commencement of operations.
8
<PAGE> 11
<TABLE>
<CAPTION>
----------------------------------------------------------
VALUE PORTFOLIO
----------------------------------------------------------
YEAR ENDED DECEMBER 31, NOVEMBER 2+, 1992,
1995 1994 1993 TO DECEMBER 31, 1992
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD........................ $11.12 $11.74 $10.30 $10.00
------ ------ ------ ------
INVESTMENT OPERATIONS
Net Investment Income..................................... .41 .38 .38 .07
Net Realized and Unrealized Gain (Loss) on Investments.... 3.66 (.46) 1.50 .30
------ ------ ------ ------
TOTAL FROM INVESTMENT OPERATIONS........................ 4.07 (.08) 1.88 .37
- ------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income...................... (.40) (.38) (.38) (.07)
Distributions from Realized Capital Gains................. -- (.16) (.06) --
------ ------ ------ ------
TOTAL DISTRIBUTIONS..................................... (.40) (.54) (.44) (.07)
- ------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD.............................. $14.79 $11.12 $11.74 $10.30
========================================================================================================================
TOTAL RETURN**.............................................. 36.94% (0.73)% 18.35% 3.70%
========================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions)........................ $496 $297 $190 $24
Ratio of Expenses to Average Net Assets..................... .20% .20% .20% 0%*
Ratio of Net Investment Income to Average Net Assets........ 3.06% 3.37% 3.26% 3.46%*
Portfolio Turnover Rate..................................... 27% 32% 30% 4%
</TABLE>
* Annualized.
** Total return figures do not reflect the annual account maintenance fee of
$10.
+ Commencement of operations.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------
SMALL CAPITALIZATION STOCK PORTFOLIO*
--------------------------------------------------------------------------------------------------------------
FEB. 1 TO OCT. 1, 1993 YEAR ENDED SEPTEMBER 30,
DEC. 31, TO JAN. 31, ------------------------------------------------------------------------
1995 1994 1994 1993 1992 1991 1990(1) 1989+ 1988 1987 1986
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <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 $11.96 $15.73 $13.24 $11.68
------ ------- ------ ------ ------ ----- ------- ------ ------ ------ ------
INVESTMENT
OPERATIONS
Net Investment
Income (Loss) .24 .20 .05 .20 .19 .20 .17 .10 .03 (.04) (.01)
Net Realized
and
Unrealized
Gain (Loss) on
Investments... 4.06 (.86) .96 3.73 .88 3.60 (3.46) 2.13 (2.59) 4.42 1.57
------ ------- ------ ------ ------ ----- ------- ------ ------ ------ ------
TOTAL FROM
INVESTMENT
OPERATIONS.. 4.30 (.66) 1.01 3.93 1.07 3.80 (3.29) 2.23 (2.56) 4.38 1.56
- ------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from
Net Investment
Income........ (.23) (.22) (.18) (.18) (.18) (.18) (.04) (.14) -- -- --
Distributions
from Realized
Capital Gains. (.45) (.37) (.82) (.15) (.29) (.14) -- (2.17) (1.21) (1.89) --
------ ------- ------ ------ ------ ----- ------- ------ ------ ------ ------
TOTAL
DISTRIB-
UTIONS...... (.68) (.59) (1.00) (.33) (.47) (.32) (.04) (2.31) (1.21) (1.89) --
- ------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE,
END OF
PERIOD......... $18.61 $14.99 $16.24 $16.23 $12.63 $12.03 $8.55 $11.88 $11.96 $15.73 $13.24
==============================================================================================================================
TOTAL
RETURN++....... 28.74% (4.00)% 6.65% 31.60% 9.34% 45.91% (27.73)% 18.83% (14.30)% 38.02% 13.33%
==============================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End
of Period
(Millions)..... $971 $605 $533 $432 $202 $111 $40 $20 $27 $35 $31
Ratio of
Expenses to
Average Net
Assets......... .25% .17%** .18%** .18% .18% .21% .31% 1.00% .95% .92% .92%
Ratio of Net
Investment
Income (Loss)
to Average Net
Assets......... 1.58% 1.50%** 1.16%** 1.47% 1.65% 2.11% 1.91% .65% .24% (.25)% (.06)%
Portfolio
Turnover Rate.. 28% 25% 5% 26% 26% 33% 40% 160% 68% 92% 92%
</TABLE>
(1) Adjusted to reflect a 3-for-1 stock split as of February 3, 1990.
* Results prior to January 31, 1994, are for the former Vanguard Small
Capitalization Stock Fund.
** Annualized.
+ Prior to September 11, 1989, Schroder Capital Management International
provided investment advisory services to the Fund. Effective September 11,
1989, The Vanguard Group, Inc. began providing investment advisory services
to the Fund on an at-cost basis.
++ Total return figures do not reflect the annual account maintenance fees of
$10 or applicable portfolio transaction fees.
- --------------------------------------------------------------------------------
9
<PAGE> 12
YIELD AND From time to time a Portfolio of the Trust may advertise
TOTAL RETURN 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.
Additionally, the Portfolios may compare their performance
to that of their comparative indexes. The target
benchmarks include the Standard & Poor's 500 Composite
Stock Price Index, the Wilshire 4500 Index, the Wilshire
5000 Index, the Russell 2000 Small Stock Index, the
S&P/BARRA Value Index and the S&P/BARRA Growth Index.
- --------------------------------------------------------------------------------
INVESTMENT The Trust is an open-end diversified investment company
OBJECTIVES designed as an "index" fund. The Trust consists of six
Portfolios, each of which seeks to provide investment
EACH PORTFOLIO SEEKS results that correspond to a particular stock market
TO MATCH THE index. The correlation between the performance of each of
INVESTMENT the Trust's Portfolios and the respective index that each
PERFORMANCE OF ITS Portfolio attempts to match is expected to be at least
RESPECTIVE INDEX 0.95. The 500, Extended Market, Total Stock Market and
Small Capitalization Stock Portfolios attempt to replicate
the investment performance of broad market indexes, while
the Value and Growth Portfolios attempt to replicate
indexes which possess certain "value" and "growth"
investment characteristics.
10
<PAGE> 13
The pie chart below illustrates how, as measured by market
capitalization, the Standard & Poor's 500 Index, the
Wilshire 4500 Index and the Russell 2000 Index cover the
entire U.S. equity market, as represented by the Wilshire
5000 Index:
[FIGURE #1]
- The 500 PORTFOLIO seeks to replicate the aggregate price
and yield performance of the Standard & Poor's 500
Composite Stock Price Index (the "S&P 500 Index"), an
index which emphasizes large-capitalization companies.
- The EXTENDED MARKET PORTFOLIO seeks to replicate the
aggregate price and yield performance of the Wilshire
4500 Index, an index which consists of more than 5,000
medium- and small-capitalization companies that are not
included in the S&P 500 Index.
- The TOTAL STOCK MARKET PORTFOLIO seeks to replicate the
aggregate price and yield performance of the Wilshire
5000 Index, an index which consists of all U.S. stocks
that trade on a regular basis on either the New York or
American Stock Exchange or the NASDAQ over-the-counter
market. These stocks include the large-capitalization
companies of the S&P 500 Index, with the exception of
Royal Dutch and Unilever, N.V., which trade on the New
York Stock Exchange as ADR's, as well as the medium-and
small-capitalization companies of the Wilshire 4500
Index.
- The SMALL CAPITALIZATION STOCK PORTFOLIO seeks to
replicate the aggregate price and yield performance of
the Russell 2000 Small Stock Index (the "Russell 2000"),
a broadly diversified small-capitalization stock index
consisting of approximately 2,000 common stocks.
11
<PAGE> 14
The pie chart below illustrates how, as measured by market
capitalization, the S&P 500 Index is divided into the S&P/
BARRA Value and S&P/BARRA Growth Indexes.
[FIGURE #2]
- The VALUE PORTFOLIO seeks to replicate the aggregate
price and yield performance of the S&P/BARRA Value
Index, an index which includes stocks in the S&P 500
Index with lower than average ratios of market price to
book value. These types of stocks are often referred to
as "value" stocks.
- The GROWTH PORTFOLIO seeks to replicate the aggregate
price and yield performance of the S&P/BARRA Growth
Index, an index which includes stocks in the S&P 500
Index with higher than average ratios of market price to
book value. These types of stocks are often referred to
as "growth" stocks.
There is no assurance that the Portfolios will achieve
their stated objectives.
These investment objectives are fundamental and so cannot
be changed without the approval of a majority of a
Portfolio's shareholders.
- --------------------------------------------------------------------------------
INVESTMENT POLICIES The six Portfolios of the Trust are not managed according
to traditional methods of "active" investment management,
ALL SIX PORTFOLIOS which involve the buying and selling of securities based
USE A "PASSIVE" upon economic, financial and market analysis and
APPROACH TO INVEST investment judgment. Instead, the Portfolios, utilizing a
IN COMMON STOCKS "passive" or "indexing" investment approach, attempt to
duplicate the investment performance of their respective
indexes through statistical procedures. The Portfolios are
managed without regard to tax ramifications.
The 500 PORTFOLIO invests in all 500 stocks in the S&P 500
Index in approximately the same proportions as they are
represented in the Index.
The EXTENDED MARKET PORTFOLIO invests in a statistically
selected sample of the more than 5,000 stocks included in
the Wilshire 4500 Index. Typically, the Portfolio invests
in approximately 1,900 stocks. Stocks are selected for
inclusion in the Portfolio based primarily on market
capitalization and industry weightings. The
12
<PAGE> 15
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 nearly 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 Each Portfolio attempts to remain fully invested in common
ATTEMPT TO REMAIN stocks. Under normal circumstances each Portfolio will
FULLY INVESTED invest at least 95% of its assets in the common stocks of
its respective index and futures contracts and options.
Each Portfolio may invest in certain short-term fixed
income securities as cash reserves, although cash or cash
equivalents are normally expected to represent less than
1% of each Portfolio's assets. Each Portfolio may also
invest up to 20% of its assets in stock futures contracts
and options in order to invest uncommitted cash balances,
to maintain liquidity to meet shareholder redemptions, or
to minimize trading costs. The Portfolios will not invest
in cash reserves, futures contracts or options as part of
a temporary defensive strategy, such as lowering a
Portfolio's investment in common stocks to protect against
potential stock market declines. The Portfolios intend to
remain fully invested, to the extent practicable, in a
pool of securities which will duplicate the investment
characteristics of their respective indexes. See
"Implementation of Policies" for a description of these
and other investment practices of the Trust.
The Trust is responsible for voting the shares of all
securities it holds.
13
<PAGE> 16
These investment policies are not fundamental and so may
be changed by the Board of Trustees without shareholder
approval. However, shareholders would be notified prior to
a material change in either.
- --------------------------------------------------------------------------------
INVESTMENT As mutual funds investing primarily in common stocks, the
RISKS Portfolios of the Trust are subject to market
risk -- i.e., the possibility that common stock prices
EACH PORTFOLIO IS will decline over short or even extended periods. The U.S.
SUBJECT TO MARKET stock market tends to be cyclical, with periods when stock
RISK prices generally rise and periods when prices generally
decline.
To illustrate the volatility of stock prices, the
following table sets forth the extremes for stock market
returns as well as the average return for the period from
1926 to 1995, as measured by the S&P 500 Composite Stock
Price Index:
<TABLE>
<CAPTION>
U.S. STOCK MARKET RETURNS (1926-1995)
OVER VARIOUS TIME HORIZONS
--------------------------------------------
1 YEAR 5 YEARS 10 YEARS 20 YEARS
------ ------- -------- --------
<S> <C> <C> <C> <C>
Best +53.9% +23.9% +20.1% +16.9%
Worst -43.3 -12.5 - 0.9 + 3.1
Average +12.5 +10.3 +10.7 +10.7
</TABLE>
As shown, common stocks have provided annual total returns
(capital appreciation plus dividend income) averaging
+10.7% for all 10-year periods from 1926 to 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.
THE EXTENDED MARKET, Historically, medium- and small-capitalization stocks have
TOTAL STOCK MARKET been more volatile in price than the larger-capitalization
AND SMALL stocks included in the S&P 500 Index. Among the reasons
CAPITALIZATION for the greater price volatility of these securities are
STOCK PORTFOLIOS the less certain growth prospects of smaller firms, the
MAY EXHIBIT GREATER lower degree of liquidity in the markets for such stocks,
VOLATILITY 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.
14
<PAGE> 17
THE VALUE AND GROWTH Stocks that emphasize particular investment
PORTFOLIOS MAY characteristics, such as "value" and "growth," may
FLUCTUATE fluctuate divergently from the broad market as represented
INDEPENDENTLY 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.
- --------------------------------------------------------------------------------
WHO SHOULD INVEST All six Portfolios of the Trust are designed for long-term
investors seeking the advantages of a low-cost, "passive"
LONG-TERM INVESTORS approach for investing in a diversified portfolio of
SEEKING A "PASSIVE" common stocks. Unlike other equity mutual funds, which
APPROACH FOR generally seek to "beat" stock market averages with
INVESTING IN unpredictable results, all six Portfolios seek to "match"
COMMON STOCKS their respective indexes and thus are expected to provide
a highly predictable return relative to their benchmarks.
Four Portfolios of the Trust provide a vehicle for
investing in a broad market index:
- The 500 PORTFOLIO is designed for investors seeking to
replicate the total return of the S&P 500 Index, an
index emphasizing large capitalization common stocks.
- The EXTENDED MARKET PORTFOLIO is designed for investors
seeking to replicate the total return of the Wilshire
4500 Index, an index consisting of small- and
medium-capitalization companies.
- The TOTAL STOCK MARKET PORTFOLIO is designed for
investors seeking to replicate the total return of the
Wilshire 5000 Index, an index consisting of all U.S.
stocks that trade on a regular basis on either the New
York or American Stock Exchange or the NASDAQ
over-the-counter market. The Total Stock Market
Portfolio will therefore reflect the performance of the
entire U.S. stock market.
- The SMALL CAPITALIZATION STOCK PORTFOLIO is designed for
investors seeking to replicate the total return of the
Russell 2000 Small Stock Index, an index consisting of
approximately 2,000 small-capitalization stocks.
Two Portfolios are designed for investors seeking to
emphasize certain investment characteristics while
continuing to utilize a "passive" investment approach:
- The VALUE PORTFOLIO is designed for investors seeking to
replicate the total return of the S&P/BARRA Value Index,
an index consisting of companies of the S&P 500 Index
with lower than average market price to book value
ratios. Such a "value-oriented" Portfolio may be
appropriate for more conservative stock market
15
<PAGE> 18
investors who are seeking higher dividend income and
somewhat below average stock market volatility.
- The GROWTH PORTFOLIO is designed for investors seeking
to replicate the total return of the S&P/BARRA Growth
Index, an index consisting of companies of the S&P 500
Index with higher than average market price to book
value ratios. Such a "growth-oriented" Portfolio may be
appropriate for investors who have little need for
current dividend income and who can tolerate somewhat
above average stock market volatility.
Taken together in appropriate proportions, the Value and
Growth Portfolios are expected to approximate the total
return achieved by the 500 Portfolio.
The share price of each Portfolio is expected to be
volatile, and investors should be able to tolerate sudden,
sometimes substantial fluctuations in the value of their
investment. No assurance can be given that the Portfolios
will achieve their stated objectives or that shareholders
will be protected from the risks inherent in equity
investing. Investors may wish to purchase shares on a
regular, periodic basis (dollar-cost averaging) rather
than investing in one lump sum in order to reduce the risk
of investing all their monies in common stocks at a
particularly unfavorable time.
The Trust is intended to be a long-term investment vehicle
and is not designed to provide investors with a means of
speculating on short-term market movements. Investors who
engage in excessive account activity generate additional
costs which are borne by all of the Trust's shareholders.
In order to minimize such costs the Trust has adopted the
following policies. The Trust reserves the right to reject
any purchase request (including exchange purchases from
other Vanguard portfolios) that is reasonably deemed to be
disruptive to efficient portfolio management, either
because of the timing of the investment or previous
excessive trading by the investor. Additionally, the Trust
has adopted exchange privilege limitations as described in
the section "Exchange Privilege Limitations." Finally, the
Trust reserves the right to suspend the offering of its
shares.
Investors should not consider the Trust a complete
investment program, but should maintain holdings of
securities with different risk characteristics --
including common stocks, bonds and money market
instruments. Investors may also wish to complement an
investment in the Trust with other types of common stock
investments.
- ------------------------------------------------------------------------------
IMPLEMENTATION Each Portfolio of the Trust utilizes a number of
OF POLICIES investment practices in an effort to match the investment
performance of its respective index.
THE 500 PORTFOLIO The 500 Portfolio attempts to duplicate the investment
INVESTS IN ALL 500 results of the S&P 500 Index by holding all 500 stocks in
S&P STOCKS approximately the same proportions as they are represented
in the Index. This indexing technique is known as
"complete replication."
The S&P 500 Index is composed of 500 common stocks, which
are chosen by Standard & Poor's Corporation on a
statistical basis to be included in the Index. The
inclusion of a stock in the S&P 500 Index in no way
implies that Standard & Poor's Corporation believes the
stock to be an attractive investment. The 500 securities,
16
<PAGE> 19
most of which trade on the New York Stock Exchange,
represented, as of December 31, 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 While the S&P 500 Index includes the preponderance of
PORTFOLIO INVESTS IN large market capitalization stocks, it excludes most of
MEDIUM- AND the medium- and small-size companies which comprise the
SMALL-SIZE remaining 30% of the capitalization of the U.S. stock
COMPANY STOCKS 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 Neither the S&P 500 Index nor the Wilshire 4500 Index
MARKET PORTFOLIO independently represents the U.S. stock market as a whole.
INVESTS IN A SAMPLE The Wilshire 5000 Index, which consists of all regularly
OF ALL U.S. STOCKS and publicly traded U.S. stocks, provides a complete proxy
for the U.S. stock market. More than 6,000 stocks,
including large-, medium-, and small-capitalization
companies are included in the Wilshire 5000 Index.
The following table illustrates the changing proportions
that the S&P 500 Index and the Wilshire 4500 Index have
represented in the Wilshire 5000 Index since 1986.
<TABLE>
<CAPTION>
WILSHIRE 5000 INDEX
------------------- 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
S&P 500................... 70% 71% 71% 73% 72% 75% 71% 67% 69% 70%
Wilshire 4500............. 30% 29% 29% 27% 28% 25% 29% 33% 31% 30%
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
</TABLE>
In an effort to replicate the investment performance of
the Wilshire 5000 Index, the Total Stock Market Portfolio
will invest in approximately 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 high transaction costs and illiquidity of
many of the smaller stocks make complete replication of
the Wilshire 4500 Index's holdings impractical.
17
<PAGE> 20
The Extended Market and Total Stock Market Portfolios are
not sponsored, endorsed, sold or promoted by Wilshire
Associates. Wilshire(R) and Wilshire 5000(R) are
registered service marks of Wilshire Associates.
THE SMALL The Small Capitalization Stock Portfolio attempts to
CAPITALIZATION STOCK duplicate the investment results of the Russell 2000 Index
PORTFOLIO INVESTS IN by investing in approximately 1,400 stocks in the Russell
SMALL-SIZE COMPANY 2000 Index. The Russell 2000 Index is composed of
STOCKS 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, The stocks of the Wilshire 4500 Index to be included in
TOTAL STOCK MARKET the Extended Market Portfolio will be selected utilizing a
AND SMALL statistical sampling technique known as "optimization."
CAPITALIZATION STOCK This process selects stocks for the Portfolio so that
PORTFOLIOS USE various industry weightings, market capitalizations and
SAMPLING TECHNIQUES fundamental characteristics (e.g. price-to-book,
price-to-earnings, debt-to-asset ratios, and dividend
yields) closely approximate those of the appropriate
Index. For instance, if 10% of the capitalization of the
Wilshire 4500 Index consists of utility companies with
relatively large stock capitalizations, then the Extended
Market Portfolio is constructed so that approximately 10%
of the Portfolio's assets are invested in the stocks of
utility companies with relatively large capitalizations.
The Total Stock Market and Small Capitalization Stock
Portfolios are constructed using the same sampling
technique.
This sampling technique is expected to be an effective
means of substantially duplicating the income and capital
returns of the Extended Market, Total Stock Market and
Small Capitalization Stock Portfolios' target benchmarks.
Over time, the correlation between the performance of the
Extended Market, Total Stock Market and Small
Capitalization Stock Portfolios and their respectives
indexes, the Wilshire 4500 Index, Wilshire 5000 Index and
Russell 2000 Index, is expected to be at least 0.95. A
correlation of 1.00 would indicate perfect correlation,
which would be achieved when the net asset value of a
Portfolio, including the value of its dividend and capital
gains distributions, increases or decreases in exact
proportion to changes in the respective target benchmark.
Due to the use of the sampling technique, neither the
Extended Market Portfolio, Total Stock Market Portfolio
nor the Small Capitalization Stock Portfolio is expected
to track its benchmark index with the same degree of
accuracy as evidenced by the high degree of correlation
between the 500 Portfolio and its benchmark. However, the
principal advantage of this technique is to provide an
efficient means to invest in the universe of stocks. In
particular, the three Portfolios are expected to provide
18
<PAGE> 21
broad diversification, and should operate at low costs due
both to their "passive" approach to portfolio management
and low portfolio turnover rate.
THE VALUE AND GROWTH In an effort to duplicate the investment results of their
PORTFOLIOS EMPHASIZE respective indexes, the Value and Growth Portfolios will
STOCKS WITH CERTAIN utilize "complete replication," the same indexing
INVESTMENT technique used for the 500 Portfolio. Specifically, the
CHARACTERISTICS 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 semiannually 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 semiannual 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.
"Standard & Poor's(R)," "S&P(R)," "S&P 500(R)," "Standard
& Poor's 500(R)," and "500" are trademarks of McGraw-Hill,
Inc. and have been licensed for use by Vanguard. The 500,
Value and Growth Portfolios are not sponsored, endorsed,
sold or promoted by Standard & Poor's Corporation ("S&P").
S&P makes no representations or warranty, implied or
expressed, to the purchasers of the Portfolios or any
member of the public regarding the advisability of
investing in index funds or the ability of the S&P 500,
S&P/BARRA Value and S&P/BARRA Growth Indexes to track
general stock market performance or to track the general
performance of value and growth stocks. S&P does not
guarantee the accuracy and/or the completeness of the S&P
500, S&P/BARRA Value and S&P/BARRA Growth Indexes or any
data included herein.
S&P MAKES NO WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS
TO BE OBTAINED BY LICENSEE, OWNERS OF THE TRUST, ANY
PERSON OR ENTITY FROM
19
<PAGE> 22
THE USE OF THE S&P 500 OR ANY DATA INCLUDED THEREIN IN
CONNECTION WITH THE USE LICENSED HEREUNDER, OR FOR ANY
OTHER USE. S&P MAKES NO EXPRESS OR IMPLIED WARRANTIES, AND
HEREBY EXPRESSLY DISCLAIMS ALL SUCH WARRANTIES OF
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE FOR
USE WITH RESPECT TO THE S&P 500 OR ANY DATA INCLUDED
THEREIN.
S&P's only relationship to the Portfolios is the licensing
of the S&P marks and the S&P 500, S&P/BARRA Value and
S&P/BARRA Growth Indexes, which are determined, composed
and calculated by S&P without regard to the 500, Value and
Growth Portfolios.
EACH PORTFOLIO MAY Although all six Portfolios normally seek to remain
INVEST IN SHORT-TERM substantially fully invested in common stocks, the
FIXED INCOME Portfolios of the Trust may invest temporarily in certain
SECURITIES short-term fixed income securities. Such securities may be
used to invest uncommitted cash balances or to maintain
liquidity to meet shareholder redemptions. These
securities include: obligations of the United States
Government and its agencies or instrumentalities;
commercial paper, bank certificates of deposit, and
bankers' acceptances; and repurchase agreements
collateralized by these securities.
DERIVATIVE INVESTING Derivatives are instruments whose values are linked to or
derived from an underlying security or index. The most
common and conventional types of derivative securities are
futures and options.
EACH PORTFOLIO MAY Each Portfolio of the Trust may utilize stock futures
USE FUTURES contracts, options, warrants, convertible securities and
CONTRACTS, OPTIONS swap agreements to a limited extent. Specifically, each
AND WARRANTS, Portfolio may enter into futures contracts and options
CONVERTIBLE provided that not more than 5% of its assets are required
SECURITIES AND as a margin deposit for futures contracts or options and
SWAP AGREEMENTS provided that not more than 20% of a Portfolio's assets
are invested in futures and options at any time.
Additionally, the Trust's investment in warrants will not
exceed more than 5% of its assets (2% with respect to
warrants not listed on the New York or American Stock
Exchanges). Futures contracts, options, warrants,
convertible securities and swap agreements may be used for
several reasons: to simulate full investment in the
underlying index while retaining a cash balance for fund
management purposes, to facilitate trading, to reduce
transaction costs or to seek higher investment returns
when a futures contract, option, warrant, convertible
security or swap agreement is priced more attractively
than the underlying equity security or index. While each
of these securities can be used as leveraged investments,
the Portfolios may not use them to leverage its net
assets.
FUTURES CONTRACTS, The risk of loss associated with futures contracts in some
OPTIONS, WARRANTS, strategies can be substantial due both to the low margin
CONVERTIBLE deposits required and the extremely high degree of
SECURITIES AND SWAP leverage involved in futures pricing. As a result, a
AGREEMENTS POSE relatively small price movement in a futures contract may
CERTAIN RISKS result in an immediate and substantial loss or gain.
However, the Portfolios will not use futures contracts,
options, warrants, convertible securities and swap
agreements for speculative purposes or to leverage their
net assets. Accordingly, the primary risks associated with
the use of futures contracts, options, warrants,
convertible securities and swap agreements by the
Portfolios are: (i) imperfect correlation between the
change in market value of the stocks held by a Portfolio
and the prices of futures contracts, options, warrants,
20
<PAGE> 23
convertible securities and swap agreements; and (ii)
possible lack of a liquid secondary market for a futures
contract and the resulting inability to close a futures
position prior to its maturity date. The risk of imperfect
correlation will be minimized by investing only in those
contracts whose behavior is expected to resemble that of a
Portfolio's underlying securities. The risk that a
Portfolio will be unable to close out a futures position
will be minimized by entering into such transactions on an
exchange with an active and liquid secondary market.
However options, warrants, convertible securities and swap
agreements purchased or sold over-the-counter may be less
liquid than exchange-traded securities. Illiquid
securities, in general, may not represent more than 15% of
the net assets of a Portfolio of the Trust.
Since there are no futures traded on the S&P/BARRA Value
or Growth Indexes, it will be necessary for the Value and
Growth Portfolios to utilize a composite of other futures
contracts to simulate the performance of each of these
Indexes. This process may magnify the "tracking error" of
each Portfolio's performance compared to that of the
Indexes, due to lower correlation of the selected futures
with the Indexes. The investment adviser will attempt to
reduce this tracking error by investing in futures
contracts whose behavior is expected to resemble that of
the underlying securities, although there can be no
assurance that these selected futures will perfectly
correlate with the performance of the Indexes.
Swap agreements are contracts between parties in which one
party agrees to make payments to the other party based on
the change in market value of a specified index or asset.
In return, the other party agrees to make payments to the
first party based on the return of a different specified
index or asset. Although swap agreements entail the risk
that a party will default on its payment obligations
thereunder, the Portfolios will minimize this risk by
entering into agreements that mark to market no less
frequently than quarterly. Swap agreements also bear the
risk that the Portfolios will not be able to meet its
obligation to the counterparty. This risk will be
mitigated by investing the Portfolios in the specific
asset for which it is obligated to pay a return.
EACH PORTFOLIO MAY Each Portfolio of the Trust may lend its investment
LEND ITS SECURITIES securities to qualified institutional investors for either
short-term or long-term purposes of realizing additional
income. Loans of securities by a Portfolio will be
collateralized by cash, letters of credit, or securities
issued or guaranteed by the U.S. Government or its
agencies. The collateral will equal at least 100% of the
current market value of the loaned securities, and such
loans may not exceed 33 1/3% of the value of the
Portfolio's net assets.
PORTFOLIO TURNOVER Although each Portfolio generally seeks to invest for the
IS EXPECTED TO long term, the six Portfolios of the Trust retain the
BE LOW right to sell securities irrespective of how long they
have been held. However, because of the "passive"
investment management approach of the Trust, the portfolio
turnover rate for each Portfolio is expected to be under
50%, a generally lower turnover rate than for most other
investment companies. A portfolio turnover rate of 50%
would occur if one half of a Portfolio's securities were
sold within one year. Ordinarily, securities will be sold
from a Portfolio only to reflect
21
<PAGE> 24
certain administrative changes in an index (including
mergers or changes in the composition of an index) or to
accommodate cash flows into and out of each Portfolio
while maintaining the similarity of a Portfolio to its
benchmark index.
- --------------------------------------------------------------------------------
INVESTMENT The Trust has adopted certain limitations on its
LIMITATIONS investment practices. Specifically, each Portfolio of the
Trust will not:
THE TRUST HAS
ADOPTED CERTAIN (a) with respect to 75% of its assets, purchase securities
FUNDAMENTAL of any issuer (except obligations of the U.S.
LIMITATIONS Government and its instrumentalities) if, as a result,
more than 5% of the value of the Portfolio's assets
would be invested in the securities of such issuer;
(b) with respect to 75% of its assets, purchase more than
10% of the voting securities of any issuer;
(c) invest more than 25% of its assets in any one
industry; and
(d) borrow money, except that a Portfolio may borrow from
banks (or through reverse repurchase agreements), for
temporary or emergency (not leveraging) purposes,
including the meeting of redemption requests which
might otherwise require the untimely disposition of
securities, in an amount not exceeding 15% of the
value of the Portfolio's net assets (including the
amount borrowed and the value of any outstanding
reverse repurchase agreements) at the time the
borrowing is made. Whenever borrowings exceed 5% of
the value of a Portfolio's net assets, the Portfolio
will not make any additional investments.
These investment limitations are considered at the time
investment securities are purchased. The limitations
described here and in the Statement of Additional
Information are fundamental and may be changed only with
the approval of a majority of a Portfolio's shareholders.
- --------------------------------------------------------------------------------
MANAGEMENT The Trust is a member of The Vanguard Group of Investment
OF THE TRUST Companies, a family of more than 30 investment companies
VANGUARD ADMINISTERS with more than 90 distinct portfolios and total assets in
AND DISTRIBUTES THE excess of $190 billion. Through their jointly-owned
TRUST subsidiary, The Vanguard Group, Inc. ("Vanguard"), the
Trust and the other funds in the Group obtain at cost
virtually all of their corporate management,
administrative and distribution services. Vanguard also
provides investment advisory services on an at-cost basis
to certain Vanguard funds. As a result of Vanguard's
unique corporate structure, the Vanguard funds have costs
substantially lower than those of most competing mutual
funds. In 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 Trust manage its day-to-day operations
and are responsible to the Trust's Board of Trustees. The
Trustees set broad policies for the Trust and choose its
Officers. A list of the Trustees and Officers of the Trust
and a statement of their present positions and principal
occupations during the past five years can be found in the
Statement of Additional Information.
22
<PAGE> 25
Vanguard employs a supporting staff of management and
administrative personnel to provide the requisite services
to the funds and also furnishes the funds with necessary
office space, furnishings and equipment. Each fund pays
its share of Vanguard's total expenses, which are
allocated among the funds under methods approved by the
Board of Trustees (Directors) of each fund. In addition,
each fund bears its own direct expenses, such as legal,
auditing and custodian fees.
Vanguard provides distribution and marketing services to
the funds. The funds are available on a no-load basis
(i.e., there are no sales commissions or 12b-1 fees).
However, each fund bears its share of the Group's
distribution costs.
- --------------------------------------------------------------------------------
INVESTMENT The six Portfolios of the Trust receive all investment
ADVISER advisory services on an at-cost basis from Vanguard's Core
Management Group. The Core Management Group also provides
VANGUARD MANAGES investment advisory services to several other Vanguard
THE TRUST ON AN Funds, including Vanguard International Equity Index Fund,
AT-COST BASIS Vanguard Institutional Index Fund, Vanguard Balanced Index
Fund, Vanguard Variable Insurance Fund--Equity Index
Portfolio, the Aggressive Growth Portfolio of Vanguard
Horizon Fund, Vanguard Tax-Managed Fund, a portion of
Vanguard/Windsor II, and a portion of Vanguard/Morgan
Growth Fund, as well as several indexed separate accounts.
Total assets under management by the Core Management Group
were $33 billion as of December 31, 1995. The Trust is not
actively managed, but is instead administered by the Core
Management Group using computerized, quantitative
techniques. The Core Management Group is supervised by the
Officers of the Trust.
In placing portfolio transactions, the Core Management
Group uses its best judgment to choose the broker most
capable of providing the brokerage services necessary to
obtain the best available price and most favorable
execution at the lowest commission rate. The full range
and quality of brokerage services available are considered
in making these determinations. In those instances where
it is reasonably determined that more than one broker can
offer the services needed to obtain the best available
price and most favorable execution, consideration may be
given to those brokers which supply statistical
information and provide other services in addition to
execution services to the Trust.
- --------------------------------------------------------------------------------
PERFORMANCE The tables in this section provide investment results for
RECORD the 500, Extended Market and Small Capitalization Stock
Portfolios of the Trust for several periods throughout the
Trust's lifetime. The results shown represent "total
return" investment performance, which assumes the
reinvestment of all capital gains and income dividends for
the indicated periods. Also included is comparative
information with respect to the unmanaged S&P 500
Composite Stock Price Index, the Wilshire 4500 Index and
the Russell 2000 Index. The results for the Portfolios are
net of all expenses while the results of the stock indexes
are hypothetical and make no allowances for the costs of
investing. The tables do not make any allowance for
federal, state or local income taxes, which shareholders
must pay on a current basis. The Total Stock Market,
Value, and Growth Portfolios were introduced in 1992, and
so long-term investment results are not yet available.
23
<PAGE> 26
The results shown should not be considered a
representation of the total return from an investment made
in the Trust today. The periods shown were generally
favorable ones for stock market investing. This
information is provided to help investors better
understand the Trust and may not provide a basis for
comparison with other investments or mutual funds which
use a different method to calculate performance.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL
RETURN FOR
VANGUARD INDEX
TRUST -- 500 PORTFOLIO
--------------------------
FISCAL PERIODS 500 S&P 500
ENDED 12/31/95 PORTFOLIO* INDEX
------------------ ------------ ---------
<S> <C> <C>
1 Year +37.4% +37.6%
5 Years +16.4 +16.6
10 Years +14.5 +14.9
Lifetime** +13.7 +14.2
</TABLE>
* Inclusive of $10 annual account maintenance fee.
** August 31, 1976 to December 31, 1995.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL
RETURN FOR
VANGUARD INDEX TRUST --
EXTENDED MARKET PORTFOLIO
---------------------------
EXTENDED WILSHIRE
FISCAL PERIODS MARKET 4500
ENDED 12/31/95 PORTFOLIO* INDEX
------------------ ------------ ----------
<S> <C> <C>
1 Year +33.1% +33.5%
5 Years +19.0 +19.0
Lifetime** +14.8 +15.1
</TABLE>
* Includes 0.5% portfolio transaction fee and $10
annual account maintenance fee.
** December 21, 1987 to December 31, 1995.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN FOR
VANGUARD INDEX TRUST --
SMALL CAPITALIZATION STOCK
PORTFOLIO+
--------------------------------
SMALL RUSSELL
FISCAL PERIODS CAPITALIZATION 2000
ENDED 12/31/95 STOCK PORTFOLIO* INDEX
------------------------- ------------------ ---------
<S> <C> <C>
1 Year +27.4% +28.4%
3 Years +14.5 +14.5
5 Years +20.8 +21.0
Since September 11, 1989 +11.2 N/A
</TABLE>
* Includes 1% portfolio transaction fee and $10
annual account maintenance fee.
+ Formerly Vanguard Small Capitalization Stock
Fund, Inc.
- --------------------------------------------------------------------------------
24
<PAGE> 27
DIVIDENDS, The Trust distributes substantially all of its net
CAPITAL GAINS investment income in the form of dividends. The 500, Total
AND TAXES Stock Market, Value and Growth Portfolios pay quarterly
dividends, while the Extended Market and Small
FOUR PORTFOLIOS PAY Capitalization Stock Portfolios pay annual dividends. For
QUARTERLY DIVIDENDS; all six Portfolios, net capital gains, if any, are
TWO PAY DIVIDENDS distributed annually.
ONCE A YEAR
A Portfolio's dividend and capital gains distributions may
be reinvested in additional shares or received in cash.
See "Choosing a Distribution Option" for a description of
these distribution methods.
Pursuant to the Internal Revenue Code, certain dividend
and capital gains distributions declared by each Portfolio
during December, if received by shareholders by January
31, are deemed to have been paid by the Trust and received
by shareholders on December 31 of the prior year.
EACH PORTFOLIO The Trust automatically deducts a $10 annual account
CHARGES A $10 ANNUAL maintenance fee from the dividend income paid to each
ACCOUNT MAINTENANCE Portfolio account. For the 500, Total Stock Market, Value
FEE and Growth Portfolios the $10 account maintenance fee is
deducted at a rate of $2.50 per quarter from the dividend;
while for the Extended Market and Small Capitalization
Stock Portfolios the $10 fee is deducted once a year from
the dividend. If the dividend to be paid to an account is
less than the fee to be deducted, sufficient shares will
be redeemed from an account to make up the difference. The
Board of Trustees reserves the right to change the annual
account maintenance fee to reflect the actual cost of
maintaining shareholder accounts. This fee will be waived
for shareholders with an account balance of $10,000 or
more.
Each Portfolio of the Trust intends to continue to qualify
for taxation as a "regulated investment company" under the
Internal Revenue Code so that each Portfolio will not be
subject to federal income tax to the extent its income is
distributed to shareholders. Dividends paid by each
Portfolio from net investment income and net short-term
capital gains, whether received in cash or reinvested in
additional shares, will be taxable to shareholders as
ordinary income. For corporate investors, dividends from
net investment income will generally qualify in part for
the intercorporate dividends-received deduction. However,
the portion of the dividends so qualified depends on the
aggregate taxable qualifying dividend income received by a
Portfolio from domestic (U.S.) sources.
Distributions paid by a Portfolio from long-term capital
gains, whether received in cash or reinvested in
additional shares, are taxable as long-term capital gains,
regardless of the length of time you have owned shares in
the Portfolio. Capital gains distributions are made when a
Portfolio realizes net capital gains on sales of portfolio
securities during the year. A Portfolio does not seek to
realize any particular amount of capital gains during a
year; rather, realized gains are a by-product of portfolio
management activities. Consequently, capital gains
distributions may be expected to vary considerably from
year to year; there will be no capital gains distributions
in years when a Portfolio realizes net capital losses.
Note that if you elect to receive capital gains
distributions in cash, instead of reinvesting them in
additional shares, you are in effect reducing the capital
at work
25
<PAGE> 28
for you in a Portfolio. Also, keep in mind that if you
purchase shares in a Portfolio shortly before the record
date for a dividend or capital gains distribution, a
portion of your investment will be returned to you as a
taxable distribution, regardless of whether you are
reinvesting your distributions or receiving them in cash.
The Trust will notify you annually as to the tax status of
dividend and capital gains distributions paid by each
Portfolio.
A CAPITAL GAIN OR A sale of shares of a Portfolio is a taxable event, and
LOSS MAY BE REALIZED may result in a capital gain or loss. A capital gain or
UPON EXCHANGE loss may be realized from an ordinary redemption of shares
OR REDEMPTION or an exchange of shares between two mutual funds (or two
portfolios of the same fund).
Dividend distributions, capital gain distributions, and
capital gains or losses from redemptions and exchanges may
be subject to state and local taxes.
Each Portfolio of the Trust is required to withhold 31% of
taxable dividends, capital gains distributions, and
redemptions paid to shareholders who have not complied
with IRS taxpayer identification regulations. You may
avoid this withholding requirement by certifying on your
Account Registration Form your proper Social Security or
Employer Identification number and by certifying that you
are not subject to backup withholding.
The Trust is organized as a Pennsylvania business trust
and, in the opinion of counsel, is not liable for any
income or franchise tax in the Commonwealth of
Pennsylvania. The Trust will be subject to Pennsylvania
county personal property tax in the county which is the
site of its principal office. Shareholders who are
Pennsylvania residents will not be subject to county
personal property taxes, with the exception of non-exempt
holders who are residents of the City and School District
of Pittsburgh.
The tax discussion set forth above is included for general
information only. Prospective investors should consult
their own tax advisers concerning the tax consequences of
an investment in the Trust.
- --------------------------------------------------------------------------------
THE SHARE The share price or "net asset value" per share of each
PRICE OF Portfolio is determined by dividing the total market value
EACH PORTFOLIO 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 as of
the regular close of the New York Stock Exchange
(generally 4:00 p.m. Eastern time), each day the Exchange
is open for trading.
Portfolio securities that are listed on a securities
exchange are valued at the last quoted sales price on the
day the valuation is made. Price information on listed
securities is taken from the exchange where the security
is primarily traded. Securities which are listed on an
exchange and which are not traded on the valuation date
are valued at the mean of the bid and ask prices. For the
500, Value and Growth Portfolios, unlisted securities for
which market quotations are readily available are valued
at the latest quoted bid price. For the Extended Market,
Total Stock Market and Small Capitalization Stock
Portfolios, unlisted securities for which market
quotations
26
<PAGE> 29
are readily available are valued at the mean of the bid
and ask prices. Temporary cash investments are valued at
amortized cost which approximates market value. Securities
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. Securities for which no
current quotations are readily available are valued at
fair market value as determined in good faith by the
Trustees.
Each Portfolio's share price can be found daily in the
mutual fund listings of most major newspapers under the
heading of Vanguard.
- --------------------------------------------------------------------------------
GENERAL The Trust is a Pennsylvania business trust. The
INFORMATION Declaration of Trust permits the Trustees to issue an
unlimited number of shares of beneficial interest with no
par value. The Board of Trustees has the power to
designate one or more classes or series of shares of
common stock and to classify or reclassify any unissued
shares with respect to such series. Currently, the Trust
is offering shares of six series.
The shares of each series are fully paid and
non-assessable; have no preference as to conversion,
exchange, dividends, retirement or other features; and
have no pre-emptive rights. Such shares have
non-cumulative voting rights, meaning that the holders of
more than 50% of the shares voting for the election of
Trustees can elect 100% of the Trustees if they so choose.
Annual meetings of shareholders will not be held except as
required by the Investment Company Act of 1940 and other
applicable law. An annual meeting will be held to vote on
the removal of a Trustee or Trustees of the Trust if
requested in writing by the holders of not less than 10%
of the outstanding shares of the Trust.
All securities and cash for the 500, Extended Market and
Total Stock Market Portfolios are held by State Street
Bank and Trust Company, Boston, MA. CoreStates Bank, N.A.,
holds daily cash balances that are used by these three
Portfolios to invest in repurchase agreements or
securities acquired in these transactions. All securities
and cash for the Small Capitalization Stock and the Value
and Growth Portfolios are held by CoreStates Bank,
Philadelphia, PA. The Vanguard Group, Inc., Valley Forge,
PA, serves as the Trust's Transfer and Dividend Disbursing
Agent. Price Waterhouse LLP serves as independent
accountants for the Trust and will audit its financial
statements annually. The Trust is not involved in any
litigation.
- --------------------------------------------------------------------------------
27
<PAGE> 30
SHAREHOLDER GUIDE
OPENING AN You may open a regular (non-retirement) account, either by
ACCOUNT AND mail or wire. Simply complete and return an Account
PURCHASING Registration Form or appropriate Adoption Agreement (e.g.,
SHARES the IRA Adoption Agreement) and any required legal
documentation, indicating the amount you wish to invest.
Your purchase must be equal to or greater than the $3,000
minimum initial investment requirement for each Portfolio
($1,000 for retirement accounts or Uniform Gifts/Transfers
to Minors Act accounts). You must open a new Individual
Retirement Account by mail (IRAs may not be opened by
wire) using a Vanguard IRA Adoption Agreement. Your
purchase must be equal to or greater than the $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
forms or have any questions about the Trust, please call
our Investor Information Department (1-800-662-7447).
NOTE: For other types of account registrations (e.g.,
corporations, associations, other organizations, trusts or
powers of attorney), please call us to determine which
additional forms you may need.
IMPORTANT NOTE ON Shares of each Portfolio generally are purchased at the
EXPENSES next-determined net asset value per share after your
investment has been received. Purchases of the Small
Capitalization Stock Portfolio are subject to a portfolio
transaction fee of 1%, and purchases of the Extended
Market Portfolio are subject to a 0.5% portfolio
transaction fee. In addition, all six Portfolios charge 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 "Trust Expenses."
The Trust is offered on a no-load basis (i.e., there are
no sales commissions or 12b-1 fees).
PURCHASE RESTRICTIONS 1) Because of the risks associated with common stock
investments, the Trust is intended to be a long-term
investment vehicle and is not designed to provide
investors with a means of speculating on short-term
market movements. Consequently, the Trust reserves the
right to reject any specific purchase (and exchange
purchase) request. The Trust also reserves the right to
suspend the offering of shares for a period of time.
2) Vanguard will not accept third-party checks to purchase
shares of the Trust. Please be sure your purchase check
is payable to the Vanguard Group.
ADDITIONAL Subsequent investments to regular accounts may be made by
INVESTMENTS mail ($100 minimum), wire ($1,000 minimum), written
exchange from another Vanguard Fund account ($100
minimum), or Vanguard Fund Express. However, the Trust
reserves the right to reject any specific purchase
request, whether it be made by check, wire, exchange from
another Vanguard Fund account, or Vanguard Fund Express.
Subsequent investments to Individual Retirement Accounts
may be made by mail ($100 minimum) or exchange from
another Vanguard Fund account. In some instances,
contributions may be made by wire or Vanguard Fund
Express. Please call us for more information on these
options.
- --------------------------------------------------------------------------------
28
<PAGE> 31
<TABLE>
<S> <C> <C>
ADDITIONAL INVESTMENTS
NEW ACCOUNT TO EXISTING ACCOUNTS
PURCHASING BY MAIL Please include the amount of Additional investments should
your initial investment and include the Invest-by-Mail
Complete and sign the indicate the Portfolio(s) you remittance form attached to your
enclosed Account have selected on the Fund confirmation statements.
Registration Form registration form, make your Please make your check payable
check payable to The Vanguard to The Vanguard Group--
Group--(Portfolio Number), see (Portfolio Number), see
below for the appropriate below for the appropriate
portfolio number, and mail to: portfolio number, write your
account number on your check
VANGUARD FINANCIAL CENTER and, using the return envelope
P.O. BOX 2600 provided, mail to the address
VALLEY FORGE, PA 19482 indicated on the Invest-by-Mail
Form.
For express or VANGUARD FINANCIAL CENTER
registered mail, 455 DEVON PARK DRIVE All written requests should be
send to: WAYNE, PA 19087 mailed to one of the addresses
indicated for new accounts. Do
not send registered or express
mail to the post office box
</TABLE> address.
VANGUARD INDEX TRUST PORTFOLIO NUMBERS:
500 Portfolio -- 40
Extended Market Portfolio -- 98
Total Stock Market Portfolio -- 85
Small Capitalization Stock Portfolio -- 48
Value Portfolio -- 06
Growth Portfolio -- 09
------------------------------------------------------
PURCHASING BY WIRE CORESTATES BANK, N.A.
ABA 031000011
Money should be CORESTATES NO. 0101 9897
wired to: ATTN VANGUARD
VANGUARD INDEX TRUST
BEFORE WIRING NAME OF PORTFOLIO
ACCOUNT NUMBER
Please contact our ACCOUNT REGISTRATION
Client Services
Department You should notify our Client Services Department of
(1-800-662-2739) your intended wire purchase, including the federal
wire number to be used, by 12:00 noon (Eastern time).
To assure proper receipt, please be sure your bank
includes the Portfolio name, the account number
Vanguard has assigned to you and the eight-digit
CoreStates number. If you are opening a new account,
please complete the Account Registration Form and
mail it to the "New Account" address after
completing your wire arrangement. NOTE: Federal
Funds wire purchase orders will be accepted only
when the Trust and Custodian Banks are open for
business.
-----------------------------------------------------
29
<PAGE> 32
PURCHASING BY Telephone exchanges are not accepted for Vanguard Index
EXCHANGE (from a Trust. You may, however, open an account by exchange by
Vanguard account) providing the appropriate information on the Account
Registration Form. The new account will have the same
registration as the existing account. The Trust reserves
the right to refuse any exchange purchase request.
- --------------------------------------------------------------------------------
PURCHASING BY The Fund Express Automatic Investment option lets you move
FUND EXPRESS money from your bank account to your Vanguard account on
Automatic Investment the schedule (monthly, bimonthly [every other month],
quarterly or yearly) you select. To establish this Fund
Express option, please provide the appropriate information
on the Account Registration Form. We will send you a
confirmation of your Fund Express enrollment; please wait
three weeks before using the service.
- --------------------------------------------------------------------------------
CHOOSING A You must select one of three distribution options:
DISTRIBUTION
OPTION 1. AUTOMATIC REINVESTMENT OPTION -- Both dividends and
capital gains distributions will be reinvested in
additional shares. This option will be selected for you
automatically unless you specify one of the other
options.
2. CASH DIVIDEND OPTION -- Your dividends will be paid in
cash and your capital gains will be reinvested in
additional shares.
3. ALL CASH OPTION -- Both dividend and capital gains
distributions will be paid in cash.
You may change your option by calling our Client Services
Department (1-800-662-2739).
In addition, an option to invest your cash dividends
and/or capital gains distributions in another Vanguard
Fund account is available. Please call our Client Services
Department (1-800-662-2739) for information. You may also
elect Vanguard Dividend Express which allows you to
transfer your cash dividends and/or capital gains
distributions automatically to your bank account. Please
see "Other Vanguard Services" for more information.
- --------------------------------------------------------------------------------
TAX CAUTION Under Federal tax laws, the Trust is required to
distribute net capital gains and dividend income to Trust
INVESTORS SHOULD shareholders. These distributions are made to all
ASK ABOUT THE shareholders who own Trust shares as of the distribution's
TIMING OF CAPITAL record date, regardless of how long the shares have been
GAINS AND DIVIDEND owned. Purchasing shares just prior to the record date
DISTRIBUTIONS could have a significant impact on your tax liability for
BEFORE INVESTING the year. For example, if you purchase shares immediately
prior to the record date of a sizable capital gain or
income dividend distribution, you will be assessed taxes
on the amount of the capital gain and/or dividend
distribution later paid even though you owned the Trust
shares for just a short period of time. (Taxes are due on
the distributions even if the dividend or gain is
reinvested in additional Trust shares.) While the total
value of your investment will be the same after the
distribution -- the amount of the distribution will offset
the drop in the net asset value of the shares -- you
should be aware of the tax implications the timing of your
purchase may have.
30
<PAGE> 33
Prospective investors should, therefore, inquire about
potential distributions before investing. The Trust's
annual capital gains distribution normally occurs in
December, while income dividends are generally paid
quarterly for the 500, Total Stock Market, Value and
Growth Portfolios in March, June, September & December;
annually for the Extended Market and the Small
Capitalization Stock Portfolios in December. For
additional information on distributions and taxes, see the
section titled "Dividends, Capital Gains and Taxes."
- --------------------------------------------------------------------------------
IMPORTANT The easiest way to establish optional Vanguard services on
INFORMATION your account is to select the options you desire when you
ESTABLISHING complete your Account Registration Form. If you wish to
OPTIONAL SERVICES 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 For our mutual protection, we may require a signature
GUARANTEES guarantee on certain written transaction requests. A
signature guarantee verifies the authenticity of your
signature and may be obtained from banks, brokers and any
other guarantor that Vanguard deems acceptable. A
signature guarantee cannot be provided by a notary public.
CERTIFICATES Share certificates will be issued upon request (except for
the Total Stock Market, Value and Growth Portfolios). If a
certificate is lost, you may incur an expense to replace
it.
BROKER-DEALER If you purchase shares in Vanguard Funds through a
PURCHASES registered broker-dealer or investment adviser, the
broker-dealer or adviser may charge a service fee.
CANCELLING TRADES The Trust will not cancel any trade (e.g., purchase,
exchange or redemption) believed to be authentic, received
in writing or by telephone, once the trade request has
been received.
ELECTRONIC PROSPECTUS If you would prefer to receive a prospectus for the Fund
DELIVERY or any of the Vanguard Funds in an electronic format,
please call 1-800-231-7870 for additional information. If
you elect to do so, you may also receive a paper copy of
the prospectus, by calling 1-800-662-7447.
- --------------------------------------------------------------------------------
WHEN YOUR Your trade date is the date on which your account is
ACCOUNT WILL BE credited. If your purchase is made by check, Federal Funds
CREDITED wire or exchange, and is received by the close of regular
trading the New York Stock Exchange (generally 4:00 p.m.
Eastern time), your trade date is the day of receipt. If
your purchase is received after the close of the Exchange,
your trade date is the next business day. Shares of the
500, Extended Market, Total Stock Market, Small
Capitalization Stock, Value and Growth Portfolios are
purchased at the net asset value determined on your trade
date. Shares of the Extended Market and Small
Capitalization Stock Portfolios are also subject to a 1%
portfolio transaction fee. (See "Trust Expenses.")
In order to prevent lengthy processing delays caused by
the clearing of foreign checks, Vanguard will only accept
a foreign check which has been drawn in U.S. dollars and
31
<PAGE> 34
has been issued by a foreign bank with a U.S.
correspondent bank. The name of the U.S. correspondent
bank must be printed on the face of the foreign check.
- --------------------------------------------------------------------------------
SELLING YOUR You may withdraw any portion of the funds in your account
SHARES by redeeming shares at any time. You generally may
initiate a request by writing or by telephoning. Your
redemption proceeds are normally mailed within two
business days after the receipt of the request in Good
Order.
- --------------------------------------------------------------------------------
SELLING BY MAIL Requests should be mailed to VANGUARD FINANCIAL CENTER,
VANGUARD INDEX TRUST, P.O. BOX 1120, VALLEY FORGE, PA
19482. (For express or registered mail, send your request
to Vanguard Financial Center, Vanguard Index Trust, 455
Devon Park Drive, Wayne, PA 19087.)
The redemption price of shares will be the Portfolio's net
asset value next determined after Vanguard has received
all required documents in Good Order.
- --------------------------------------------------------------------------------
DEFINITION OF GOOD ORDER means that the request includes the following:
GOOD ORDER
1. The account number and Portfolio name.
2. The amount of the transaction (specified in dollars or
shares).
3. Signatures of all owners EXACTLY as they are registered
on the account.
4. Any required signature guarantees.
5. Other supporting legal documentation that might be
required, in the case of estates, corporations, trusts
and certain other accounts.
6. Any certificates that you hold for the account.
IF YOU HAVE QUESTIONS ABOUT THIS DEFINITION AS IT PERTAINS
TO YOUR REQUEST, PLEASE CALL OUR CLIENT SERVICES
DEPARTMENT (1-800-662-2739).
- --------------------------------------------------------------------------------
SELLING BY To sell shares by telephone, you or your pre-authorized
TELEPHONE representative may call our Client Services Department at
1-800-662-2739. The proceeds will be sent to you by mail.
Please see "Important Information About Telephone
Transactions."
- --------------------------------------------------------------------------------
SELLING BY FUND With the Fund Express Automatic Withdrawal option, money
EXPRESS will be automatically moved from your Vanguard Fund
account to your bank account according to the schedule you
Automatic have selected. You may elect Fund Express on the Account
Withdrawal Registration Form or call our Investor Information
Department (1-800-662-7447) for a Fund Express
application.
- --------------------------------------------------------------------------------
SELLING BY You may sell shares by making an exchange to another
EXCHANGE Vanguard Fund account. Exchanges to or from Vanguard Index
Trust may be made only by mail. Send your exchange request
to VANGUARD FINANCIAL CENTER, VANGUARD INDEX TRUST, P.O.
BOX 1120, VALLEY FORGE, PA 19482.
- --------------------------------------------------------------------------------
IMPORTANT REDEMPTION Shares purchased by check or Fund Express may be redeemed
INFORMATION 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.
- --------------------------------------------------------------------------------
32
<PAGE> 35
DELIVERY OF Redemption requests received by telephone prior to the
REDEMPTION close of the New York Stock Exchange (generally 4:00 p.m.
PROCEEDS 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 Trust reserves the right to
revise or terminate the telephone redemption privilege at
any time.
The Trust may suspend the redemption right or postpone
payment at times when the New York Stock Exchange is
closed or under any emergency circumstances as determined
by the United States Securities and Exchange Commission.
If the Board of Trustees determines that it would be
detrimental to the best interests of the Trust's remaining
shareholders to make payment in cash, the Trust may pay
redemption proceeds in whole or in part by a distribution
in kind of readily marketable securities.
- --------------------------------------------------------------------------------
VANGUARD'S AVERAGE If you make a redemption from a qualifying account,
COST STATEMENT 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.
- --------------------------------------------------------------------------------
LOW BALANCE Due to the relatively high cost of maintaining smaller
FEE AND accounts, each Portfolio will automatically deduct a $10
MINIMUM ACCOUNT annual fee from non-retirement accounts with balances
BALANCE REQUIREMENT falling below $2,500 ($1,000 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, the Trust reserves the right to liquidate any
non-retirement account that is below $3,000 ($250 with
respect to the 500 Portfolio). It is the Trust's current
policy that, at any time your total investment in the
Extended Market, Total Stock Market, Small Capitalization
Stock, Value or Growth Portfolios falls below $3,000 ($250
with respect to the 500 Portfolio), you may be notified
that your account is below the Portfolio's minimum account
balance requirement. You would then be allowed 60 days to
make an additional investment before the account is
liquidated. Proceeds would be promptly paid to the
registered shareholder.
Vanguard will not liquidate your account if it has fallen
below $3,000 ($250 with respect to the 500 Portfolio)
solely as a result of declining markets (i.e., a decline
in a Portfolio's net asset value).
- --------------------------------------------------------------------------------
33
<PAGE> 36
EXCHANGING YOUR Should your investment goals change, you may exchange your
SHARES shares of Vanguard Index Trust for those of other
available Vanguard Funds. Exchanges to or from Vanguard
Index Trust may be made only by mail. TELEPHONE EXCHANGES
BETWEEN NON-RETIREMENT ACCOUNTS ARE NOT ACCEPTED FOR THE
TRUST.
- --------------------------------------------------------------------------------
EXCHANGING BY MAIL Please be sure to include on your exchange request the
name and account number of your current Portfolio, the
name of the Trust you wish to exchange into, the amount
you wish to exchange, and the signatures of all registered
account holders. Send your request to VANGUARD FINANCIAL
CENTER, VANGUARD INDEX TRUST, P.O. BOX 1120, VALLEY FORGE,
PA 19482. (For express or registered mail, send your
request to Vanguard Financial Center, Vanguard Index
Trust, 455 Devon Park Drive, Wayne, PA 19087.)
- --------------------------------------------------------------------------------
IMPORTANT EXCHANGE Before you make an exchange, you should consider the
INFORMATION following:
- Please read the Fund's prospectus before making an
exchange. For a copy and for answers to any questions
you may have, call our Investor Information Department
(1-800-662-7447).
- An exchange is treated as a redemption and a purchase.
Therefore, you could realize a taxable gain or loss on
the transaction.
- Exchanges are accepted only if the registrations and the
Taxpayer Identification numbers of the two accounts are
identical.
- The shares to be exchanged must be on deposit and not
held in certificate form.
- New accounts are not currently accepted in the Vanguard/
Windsor Fund or Vanguard/ PRIMECAP Fund.
- The redemption price of shares redeemed by exchange is
the net asset value next determined after Vanguard has
received all required documentation in Good Order.
- When opening a new account by exchange, you must meet
the minimum investment requirement of the new Fund.
Every effort will be made to maintain the exchange
privilege. However, the Trust reserves the right to revise
or terminate its provisions, limit the amount of or reject
any exchange, as deemed necessary, at any time.
- --------------------------------------------------------------------------------
EXCHANGE The Trust's exchange privilege is not intended to afford
PRIVILEGE shareholders a way to speculate on short-term movements in
LIMITATIONS the market. Accordingly, in order to prevent excessive use
of the exchange privilege that may potentially disrupt the
management of the Trust and increase transaction costs,
the Trust has established a policy of limiting excessive
exchange activity.
Exchange activity generally will not be deemed excessive
if limited to TWO SUBSTANTIVE EXCHANGE REDEMPTIONS (AT
LEAST 30 DAYS APART) from a Portfolio of the Trust during
any twelve-month period. Notwithstanding these
limitations, the Trust reserves the right to reject any
purchase request (including exchange
34
<PAGE> 37
purchases from other Vanguard portfolios) that is
reasonably deemed to be disruptive to efficient portfolio
management.
- --------------------------------------------------------------------------------
IMPORTANT The ability to initiate redemptions (except wire
INFORMATION ABOUT redemptions) by telephone is automatically established on
TELEPHONE your account unless you request in writing that telephone
TRANSACTIONS transactions on your account not be permitted.
To protect your account from losses resulting from
unauthorized or fraudulent telephone instructions,
Vanguard adheres to the following security procedures:
1. SECURITY CHECK. To request a transaction by telephone,
the caller must know (i) the name of the Portfolio;
(ii) the 10-digit account number; (iii) the exact name
and address used in the registration; and (iv) the
Social Security or Employer Identification number
listed on the account.
2. PAYMENT POLICY. The proceeds of any telephone
redemption by mail will be made payable to the
registered shareowner and mailed to the address of
record, only.
Neither the Trust nor Vanguard will be responsible for the
authenticity of transaction instructions received by
telephone, provided that reasonable security procedures
have been followed. Vanguard believes that the security
procedures described above are reasonable, and that if
such procedures are followed, you will bear the risk of
any losses resulting from unauthorized or fraudulent
telephone transactions on your account. 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 You may transfer the registration of any of your Trust
REGISTRATION shares to another person by completing a transfer form and
sending it to: VANGUARD FINANCIAL CENTER, P.O. BOX 1110,
VALLEY FORGE, PA 19482 ATTENTION: TRANSFER DEPARTMENT. The
request must be in Good Order. To obtain a transfer form
and full instructions, please call our Client Services
Department (1-800-662-2739).
- --------------------------------------------------------------------------------
STATEMENTS AND Vanguard will send you a confirmation statement each time
REPORTS you initiate a transaction in your account except for
checkwriting redemptions from Vanguard money market
accounts. You will also receive a comprehensive account
statement at the end of each calendar quarter. The
fourth-quarter statement will be a year-end statement,
listing all transaction activity for the entire calendar
year.
Financial reports on the Trust will be mailed to you
semiannually, according to the Fund's fiscal year-end.
Vanguard's Average Cost Statement provides you with the
average cost of shares redeemed from your account, using
the average cost single category method. This service is
available for most taxable accounts opened since January
1, 1986. In general, investors who redeemed shares from a
qualifying Vanguard account may expect to receive their
Average Cost Statement along with their Portfolio Summary
Statement. Please call our Client Services Department
(1-800-662-2739) for information.
- --------------------------------------------------------------------------------
35
<PAGE> 38
OTHER VANGUARD For more information about any of these services, please
SERVICES call our Investor Information Department at
1-800-662-7447.
VANGUARD DIRECT With Vanguard's Direct Deposit Service, most U.S.
DEPOSIT SERVICE 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 Vanguard's Automatic Exchange Service allows you to move
EXCHANGE SERVICE 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 Vanguard's Fund Express allows you to transfer money
EXPRESS between your Trust account and your account at a bank,
savings and loan association, or a credit union that is a
member of the Automated Clearing House (ACH) system. You
may elect this service on the Account Registration Form or
call our Investor Information Department (1-800-662-7447)
for a Fund Express application.
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 Vanguard's Dividend Express allows you to transfer your
EXPRESS dividends and/or capital gains distributions automatically
from your Trust account, one business day after the
Trust's payable date, to your account at a bank, savings
and loan association, or a credit union that is a member
of the Automated Clearing House (ACH) system. You may
elect this service on the Account Registration Form or
call the Investor Information Department (1-800-662-7447)
for a Vanguard Dividend Express application.
VANGUARD Vanguard's Tele-Account is a convenient, automated service
TELE-ACCOUNT that provides share price, price change and yield
quotations on Vanguard Funds through any TouchTone(TM)
telephone. This service also lets you obtain information
about your account balance, your last transaction, and
your most recent dividend or capital gains payment. To
contact Vanguard's Tele-Account service, dial
1-800-ON-BOARD (1-800-662-6273). A brochure offering
detailed operating instructions is available from our
Investor Information Department (1-800-662-7447).
- --------------------------------------------------------------------------------
36
<PAGE> 39
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<PAGE> 40
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<PAGE> 41
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE> 42
- --------------------------------------------------------------------------------
[VANGUARD INDEX TRUST LOGO]
---------------------------
THE VANGUARD GROUP [Figure #3]
OF INVESTMENT
COMPANIES [VANGUARD INDEX TRUST LOGO]
Vanguard Financial Center
P.O. Box 2900 P R O S P E C T U S
Valley Forge, PA 19482
INVESTOR INFORMATION APRIL 30, 1996
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
P040 [THE VANGUARD GROUP LOGO]
- --------------------------------------------------------------------------------
<PAGE> 43
================================================================================
[VANGUARD INDEX TRUST LOGO]
A Member of The Vanguard Group
================================================================================
PROSPECTUS -- APRIL 30, 1996
- --------------------------------------------------------------------------------
FUND INFORMATION: PARTICIPANT SERVICES -- 1-800-523-1188
- --------------------------------------------------------------------------------
INVESTMENT Vanguard Index Trust (the "Trust") is an open-end
OBJECTIVE AND diversified investment company designed as an "index"
POLICIES fund. THE TRUST CONSISTS OF SIX PORTFOLIOS: THE 500,
EXTENDED MARKET, TOTAL STOCK MARKET, SMALL CAPITALIZATION
STOCK, VALUE AND GROWTH PORTFOLIOS. Each of these
Portfolios invests in common stocks in order to match the
investment performance of a distinct market index.
- --------------------------------------------------------------------------------
IMPORTANT NOTE This Prospectus is intended exclusively for participants
in employer-sponsored retirement or savings plans, such as
tax-qualified pension and profit-sharing plans and 401(k)
thrift plans, as well as 403(b) custodial accounts for
non-profit educational and charitable organizations.
Another version of this Prospectus, containing information
on how to open a personal investment account with the
Trust, is available for individual investors. To obtain a
copy of that version of the Prospectus, please call
1-800-662-7447.
- --------------------------------------------------------------------------------
OPENING AN A Portfolio of the Trust is an investment option under a
ACCOUNT retirement or savings program sponsored by your employer.
The administrator of your retirement plan or your employee
benefits office can provide you with detailed information
on how to participate in your plan and how to elect a
Portfolio of the Trust as an investment option.
If you have any questions about the Trust, please contact
Participant Services at 1-800-523-1188. If you have any
questions about your plan account, contact your plan
administrator or the organization that provides
recordkeeping services for your plan.
- --------------------------------------------------------------------------------
ABOUT THIS This Prospectus is designed to set forth concisely the
PROSPECTUS information you should know about the Trust before you
invest. It should be retained for future reference. A
"Statement of Additional Information" containing
additional information about the Trust has been filed with
the Securities and Exchange Commission. This Statement is
dated April 30, 1996 and has been incorporated by
reference into this Prospectus. A copy may be obtained
without charge by writing to the Trust or by calling
Participant Services at 1-800-523-1188.
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
Page Page Page
Highlights ....................... 2 Investment Risks ................. 13 Performance Record ............... 23
Trust Expenses ................... 4 Who Should Invest ................ 14 Dividends, Capital Gains
Financial Highlights ............. 6 Implementation of Policies ....... 16 and Taxes ..................... 24
Yield and Total Return ........... 9 Investment Limitations ........... 21 The Share Price of Each Portfolio . 24
Investment Objectives ............ 10 Management of the Trust .......... 22 General Information ............... 25
Investment Policies .............. 12 Investment Adviser ............... 22 Service Guide ..................... 26
</TABLE>
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
- --------------------------------------------------------------------------------
<PAGE> 44
HIGHLIGHTS
OBJECTIVE AND The Trust is an open-end diversified investment company
POLICIES designed as an "index" fund. Shares of the Trust are
offered on a no-load basis, although the Trust incurs
certain distribution expenses. The Trust consists of six
separate Portfolios, each of which invests in common
stocks in order to match the performance of a selected
market index. There is no assurance, however, that the
Trust will achieve its stated objective. PAGE 10
- --------------------------------------------------------------------------------
SIX SEPARATE Investors may choose to invest in any of six Portfolios of
PORTFOLIOS the Trust:
500 PORTFOLIO -- seeks to match the investment performance
of the Standard & Poor's 500 Composite Stock Price Index,
an index emphasizing large-capitalization stocks.
EXTENDED MARKET PORTFOLIO -- seeks to match the investment
performance of the Wilshire 4500 Index, an index
consisting of medium- and small-capitalization stocks.
TOTAL STOCK MARKET PORTFOLIO -- seeks to match the
investment performance of the Wilshire 5000 Index, an
index consisting of all regularly and publicly traded U.S.
stocks.
SMALL CAPITALIZATION STOCK PORTFOLIO -- seeks to match the
investment performance of the Russell 2000 Small Stock
Index, an index consisting of 2,000 small-capitalization
common stocks.
VALUE PORTFOLIO -- seeks to match the investment
performance of the S&P/BARRA Value Index, an index
consisting of stocks selected from the Standard & Poor's
500 Index with lower than average ratios of market price
to book value.
GROWTH PORTFOLIO -- seeks to match the investment
performance of the S&P/BARRA Growth Index, an index
consisting of stocks selected from the Standard & Poor's
500 Index with higher than average ratios of market price
to book value. PAGE 10
- --------------------------------------------------------------------------------
RISK As mutual funds investing in common stocks, all six
CHARACTERISTICS Portfolios of the Trust are subject to market risk, which
is the possibility that common stock prices will decline,
sometimes substantially over short or extended periods.
Due to differences in the securities they hold, the
six Portfolios may exhibit varying levels of
volatility. PAGE 13
- --------------------------------------------------------------------------------
THE VANGUARD The Trust is a member of The Vanguard Group of Investment
GROUP 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 22
- --------------------------------------------------------------------------------
INVESTMENT The Trust receives investment advisory services on an
ADVISER at-cost basis from Vanguard's Core Management Group. As a
result, the Trust receives its investment advisory
services at a substantially lower cost than would be
possible if the Trust paid an investment advisory fee to
an external investment adviser. PAGE 22
- --------------------------------------------------------------------------------
2
<PAGE> 45
FEES AND EXPENSES A portfolio transaction fee of 1% is deducted from
purchases of the Small Capitalization Stock Portfolio; and
a 0.5% portfolio transaction fee is deducted from
purchases of the Extended Market Portfolio. Portfolio
transaction fees are paid to the Portfolios to offset
transaction costs of buying securities of small- and
medium-sized companies. PAGE 4
- --------------------------------------------------------------------------------
DIVIDEND POLICY The Trust distributes substantially all of its net
investment income in the form of dividends. The 500, Total
Stock Market, Value and Growth Portfolios distribute
dividends quarterly, whereas the Extended Market and Small
Capitalization Stock Portfolios distribute dividends
annually. In all six Portfolios, net capital gains, if
any, are distributed annually. PAGE 24
- --------------------------------------------------------------------------------
SPECIAL (1) Each Portfolio may invest a portion of its assets in
CONSIDERATIONS futures contracts, options, convertible securities &
swap agreements. PAGE 20
(2) Each Portfolio may invest in short-term fixed income
securities. PAGE 19
(3) Each Portfolio may lend its securities. PAGE 21
(4) Each Portfolio may borrow money. PAGE 21
- --------------------------------------------------------------------------------
3
<PAGE> 46
TRUST EXPENSES The following table illustrates all expenses and fees that
you would incur as a shareholder of the Trust. The
expenses and fees are for the fiscal year ended December
31, 1995.
<TABLE>
<CAPTION>
TOTAL SMALL
SHAREHOLDER EXTENDED STOCK CAPITALIZATION
TRANSACTION 500 MARKET MARKET VALUE GROWTH STOCK
EXPENSES PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO+
<S> <C> <C> <C> <C> <C> <C>
----------------------------------------------------------------------------------------------
Sales Load
Imposed on
Purchases... None None** None None None None*
Sales Load
Imposed
on
Reinvested
Dividends... None None None None None None
Redemption
Fees........ None None None None None None
Exchange
Fees........ None None None None None None
</TABLE>
* Shareholders are charged a 1% portfolio transaction
fee, payable directly to the Portfolio, on each
purchase of shares.
** Shareholders are charged a 0.5% portfolio transaction
fee, payable directly to the Portfolio, on each
purchase of shares.
+ Formerly Vanguard Small Capitalization Stock Fund, Inc.
<TABLE>
<CAPTION>
TOTAL SMALL
ANNUAL FUND EXTENDED STOCK CAPITALIZATION
OPERATING 500 MARKET MARKET VALUE GROWTH STOCK
EXPENSES PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO+
<S> <C> <C> <C> <C> <C> <C>
---------------------------------------------------------------------------------------------
Management &
Administrative
Expenses++... 0.17% 0.21% 0.21% 0.15% 0.14% 0.21%
Investment
Advisory
Fees........ 0.00 0.00 0.00 0.01 0.01 0.01
12b-1 Fees.... None None None None None None
Other Expenses
Distribution
Costs....... 0.02 0.02 0.02 0.02 0.02 0.02
Miscellaneous
Expenses... 0.01 0.02 0.02 0.02 0.03 0.01
----- ----- ----- ----- ----- -----
Total Other
Expenses.... 0.03 0.04 0.04 0.04 0.05 0.03
----- ----- ----- ----- ----- -----
Total
Operating
Expenses... 0.20% 0.25% 0.25% 0.20% 0.20% 0.25%
===== ===== ===== ===== ===== ======
</TABLE>
+ Formerly Vanguard Small Capitalization Stock Fund, Inc.
++ In addition to these costs, each Portfolio assesses an
annual account maintenance fee of $10. This fee will be
waived for shareholders with an account balance of
$10,000 or more.
The purpose of this table is to assist you in
understanding the various costs and expenses that you
would bear directly or indirectly as an investor in the
Trust.
TWO PORTFOLIOS The Small Capitalization Stock Portfolio assesses a
ASSESS TRANSACTION portfolio transaction fee on purchases of Portfolio shares
FEES equal to 1% of the dollar amount invested; and the
Extended Market Portfolio assesses a portfolio transaction
fee equal to 0.5% of the dollar amount invested. The
portfolio transaction fees are paid to the respective
Portfolio, not to Vanguard. They are not sales charges.
These fees apply to initial investments in the Extended
Market, and Small Capitalization Stock Portfolios and all
subsequent purchases (including purchases made by exchange
from another Vanguard Fund or from the other portfolios of
the
4
<PAGE> 47
Trust), but not to reinvested dividend or capital gains
distributions. Portfolio transaction fees are deducted
automatically from the amount invested; they cannot be
paid separately.
The purpose of these transaction fees is to allocate
transaction costs associated with new purchases to
investors making those purchases, thus insulating existing
shareholders from those transaction costs. These costs
include: (1) brokerage costs; (2) market impact
costs -- i.e., the increase in market prices which may
result when the Portfolio purchases thinly traded stocks;
and, most importantly, (3) the effect of the "bid-ask"
spread in the over-the-counter market. (Securities in the
over-the-counter market are bought at the "ask" or
purchase price, but are valued in the Portfolio at the
mean of the "bid," or sale, and "ask" prices.)
The 1% and 0.5% fees represent Vanguard's estimate of the
brokerage and other transaction costs incurred by the
Small Capitalization Stock and Extended Market Portfolios
in acquiring stocks of mid-sized and small capitalization
companies. Without the fees, the two Portfolios, which
incur these costs directly, would experience reduced
investment performance for all shareholders in each
Portfolio. With the fees, the transaction costs of
acquiring additional stocks are borne not by all existing
shareholders, but by those investors making additional
purchases. Because the purchaser, not the Portfolios,
bears these costs, the Portfolios are expected to track
their respective benchmark indexes more closely.
500 PORTFOLIO The Portfolio reserves the right to deduct a portfolio
transaction fee, ranging from 0.08% to 0.20%, from
purchases of shares of the Portfolio, if such purchase or
cumulative purchases are of a size that is reasonably
deemed to be disruptive to efficient portfolio management.
The fee will be paid to the Portfolio to offset
transaction costs of buying securities. The fee is not
paid to Vanguard and is not a sales charge. It is not
expected that the 500 Portfolio would deduct a portfolio
transaction fee on amounts of less than $10 million.
The following example illustrates the expenses that you
would incur on a $1,000 investment over various time
periods, assuming (1) a 5% annual rate of return and (2)
redemption at the end of each period. The example includes
the $10 account maintenance fee for each Portfolio; the 1%
portfolio transaction fee for the Small Capitalization
Stock Portfolio; and the 0.5% portfolio transaction fee
for the Extended Market Portfolio. As noted in the table
on the previous page, the Trust charges no redemption fees
of any kind.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
500 Portfolio......................... $12 $36 $61 $124
Extended Market Portfolio............. $15 $40 $66 $133
Total Stock Market Portfolio.......... $13 $38 $64 $130
Growth Portfolio...................... $12 $36 $61 $124
Value Portfolio....................... $12 $36 $61 $124
Small Capitalization Stock Portfolio.. $23 $48 $74 $140
</TABLE>
5
<PAGE> 48
Included in these estimates are account maintenance fees
of $10, $30, $50 and $100 for the respective periods
shown. Accordingly, for investments larger than $1,000,
your total expenses will be substantially lower in
percentage terms than this illustration implies.
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF
PAST OR FUTURE EXPENSES OR PERFORMANCE. ACTUAL EXPENSES
MAY BE HIGHER OR LOWER THAN THOSE SHOWN.
- --------------------------------------------------------------------------------
The following financial highlights for a share outstanding
FINANCIAL throughout each period, insofar as they relate to each of
HIGHLIGHTS the five years ended December 31, 1995, have been audited
by Price Waterhouse LLP, independent accountants, whose
reports thereon were unqualified. This financial
information should be read in conjunction with the Trust's
financial statements and notes thereto, which, together
with the remaining portions of the Fund's 1995 Annual
Report to Shareholders, are incorporated by reference in
the Statement of Additional Information and in this
Prospectus, and which appear, along with the reports of
Price Waterhouse LLP, in the Trust's 1995 Annual Report to
Shareholders and inserts thereto. For a more complete
discussion of the Trust's performance, please see the
Trust's 1995 Annual Report to Shareholders, which may be
obtained free of charge by writing to the Trust or calling
Participant Services at 1-800-523-1188.
<TABLE>
<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 YEAR.............. $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 YEAR..... $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 Year
(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.
6
<PAGE> 49
<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 annual account maintenance fee of $10
or applicable portfolio transaction fees.
+ Commencement of operations.
<TABLE>
<CAPTION>
-----------------------------------------------------------
TOTAL STOCK MARKET PORTFOLIO
-----------------------------------------------------------
YEAR ENDED DECEMBER 31, MARCH 16+, 1992,
1995 1994 1993 TO DECEMBER 31, 1992
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD........................ $11.37 $11.69 $10.84 $10.00
------ ------ ------ ------
INVESTMENT OPERATIONS
Net Investment Income..................................... .29 .27 .26 .23
Net Realized and Unrealized Gain (Loss) on Investments.... 3.75 (.29) .88 .84
------ ------ ------ ------
TOTAL FROM INVESTMENT OPERATIONS........................ 4.04 (.02) 1.14 1.07
- ------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income...................... (.28) (.27) (.26) (.23)
Distributions from Realized Capital Gains................. (.09) (.03) (.03) --
------ ------ ------ ------
TOTAL DISTRIBUTIONS..................................... (.37) (.30) (.29) (.23)
- ------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD.............................. $15.04 $11.37 $11.69 $10.84
========================================================================================================================
TOTAL RETURN**.............................................. 35.79% (0.17)% 10.62% 10.41%
========================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions)........................ $1,571 $786 $512 $275
Ratio of Expenses to Average Net Assets..................... .25% .20% .20% .21%*
Ratio of Net Investment Income to Average Net Assets........ 2.14% 2.35% 2.31% 2.42%*
Portfolio Turnover Rate..................................... 3% 2% 1% 3%
</TABLE>
* Annualized.
** Total return figures do not reflect the annual account maintenance fee of $10
or applicable portfolio transaction fees.
+ Commencement of operations.
7
<PAGE> 50
<TABLE>
<CAPTION>
-----------------------------------------------------------
GROWTH PORTFOLIO
-----------------------------------------------------------
YEAR ENDED DECEMBER 31, NOVEMBER 2+, 1992,
1995 1994 1993 TO DECEMBER 31, 1992
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD........................ $10.28 $10.20 $10.26 $10.00
------ ------ ------ ------
INVESTMENT OPERATIONS
Net Investment Income..................................... .21 .21 .21 .06
Net Realized and Unrealized Gain (Loss) on Investments.... 3.68 .08 (.06) .26
------ ------ ------ ------
TOTAL FROM INVESTMENT OPERATIONS........................ 3.89 .29 .15 .32
- -------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income...................... (.20) (.21) (.21) (.06)
Distributions from Realized Capital Gains................. -- -- -- --
------ ------ ------ ------
TOTAL DISTRIBUTIONS..................................... (.20) (.21) (.21) (.06)
- ------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD.............................. $13.97 $10.28 $10.20 $10.26
========================================================================================================================
TOTAL RETURN**.............................................. 38.06% 2.89% 1.53% 3.19%
========================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions)........................ $271 $86 $51 $21
Ratio of Expenses to Average Net Assets..................... .20% .20% .20% 0%*
Ratio of Net Investment Income to Average Net Assets........ 1.71% 2.08% 2.10% 2.85%*
Portfolio Turnover Rate..................................... 24% 28% 36% 2%
</TABLE>
* Annualized.
** Total return figures do not reflect the annual account maintenance fee of
$10.
+ Commencement of operations.
<TABLE>
<CAPTION>
-----------------------------------------------------------
VALUE PORTFOLIO
-----------------------------------------------------------
YEAR ENDED DECEMBER 31, NOVEMBER 2+, 1992,
1995 1994 1993 TO DECEMBER 31, 1992
<S> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD....................... $11.12 $11.74 $10.30 $10.00
------ ------ ------ ------
INVESTMENT OPERATIONS
Net Investment Income.................................... .41 .38 .38 .07
Net Realized and Unrealized Gain (Loss) on Investments... 3.66 (.46) 1.50 .30
------ ------ ------ ------
TOTAL FROM INVESTMENT OPERATIONS....................... 4.07 (.08) 1.88 .37
- ------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income..................... (.40) (.38) (.38) (.07)
Distributions from Realized Capital Gains................ -- (.16) (.06) --
------ ------ ------ ------
TOTAL DISTRIBUTIONS.................................... (.40) (.54) (.44) (.07)
- ------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD............................. $14.79 $11.12 $11.74 $10.30
========================================================================================================================
TOTAL RETURN**............................................. 36.94% (0.73)% 18.35% 3.70%
========================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions)....................... $496 $297 $190 $24
Ratio of Expenses to Average Net Assets.................... .20% .20% .20% 0%*
Ratio of Net Investment Income to Average Net Assets....... 3.06% 3.37% 3.26% 3.46%*
Portfolio Turnover Rate.................................... 27% 32% 30% 4%
</TABLE>
* Annualized.
** Total return figures do not reflect the annual account maintenance fee of
$10.
+ Commencement of operations.
8
<PAGE> 51
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------
SMALL CAPITALIZATION STOCK PORTFOLIO*
---------------------------------------------------------------------------------------------------
FEB. 1 TO OCT. 1, 1993 YEAR ENDED SEPTEMBER 30,
DEC. 31, TO JAN. 31, --------------------------------------------------------------------
1995 1994 1994 1993 1992 1991 1990(1) 1989+ 1988 1987 1986
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <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 $11.96 $15.73 $13.24 $11.68
------ ------ ------ ------ ------ ----- ------ ------ ------ ------ ------
INVESTMENT OPERATIONS
Net Investment Income
(Loss)............... .24 .20 .05 .20 .19 .20 .17 .10 .03 (.04) (.01)
Net Realized and
Unrealized Gain (Loss)
on Investments......... 4.06 (.86) .96 3.73 .88 3.6 (3.46) 2.13 (2.59) 4.42 1.57
------ ------ ------ ------ ------ ----- ------ ------ ------ ------ ------
TOTAL FROM INVESTMENT
OPERATIONS........... 4.30 (.66) 1.01 3.93 1.07 3.80 (3.29) 2.23 (2.56) 4.38 1.56
- ---------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net
Investment Income...... (.23) (.22) (.18) (.18) (.18) (.18) (.04) (.14) -- -- --
Distributions from
Realized Capital Gains. (.45) (.37) (.82) (.15) (.29) (.14) -- (2.17) (1.21) (1.89 --
----- ------ ------ ------ ------ ----- ------ ------ ------ ------ ------
TOTAL DISTRIBUTIONS.... (.68) (.59) (1.00) (.33) (.47) (.32) (.04) (2.31 (1.21) (1.89) --
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF
PERIOD.................. $18.61 $14.99 $16.24 $16.23 $12.63 $12.03 $8.55 $11.88 $11.96 $15.73 $13.24
=================================================================================================================================
TOTAL RETURN++............ 28.74% (4.00) 6.65% 31.60% 9.34% 45.91% (27.73)% 18.83% (14.30)% 38.02% 13.33%
=================================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of
Period (Millions)....... $971 $605 $533 $432 $202 $111 $40 $20 $27 $35 $31
Ratio of Expenses to
Average Net Assets..... .25% .17%** .18%** .18% .18% .21% .31% 1.00% .95% .92% .92%
Ratio of Net Investment
Income (Loss) to
Average Net Assets..... 1.58% 1.50%** 1.16%** 1.47% 1.65% 2.11% 1.91% .65% .24% (.25)% (.06)%
Portfolio Turnover Rate. 28% 25% 5% 26% 26% 33% 40% 160% 68% 92% 92%
</TABLE>
(1) Adjusted to reflect a 3-for-1 stock split as of February 3, 1990.
* Results prior to January 31, 1994, are for the former Vanguard Small
Capitalization Stock Fund.
** Annualized.
+ Prior to September 11, 1989, Schroder Capital Management International
provided investment advisory services to the Fund. Effective September 11,
1989, The Vanguard Group, Inc. began providing investment advisory
services to the Fund on an at-cost basis.
the Fund on an at-cost basis.
++ Total return figures do not reflect the annual account maintenance fees of
$10 or applicable portfolio transaction fees.
- --------------------------------------------------------------------------------
YIELD AND TOTAL From time to time a Portfolio of the Trust may advertise
RETURN 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.
9
<PAGE> 52
Additionally, the Portfolios may compare their performance
to that of their comparative indexes. The target
benchmarks include the Standard & Poor's 500 Composite
Stock Price Index, the Wilshire 4500 Index, the Wilshire
5000 Index, the Russell 2000 Small Stock Index, the
S&P/BARRA Value Index and the S&P/BARRA Growth Index.
- --------------------------------------------------------------------------------
INVESTMENT The Trust is a no-load, open-end diversified investment
OBJECTIVES company designed as an "index" fund. The Trust consists of
six Portfolios, each of which seeks to provide investment
EACH PORTFOLIO results that correspond to a particular stock market
SEEKS TO MATCH THE index. The correlation between the performance of each of
INVESTMENT the Trust's Portfolios and the respective index that each
PERFORMANCE OF ITS Portfolio attempts to match is expected to be at least
RESPECTIVE INDEX 0.95. The 500, Extended Market, Total Stock Market and
Small Capitalization Stock Portfolios attempt to replicate
the investment performance of broad market indexes, while
the Value and Growth Portfolios attempt to replicate
indexes which possess certain "value" and "growth"
investment characteristics.
The pie chart below illustrates how, as measured by
capitalization, the Standard & Poor's 500 Index, the
Wilshire 4500 Index and the Russell 2000 Index cover the
entire U.S. equity market, as represented by the Wilshire
5000 Index:
[FIGURE #1]
- The 500 PORTFOLIO seeks to replicate the aggregate price
and yield performance of the Standard & Poor's 500
Composite Stock Price Index (the "S&P 500 Index"), an
index which emphasizes large-capitalization companies.
- The EXTENDED MARKET PORTFOLIO seeks to replicate the
aggregate price and yield performance of the Wilshire
4500 Index, an index which consists of more than 5,000
medium- and small-capitalization companies that are not
included in the S&P 500 Index.
10
<PAGE> 53
- The TOTAL STOCK MARKET PORTFOLIO seeks to replicate the
aggregate price and yield performance of the Wilshire
5000 Index, an index which consists of all U.S. stocks
that trade on a regular basis on either the New York or
American Stock Exchange or the NASDAQ over-the-counter
market. These stocks include the large-capitalization
companies of the S&P 500 Index, with the exception of
Royal Dutch and Unilever, N.V., which trade on the New
York Stock Exchange as ADR's, as well as the medium- and
small-capitalization companies of the Wilshire 4500
Index.
- The SMALL CAPITALIZATION STOCK PORTFOLIO seeks to
replicate the aggregate price and yield performance of
the Russell 2000 Small Stock Index (the "Russell 2000"),
a broadly diversified small-capitalization stock index
consisting of approximately 2,000 common stocks.
The pie chart below illustrates how, as measured by market
capitalization, the S&P 500 Index is divided into the S&P/
BARRA Value and S&P/BARRA Growth Indexes.
[FIGURE #2]
- The VALUE PORTFOLIO seeks to replicate the aggregate
price and yield performance of the S&P/BARRA Value
Index, an index which includes stocks in the S&P 500
with lower than average ratios of market price to book
value. These types of stocks are often referred to as
"value" stocks.
- The GROWTH PORTFOLIO seeks to replicate the aggregate
price and yield performance of the S&P/BARRA Growth
Index, an index which includes stocks in the S&P 500
with higher than average ratios of market price to book
value. These types of stocks are often referred to as
"growth" stocks.
There is no assurance that the Portfolios will achieve
their stated objectives.
These investment objectives are fundamental and so cannot
be changed without the approval of a majority of a
Portfolio's shareholders.
- --------------------------------------------------------------------------------
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<PAGE> 54
INVESTMENT The six Portfolios of the Trust are not managed according
POLICIES to traditional methods of "active" investment management,
which involve the buying and selling of securities based
ALL SIX PORTFOLIOS upon economic, financial and market analysis and
USE A "PASSIVE" investment judgment. Instead, the Portfolios, utilizing a
APPROACH TO INVEST "passive" or "indexing" investment approach, attempt to
IN COMMON STOCKS duplicate the investment performance of their respective
indexes through statistical procedures.
THE 500 PORTFOLIO invests in all 500 stocks in the S&P 500
Index in approximately the same proportions as they are
represented in the Index.
THE EXTENDED MARKET PORTFOLIO invests in a statistically
selected sample of the more than 5,000 stocks included in
the Wilshire 4500 Index. Typically, the Portfolio invests
in 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 nearly 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.
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<PAGE> 55
ALL SIX PORTFOLIOS Each Portfolio attempts to remain fully invested in common
ATTEMPT TO REMAIN stocks. Under normal circumstances, each Portfolio will
FULLY INVESTED invest at least 95% of its assets in the common stocks of
its respective index and futures contracts and options.
Each Portfolio may invest in certain short-term fixed
income securities as cash reserves, although cash or cash
equivalents are normally expected to represent less than
1% of each Portfolio's assets. Each Portfolio may also
invest up to 20% of its assets in stock futures contracts
and options in order to invest uncommitted cash balances,
to maintain liquidity to meet shareholder redemptions, or
to minimize trading costs. The Portfolios will not invest
in cash reserves, futures contracts or options as part of
a temporary defensive strategy, such as lowering a
Portfolio's investment in common stocks to protect against
potential stock market declines. The Portfolios intend to
remain fully invested, to the extent practicable, in a
pool of securities which will duplicate the investment
characteristics of their respective indexes. See
"Implementation of Policies" for a description of these
and other investment practices of the Trust.
The Trust is responsible for voting the shares of all
securities it holds.
These investment policies are not fundamental and so may
be changed by the Board of Trustees without shareholder
approval. However, shareholders would be notified prior to
a material change in either.
- ------------------------------------------------------------------------------
INVESTMENT RISKS As mutual funds investing primarily in common stocks, the
Portfolios of the Trust are subject to market
EACH PORTFOLIO IS risk -- i.e., the possibility that common stock prices
SUBJECT TO MARKET will decline over short or even extended periods. The U.S.
RISK stock market tends to be cyclical, with periods when stock
prices generally rise and periods when prices generally
decline.
To illustrate the volatility of stock prices, the
following table sets forth the extremes for stock market
returns as well as the average return for the period from
1926 to 1995, as measured by the S&P 500 Composite Stock
Price Index:
<TABLE>
<CAPTION>
U.S. MARKET RETURNS (1926-1995)
OVER VARIOUS TIME HORIZONS
--------------------------------------------
1 YEAR 5 YEARS 10 YEARS 20 YEARS
------ ------- -------- --------
<S> <C> <C> <C> <C>
Best +53.9% +23.9% +20.1% +16.9%
Worst -43.3 -12.5 - 0.9 + 3.1
Average +12.5 +10.3 +10.7 +10.7
</TABLE>
As shown, common stocks have provided annual total returns
(capital appreciation plus dividend income) averaging
+10.7% for all 10-year periods from 1926 to 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.
THE EXTENDED MARKET, Historically, medium- and small-capitalization stocks have
TOTAL STOCK MARKET been more volatile in price than the larger-capitalization
AND SMALL stocks included in the S&P 500 Index. Among the reasons
CAPITALIZATION for the greater price volatility of these securities are
STOCK PORTFOLIOS the less certain growth prospects of smaller firms, the
MAY EXHIBIT lower degree of liquidity in the markets for such stocks,
GREATER VOLATILITY and the greater sensitivity of medium- and small-size
companies to changing economic conditions. Besides
exhibiting greater volatility, medium- and
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<PAGE> 56
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.
THE VALUE AND GROWTH Stocks that emphasize particular investment
PORTFOLIOS MAY characteristics, such as "value" and "growth," may
FLUCTUATE fluctuate divergently from the broad market as represented
INDEPENDENTLY by the S&P 500 Index, and may also demonstrate greater
volatility over short or extended periods relative to the
broad market.
The S&P/BARRA Value Index maintains a lower price-to-book
ratio and historically has had a higher yield than the S&P
500 Index, while the S&P/BARRA Growth Index maintains a
higher price-to-book and historically has had a lower
yield than the S&P 500 Index. Because of these investment
characteristics, the S&P/BARRA Value Index has exhibited
somewhat less short-term volatility than the S&P 500
Index, while the S&P/BARRA Growth Index has displayed
somewhat greater short-term volatility than the S&P 500
Index from 1975 through 1994. However, as stated above,
both Indexes may be more volatile than the S&P 500 Index
over short or extended periods. The Indexes have been in
existence since May, 1992. Historical performance data was
generated by BARRA by constructing the S&P/BARRA Value and
Growth Indexes from actual S&P 500 Index holdings.
- --------------------------------------------------------------------------------
WHO SHOULD INVEST All six Portfolios of the Trust are designed for long-term
investors seeking the advantages of a low-cost, "passive"
LONG-TERM INVESTORS approach for investing in a diversified portfolio of
SEEKING A "PASSIVE" common stocks. Unlike other equity mutual funds, which
APPROACH FOR generally seek to "beat" stock market averages with
INVESTING IN unpredictable results, all six Portfolios seek to "match"
COMMON STOCKS their respective indexes and thus are expected to provide
a highly predictable return relative to their benchmarks.
Four Portfolios of the Trust provide a vehicle for
investing in a broad market index:
- THE 500 PORTFOLIO is designed for investors seeking to
replicate the total return of the S&P 500 Index, an
index emphasizing large-capitalization common stocks.
- THE EXTENDED MARKET PORTFOLIO is designed for investors
seeking to replicate the total return of the Wilshire
4500 Index, an index consisting of medium- and
small-capitalization companies.
- THE TOTAL STOCK MARKET PORTFOLIO is designed for
investors seeking to replicate the total return of the
Wilshire 5000 Index, an index consisting of all U.S.
stocks
14
<PAGE> 57
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
return achieved by the 500 Portfolio.
The share price of each Portfolio is expected to be
volatile, and investors should be able to tolerate sudden,
sometimes substantial fluctuations in the value of their
investment. No assurance can be given that the Portfolios
will achieve their stated objectives or that shareholders
will be protected from the risks inherent in equity
investing. Investors may wish to purchase shares on a
regular, periodic basis (dollar-cost averaging) rather
than investing in one lump sum in order to reduce the risk
of investing all their monies in common stocks at a
particularly unfavorable time.
The Trust is intended to be a long-term investment vehicle
and is not designed to provide investors with a means of
speculating on short-term market movements. Investors who
engage in excessive account activity generate additional
costs which are borne by all of the Trust's shareholders.
In order to minimize such costs the Trust has adopted the
following policies. The Trust reserves the right to reject
any purchase request (including exchange purchases from
other Vanguard portfolios) that is reasonably deemed to be
disruptive to efficient portfolio management, either
because of the timing of the investment or previous
excessive trading by the investor. Finally, the Trust
reserves the right to suspend the offering of its shares.
Investors should not consider the Trust a complete
investment program, but should maintain holdings of
securities with different risk
characteristics -- including common
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<PAGE> 58
stocks, bonds and money market instruments. Investors may
also wish to complement an investment in the Trust with
other types of common stock investments.
- --------------------------------------------------------------------------------
IMPLEMENTATION Each Portfolio of the Trust utilizes a number of
OF POLICIES investment practices in an effort to match the investment
performance of its respective index.
THE 500 PORTFOLIO The 500 Portfolio attempts to duplicate the investment
INVESTS IN ALL 500 results of the S&P 500 Index by holding all 500 stocks in
S&P STOCKS 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
(2.0%), 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 While the S&P 500 Index includes the preponderance of
PORTFOLIO INVESTS IN large market capitalization stocks, it excludes most of
MEDIUM- AND SMALL- the medium- and small-size companies which comprise the
SIZE COMPANY STOCKS 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 Neither the S&P 500 Index nor the Wilshire 4500 Index
MARKET PORTFOLIO independently represents the U.S. stock market as a whole.
INVESTS IN A SAMPLE The Wilshire 5000 Index, which consists of all regularly
OF ALL U.S. STOCKS 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.
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<PAGE> 59
The following table illustrates the changing proportions
that the S&P 500 Index and the Wilshire 4500 Index have
represented in the Wilshire 5000 Index since 1986.
<TABLE>
<CAPTION>
WILSHIRE 5000 INDEX 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995
------------------ ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
S&P 500............. 70% 71% 71% 73% 72% 75% 71% 67% 69% 70%
Wilshire 4500....... 30% 29% 29% 27% 28% 25% 29% 33% 31% 30%
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
</TABLE>
In an effort to replicate the investment performance of
the Wilshire 5000 Index, the Total Stock Market Portfolio
will invest in approximately 1,000 of the largest stocks
in the index and an additional representative sample of
the remaining stocks. As in the case for the Extended
Market Portfolio, the high transaction costs and
illiquidity of many of the smaller stocks make complete
replication of the Wilshire 4500 Index's holdings
impractical.
The Extended Market and Total Stock Market Portfolios are
not sponsored, endorsed, sold or promoted by Wilshire
Associates. Wilshire(R) and Wilshire 5000(R) are
registered service marks of Wilshire Associates.
THE SMALL The Small Capitalization Stock Portfolio attempts to
CAPITALIZATION STOCK duplicate the investment results of the Russell 2000 Index
PORTFOLIO INVESTS IN by investing in approximately 1,400 of the 2,000 stocks in
SMALL-SIZE COMPANY the Russell 2000 Index. The Russell 2000 Index is composed
STOCKS 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, The stocks of the Wilshire 4500 Index to be included in
TOTAL STOCK MARKET the Extended Market Portfolio will be selected utilizing a
AND SMALL statistical sampling technique known as "optimization."
CAPITALIZATION This process selects stocks for the Portfolio so that
STOCK PORTFOLIOS USE various industry weightings, market capitalizations, and
SAMPLING TECHNIQUES fundamental characteristics (e.g. price-to-book,
price-to-earnings, debt to asset ratios, and dividend
yields) closely approximate those of the appropriate
Index. For instance, if 10% of the capitalization of the
Wilshire 4500 Index consists of utility companies with
relatively large stock capitalizations, then the Extended
Market Portfolio is constructed so that approximately 10%
of the Portfolio's assets are invested in the stocks of
utility companies with relatively large capitalizations.
The Total Stock Market and Small Capitalization Stock
Portfolios are constructed using a sampling technique
known as optimization.
This sampling technique is expected to be an effective
means of substantially duplicating the income and capital
returns of the Extended Market, Total Stock Market and
Small Capitalization Stock Portfolios' target benchmarks.
Over time, the
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<PAGE> 60
correlation between the performance of the Extended
Market, Total Stock Market and Small Capitalization Stock
Portfolios and their respective indexes, the Wilshire 4500
Index, Wilshire 5000 Index and Russell 2000 Index is
expected to be at least 0.95. A correlation of 1.00 would
indicate perfect correlation, which would be achieved when
the net asset value of a Portfolio, including the value of
its dividend and capital gains distributions, increases or
decreases in exact proportion to changes in the respective
target benchmark.
Due to the use of the sampling technique, neither the
Extended Market Portfolio, Total Stock Market Portfolio
nor the Small Capitalization Stock Portfolio is expected
to track its benchmark index with the same degree of
accuracy as evidenced by the high degree of correlation
between the 500 Portfolio and its benchmark. However, the
principal advantage of this technique is to provide an
efficient means to invest in the universe of stocks. In
particular, the three Portfolios are expected to provide
broad diversification, and should operate at low costs due
both to their "passive" approach to portfolio management
and low portfolio turnover rate.
THE VALUE AND GROWTH In an effort to duplicate the investment results of their
PORTFOLIOS EMPHASIZE respective indexes, the Value and Growth Portfolios will
STOCKS WITH CERTAIN utilize "complete replication," the same indexing
INVESTMENT technique used for the 500 Portfolio. Specifically, the
CHARACTERISTICS 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
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<PAGE> 61
Coca Cola Co., Merck & Co., Inc. and Phillip Morris Cos.,
Inc.
"Standard & Poor's(R)", "S&P(R)", "S&P 500(R)", "Standard
& Poor's 500(R)", and "500" are trademarks of McGraw-Hill,
Inc. and have been licensed for use by Vanguard. The 500,
Value and Growth Portfolios are not sponsored, endorsed,
sold or promoted by Standard & Poor's Corporation ("S&P").
S&P makes no representations or warranty, implied or
expressed, to the purchasers of the Portfolios or any
member of the public regarding the advisability of
investing in index funds or the ability of the S&P 500,
S&P/BARRA Value and S&P/BARRA Growth Indexes to track
general stock market performance or to track the general
performance of value and growth stocks. S&P does not
guarantee the accuracy and/or the completeness of the S&P
500, S&P/BARRA Value and S&P/BARRA Growth Indexes or any
data included herein.
S&P MAKES NO WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS
TO BE OBTAINED BY LICENSEE, OWNERS OF THE TRUST, ANY
PERSON OR ENTITY FROM 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 OR MERCHANTABILITY OR FITNESS FOR A
PARTICULAR PURPOSE FOR USE WITH RESPECT TO THE S&P 500 OR
ANY DATA INCLUDED THEREIN.
S&P's only relationship to the Portfolios is the licensing
of the S&P marks and the S&P 500, S&P/BARRA Value and
S&P/BARRA Growth Indexes, which are determined, composed
and calculated by S&P without regard to the 500, Value and
Growth Portfolios.
EACH PORTFOLIO MAY Although all six Portfolios normally seek to remain
INVEST IN SHORT-TERM substantially fully invested in common stocks, the
FIXED INCOME Portfolios of the Trust may invest temporarily in certain
SECURITIES short-term fixed income securities. Such securities may be
used to invest uncommitted cash balances or to maintain
liquidity to meet shareholder redemptions. These
securities include: obligations of the United States
Government and its agencies or instrumentalities;
commercial paper, bank certificates of deposit, and
bankers' acceptances; and repurchase agreements
collateralized by these securities.
DERIVATIVE Derivatives are instruments whose values are linked to or
INVESTING derived from an underlying security or index. The most
common and conventional types of derivative securities are
futures and options.
EACH PORTFOLIO MAY Each Portfolio of the Trust may utilize stock futures
USE FUTURES contracts, options, warrants, convertible securities and
CONTRACTS, OPTIONS swap agreements to a limited extent. Specifically, each
AND WARRANTS, Portfolio may enter into futures contracts and options
CONVERTIBLE provided that not more than 5% of its assets are required
SECURITIES ND as a margin deposit for futures contracts or options and
SWAP AGREEMENTS provided that not more than 20% of a Portfolio's assets
are invested in futures and options at any time.
Additionally, the Trust's investment in warrants will not
exceed more than 5% of its assets (2% with respect to
warrants not listed on the New York or American Stock
Exchanges). Futures contracts, options, warrants,
convertible securities and swap agreements may be used for
several reasons: to
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<PAGE> 62
simulate full investment in the underlying index while
retaining a cash balance for fund management purposes, to
facilitate trading, to reduce transaction costs or to seek
higher investment returns when a futures contract, option,
warrant, convertible security or swap agreement is priced
more attractively than the underlying equity security or
index. While each of these securities can be used as
leveraged investments, the Portfolios may not use them to
leverage its net assets.
FUTURES CONTRACTS, The risk of loss associated with futures contracts in some
OPTIONS, WARRANTS, strategies can be substantial due both to the low margin
CONVERTIBLE deposits required and the extremely high degree of
SECURITIES AND SWAP leverage involved in futures pricing. As a result, a
AGREEMENTS POSE relatively small price movement in a futures contract may
CERTAIN RISKS result in an immediate and substantial loss or gain.
However, the Portfolios will not use futures contracts,
options, warrants, convertible securities and swap
agreements for speculative purposes or to leverage their
net assets. Accordingly, the primary risks associated with
the use of futures contracts, options, warrants,
convertible securities and swap agreements by the
Portfolios are: (i) imperfect correlation between the
change in market value of the stocks held by a Portfolio
and the prices of futures contracts, options, warrants,
convertible securities and swap agreements; and (ii)
possible lack of a liquid secondary market for a futures
contract and the resulting inability to close a futures
position prior to its maturity date. The risk of imperfect
correlation will be minimized by investing only in those
contracts whose behavior is expected to resemble that of a
Portfolio's underlying securities. The risk that a
Portfolio will be unable to close out a futures position
will be minimized by entering into such transactions on an
exchange with an active and liquid secondary market.
However options, warrants, convertible securities and swap
agreements purchased or sold over-the-counter may be less
liquid than exchange-traded securities. Illiquid
securities, in general, may not represent more than 15% of
the net assets of a Portfolio of the Trust.
Since there are no futures traded on the S&P/BARRA Value
or Growth Indexes, it will be necessary for the Value and
Growth Portfolios to utilize a composite of other futures
contracts to simulate the performance of each of these
Indexes. This process may magnify the "tracking error" of
each Portfolio's performance compared to that of the
Indexes, due to lower correlation of the selected futures
with the Indexes. The investment adviser will attempt to
reduce this tracking error by investing in futures
contracts whose behavior is expected to resemble that of
the underlying securities, although there can be no
assurance that these selected futures will perfectly
correlate with the performance of the Indexes.
Swap agreements are contracts between parties in which one
party agrees to make payments to the other party based on
the change in market value of a specified index or asset.
In return, the other party agrees to make payments to the
first party based on the return of a different specified
index or asset. Although swap agreements entail the risk
that a party will default on its payment obligations
thereunder, the Portfolios will minimize this risk by
entering into agreements that mark to market no less
frequently than quarterly. Swap agreements also bear the
risk that the Portfolios will not be able to meet its
obligation to the counterparty.
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<PAGE> 63
This risk will be mitigated by investing the Portfolios in
the specific asset for which it is obligated to pay a
return.
EACH PORTFOLIO MAY Each Portfolio of the Trust may lend its investment
LEND ITS SECURITIES securities to qualified institutional investors for either
short-term or long-term purpose of realizing additional
income. Loans of securities by a Portfolio will be
collateralized by cash, letters of credit, or securities
issued or guaranteed by the U.S. Government or its
agencies. The collateral will equal at least 100% of the
current market value of the loaned securities, and such
loans may not exceed 33 1/3% of the value of the
Portfolio's securities.
PORTFOLIO TURNOVER Although each Portfolio generally seeks to invest for the
IS EXPECTED TO long term, the six Portfolios of the Trust retain the
BE LOW right to sell securities irrespective of how long they
have been held. However, because of the "passive"
investment management approach of the Trust, the portfolio
turnover rate for each Portfolio is expected to be under
50%, a generally lower turnover rate than for most other
investment companies. A portfolio turnover rate of 50%
would occur if one half of a Portfolio's securities were
sold within one year. Ordinarily, securities will be sold
from a Portfolio only to reflect certain administrative
changes in an index (including mergers or changes in the
composition of an index) or to accommodate cash flows into
and out of each Portfolio while maintaining the similarity
of a Portfolio to its benchmark index.
- --------------------------------------------------------------------------------
INVESTMENT The Trust has adopted certain limitations on its
LIMITATIONS investment practices. Specifically, each Portfolio of the
Trust will not:
THE TRUST HAS (a) with respect to 75% of its assets, purchase securities
ADOPTED CERTAIN of any issuer (except obligations of the U.S.
FUNDAMENTAL Government and its instrumentalities) if, as a result,
LIMITATIONS more than 5% of the value of the Portfolio's assets
would be invested in the securities of such issuer;
(b) with respect to 75% of its assets, purchase more than
10% of the voting securities of any issuer;
(c) invest more than 25% of its assets in any one
industry; and
(d) borrow money, except that a Portfolio may borrow from
banks (or through reverse repurchase agreements), for
temporary or emergency (not leveraging) purposes,
including the meeting of redemption requests which
might otherwise require the untimely disposition of
securities, in an amount not exceeding 15% of the
value of the Portfolio's net assets (including the
amount borrowed and the value of any outstanding
reverse repurchase agreements) at the time the
borrowing is made. Whenever borrowings exceed 5% of
the value of a Portfolio's net assets, the Portfolio
will not make any additional investments.
These investment limitations are considered at the time
investment securities are purchased. The limitations
described here and in the Statement of Additional
Information are fundamental and may be changed only with
the approval of a majority of a Portfolio's shareholders.
- --------------------------------------------------------------------------------
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<PAGE> 64
MANAGEMENT The Trust is a member of The Vanguard Group of Investment
OF THE TRUST Companies, a family of more than 30 investment companies
with more than 90 distinct portfolios and total assets in
VANGUARD ADMINISTERS excess of $190 billion. Through their jointly-owned
AND DISTRIBUTES THE subsidiary, The Vanguard Group, Inc. ("Vanguard"), the
TRUST Trust and the other funds in the Group obtain at cost
virtually all of their corporate management,
administrative and distribution services. Vanguard also
provides investment advisory services on an at-cost basis
to certain Vanguard funds. As a result of Vanguard's
unique corporate structure, the Vanguard funds have costs
substantially lower than those of most competing mutual
funds. In 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 Trust manage its day-to-day operations
and are responsible to the Trust's Board of Trustees. The
Trustees set broad policies for the Trust and choose its
Officers. A list of the Trustees and Officers of the Trust
and a statement of their present positions and principal
occupations during the past five years can be found in the
Statement of Additional Information.
Vanguard employs a supporting staff of management and
administrative personnel to provide the requisite services
to the funds and also furnishes the funds with necessary
office space, furnishings and equipment. Each fund pays
its share of Vanguard's total expenses, which are
allocated among the funds under methods approved by the
Board of Trustees (Directors) of each fund. In addition,
each fund bears its own direct expenses, such as legal,
auditing and custodian fees.
Vanguard provides distribution and marketing services to
the funds. The funds are available on a no-load basis
(i.e., there are no sales commissions or 12b-1 fees).
However, each fund bears its share of the Group's
distribution costs.
- --------------------------------------------------------------------------------
INVESTMENT The six Portfolios of the Trust receive all investment
ADVISER advisory services on an at-cost basis from Vanguard's Core
Management Group. The Core Management Group also provides
VANGUARD MANAGES investment advisory services to several other Vanguard
THE TRUST ON AN Funds, including Vanguard International Equity Index Fund,
AT-COST BASIS Vanguard Institutional Index Fund, Vanguard Balanced Index
Fund, Vanguard Tax-Managed Fund, the Aggressive Growth
Portfolio of Vanguard Horizon Fund, Vanguard Variable
Insurance Fund -- Equity Index Portfolio, a portion of
Vanguard/Morgan Growth Fund, and a portion of
Vanguard/Windsor II, as well as to several indexed
separate accounts. Total assets under management by the
Core Management Group were $33 billion as of December 31,
1995. The Trust is not actively managed, but is instead
administered by the Core Management Group using
computerized, quantitative techniques. The Core Management
Group is supervised by the Officers of the Trust.
In placing portfolio transactions, the Core Management
Group uses its best judgment to choose the broker most
capable of providing the brokerage services necessary to
obtain the best available price and most favorable
execution at the lowest commission rate. The full range
and quality of brokerage services available are considered
in making these determinations. In those instances where
it is
22
<PAGE> 65
reasonably determined that more than one broker can offer
the services needed to obtain the best available price and
most favorable execution, consideration may be given to
those brokers which supply statistical information and
provide other services in addition to execution services
to the Trust.
- --------------------------------------------------------------------------------
PERFORMANCE The tables in this section provide investment results for
RECORD the 500, Extended Market and Small Capitalization Stock
Portfolios of the Trust for several periods throughout the
Trust's lifetime. The results shown represent "total
return" investment performance, which assumes the
reinvestment of all capital gains and income dividends for
the indicated periods. Also included is comparative
information with respect to the unmanaged S&P 500
Composite Stock Price Index, the Wilshire 4500 Index and
the Russell 2000 Index. The results for the Portfolios are
net of all expenses while the results of the stock indexes
are hypothetical and make no allowances for the costs of
investing. The tables do not make any allowance for
federal, state or local income taxes, which shareholders
must pay on a current basis.
The results shown should not be considered a
representation of the total return from an investment made
in the Trust today. The periods shown were generally
favorable ones for stock market investing. This
information is provided to help investors better
understand the Trust and may not provide a basis for
comparison with other investments or mutual funds which
use a different method to calculate performance.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL
RETURN FOR
VANGUARD INDEX
TRUST -- 500 PORTFOLIO
--------------------------
FISCAL PERIODS 500 S&P 500
ENDED 12/31/95 PORTFOLIO* INDEX
------------------ ------------ ---------
<S> <C> <C>
1 Year +37.4% +37.6%
5 Years +16.4 +16.6
10 Years +14.5 +14.9
Lifetime** +13.7 +14.2
</TABLE>
* Exclusive of $10 annual account maintenance fee.
** August 31, 1976 to December 31, 1995.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN
FOR
VANGUARD INDEX TRUST --
EXTENDED MARKET PORTFOLIO
---------------------------
EXTENDED WILSHIRE
FISCAL PERIODS MARKET 4500
ENDED 12/31/95 PORTFOLIO* INDEX
------------------ ------------ ----------
<S> <C> <C>
1 Year +33.1% +33.5%
5 Years +19.0 +19.0
Lifetime** +14.8 +15.1
</TABLE>
* Includes 1% portfolio transaction fee but
exclusive of $10 annual account maintenance fee.
** December 21, 1987 to December 31, 1995.
23
<PAGE> 66
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURN FOR
VANGUARD INDEX TRUST --
SMALL CAPITALIZATION STOCK
PORTFOLIO+
--------------------------------
SMALL RUSSELL
FISCAL PERIODS CAPITALIZATION 2000
ENDED 12/31/95 STOCK PORTFOLIO* INDEX
------------------------- ------------------ ---------
<S> <C> <C>
1 Year +27.4% +28.4%
3 Years +14.5 +14.5
5 Years +20.8 +21.0
Since September 11, 1989 +11.2 N/A
</TABLE>
* Includes 1% portfolio transaction fee but
exclusive of $10 annual account maintenance fee.
+ Formerly Vanguard Small Capitalization Stock Fund, Inc.
- --------------------------------------------------------------------------------
DIVIDENDS, The Trust distributes substantially all of its net
CAPITAL GAINS investment income in the form of dividends. The 500, Total
AND TAXES Stock Market, Value and Growth Portfolios pay quarterly
dividends, while the Extended Market and Small
FOUR PORTFOLIOS PAY Capitalization Stock Portfolios pay annual dividends. For
QUARTERLY DIVIDENDS; all six Portfolios, net capital gains, if any, are
TWO PORTFOLIOS PAY distributed annually. A Portfolio's dividend and capital
DIVIDENDS ONCE A YEAR gains distributions are automatically reinvested in
additional shares. Each Portfolio of the Trust intends to
continue to qualify for taxation as a "regulated
investment company" under the Internal Revenue Code so
that each Portfolio will not be subject to federal income
tax to the extent its income is distributed to
shareholders.
If you utilize a Portfolio of the Trust as an investment
option in an employer-sponsored retirement savings plan,
dividend and capital gains distributions from the
Portfolio ordinarily will not be subject to current
taxation, but will accumulate on a tax-deferred basis. In
general, employer-sponsored retirement and savings plans
are governed by complex tax rules. If you participate in
such a plan, consult your plan administrator, your plan's
Summary Plan Description, or a professional tax adviser
regarding the tax consequences of your participation in
the plan and of any plan contributions or withdrawals.
- --------------------------------------------------------------------------------
THE SHARE The share price or "net asset value" per share of each
PRICE OF Portfolio is determined by dividing the total market value
EACH PORTFOLIO 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 as of
the regular close of the New York Stock Exchange
(generally 4:00 p.m. Eastern time), each day the Exchange
is open for trading.
Portfolio securities that are listed on a securities
exchange are valued at the last quoted sales price on the
day the valuation is made. Price information on listed
securities is taken from the exchange where the security
is primarily traded. Securities which are listed on an
exchange and which are not traded on the valuation date
are valued at the mean of the bid and ask prices. For the
500, Value and Growth Portfolios, unlisted securities for
which market quotations are readily available are valued
at the latest quoted bid price. For the Extended Market,
Total Stock Market and Small Capitalization Stock
Portfolios, unlisted securities for which market
quotations
24
<PAGE> 67
are readily available are valued at the mean of the bid
and ask prices. Temporary cash investments are valued at
amortized cost which approximates market value. Securities
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. Securities for which no
current quotations are readily available are valued at
fair market value as determined in good faith by the
Trustees.
Each Portfolio's share price can be found daily in the
mutual fund listings of most major newspapers under the
heading of Vanguard.
- --------------------------------------------------------------------------------
GENERAL The Trust is a Pennsylvania business trust. The
INFORMATION Declaration of Trust permits the Trustees to issue an
unlimited number of shares of beneficial interest with no
par value. The Board of Trustees has the power to
designate one or more classes or series of shares of
common stock and to classify or reclassify any unissued
shares with respect to such series. Currently, the Trust
is offering shares of six series.
The shares of each series are fully paid and
non-assessable; have no preference as to conversion,
exchange, dividends, retirement or other features; and
have no pre-emptive rights. Such shares have
non-cumulative voting rights, meaning that the holders of
more than 50% of the shares voting for the election of
Trustees can elect 100% of the Trustees if they so choose.
Annual meetings of shareholders will not be held except as
required by the Investment Company Act of 1940 and other
applicable law. An annual meeting will be held to vote on
the removal of a Trustee or Trustees of the Trust if
requested in writing by the holders of not less than 10%
of the outstanding shares of the Trust.
All securities and cash for the 500, Extended Market, and
Total Stock Market Portfolios are held by State Street
Bank and Trust Company, Boston, MA. CoreStates Bank, N.A.,
holds daily cash balances that are used by these three
Portfolios to invest in repurchase agreements or
securities acquired in these transactions. All securities
and cash for the Small Capitalization Stock, Value and
Growth Portfolios are held by CoreStates Bank,
Philadelphia, PA. The Vanguard Group, Inc., Valley Forge,
PA, serves as the Trust's Transfer and Dividend Disbursing
Agent. Price Waterhouse LLP serves as independent
accountants for the Trust and will audit its financial
statements annually. The Trust is not involved in any
litigation.
- --------------------------------------------------------------------------------
25
<PAGE> 68
SERVICE GUIDE
PARTICIPATING IN One or more Portfolios of the Trust are available as
YOUR PLAN investment options in your retirement or savings plan. The
administrator of your plan or your employee benefits
office can provide you with detailed information on how to
participate in your plan and how to elect a Portfolio of
the Trust as an investment option.
If you have any questions about a Portfolio, including the
Portfolio's investment objective, policies, risk
characteristics or historical performance, please contact
Participant Services at 1-800-523-1188.
If you have questions about your account, contact your
plan administrator or the organization which provides
recordkeeping services for your plan.
----------------------------------------------------------
INVESTMENT OPTIONS, You may be permitted to elect different investment
ALLOCATIONS AND options, alter the amounts contributed to your plan, or
PAYROLL CHANGES change how contributions are allocated among your
investment options in accordance with your plan's specific
provisions. See your plan administrator or employee
benefits office for more details.
----------------------------------------------------------
TRANSACTIONS IN Contributions, exchanges or redemptions of a Portfolio's
FUND SHARES shares are effective when received in "good order" by
Vanguard. "Good order" means that complete information on
the contribution, exchange or redemption and the
appropriate signatures and monies have been received by
Vanguard.
----------------------------------------------------------
MAKING EXCHANGES Your plan may allow you to exchange monies from one
investment option to another. Check with your plan
administrator for details on the rules governing exchanges
in your plan. Certain investment options, particularly
company stock or investment contracts, may be subject to
unique restrictions.
Before making an exchange, you should consider the
following:
- If you are making an exchange to another Vanguard Fund
option, please read the Fund's prospectus. Contact
Participant Services at 1-800-523-1188 for a copy.
- Exchanges are accepted by Vanguard only as permitted by
your plan. Your plan administrator can explain how
frequently exchanges are allowed.
- --------------------------------------------------------------------------------
26
<PAGE> 69
[THIS PAGE INTENTIONALLY LEFT BLANK.]
<PAGE> 70
- --------------------------------------------------------------------------------
[VANGUARD INDEX TRUST LOGO]
---------------------------
THE VANGUARD GROUP [Figure #3]
OF INVESTMENT
COMPANIES [VANGUARD INDEX TRUST LOGO]
Vanguard Financial Center
P.O. Box 2900 I N S T I T U T I O N A L
Valley Forge, PA 19482 P R O S P E C T U S
INSTITUTIONAL PARTICIPANT APRIL 30, 1996
SERVICES DEPARTMENT:
1-800-523-1188
TRANSFER AGENT:
The Vanguard Group, Inc.
Vanguard Financial Center
Valley Forge, PA 19482
I040 [THE VANGUARD GROUP LOGO]
- --------------------------------------------------------------------------------
<PAGE> 71
PART B
VANGUARD INDEX TRUST
STATEMENT OF ADDITIONAL INFORMATION
APRIL 30, 1996
This Statement is not a prospectus but should be read in conjunction with
the Trust's current Prospectus (dated April 30, 1996). To obtain the Prospectus
please call:
VANGUARD INVESTOR INFORMATION CENTER
1-800-662-7447
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Objectives and Policies........................................................ 1
Investment Limitations.................................................................... 5
Purchase of Shares........................................................................ 6
Redemption of Shares...................................................................... 7
Yield and Total Return.................................................................... 7
Management of the Trust................................................................... 8
Portfolio Transactions.................................................................... 11
Description of Shares and Voting Rights................................................... 11
Performance Measures...................................................................... 12
Financial Statements...................................................................... 13
</TABLE>
INVESTMENT OBJECTIVES AND POLICIES
REPURCHASE AGREEMENTS Each Portfolio of the Trust may invest in repurchase
agreements with commercial banks, brokers or dealers either for defensive
purposes due to market conditions or to generate income from its excess cash
balances. A repurchase agreement is an agreement under which the Portfolio
acquires a money market instrument (generally a security issued by the U.S.
Government or an agency thereof, a banker's acceptance or a certificate of
deposit) from a commercial bank, broker or dealer, subject to resale to the
seller at an agreed upon price and date (normally, the next business day). A
repurchase agreement may be considered a loan collateralized by securities. The
resale price reflects an agreed upon interest rate effective for the period the
instrument is held by the Portfolio and is unrelated to the interest rate on the
underlying instrument. In these transactions, the securities acquired by the
Portfolio (including accrued interest earned thereon) must have a total value in
excess of the value of the repurchase agreement and are held by a custodian bank
until repurchased. In addition, the Board of Trustees will monitor the Trust's
repurchase agreement transactions generally and will establish guidelines and
standards for review of the creditworthiness of any bank, broker or dealer party
to a repurchase agreement with the Trust. No more than an aggregate of 15% of a
Portfolio's assets at the time of investment, will be invested in repurchase
agreements having maturities longer than seven days and securities subject to
legal or contractual restrictions on resale, for which there are no readily
available market quotations. From time to time, the Fund's Board of Directors
may determine that certain restricted securities known as Rule 144A securities
are liquid and not subject to the 15% limitation described above.
The use of repurchase agreements involves certain risks. For example, if
the other party to the agreement defaults on its obligation to repurchase the
underlying security at a time when the value of the security has declined, the
Portfolio may incur a loss upon disposition of the security. If the other party
to the agreement becomes insolvent and subject to liquidation or reorganization
under the Bankruptcy Code or other laws, a court may determine that the
underlying security is collateral for a loan by the Portfolio not within the
control of the Portfolio and therefore the Portfolio may not be able to
substantiate its interest in the underlying security and
1
<PAGE> 72
may be deemed an unsecured creditor of the other party to the agreement. While
the Trust's management acknowledges these risks, it is expected that they can be
controlled through careful monitoring procedures.
LENDING OF SECURITIES Each Portfolio of the Trust may lend its securities
to qualified institutional investors who need to borrow securities in order to
complete certain transactions, such as covering short sales, avoiding failures
to deliver securities or completing arbitrage operations. By lending its
portfolio securities, a Portfolio attempts to increase its net investment income
through the receipt of interest on the loan. Any gain or loss in the market
price of the securities loaned that might occur during the term of the loan
would be for the account of the Portfolio. The Portfolio may lend its portfolio
securities to qualified brokers, dealers, banks or other financial institutions,
so long as the terms, the structure and the aggregate amount of such loans are
not inconsistent with the Investment Company Act of 1940, or the Rules and
Regulations or interpretations of the Securities and Exchange Commission (the
"Commission") thereunder, which currently require that (a) the borrower pledge
and maintain with the Trust collateral consisting of cash, a letter of credit
issued by a domestic U.S. bank, or securities issued or guaranteed by the United
States Government having at all times not less than 100% of the value of the
securities loaned, (b) the borrower add to such collateral whenever the price of
the securities loaned rises (i.e. the borrower "marks to the market" on a daily
basis), (c) the loan be made subject to termination by the Trust at any time and
(d) the Portfolio receive reasonable interest on the loan (which may include the
Portfolio's investing any cash collateral in interest bearing short-term
investments), any distribution on the loaned securities and any increase in
their market value. Loan arrangements made by the Trust will comply with all
other applicable regulatory requirements, including the rules of the New York
Stock Exchange, which rules presently require the borrower, after notice, to
redeliver the securities within the normal settlement time of three business
days. All relevant facts and circumstances, including the creditworthiness of
the broker, dealer or institution, will be considered in making decisions with
respect to the lending of securities, subject to review by the Board of
Trustees.
At the present time, the Staff of the Commission does not object if an
investment company pays reasonable negotiated fees in connection with loaned
securities, so long as such fees are set forth in a written contract and
approved by the investment company's trustees. In addition, voting rights pass
with the loaned securities, but if a material event will occur affecting an
investment on loan, the loan must be called and the securities voted.
FUTURES CONTRACTS Each Portfolio of the Trust may enter into futures
contracts, options, warrants, options on futures contracts, convertible
securities and swap agreements for the purpose of simulating full investment and
reducing transactions costs. The Trust does not use futures or options for
speculative purposes. Each Portfolio will only use futures and options to
simulate full investment in the underlying index while retaining a cash balance
for fund management purposes. Futures contracts provide for the future sale by
one party and purchase by another party of a specified amount of a specific
security at a specified future time and at a specified price. Futures contracts
which are standardized as to maturity date and underlying financial instrument
are traded on national futures exchanges. Futures exchanges and trading are
regulated under the Commodity Exchange Act by the Commodity Futures Trading
Commission ("CFTC"), a U.S. Government Agency. Assets committed to futures
contracts will be segregated at the Trust's custodian bank to the extent
required by law.
Although futures contracts by their terms call for actual delivery or
acceptance of the underlying securities, in most cases the contracts are closed
out before the settlement date without the making or taking of delivery. Closing
out an open futures position is done by taking an opposite position ("buying" a
contract which has previously been "sold," or "selling" a contract previously
purchased) in an identical contract to terminate the position. Brokerage
commissions are incurred when a futures contract is bought or sold.
Futures traders are required to make a good faith margin deposit in cash or
government securities with a broker or custodian to initiate and maintain open
positions in futures contracts. A margin deposit is intended to assure
completion of the contract (delivery or acceptance of the underlying security)
if it is not terminated prior to the specified delivery date. Minimal initial
margin requirements are established by the futures exchange and may be changed.
Brokers may establish deposit requirements which are higher than the
2
<PAGE> 73
exchange minimums. Futures contracts are customarily purchased and sold on
deposits which may range upward from less than 5% of the value of the contract
being traded.
After a futures contract position is opened, the value of the contract is
marked to market daily. If the futures contract price changes to the extent that
the margin on deposit does not satisfy margin requirements, payment of
additional "variation" margin will be required. Conversely, change in the
contract value may reduce the required margin, resulting in a repayment of
excess margin to the contract holder. Variation margin payments are made to and
from the futures broker for as long as the contract remains open. A Portfolio of
the Trust expects to earn interest income on its margin deposits.
Traders in futures contracts may be broadly classified as either "hedgers"
or "speculators." Hedgers use the futures markets primarily to offset
unfavorable changes in the value of securities otherwise held for investment
purposes or expected to be acquired by them. Speculators are less inclined to
own the securities underlying the futures contracts which they trade, and use
futures contracts with the expectation of realizing profits from fluctuations in
the prices of underlying securities. The Trust's Portfolios intend to use
futures contracts only for bona fide hedging purposes.
Regulations of the CFTC applicable to the Trust require that all of its
futures transactions constitute bona fide hedging transactions. A Portfolio will
only sell futures contracts to protect against a decrease in the price of
securities it intends to sell or purchase contracts to protect against an
increase in the price of securities it intends to purchase. As evidence of this
hedging interest, the Portfolio expects that approximately 75% of its futures
contract purchases will be "completed," that is, equivalent amounts of related
securities will have been purchased or are being purchased by the Portfolio upon
sale of open futures contracts.
Although techniques other than the sale and purchase of futures contracts
could be used to control the Portfolio's exposure to market fluctuations, the
use of futures contracts may be a more effective means of hedging this exposure.
While a Portfolio will incur commission expenses in both opening and closing out
futures positions, these costs are lower than transaction costs incurred in the
purchase and sale of the underlying securities.
RESTRICTIONS ON THE USE OF FUTURES CONTRACTS A Portfolio will not enter
into futures contract transactions to the extent that, immediately thereafter,
the sum of its initial margin deposits on open contracts exceeds 5% of the
market value of the Portfolio's total assets. In addition, a Portfolio will not
enter into futures contracts to the extent that its outstanding obligations to
purchase securities under these contracts would exceed 20% of the Portfolio's
total assets.
RISK FACTORS IN FUTURES TRANSACTIONS Positions in futures contracts may be
closed out only on an Exchange which provides a secondary market for such
futures. However, there can be no assurance that a liquid secondary market will
exist for any particular futures contract at any specific time. Thus, it may not
be possible to close a futures position. In the event of adverse price
movements, the Portfolio would continue to be required to make daily cash
payments to maintain its required margin. In such situations, if the Portfolio
has insufficient cash, it may have to sell portfolio securities to meet daily
margin requirements at a time when it may be disadvantageous to do so. In
addition, the Portfolio may be required to make delivery of the instruments
underlying futures contracts it holds. The inability to close options and
futures positions also could have an adverse impact on the ability to
effectively hedge it.
Each Portfolio will minimize the risk that it will be unable to close out a
futures contract by only entering into futures which are traded on national
futures exchanges and for which there appears to be a liquid secondary market.
The risk of loss in trading futures contracts in some strategies can be
substantial, due both to the low margin deposits required, and the extremely
high degree of leverage involved in futures pricing. As a result, a relatively
small price movement in a futures contract may result in immediate and
substantial loss (as well as gain) to the investor. For example, if at the time
of purchase, 10% of the value of the futures contract is deposited as margin, a
subsequent 10% decrease in the value of the futures contract would result in a
total loss of the margin deposit, before any deduction for the transaction
costs, if the account were then closed out. A 15% decrease would result in a
loss equal to 150% of the original margin deposit if the contract were closed
3
<PAGE> 74
out. Thus, a purchase or sale of a futures contract may result in losses in
excess of the amount invested in the contract. The Trust also bears the risk
that the adviser will incorrectly predict future stock market trends. However,
because the futures strategies of the Trust are engaged in only for hedging
purposes, the Trust's officers do not believe that the Portfolios are subject to
the risks of loss frequently associated with futures transactions. A Portfolio
would presumably have sustained comparable losses if, instead of the futures
contract, it had invested in the underlying financial instrument and sold it
after the decline.
Utilization of futures transactions by the Trust does involve the risk of
imperfect or no correlation where the securities underlying futures contracts
have different maturities than the portfolio securities being hedged.
It is also possible that the Portfolio could both lose money on futures
contracts and also experience a decline in value of its portfolio securities.
There is also the risk of loss by the Portfolio of margin deposits in the event
of bankruptcy of a broker with whom the Portfolio has an open position in a
futures contract or related option.
Most futures exchanges limit the amount of fluctuation permitted in futures
contract prices during a single trading day. The daily limit establishes the
maximum amount that the price of a futures contract may vary either up or down
from the previous day's settlement price at the end of a trading session. Once
the daily limit has been reached in a particular type of contract, no trades may
be made on that day at a price beyond that limit. The daily limit governs only
price movement during a particular trading day and therefore does not limit
potential losses, because the limit may prevent the liquidation of unfavorable
positions. Futures contract prices have occasionally moved to the daily limit
for several consecutive trading days with little or no trading, thereby
preventing prompt liquidation of future positions and subjecting some futures
traders to substantial losses.
FEDERAL TAX TREATMENT OF FUTURES CONTRACTS Each Portfolio of the Trust is
required for federal income tax purposes to recognize as income for each taxable
year its net unrealized gains and losses on certain futures contracts as of the
end of the year as well as those actually realized during the year. In most
cases, any gain or loss recognized with respect to a futures contract is
considered to be 60% long-term capital gain or loss and 40% short-term capital
gain or loss, without regard to the holding period of the contract. Furthermore,
sales of futures contracts which are intended to hedge against a change in the
value of securities held by the Portfolio may affect the holding period of such
securities and, consequently, the nature of the gain or loss on such securities
upon disposition. A Portfolio may be required to defer the recognition of losses
on futures contracts to the extent of any unrecognized gains on related
positions held by the Portfolio.
In order for each Portfolio to continue to qualify for Federal income tax
treatment as a regulated investment company, at least 90% of its gross income
for a taxable year must be derived from qualifying income; i.e., dividends,
interest, income derived from loans of securities, gains from the sale of
securities or of foreign currencies or other income derived with respect to the
Portfolio's business of investing in securities. In addition, gains realized on
the sale or other disposition of securities held for less than three months must
be limited to less than 30% of the Portfolio's annual gross income. Net gain
realized from the closing out of futures contracts will be considered gain from
the sale of securities and therefore be qualifying income for purposes of the
90% requirement. In order to avoid realizing excessive gains on securities held
less than three months, the Portfolio may be required to defer the closing out
of futures contracts beyond the time when it would otherwise be advantageous to
do so. It is anticipated that unrealized gains on futures contracts, which have
been open for less than three months as of the end of the Portfolio's fiscal
year and which are recognized for tax purposes, will not be considered gains on
sales of securities held less than three months for the purpose of the 30% test.
Each Portfolio will distribute to shareholders annually any net capital
gains which have been recognized for federal income tax purposes (including
unrealized gains at the end of the Portfolio's fiscal year) on futures
transactions. Such distributions will be combined with distributions of capital
gains realized on the Portfolio's other investments and shareholders will be
advised on the nature of the distributions.
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<PAGE> 75
INVESTMENT LIMITATIONS
The following restrictions and fundamental policies cannot be changed
without approval of the holders of a majority of the outstanding shares of each
Portfolio (as defined in the Investment Company Act of 1940). Each Portfolio may
not under any circumstances:
1) change its investment objective, which is to provide investment results
that correspond to the performance of a particular stock index as set
forth in (2) below;
2) change its investment policy, which is, in the case of the 500
Portfolio, is to attempt to duplicate the performance of Standard &
Poor's 500 Composite Stock Price Index by owning as many of the 500
stocks contained in the index as is feasible; in the case of the
Extended Market Portfolio, is to attempt to duplicate the performance
of common stocks traded on the New York Stock Exchange, American Stock
Exchange and NASDAQ not included in the S&P 500 Index as represented by
the Wilshire 4500 Index; in the case of the Total Stock Market
Portfolio to match the investment performance of the Wilshire 5000
Index, an index consisting of all regularly traded U.S. stocks; in the
case of the Value Portfolio to attempt to duplicate the performance of
the Standard & Poor's/BARRA Value Index by owning as many of the stocks
contained in the index as is feasible; in the case of the Growth
Portfolio to attempt to duplicate the performance of the Standard &
Poor's/BARRA Growth Index by owning as many of the stocks contained in
the index as is feasible; and, in the case of the Small Capitalization
Stock Portfolio to duplicate the investment performance of the Russell
2000 Small Stock Index;
3) invest in commodities or purchase real estate, although it may purchase
securities of companies which deal in real estate or interests therein,
and that each Portfolio may invest in stock index futures contracts,
stock options and options on stock index futures contracts to the
extent that not more than 5% of the Portfolio's assets are required as
margin deposit for futures contracts and not more than 20% of a
Portfolio's assets are invested in futures and options at any time;
4) lend money to any person except (i) by purchasing a portion of an issue
of short-term debt securities or similar obligations (including
repurchase agreements) which are publicly distributed or customarily
purchased by institutional investors, and (ii) as provided under
"Lending of Securities";
5) purchase securities on margin or sell securities short, except as set
forth in paragraph 3 above;
6) with respect to 75% of net assets, purchase more than 10% of the
outstanding voting securities of any company;
7) with respect to 75% of its assets, purchase securities of any issuer
(except obligations of the United States Government and its
instrumentalities), if, as a result, more than 5% of the value of the
Portfolio's total assets would be invested in the securities of such
issuer;
8) borrow money, except from banks (or through reverse repurchase
agreements) for temporary or emergency (not leveraging) purposes,
including the meeting of redemption requests which might otherwise
require the untimely disposition of securities, in an amount not
exceeding 15% of its net assets (including the amount borrowed and the
value of any outstanding reverse repurchase agreements) at the time the
borrowing is made. Whenever a borrowing exceeds 5% of a Portfolio's net
assets, the Portfolio will not make any additional investments;
9) pledge, mortgage, or hypothecate any of its assets to an extent greater
than 5% of the value of its total assets;
10) engage in the business of underwriting securities issued by other
persons except to the extent that a Portfolio may technically be deemed
an underwriter under the Securities Act of 1933, as amended, in
disposing of portfolio securities;
11) purchase or otherwise acquire any security if, as a result, more than
15% of its net assets would be invested in securities that are illiquid
(including the Trust's investment in The Vanguard Group, Inc.);
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<PAGE> 76
12) invest for the purpose of controlling management of any company;
13) invest in securities of other investment companies, except as may be
acquired as a part of a merger, consolidation or acquisition of assets
approved by the Portfolio's shareholders, or otherwise to the extent
permitted by Section 12 of the Investment Company Act of 1940. The
Portfolio will invest only in investment companies which have
investment objectives and investment policies consistent with those of
the Portfolio;
14) invest more than 25% of the value of its total assets in any one
industry; or
15) invest in put, call, straddle or spread options or in interests in oil,
gas or other mineral exploration or development programs, except as set
forth in limitation number "3", above.
The above-mentioned investment limitations are considered at the time
investment securities are purchased. Notwithstanding these limitations, the
Trust may own all or any portion of the securities of, or make loans to, or
contribute to the costs or other financial requirements of any company which
will be wholly owned by the Trust and one or more other investment companies and
is primarily engaged in the business of providing, at-cost, management,
administrative, distribution or related services to the Trust and other
investment companies. See "The Vanguard Group". Each Portfolio of the Trust may
not invest more than 5% of its total assets in securities of companies which
have (with predecessors) a record of less than three years' of continuous
operation. Additionally, each Portfolio of the Trust will not purchase or retain
securities of an issuer if those Officers and Trustees of the Trust owning more
than 1/2 of 1% of such securities together own more than 5% of such securities.
These are non-fundamental policies which may be changed by the vote of a
majority of the Trustees.
PURCHASE OF SHARES
The Trust reserves the right in its sole discretion (i) to suspend the
offerings of its shares, (ii) to reject purchase or exchange purchase orders
when in the judgment of management such rejection is in the best interest of the
Trust, and (iii) to reduce or waive the minimum investment for or any other
restrictions on initial and subsequent investments as well as redemption fees
for certain fiduciary accounts or under circumstances where certain economies
can be achieved in sales of the Trust's shares.
EXCHANGE OF SECURITIES FOR SHARES OF THE TRUST In certain circumstances,
shares of the Trust's Portfolios may be purchased in exchange for a minimum
value of $1 million in common stocks. Such common stocks must be included in the
appropriate Index and each position must have a market value in excess of
$10,000. Additionally, such securities will be acquired by a Portfolio of the
Trust for investment purpose and not for resale and must be liquid securities
which are not restricted as to transfer and have a value which is readily
ascertainable as evidenced by a listing on the American Stock Exchange, the New
York Stock Exchange or NASDAQ. Securities accepted by the Portfolio will be
valued as set forth under "The Share Price of Each Portfolio" in the Trust's
prospectus as of the time of the next determination of net asset value after
such acceptance. Shares of each Portfolio of the Trust are issued at net asset
value determined as of the same time. "IN-KIND" PURCHASES OF THE SMALL
CAPITALIZATION STOCK AND, EXTENDED MARKET PORTFOLIO WILL NOT BE SUBJECT TO THE
1% AND 0.5% TRANSACTION FEES. All dividends, subscription, or other rights which
are reflected in the market price of accepted securities at the time of
valuation become the property of the Portfolio and must be delivered to the
Portfolio by the investor upon receipt from the issuer. A gain or loss for
Federal income tax purposes would be realized by the investor upon the exchange
depending upon the cost of the securities tendered.
The Portfolio will not accept securities in exchange unless: (1) such
securities are, at the time of the exchange, included in the Portfolio; (2) such
an exchange will not cause the Portfolio's weightings to come imbalanced with
respect to the weightings of the stocks included in the Index; (3) the investor
represents and agrees that all securities offered to the Portfolio are not
subject to any restrictions upon their sale by the Portfolio under the
Securities Act of 1933, or otherwise; (4) such securities are traded in an
unrelated transaction with a quoted sales price on the same day the exchange
valuation is made; (5) the quoted sales price used as a basis of valuation is
representative (i.e., one that does not involve a trade of substantial size
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<PAGE> 77
which artificially influences the price of the security); and (6) the value of
any such security being exchanged will not exceed 5% of the Portfolio's net
assets immediately prior to the transaction.
Investors interested in such purchases should contact the Trust.
REDEMPTION OF SHARES
Each Portfolio may suspend redemption privileges or postpone the date of
payment (i) during any period that the New York Stock Exchange is closed, or
trading on the Exchange is restricted as determined by the Securities and
Exchange Commission (the "Commission"), (ii) during any period when an emergency
exists as defined by the rules of the Commission as a result of which it is not
reasonably practicable for the Trust to dispose of securities owned by it, or
fairly to determine the value of its assets, and (iii) for such other periods as
the Commission may permit.
No charge is made by the Trust for redemptions. Any redemption may be more
or less than the shareholder's cost depending on the market value of the
securities held by each Portfolio.
The Trust has made an election with the Commission to pay in cash all
redemptions requested by any shareholder of record limited in amount during any
90-day period to the lesser of $250,000 or 1% of the net assets of a Portfolio
at the beginning of such period. Such commitment is irrevocable without the
prior approval of the Commission. Redemptions in excess of the above limits may
be paid in whole or in part, in investment securities or in cash, as the
Trustees may deem advisable; however, payment will be made wholly in cash unless
the Trustees believe that economic or market conditions exist which would make
such a practice detrimental to the best interests of the Trust. If redemptions
are paid in investment securities, such securities will be valued as set forth
in the Prospectus under "The Share Price of Each Portfolio" and a redeeming
shareholder would normally incur brokerage expenses if he converted these
securities to cash.
YIELD AND TOTAL RETURN
The yield of the 500 Portfolio of the Trust for the 30-day period ended
December 31, 1995 was 2.17%. The yield of the Extended Market Portfolio of the
Trust for the 30-day period ended December 31, 1995 was 1.38%. The yield of the
Total Stock Market Portfolio of the Trust for the 30-day period ended December
31, 1995 was 1.85%. The yield of the Value Portfolio for the 30-day period ended
December 31, 1995 was 2.78%. The yield of the Growth Portfolio for the 30-day
period ended December 31, 1995 was 1.60%. The yield of the Small Capitalization
Stock Portfolio+ for the 30-day period ended December 31, 1995 was 1.48%.
The average annual total return of the 500 Portfolio* for the one- five-
and ten-year periods ended December 31, 1995 was +37.40%, +16.36% and +14.53%,
respectively. The average annual total return for the Extended Market
Portfolio** for the one- and five-year periods ended December 31, 1995 and since
the Portfolio's inception on December 21, 1987 was +33.09%, +18.97% and +14.83%,
respectively. The average annual total return of the Total Stock Market
Portfolio*** for the period ended December 31, 1995, and since the Portfolio's
inception on April 27, 1992 was +35.42% and +14.57%++. The average annual total
return of the Value Portfolio* for the period ended December 31, 1995 and since
inception on November 2, 1992 was +36.89% and +17.52%++. The average annual
total return of the Growth Portfolio* for the period ended December 31, 1995 and
since inception on November 2, 1992 was +38.00% and +13.32%++. The average
annual return of the Small Capitalization Stock Portfolio** for the one- five-
and ten-year periods ended December 31, 1995 was +27.40%, +20.85% and +10.43%,
respectively. Total return is computed by finding the average compounded rates
of return over the one- five- and ten-year periods set forth above that would
equate an initial amount invested at the beginning of the periods to the ending
redeemable value of the investment.
- ---------------
* Total return figures are adjusted to reflect the $10 annual account
maintenance fee.
** Total return figures for the Extended Market and the Small Capitalization
Stock Portfolios reflect the 1% portfolio transaction fee and the $10 annual
account maintenance fee.
*** Total return figures for the Total Stock Market Portfolio reflect the 0.25%
portfolio transaction fee and the $10 annual account maintenance fee.
+ Formerly Vanguard Small Capitalization Stock Fund, Inc.
++ Annualized.
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<PAGE> 78
MANAGEMENT OF THE TRUST
TRUSTEES AND OFFICERS
The Officers of the Trust manage its day-to-day operations and are
responsible to the Trust's Board of Trustees. The Trustees set broad policies
for the Trust and choose its Officers. The following is a list of the Trustees
and Officers of the Trust and a statement of their present positions and
principal occupations during the past five years. The mailing address of the
Trustees and Officers of the Trust is Post Office Box 876, Valley Forge, PA
19482.
JOHN C. BOGLE, Chairman and Trustee
Chairman and Director of The Vanguard Group, Inc., and of each of the
investment companies in The Vanguard Group. Director of The Mead
Corporation and General Accident Insurance.
JOHN J. BRENNAN, President, Chief Executive
Officer & Trustee*
President, Chief Executive Officer and Director of The Vanguard Group, Inc.
and of each of the investment companies in The Vanguard Group.
ROBERT E. CAWTHORN, Trustee
Chairman of Rhone-Poulenc Rorer, Inc.; Director of Sun Company.
BARBARA BARNES HAUPTFUHRER, Trustee
Director of The Great Atlantic and Pacific Tea Company. Alco Standard
Corp., Raytheon Company, Knight-Ridder Inc., and Massachusetts Mutual Life
Insurance Co. and Trustee Emerita of Wellesley College.
BRUCE K. MACLAURY, Trustee
President, The Brookings Institution; Director of American Express Bank,
Ltd., The St. Paul Companies, Inc., and Scott Paper Co.
BURTON G. MALKIEL, Trustee
Chemical Bank Chairman's Professor of Economics, Princeton University;
Director of Prudential Insurance Co. of America, Amdahl Corporation, Baker
Fentress & Co., The Jeffrey Co., and Southern New England Communications
Company.
ALFRED M. RANKIN, JR., Trustee
Chairman, President, and Chief Executive Officer of NACCO Industries, Inc.;
Director of The BFGoodrich Company, and The Standard Products Company.
JOHN C. SAWHILL, Trustee
President and Chief Executive Officer, The Nature Conservancy; formerly,
Director and Senior Partner, McKinsey & Co.; President, New York
University; Director of Pacific Gas and Electric Company and NACCO
Industries.
JAMES O. WELCH, JR., Trustee
Retired Chairman of Nabisco Brands, Inc. retired Vice Chairman and Director
of RJR Nabisco; Director of TECO Energy, Inc.; and Director of Kmart
Corporation.
J. LAWRENCE WILSON, Trustee
Chairman and Chief Executive Officer of Rohm & Haas Company; Director of
Cummins Engine Company; Trustee of Vanderbilt University.
RAYMOND J. KLAPINSKY, Secretary*
Senior Vice President and Secretary of The Vanguard Group, Inc.; Secretary
of each of the investment companies in The Vanguard Group.
RICHARD F. HYLAND, Treasurer*
Treasurer of The Vanguard Group, Inc. and of each of the investment
companies in The Vanguard Group.
KAREN E. WEST, Controller*
Vice President of The Vanguard Group, Inc.; Controller of each of the
investment companies in The Vanguard Group.
- ---------------
*Officers of the Trust are "interested persons" as defined in the Investment
Company Act of 1940.
8
<PAGE> 79
THE VANGUARD GROUP, INC.
Vanguard Index Trust is a member of the Vanguard Group of Investment
companies which consists of more than 30 investment companies. Through their
jointly-owned subsidiary, The Vanguard Group, Inc. ("Vanguard"), the Trust and
the other Funds in the Group obtain at cost virtually all of their corporate
management, administrative and distribution services. Vanguard also provides
investment advisory services on an at-cost basis to several of the Vanguard
Funds.
Vanguard employs a supporting staff of management and administrative
personnel needed to provide the requisite services to the Funds and also
furnishes the Funds with necessary office space, furnishings and equipment. Each
Fund pays its share of Vanguard's total expenses which are allocated among the
Funds under methods approved by the Board of Trustees (Directors) of each Fund.
In addition, each Fund bears its own direct expenses such as legal, auditing and
custodian fees.
The Fund's Officers are Officers of Vanguard. No Officer or employee owns,
or is permitted to own, any securities of any external adviser for the Funds.
The Vanguard Group adheres to a Code of Ethics established pursuant to Rule
17j-1 under the Investment Company Act of 1940. The Code is designed to prevent
unlawful practices in connection with the purchase or sale of securities by
persons associated with Vanguard. Under Vanguard's Code of Ethics certain
officers and employees of Vanguard who are considered access persons are
permitted to engage in personal securities transactions. However, such
transactions are subject to procedures and guidelines substantially similar to
those recommended by the mutual fund industry and approved by the U.S.
Securities and Exchange Commission.
The Vanguard Group was established and operates under a Funds' Service
Agreement which was approved by the shareholders of each of the Funds. The
Funds' Service Agreement provides as follows: (a) each aggregate Vanguard Fund
may invest up to .40% of its current assets in Vanguard, and (b) there is no
limitation on the amount that the Vanguard Funds may contribute to Vanguard's
capitalization. The amounts which each of the Funds have invested are adjusted
from time to time in order to maintain the proportionate relationship between
each Fund's relative net assets and its contribution to Vanguard's capital. At
December 31, 1995 the Trust had contributed capital of $2,487,000 to Vanguard,
representing 12.4% of Vanguard's capitalization.
MANAGEMENT Corporate management and administrative services include: (1)
executive staff; (2) accounting and financial; (3) legal and regulatory; (4)
shareholder account maintenance; (5) monitoring and control of custodian
relationships; (6) shareholder reporting; and (7) review and evaluation of
advisory and other services provided to the Funds by third parties. During the
fiscal year ended December 31, 1995 the Trust's share of Vanguard's actual net
costs of operation relating to management and administrative services (including
transfer agency) totaled approximately $28,811,000.
DISTRIBUTION Vanguard provides all distribution and marketing activities
for the Funds in the Group. Vanguard Marketing Corporation, a wholly-owned
subsidiary of The Vanguard Group, Inc., acts as Sales Agent for the shares of
the Funds in connection with any sales made directly to investors in the states
of Florida, Missouri, New York, Ohio, Texas and such other states as it may be
required.
The principal distribution expenses are for advertising, promotional
materials and marketing personnel. Distribution services may also include
organizing and offering to the public, from time to time, one or more new
investment companies which will become members of the Group. The directors and
officers of Vanguard determine the amount to be spent annually on distribution
activities, the manner and amount to be spent on each Fund, and whether to
organize new investment companies.
One half of the distribution expenses of a marketing and promotional nature
is allocated among the Funds based upon relative net assets. The remaining one
half of those expenses is allocated among the Funds based upon each Fund's sales
for the preceding 24 months relative to the total sales of the Funds as a Group,
provided, however, that no Fund's aggregate quarterly rate of contribution for
distribution expenses of a marketing and promotional nature shall exceed 125% of
average distribution expense rate for the Group, and that no Fund shall incur
annual distribution expenses in excess of 20/100 of 1% of its average month-end
net
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<PAGE> 80
assets. During the fiscal year ended December 31, 1995 the Trust paid
approximately $3,385,000 of the Group's distribution and marketing expenses.
INVESTMENT ADVISORY SERVICES Vanguard also provides investment advisory
services to Vanguard Municipal Bond Fund, Vanguard Admiral Funds, Vanguard
Balanced Index Fund, several Portfolios of Vanguard Variable Insurance Fund,
Vanguard Bond Index Fund, Vanguard International Equity Index Fund, Vanguard
Institutional Index Fund, Vanguard Money Market Reserves, several Portfolios of
Vanguard Fixed Income Securities Fund, Vanguard Tax-Managed Fund, the Aggressive
Growth Portfolio of Vanguard Horizon Fund, Vanguard California Tax-Free Fund,
Florida Insured Tax-Free Fund, New Jersey Tax-Free Fund, New York Insured
Tax-Free Fund, Ohio Tax-Free Fund, Pennsylvania Tax-Free Fund, a portion of the
assets of Vanguard/Windsor II, a portion of Vanguard/Morgan Growth Fund and
several indexed separate accounts. These services are provided on an at-cost
basis from money management staff employed directly by Vanguard. The
compensation and other expenses of this staff are paid by the Funds utilizing
these services. During the fiscal year ended December 31, 1995, the Fund paid
approximately $213,000 of Vanguard's expenses relating to investment advisory
services.
REMUNERATION OF TRUSTEES AND OFFICERS The Trust pays each Trustee, who is
not also an Officer, an annual fee plus travel and other expenses incurred in
attending Board meetings. The Trust's Officers and employees are paid by
Vanguard which, in turn, is reimbursed by the Trust and each other Fund in the
Group, for its proportionate share of Officers' and employees' salaries and
retirement benefits. For the fiscal year ended December 31, 1995, the Fund's
proportionate share of remuneration for all Officers as a group was
approximately $634,687, and its proportionate share of the amounts contributed
to the retirement plans of all Officers as a group was approximately $18,600.
During the fiscal year ended December 31, 1995, the Trust paid
approximately $60,000 in Trustees' fees and expenses.
Upon retirement, Trustees who are not Officers receive an annual fee of
$1,000 for each year of service on the Board up to a maximum of $15,000. Under
its retirement plan, Vanguard contributes annually an amount equal to 10% of
each Officer's annual compensation plus 7% of that part of the Officer's
compensation during the year, if any, that exceeds the Social Security Taxable
Wage Base then in effect.
The following table provides detailed information with respect to the
amounts paid or accrued for the Trustees and Officers of the Trust for whom the
Trust's proportionate share of remuneration exceeded $60,000 for the fiscal year
ended December 31, 1995.
VANGUARD INDEX TRUST
COMPENSATION TABLE
<TABLE>
<CAPTION>
AGGREGATE PENSION OR RETIREMENT ESTIMATED TOTAL COMPENSATION
COMPENSATION BENEFITS ACCRUED AS ANNUAL BENEFITS FROM ALL VANGUARD FUNDS
NAMES OF TRUSTEES FROM TRUST PART OF TRUST EXPENSES UPON RETIREMENT PAID TO TRUSTEES(3)
- --------------------------- ------------ ---------------------- --------------- -----------------------
<S> <C> <C> <C> <C>
John C. Bogle(1),(2) $352,833 $3,720 -- --
John J. Brennan(2) $175,833 $3,720 -- --
Barbara Barnes Hauptfuhrer $ 6,512 $1,114 $15,000 $59,000
Robert E. Cawthorn $ 6,512 $ 928 $13,000 $59,000
Bruce K. MacLaury $ 7,180 $1,098 $12,000 $55,000
Burton G. Malkiel $ 6,622 $ 742 $15,000 $60,000
Alfred M. Rankin, Jr. $ 6,622 $ 586 $15,000 $60,000
John C. Sawhill $ 6,622 $ 696 $15,000 $60,000
James O. Welch, Jr. $ 6,512 $ 857 $15,000 $59,000
J. Lawrence Wilson $ 6,622 $ 619 $15,000 $60,000
</TABLE>
(1) For the period reported in this table, Mr. Bogle was the Company's Chief
Executive Officer, and therefore an "Interested Trustee."
(2) As "Interested Trustees," Messrs. Bogle and Brennan receive no compensation
for their service as Trustees. Compensation amounts reported for Messrs.
Bogle and Brennan relate to their respective positions as Chief Executive
Officer and President of the Trust.
(3) The amounts reported in this column reflect the total compensation paid to
each Trustee for their service as Director or Trustee of 34 Vanguard Funds
(27 in the case of Mr. MacLaury).
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<PAGE> 81
PORTFOLIO TRANSACTIONS
In placing portfolio transactions, the Trust uses its best judgment to
choose the broker most capable of providing the brokerage services necessary to
obtain best available price and most favorable execution. The full range and
quality of brokerage services available are considered in making these
determinations. In those instances where it is reasonably determined that more
than one broker can offer the brokerage services needed to obtain the best
available price and most favorable execution, consideration will be given to
those brokers which supply statistical information and provide other services in
addition to execution services to the Trust.
Since the Trust does not market its shares through intermediary brokers or
dealers, it is not the Trust's practice to allocate brokerage or principal
business on the basis of sales of its shares which may be made through such
firms. However, the Trust may place portfolio orders with qualified
broker-dealers who recommend the Trust to clients, and may, when a number of
brokers and dealers can provide best price and execution on a particular
transaction, consider the sale of Trust shares by a broker or dealer in
selecting among broker-dealers.
During the years ended December 31, 1993, 1994 and 1995 the Trust paid
brokerage commissions of $1,454,492*, $2,092,196 and $3,421,567, respectively.
*Does not include the Small Capitalization Stock Portfolio (formerly Vanguard
Small Capitalization Stock Fund, Inc.).
DESCRIPTION OF SHARES AND VOTING RIGHTS
The Declaration of Trust permits the Trustees to issue an unlimited number
of shares of beneficial interest, without par value, from an unlimited number of
classes ("Portfolios") of shares. Currently the Trust is offering shares of six
Portfolios.
The shares of the Trust are fully paid and nonassessable, except as set
forth under "Shareholder and Trustee Liability," and have no preference as to
conversion, exchange, dividends, retirement or other features. The shares of the
Trust have no pre-emptive rights. The shares of the Trust have non-cumulative
voting rights, which means that the holders of more than 50% of the shares
voting for the election of Trustees can elect 100% of the Trustees if they
choose to do so. A shareholder is entitled to one vote for each full share held
(and a fractional vote for each fractional share held), then standing in his
name on the books of the Trust. On any matter submitted to a vote of
shareholders, all shares of the Trust then issued and outstanding and entitled
to vote, irrespective of the class, shall be voted in the aggregate and not by
class: except (i) when required by the Investment Company Act of 1940, shares
shall be voted by individual class; and (ii) when the matter does not affect any
interest of a particular class, then only shareholders of the affected class or
classes shall be entitled to vote thereon.
The Trust will continue without limitation of time, provided however that:
1) Subject to the majority vote of the holders of shares of any Portfolio
of the Trust outstanding, the Trustees may sell or convert the assets of
such Portfolio to another investment company in exchange for shares of
such investment company and distribute such shares ratably among the
shareholders of such Portfolio;
2) Subject to the majority vote of shares of any Portfolio of the Trust
outstanding, the Trustees may sell and convert into money the assets of
such Portfolio and distribute such assets ratably among the shareholders
of such Portfolio; and
3) Without the approval of the shareholders of any Portfolio, unless
otherwise required by law, the Trustees may combine the assets of any
two or more Portfolios into a single Portfolio so long as such
combination will not have a material adverse effect upon the
shareholders of such Portfolio.
Upon completion of the distribution of the remaining proceeds or the
remaining assets of any Portfolio as provided in paragraphs 1), 2), 3) above the
Trust shall terminate as to that Portfolio and the Trustees shall be discharged
of any and all further liabilities and duties hereunder and the right, title and
interest of all parties shall be cancelled and discharged.
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<PAGE> 82
SHAREHOLDER AND TRUSTEE LIABILITY Under Pennsylvania law, shareholders of
such a Trust may, under certain circumstances, be held personally liable as
partners for the obligations of the Trust. Therefore, the Declaration of Trust
contains an express disclaimer of shareholder liability for acts or obligations
of the Trust and requires that notice of such disclaimer be given in each
agreement, obligation, or instrument entered into or executed by the Trust or
the Trustees. The Declaration of Trust provides for indemnification out of the
Trust property of any shareholder held personally liable for the obligations of
the Trust. The Declaration of Trust also provides that the Trust shall, upon
request, assume the defense of any claim against any shareholder for any act or
obligation of the Trust and satisfy any judgment thereon. Thus, the risk of a
shareholder incurring financial loss on account of shareholder liability is
limited to circumstances in which the Trust itself would be unable to meet its
obligations.
The Declaration of Trust further provides that the Trustees will not be
liable for errors of judgment or mistakes of fact or law, but nothing in the
Declaration of Trust protects a Trustee against any liability to which he would
otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties involved in the conduct of his
office.
PERFORMANCE MEASURES
Vanguard may use reprinted material discussing The Vanguard Group, Inc. or
any of the member funds of The Vanguard Group, Inc.
Each of the investment company members of the Vanguard Group, including
Vanguard Index Trust, may from time to time, use one or more of the following
unmanaged indices for comparative performance purposes.
STANDARD & POOR'S 500 COMPOSITE STOCK PRICE INDEX -- is a well diversified list
of 500 companies representing the U.S. Stock Market.
STANDARD & POOR'S/BARRA VALUE INDEX -- contains common stocks of the S&P 500
Index which have lower than average price-to-book ratios.
STANDARD & POOR'S/BARRA GROWTH INDEX -- contains common stocks of the S&P 500
Index which have higher than average price-to-book ratios.
WILSHIRE 5000 EQUITY INDEX -- consists of more than 6,000 common equity
securities, covering all stocks in the U.S. for which daily pricing is
available.
WILSHIRE 4500 EQUITY INDEX -- consists of all stocks in the Wilshire 5000 except
for the 500 stocks in the Standard & Poor's 500 Index.
RUSSELL 2000 INDEX -- is composed of approximately 2,000 small capitalization
stocks.
MORGAN STANLEY CAPITAL INTERNATIONAL EAFE INDEX -- is an arithmetic, market
value-weighted average of the performance of over 900 securities listed on the
stock exchanges of countries in Europe, Australia and the Far East.
GOLDMAN SACHS 100 CONVERTIBLE BOND INDEX -- currently includes 71 bonds and 29
preferred. The original list of names was generated by screening for convertible
issues of $100 million or greater in market capitalization. The index is priced
monthly.
SALOMON BROTHERS GNMA INDEX -- includes pools of mortgages originated by private
lenders and guaranteed by the mortgage pools of the Government National Mortgage
Association.
SALOMON BROTHERS HIGH-GRADE CORPORATE BOND INDEX -- consists of publicly issued,
non-convertible corporate bonds rated Aa or Aaa. It is a value-weighted, total
return index, including approximately 800 issues with maturities of 12 years or
greater.
SALOMON BROTHERS BROAD INVESTMENT-GRADE BOND -- is a market-weighted index that
contains approximately 4700 individually priced investment-grade corporate bonds
rated BBB or better, U.S. Treasury/agency issues and mortgage passthrough
securities.
LEHMAN LONG-TERM TREASURY BOND -- is composed of all bonds covered by the
Shearson Lehman Hutton Treasury Bond Index with maturities of 10 years or
greater.
NASDAQ INDUSTRIAL INDEX -- is composed of more than 3,000 industrial issues. It
is a value-weighted index calculated on price change only and does not include
income.
12
<PAGE> 83
COMPOSITE INDEX -- 70% Standard & Poor's 500 Index and 30% NASDAQ Industrial
Index.
COMPOSITE INDEX -- 65% Standard & Poor's 500 Index and 35% Lehman Long-Term
Corporate AA or Better Bond Index.
COMPOSITE INDEX -- 65% Lehman Long-Term Corporate AA or Better Bond Index and a
35% weighting in a blended equity composite (75% Standard & Poor's/BARRA Value
Index and 25% Standard & Poor's Utilities Index).
LEHMAN LONG-TERM CORPORATE AA OR BETTER BOND INDEX -- consists of all publicly
issued, fixed rate, nonconvertible investment grade, dollar-denominated,
SEC-registered corporate debt rated AA or AAA.
LEHMAN BROTHERS AGGREGATE BOND INDEX -- is a market-weighted index that contains
individually priced U.S. Treasury, agency, corporate, and mortgage pass-through
securities corporate rated Baa- or better. The Index has a market value of over
$4 trillion.
LEHMAN BROTHERS MUTUAL FUND SHORT (1-5) GOVERNMENT/CORPORATE INDEX -- is a
market-weighted index that contains individually priced U.S. Treasury, agency,
and corporate investment grade bonds rated BBB- or better with maturities
between 1 and 5 years. The index has a market value of over $1.3 trillion.
LEHMAN BROTHERS MUTUAL FUND INTERMEDIATE (5-10+) GOVERNMENT/CORPORATE
INDEX -- is a market-weighted index that contains individually priced U.S.
Treasury, agency, and corporate securities rated BBB- or better with maturities
between 5 and 10 years. The index has a market value of over $600 billion.
LEHMAN BROTHERS MUTUAL FUND LONG (10+) GOVERNMENT/CORPORATE INDEX -- is a
market-weighted index that contains individually priced U.S. Treasury, agency,
and corporate securities rated BBB- or better with maturities greater than 10
years. The index has a market value of over $900 billion.
LEHMAN CORPORATE (BAA) BOND INDEX -- all publicly offered fixed-rate,
nonconvertible domestic corporate bonds rated Baa by Moody's, with a maturity
longer than 1 year and with more than $25 million outstanding. This index
includes over 1,000 issues.
LEHMAN BROTHERS LONG-TERM CORPORATE BOND INDEX -- is a subset of the Lehman
Corporate Bond Index covering all corporate, publicly issued, fixed-rate
nonconvertible U.S. debt issues rated at least Baa, with at least $50 million
principal outstanding and maturity greater than 10 years.
FINANCIAL STATEMENTS
The Trust's Financial Statements for the year ended December 31, 1995,
including the financial highlights for each of the respective periods presented,
appearing in the Vanguard Index Trust 1995 Annual Report to Shareholders and
inserts thereto, and the reports thereon of Price Waterhouse LLP, independent
accountants, also appearing therein, are incorporated by reference in this
Statement of Additional Information. The Trust's 1995 Annual Report to
Shareholders and inserts thereto, are enclosed with this Statement of Additional
Information.
13
<PAGE> 84
PART C
VANGUARD INDEX TRUST
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(A) FINANCIAL STATEMENTS
The Trust's Financial Statements for the year ended December 31, 1995,
including the financial highlights for each of the respective periods presented,
appearing in the Vanguard Index Trust 1995 Annual Report to Shareholders and
inserts thereto, and the reports thereon of Price Waterhouse LLP, independent
accountants, also appearing therein, are incorporated by reference in this
Statement of Additional Information. The Financial Statements included in the
Annual Report:
1. Statement of Net Assets as of December 31, 1995.
2.Statement of Operations for the year ended December 31, 1995.
3. Statement of Changes in Net Assets for the years ended December 31, 1994
and December 31, 1995.
4. Financial Highlights for the respective periods ended December 31, 1995.
5. Notes to Financial Statements.
6. Reports of Independent Accountants.
(B) EXHIBITS
1. Articles of Declaration of Trust**
2. By-Laws of Registrant**
3. Not Applicable
4. Not Applicable
5. Not Applicable
6. Not Applicable
7. Reference is made to the section entitled "Management of the Fund" in
the Registrant's Statement of Additional Information
8. Form of Custody Agreement**
9. Form of Vanguard Service Agreement**
10. Opinion of Counsel**
11. Consent of Independent Accountants*
12. Financial Statements -- reference is made to (a) above
13. Not Applicable
14. Not Applicable
15. Not Applicable
16. Schedule for Computation of Performance Quotations*
27. Financial Data Schedule*.
- ---------------
* Filed herewith
** Previously filed.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
Registrant is not controlled by or under common control with any person.
The Officers of the Registrant, the investment companies in The Vanguard Group
of Investment Companies and The Vanguard Group, Inc. are identical. Reference is
made to the caption "Management of the Fund" in the Prospectus constituting Part
A and in the Statement of Additional Information constituting Part B of this
Registration Statement.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES
As of December 31, 1995 there were 632,185 shareholders of the 500
Portfolio, 50,269 shareholders of the Extended Market Portfolio, 34,177
shareholders of the Total Stock Market Portfolio, 21,024 shareholders
<PAGE> 85
of the Value Portfolio, 15,117 shareholders of the Growth Portfolio and 43,164
shareholders of Vanguard Small Capitalization Stock Portfolio.
ITEM 27. INDEMNIFICATION
Reference is made to Article XI of Registrant's Declaration of Trust.
Insofar as indemnification for liability arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
Investment advisory services are provided to the Registrant on an at-cost
basis by The Vanguard Group, Inc., a jointly-owned subsidiary of the Registrant
and the other Funds in the Group. See the information concerning The Vanguard
Group set forth in Parts A and B.
ITEM 29. PRINCIPAL UNDERWRITERS
(a) None
(b) Not Applicable
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
The books, accounts and other documents required by Section 31(a) under the
Investment Company Act and the rules promulgated thereunder will be maintained
in the physical possession of Registrant; Registrant's Transfer Agent, The
Vanguard Group, Inc. c/o The Vanguard Financial Center, Valley Forge,
Pennsylvania 19482; and the Registrant's Custodians, State Street Bank and Trust
Company, 225 Franklin Street, Boston, Massachusetts 02105, and CoreStates Bank,
N.A., Broad and Market Sts., Philadelphia, PA 19103.
ITEM 31. MANAGEMENT SERVICES
Other than the Amended and Restated Funds' Service Agreement with The
Vanguard Group, Inc. which was previously filed as Exhibit 9(c) and described
Registrant is not a party of any management-related service contract.
ITEM 32. UNDERTAKINGS
Registrant hereby undertakes to comply with the provisions of Section 16(c)
of the Investment Company Act of 1940 in regard to shareholder's rights to call
a meeting of shareholders for the purpose of voting on the removal of trustees
and to assist in shareholder communications in such matters to the extent
required by law.
Registrant hereby undertakes to provide an Annual Report to Shareholders of
prospective investors, free of charge, upon request.
<PAGE> 86
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all the
requirements for effectiveness of this Registration Statement pursuant to Rule
485(b) under the Securities Act of 1933 and has duly caused this Post-Effective
Amendment to this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the Town of Valley Forge and the
Commonwealth of Pennsylvania, on the 23rd day of April, 1996.
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment to the Registration Statement has been signed below by
the following persons in the capacities and on the date indicated:
BY: John C. Bogle*, Chairman of the Board and Trustee
April 23, 1996
BY: John J. Brennan*, President, Trustee and Chief Executive Officer
April 23, 1996
BY: Robert E. Cawthorn*, Trustee
April 23, 1996
BY: Barbara B. Hauptfuhrer*, Trustee
April 23, 1996
BY: Bruce K. MacLaury*, Trustee
April 23, 1996
BY: Burton G. Malkiel*, Trustee
April 23, 1996
BY: Alfred M. Rankin, Jr.*, Trustee
April 23, 1996
BY: John C. Sawhill*, Trustee
April 23, 1996
BY: James O. Welch, Jr.*, Trustee
April 23, 1996
BY: J. Lawrence Wilson*, Trustee
April 23, 1996
BY: Richard F. Hyland*, Treasurer and Principal
Financial Officer and Accounting Officer
April 23, 1996
*By Power of Attorney. See File Number 2-14336, January 23, 1990. Incorporated
by Reference.
<PAGE> 87
INDEX TO EXHIBITS
<TABLE>
<S> <C>
Consent of Independent Accountants................................................... EX-99.B11
Schedule for Computation of Performance Quotations................................... EX-99.B16
Financial Data Schedules............................................................. EX-27
</TABLE>
<PAGE> 1
EX-99.B11
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to incorporation by reference in the Prospectuses and the
Statement of Additional Information, constituting parts of this amended
Registration Statement on Form N-1A, of our reports dated January 31, 1996
relating to the financial statements and the financial highlights appearing in
the 1995 Annual Reports to Shareholders of Vanguard Index Trust. We also consent
to the references to us under the headings "Financial Highlights" and "General
Information" in Prospectuses and "Financial Statements" in the Statement of
Additional Information.
PRICE WATERHOUSE LLP
Philadelphia, PA
April 22, 1996
<PAGE> 1
EX-99.B16
SCHEDULE FOR COMPUTATION OF PERFORMANCE QUOTATIONS
VANGUARD INDEX TRUST -- 500 PORTFOLIO
1. Average Annual Total Return (As of December 31, 1995)
P (1 + T)n = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
N = number of years
ERV = ending redeemable value at the end of the period
EXAMPLE:
One Year
P = $1,000
T = +37.40%
N = 1
ERV = $1,374.05*
Five Year
P = $1,000
T = +16.36%
N = 5
ERV = $2,133.40*
Ten Year
P = $1,000
T = +14.53%
N = 10
ERV = $3,883.98*
*Adjusted for $10 account maintenance fee.
2. YIELD (30 Days Ended December 31, 1995)
Yield = 2[(a - b +1)6-1]
------
c x d
Where: a = dividends and interest paid during the period
b = expense dollars during the period (net of reimbursements)
c = the average daily number of shares outstanding during the
period
d = the maximum offering price per share on the last day of
the period
Example a = $33,074,080.53
b = $2,516,247.51
c = 294,356,867.551
d = $57.60
Yield = 2.17%
<PAGE> 2
VANGUARD INDEX TRUST -- EXTENDED MARKET PORTFOLIO
1. Average Annual Total Return (As of December 31, 1995)
P (1 + T)n = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
N = number of years
ERV = ending redeemable value at the end of the period
EXAMPLE:
One Year
-------
P = $1,000
T = +33.09%
N = 1
ERV = $1,330.91*
Five Year
--------
P = $1,000
T = +18.97%
N = 5
ERV = $2,383.67*
Ten Year
-------
P = $1,000
T = +14.83%
N = since inception 12/21/87
ERV = $3,035.48*
*Adjusted for $10 account maintenance fee and .50% portfolio transaction
fee.
2. YIELD (30 Days Ended December 31, 1995)
Yield = 2[(a - b +1)6-1]
------
c x d
Where: a = dividends and interest paid during the period
b = expense dollars during the period (net of reimbursements)
c = the average daily number of shares outstanding during the
period
d = the maximum offering price per share on the last day of
the period
Example a = $1,888,331.33
b = $206,821.81
c = 61,104,942.590
d = $24.07
Yield = 1.38%
<PAGE> 3
VANGUARD INDEX TRUST -- TOTAL STOCK MARKET PORTFOLIO
1. Average Annual Total Return (As of December 31, 1995)
P (1 + T)n = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
N = number of years
ERV = ending redeemable value at the end of the period
EXAMPLE:
----------
One Year
-------
P = $1,000
T = +35.42%
N = 1
ERV = $1,354.19**
Five Year
--------
P = $1,000
T = +14.57%
N = *
ERV = $1,648.98**
* Since inception March 16, 1992.
** Adjusted for $10 account maintenance fee and .25% portfolio transaction
fee.
2. YIELD (30 Days Ended December 31, 1995)
Yield = 2[(a - b +1)6-1]
------
c x d
Where: a = dividends and interest paid during the period
b = expense dollars during the period (net of reimbursements)
c = the average daily number of shares outstanding during the
period
d = the maximum offering price per share on the last day of
the period
Example a = $2,763,028.84
b = $379,209.37
c = 102,071,309.245
d = $15.04
Yield = 1.85%
<PAGE> 4
VANGUARD INDEX TRUST -- VALUE PORTFOLIO
1. Average Annual Total Return (As of December 31, 1995)
P (1 + T)n = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
N = number of years
ERV = ending redeemable value at the end of the period
EXAMPLE:
----------
One Year
-------
P = $1,000
T = +36.89%
N = 1
ERV = $1,368.89**
Five Year
--------
P = $1,000
T = +17.52%*
N = *
ERV = $1,665.74**
* Since inception November 2, 1992.
** Adjusted for $10 account maintenance fee.
2. YIELD (30 Days Ended December 31, 1995)
Yield = 2[(a - b +1)6-1]
------
c x d
Where: a = dividends and interest paid during the period
b = expense dollars during the period (net of reimbursements)
c = the average daily number of shares outstanding during the
period
d = the maximum offering price per share on the last day of
the period
Example a = $1,187,696.01
b = $67,726.26
c = 32,837,361.770
d = $14.80
Yield = 2.78%
<PAGE> 5
VANGUARD INDEX TRUST -- GROWTH PORTFOLIO
1. Average Annual Total Return (As of December 31, 1995)
P (1 + T)n = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
N = number of years
ERV = ending redeemable value at the end of the period
EXAMPLE:
----------
One Year
-------
P = $1,000
T = +38.00%
N = 1
ERV = $1,380.01**
Five Year
--------
P = $1,000
T = +13.32%
N = *
ERV = $1,484.63**
* Since inception November 2, 1992.
** Adjusted for $10 account maintenance fee.
2. YIELD (30 Days Ended December 31, 1995)
Yield = 2[(a - b +1)6-1]
------
c x d
Where: a = dividends and interest paid during the period
b = expense dollars during the period (net of reimbursements)
c = the average daily number of shares outstanding during the
period
d = the maximum offering price per share on the last day of
the period
Example a = $381,550.49
b = $40,093.00
c = 18,356,635.735
d = $13.97
Yield = 1.60%
<PAGE> 6
SMALL CAPITALIZATION STOCK PORTFOLIO
(FORMERLY VANGUARD SMALL CAPITALIZATION STOCK FUND, INC.)
1. Average Annual Total Return (As of December 31, 1995)
P (1 + T)n = ERV
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
N = number of years
ERV = ending redeemable value at the end of the period
EXAMPLE:
----------
One Year
-------
P = $1,000
T = +27.40%
N = 1
ERV = $1,274.04*
Five Year
--------
P = $1,000
T = +20.85%
N = 5
ERV = $2,577,69*
Ten Year
-------
P = $1,000
T = +10.43%
N = 10
ERV = $2,696.90*
*Adjusted for $10 account maintenance fee and 1% portfolio transaction fee.
2. YIELD (30 Days Ended December 31, 1995)
Yield = 2[(a - b +1)6-1]
------
c x d
Where: a = dividends and interest paid during the period
b = expense dollars during the period (net of reimbursements)
c = the average daily number of shares outstanding during the
period
d = the maximum offering price per share on the last day of
the period
Example a = $1,226,651.94
b = $69,949.15
c = 50,408,609.734
d = $18.61
Yield = 1.48%
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<NET-CHANGE-IN-ASSETS> 785205
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<ACCUMULATED-GAINS-PRIOR> 35
<OVERDISTRIB-NII-PRIOR> 140
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 47
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2898
<AVERAGE-NET-ASSETS> 1157808
<PER-SHARE-NAV-BEGIN> 11.37
<PER-SHARE-NII> 0.29
<PER-SHARE-GAIN-APPREC> 3.75
<PER-SHARE-DIVIDEND> 0.28
<PER-SHARE-DISTRIBUTIONS> 0.09
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 15.04
<EXPENSE-RATIO> 0.25
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000036405
<NAME> VANGUARD INDEX TRUST
<SERIES>
<NUMBER> 004
<NAME> VALUE PORTFOLIO
<MULTIPLIER> 1,000
<CURRENCY> US
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 409122
<INVESTMENTS-AT-VALUE> 496271
<RECEIVABLES> 48281
<ASSETS-OTHER> 59
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 544611
<PAYABLE-FOR-SECURITIES> 46114
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 2170
<TOTAL-LIABILITIES> 48284
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 399764
<SHARES-COMMON-STOCK> 33551
<SHARES-COMMON-PRIOR> 26698
<ACCUMULATED-NII-CURRENT> 195
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 9219
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 87149
<NET-ASSETS> 496327
<DIVIDEND-INCOME> 12021
<INTEREST-INCOME> 106
<OTHER-INCOME> 0
<EXPENSES-NET> 755
<NET-INVESTMENT-INCOME> 11372
<REALIZED-GAINS-CURRENT> 11285
<APPREC-INCREASE-CURRENT> 91742
<NET-CHANGE-FROM-OPS> 114399
<EQUALIZATION> 772
<DISTRIBUTIONS-OF-INCOME> 11989
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 13982
<NUMBER-OF-SHARES-REDEEMED> 7889
<SHARES-REINVESTED> 761
<NET-CHANGE-IN-ASSETS> 199398
<ACCUMULATED-NII-PRIOR> 40
<ACCUMULATED-GAINS-PRIOR> (2066)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 24
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 755
<AVERAGE-NET-ASSETS> 372147
<PER-SHARE-NAV-BEGIN> 11.12
<PER-SHARE-NII> 0.41
<PER-SHARE-GAIN-APPREC> 3.66
<PER-SHARE-DIVIDEND> 0.40
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 14.79
<EXPENSE-RATIO> 0.20
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000036405
<NAME> VANGUARD INDEX TRUST
<SERIES>
<NUMBER> 005
<NAME> GROWTH PORTFOLIO
<MULTIPLIER> 1,000
<CURRENCY> US
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 230887
<INVESTMENTS-AT-VALUE> 277005
<RECEIVABLES> 28814
<ASSETS-OTHER> 29
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 305848
<PAYABLE-FOR-SECURITIES> 34502
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 344
<TOTAL-LIABILITIES> 0
<SENIOR-EQUITY> 34846
<PAID-IN-CAPITAL-COMMON> 223191
<SHARES-COMMON-STOCK> 19405
<SHARES-COMMON-PRIOR> 8380
<ACCUMULATED-NII-CURRENT> 142
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 1573
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 46096
<NET-ASSETS> 271002
<DIVIDEND-INCOME> 3025
<INTEREST-INCOME> 104
<OTHER-INCOME> 0
<EXPENSES-NET> 322
<NET-INVESTMENT-INCOME> 2807
<REALIZED-GAINS-CURRENT> 2780
<APPREC-INCREASE-CURRENT> 43832
<NET-CHANGE-FROM-OPS> 49419
<EQUALIZATION> 153
<DISTRIBUTIONS-OF-INCOME> 2809
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 13833
<NUMBER-OF-SHARES-REDEEMED> 3005
<SHARES-REINVESTED> 197
<NET-CHANGE-IN-ASSETS> 184832
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (1207)
<OVERDISTRIB-NII-PRIOR> 9
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 24
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 322
<AVERAGE-NET-ASSETS> 164658
<PER-SHARE-NAV-BEGIN> 10.28
<PER-SHARE-NII> 0.21
<PER-SHARE-GAIN-APPREC> 3.68
<PER-SHARE-DIVIDEND> 0.20
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 13.97
<EXPENSE-RATIO> 0.20
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000036405
<NAME> VANGUARD INDEX TRUST
<SERIES>
<NUMBER> 006
<NAME> SMALL CAPITALIZATION STOCK PORTFOLIO
<MULTIPLIER> 1,000
<CURRENCY> US
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 792492
<INVESTMENTS-AT-VALUE> 976299
<RECEIVABLES> 36993
<ASSETS-OTHER> 109
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1013401
<PAYABLE-FOR-SECURITIES> 6044
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 36124
<TOTAL-LIABILITIES> 42168
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 780052
<SHARES-COMMON-STOCK> 52196
<SHARES-COMMON-PRIOR> 40390
<ACCUMULATED-NII-CURRENT> 49
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 7411
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 183721
<NET-ASSETS> 971233
<DIVIDEND-INCOME> 12223
<INTEREST-INCOME> 1865
<OTHER-INCOME> 0
<EXPENSES-NET> 1930
<NET-INVESTMENT-INCOME> 12158
<REALIZED-GAINS-CURRENT> 32925
<APPREC-INCREASE-CURRENT> 142138
<NET-CHANGE-FROM-OPS> 187221
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 11543
<DISTRIBUTIONS-OF-GAINS> 22583
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 16951
<NUMBER-OF-SHARES-REDEEMED> 6821
<SHARES-REINVESTED> 1676
<NET-CHANGE-IN-ASSETS> 365857
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (2931)
<OVERDISTRIB-NII-PRIOR> 566
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 47
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1930
<AVERAGE-NET-ASSETS> 767920
<PER-SHARE-NAV-BEGIN> 14.99
<PER-SHARE-NII> 0.24
<PER-SHARE-GAIN-APPREC> 4.06
<PER-SHARE-DIVIDEND> 0.23
<PER-SHARE-DISTRIBUTIONS> 0.45
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 18.61
<EXPENSE-RATIO> 0.25
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
