<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. 47
AND
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY
ACT OF 1940
AMENDMENT NO. 49
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
60 days after filing pursuant to paragraph (a)(1) of Rule 485.
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
As soon as practicable after this Registration Statement becomes effective.
WE HAVE ELECTED 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, 1996 ON FEBRUARY 19, 1997.
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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...................................... Fund & Trust Expenses
Item 3. Condensed Financial Information............... Financial Highlights
Item 4. General Description of Registrant............. Investment Objectives; Investment
Limitations; Investment Policies;
Investment Risks; General Information
Item 5. Management of the Fund........................ Management and Investment Advisory
Services
Item 5A. Management's Discussion of Fund Performance... Herein incorporated by reference to
Registrant's Annual Report to
Shareholders dated December 31, 1996
filed with the Securities & Exchange
Commission's EDGAR system on March
11, 1997
Item 6. Capital Stock and Other Securities............ Opening an Account and Purchasing
Shares; Selling Shares; The Share
Price of the Fund and Each Portfolio;
Dividends, Capital Gains and Taxes;
General Information
Item 7. Purchase of Securities Being Offered.......... Opening an Account and Purchasing
Shares; Exchanging Shares; Exchange
Privilege Limitations
Item 8. Redemption or Repurchase...................... Selling 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............... Not Applicable
Item 13. Investment Objectives and Policies............ Investment Objectives and Policies;
Investment Limitations
Item 14. Management of the Registrant.................. Management of the Trust
Item 15. Control Persons and Principal Holders of
Securities.................................... Not Applicable
Item 16. Investment Advisory and Other Services........ Management of the Trust
Item 17. Brokerage Allocation and Other Services....... Portfolio Transactions
Item 18. Capital Stock and Other Securities............ Description of Shares and Voting
Rights
Item 19. Purchase, Redemption and Pricing of Securities
Being Offered................................. Purchase of Shares; Redemption of
Shares
Item 20. Tax Status.................................... Not Applicable
Item 21. Underwriters.................................. Management of the Trust
Item 22. Calculation Performance Data.................. Yield and Total Return; Performance
Measures
Item 23. Financial Statements.......................... Financial Statements
</TABLE>
<PAGE> 3
[FLAG LOGO]
C O M B I N E D
P R O S P E C T U S
MAY 19, 1997
VANGUARD BOND INDEX FUND
VANGUARD BALANCED INDEX FUND
VANGUARD INDEX TRUST
VANGUARD INTERNATIONAL EQUITY INDEX FUND
VANGUARD TOTAL INTERNATIONAL PORTFOLIO
[VANGUARD GROUP LOGO]
<PAGE> 4
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COMBINED PROSPECTUS -- MAY 19, 1997 Members of The Vanguard Group
================================================================================
NEW ACCOUNT INFORMATION: INVESTOR INFORMATION DEPARTMENT -- 1-800-662-7447
(SHIP)
- --------------------------------------------------------------------------------
SHAREHOLDER ACCOUNT SERVICES: CLIENT SERVICES DEPARTMENT -- 1-800-662-2739
(CREW)
- --------------------------------------------------------------------------------
INVESTMENT
OBJECTIVES AND
POLICIES The Vanguard index funds offered in this prospectus are four
separate, individual open-end diversified investment
companies. These include: Vanguard Bond Index Fund, Inc.
(the Total Bond Market, Short-Term Bond, Intermediate-Term
Bond and Long-Term Bond Portfolios); Vanguard Balanced Index
Fund, Inc.; Vanguard Index Trust (the 500, Extended Market,
Total Stock Market, Small Capitalization Stock, Value and
Growth Portfolios); and Vanguard International Equity Index
Fund, Inc. (the European, Pacific and Emerging Markets
Portfolios). The Total International Portfolio, which is
also discussed in this prospectus, is part of Vanguard STAR
Fund, an open-end non-diversified investment company. Each
of the Portfolios invests in securities (bonds or common
stocks) in order to match the investment performance of a
distinct market index.
- --------------------------------------------------------------------------------
OPENING AN
ACCOUNT To open a regular (non-retirement) account, please complete
and return the Account Registration Form. If you need
assistance in completing this Form, please call our Investor
Information Department. To open an Individual Retirement
Account (IRA), please use a Vanguard IRA Adoption Agreement.
To obtain a copy of this form, call 1-800-662-7447, Monday
through Friday, from 8:00 a.m. to 9:00 p.m. and Saturday,
from 9:00 a.m. to 4:00 p.m. (Eastern time). The minimum
initial investment for each Portfolio is $3,000 or $1,000
for Uniform Gifts/Transfers to Minors Act accounts. Each of
the Funds assesses a $10 annual account maintenance fee.
Certain Vanguard index funds deduct a portfolio transaction
fee from share purchases or share redemptions. The fee on
share purchases is .05% for the Extended Market, Small
Capitalization Stock and Pacific Portfolios. For the
European, Total International and Emerging Markets
Portfolios, the fee on share purchases is 1%, 0.75% and
1.5%, respectively. The Emerging Markets Portfolio, but not
the other Vanguard index funds, also deducts a 1% portfolio
transaction fee from share redemptions. Portfolio
transaction fees are paid to the Portfolios to offset
transaction costs of buying and selling securities of small-
and medium-sized companies and international companies. See
"Fund Expenses."
Note to Large Investors: Through a separate prospectus, the
Total Bond Market Portfolio of Vanguard Bond Market Fund
offers a separate, institutional class of shares for certain
investors investing $10 million or more. For a copy of the
Portfolio's Institutional Shares prospectus, please call
Vanguard's Institutional Investor Services Department at
1-800-523-8066.
- --------------------------------------------------------------------------------
ABOUT THIS
PROSPECTUS This Prospectus is designed to set forth concisely the
information you should know about the Portfolios before you
invest. It should be retained for future reference.
"Statements of Additional Information" containing additional
information about each of the Vanguard index funds have been
filed with the Securities and Exchange Commission. These
Statements have been incorporated by reference into this
Prospectus. A copy may be obtained without charge by writing
to the Portfolios or by calling our Investor Information
Department.
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
<TABLE>
<S> <C> <C> <C> <C> <C>
Highlights................. 2 Implementation of SHAREHOLDER GUIDE
Fund Expenses.............. 5 Policies................... 35 Opening an Account and
Financial Highlights....... 8 Investment Limitations..... 45 Purchasing Shares.......... 52
Yield and Total Return..... 17 Management of the Funds.... 46 When Your Account Will
Investment Advisers........ 47
FUND INFORMATION Dividends, Capital Gains Be Credited................ 57
Investment Objectives...... 17 and Taxes.................. 48 Selling Your Shares........ 58
Investment Policies........ 20 The Share Price of Exchanging Your Shares..... 61
Investment Risks........... 27 Each Portfolio............. 50 Important Information About
Who Should Invest.......... 31 General Information........ 50 Telephone Transactions..... 63
Transferring
Registration............... 63
</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.
- --------------------------------------------------------------------------------
<PAGE> 5
HIGHLIGHTS
Vanguard offers a total of fifteen separate index
portfolios or funds ("Portfolios"). Unlike other mutual
funds, which generally attempt to "beat" market
averages with often unpredictable results, the
Portfolios seek to "match" the performance of their
underlying indexes and thus are expected to provide
highly predictable returns relative to their
benchmarks. The Portfolios offer investors the
advantages of a "passive" approach to investing. These
include low investment costs, exceptional
diversification among securities, minimal portfolio
turnover, and relative predictability.
As with any mutual fund, there is no assurance that the
Portfolios will meet their objectives.
- --------------------------------------------------------------------------------
INVESTMENT
OBJECTIVES AND
POLICIES Vanguard Bond Index Fund, Vanguard Balanced Index Fund,
Vanguard Index Trust and Vanguard International Equity
Index Fund are each open-end diversified investment
companies designed as "index" funds. Vanguard Total
International Portfolio, also designed as an index
fund, is part of Vanguard STAR Fund, an open-end non-
diversified investment company.
VANGUARD BOND
INDEX FUND The Fund consists of four Portfolios, each of which
invests in bonds.
- The TOTAL BOND MARKET PORTFOLIO seeks to replicate
the performance of the Lehman Brothers Aggregate Bond
Index.
- The SHORT-TERM BOND PORTFOLIO seeks to replicate the
performance of the Lehman Brothers Mutual Fund Short
(1-5) Government/ Corporate Index.
- The INTERMEDIATE-TERM BOND PORTFOLIO seeks to
replicate the performance of the Lehman Brothers
Mutual Fund Intermediate (5-10) Government/Corporate
Index.
- The LONG-TERM BOND PORTFOLIO seeks to replicate the
performance of the Lehman Brothers Mutual Fund Long
(10+) Government/Corporate Index.
Each Portfolio will invest at least 80% of its assets
in securities included in its respective index. The
Lehman Brothers Indexes encompass two major classes of
investment grade fixed income securities: U.S. Treasury
and agency securities and corporate bonds.
Additionally, the Lehman Brothers Aggregate Bond Index
includes mortgage-backed securities. PAGE 17
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VANGUARD BALANCED
INDEX FUND The Fund invests in common stocks and bonds. It seeks
to replicate with respect to 60% of its assets the
performance of the Wilshire 5000 Equity Index and with
respect to 40% of its assets, the Lehman Brothers
Aggregate Bond Index. Under normal circumstances the
Fund will invest primarily in securities of its
underlying indexes. PAGE 17
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VANGUARD INDEX TRUST The Trust consists of six separate Portfolios, each of
which invests in U.S. common stocks.
- The 500 PORTFOLIO seeks to replicate the performance
of the S&P 500 Composite Stock Price Index.
- The EXTENDED MARKET PORTFOLIO seeks to replicate the
performance of the Wilshire 4500 Equity Index.
2
<PAGE> 6
- The TOTAL STOCK MARKET PORTFOLIO seeks to replicate
the performance of the Wilshire 5000 Equity Index.
- The SMALL CAPITALIZATION STOCK PORTFOLIO seeks to
replicate the performance of the Russell 2000 Small
Stock Index.
- The VALUE PORTFOLIO seeks to replicate the
performance of the S&P/BARRA Value Index.
- The GROWTH PORTFOLIO seeks to replicate the
performance of the S&P/BARRA Growth Index. PAGE 18
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VANGUARD
INTERNATIONAL
EQUITY INDEX FUND The Fund consists of three Portfolios each of which
invests in international common stocks.
- The EUROPEAN PORTFOLIO seeks to parallel the
performance of the Morgan Stanley Capital
International -- Europe (Free) Index.
- The PACIFIC PORTFOLIO seeks to parallel the
performance of the Morgan Stanley Capital
International -- Pacific (Free) Index.
- The EMERGING MARKETS PORTFOLIO seeks to parallel the
performance of the Morgan Stanley Capital
International -- Select Emerging (Free) Markets Free
Index.
The European Portfolio and the Pacific Portfolio invest
primarily in the common stocks included in their
respective indexes. The Emerging Markets Portfolio
invests 95% of its assets in securities which are
representative of securities in its index and 5% in
cash reserves. PAGE 19
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VANGUARD
TOTAL INTERNATIONAL
PORTFOLIO The Total International Portfolio seeks to match the
performance of the Morgan Stanley Capital
International -- Europe, Australia, and Far East +
Select Emerging Markets (Free) Index. PAGE 19
- --------------------------------------------------------------------------------
INVESTMENT
RISKS The Portfolios of the Vanguard Bond Index Fund and the
bond portion of the Vanguard Balanced Fund are subject
to risks associated with fixed income investing
including interest rate, income, call and credit risks.
Additionally, since the Total Bond Market Portfolio of
Vanguard Bond Index Fund invests in mortgage-backed
securities, the Portfolio is subject to prepayment
risk.
The equity portion of Vanguard Balanced Index Fund,
Vanguard Index Trust, Vanguard International Equity
Index Fund and Vanguard Total International Portfolio
are subject to stock market risk, which is the
possibility that common stock prices will decline over
short or extended periods. Both U.S. and foreign stock
markets tend to be cyclical, with periods when stock
prices generally rise and periods when stock prices
generally decline. Additionally, Vanguard International
Equity Index Fund and Vanguard Total International
Portfolio are subject to currency risk, the risk that
changes in foreign exchange rates will affect the value
of foreign securities held by the Portfolios.
Investors considering the Emerging Markets Portfolio
should be aware that emerging markets can be
substantially more volatile than both U.S. and more
developed foreign markets. Volatility in emerging
markets can be exacerbated by illiquidity in the market
for emerging market stocks.
3
<PAGE> 7
Because of the risks associated with common stocks and
bonds, the Portfolios are intended to be long-term
investment vehicles and are not designed to provide
investors with a means of speculating on short-term
market movements. Investors should not consider an
investment in any one portfolio a complete investment
program, but should maintain holdings of securities
with different risk characteristics -- including U.S.
common stocks, bonds and money market instruments. For
further information concerning the risks associated
with investing in the Portfolios, see "Investment
Risks". PAGE 27
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THE VANGUARD
GROUP The investment companies to which the Portfolios belong
are members of The Vanguard Group of Investment
Companies, a group of more than 30 investment companies
with more than 90 distinct investment portfolios and
total assets in excess of $250 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 46
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INVESTMENT
ADVISERS The Vanguard Bond Index Fund and the bond portion of
Vanguard Balanced Index Fund receive investment
advisory services from Vanguard's Fixed Income Group.
Vanguard Index Trust, Vanguard International Equity
Index Fund, Vanguard Total International Portfolio, and
the equity portion of Vanguard Balanced Index Fund
receive investment advisory services from Vanguard's
Core Management Group. All investment advisory services
are provided to the Index Funds on an at-cost basis. As
a result, the Funds receive investment advisory
services at a substantially lower cost than would be
possible if the Funds paid an investment advisory fee
to an external investment adviser. PAGE 47
- --------------------------------------------------------------------------------
FEES AND EXPENSES Certain Portfolios impose transaction fees on share
purchases or redemptions:
<TABLE>
<CAPTION>
FEE DEDUCTED
FEE DEDUCTED FROM
FROM PURCHASES REDEMPTIONS
<S> <C> <C>
VANGUARD INDEX TRUST
Extended Market Portfolio 0.5% None
Small Capitalization Stock Portfolio 0.5% None
VANGUARD INTERNATIONAL EQUITY INDEX
FUND
European Portfolio 1% None
Pacific Portfolio 0.5% None
Emerging Markets Portfolio 1.5% 1%
TOTAL INTERNATIONAL PORTFOLIO 0.75% None
</TABLE>
The Vanguard Bond Index Fund reserves the right to
impose a portfolio transaction fee on certain large
purchases. Portfolio transaction fees are paid directly
to the Portfolios to offset all transaction costs of
buying securities of small- and medium-sized companies
and international companies. PAGE 6
Each Portfolio charges a $10 annual account maintenance
fee for accounts with balances of less than
$10,000. PAGE 53
- --------------------------------------------------------------------------------
4
<PAGE> 8
FUND EXPENSES The following table illustrates ALL expenses and fees
that you would incur as a shareholder of Vanguard Index
Trust, Vanguard Bond Index Fund, Vanguard International
Equity Index Fund and Vanguard Balanced Index Fund. The
expenses and fees set forth below are for the 1996
fiscal year.
<TABLE>
<CAPTION>
TOTAL SMALL
SHAREHOLDER EXTENDED STOCK CAPITALIZATION BALANCED
TRANSACTION 500 MARKET MARKET VALUE GROWTH STOCK INDEX
EXPENSES PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO+ FUND
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Sales Load Imposed on Purchases......... None None* None None None None* None
Sales Load Imposed on Reinvested
Dividends............................. None None None None None None None
Redemption Fees++....................... None None None None None None None
Exchange Fees........................... None None None None None None None
* Shareholders are charged a 0.5% portfolio transaction fee, payable directly to the
Portfolio, on each purchase of shares.
+ Formerly Vanguard Small Capitalization Stock Fund, Inc.
++ Wire redemptions of less than $5,000 are subject to a $5 processing fee.
</TABLE>
<TABLE>
<CAPTION>
TOTAL SMALL
ANNUAL FUND EXTENDED STOCK CAPITALIZATION BALANCED
OPERATING 500 MARKET MARKET VALUE GROWTH STOCK INDEX
EXPENSES PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO+ FUND
-----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Management & Administrative
Expenses++............................ 0.17% 0.21% 0.18% 0.16% 0.16% 0.21% 0.12%
Investment Advisory Fees................ 0.00 0.00 0.00 0.00 0.00 0.00 0.01
12b-1 Fees.............................. None None None None None None None
Other Expenses
Distribution Costs.................... 0.02 0.02 0.02 0.02 0.02 0.02 0.02
Miscellaneous Expenses................ 0.01 0.02 0.02 0.02 0.02 0.02 0.05
-------- -------- -------- -------- -------- ----------- --------
Total Other Expenses.................... 0.03 0.04 0.04 0.04 0.04 0.04 0.07
-------- -------- -------- -------- -------- ----------- --------
TOTAL OPERATING EXPENSES............ 0.20% 0.25% 0.22% 0.20% 0.20% 0.25% 0.20%
======== ======== ======== ======== ======== =========== ========
+ Formerly Vanguard Small Capitalization Stock Fund, Inc.
++ In addition to these costs, each Portfolio assesses an annual account maintenance fee of
$10. This fee will be waived for shareholders with an account balance of $10,000 or more.
</TABLE>
<TABLE>
<CAPTION>
TOTAL SHORT- LONG-
SHAREHOLDER BOND TERM INTERMEDIATE- TERM EMERGING TOTAL
TRANSACTION MARKET BOND TERM BOND BOND EUROPEAN PACIFIC MARKETS INTERNATIONAL
EXPENSES PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sales Load Imposed on
Purchases.................. None(1) None(1) None(1) None(1) None** None* None+ None(2)
Sales Load Imposed on
Reinvested Dividends....... None None None None None None None None
Redemption Fees++............ None None None None None None 1.0%*** None
Exchange Fees................ None None None None None None None None
* Shareholders are charged a 0.5% portfolio transaction fee, payable directly to the Portfolio
on each purchase of shares.
** Shareholders are charged a 1% portfolio transaction fee, payable directly to the Portfolio
on each purchase of shares.
*** The 1.0% portfolio transaction fee withheld from redemption proceeds is paid to the
Portfolio.
+ Shareholders are charged a 1.5% portfolio transaction fee, payable directly to the Portfolio
on each purchase of shares.
++ Wire redemptions of less than $5,000 are subject to a $5 processing fee.
(1) A portfolio transaction fee, payable directly to the Portfolio, may be imposed on purchases
of $50 million or more for the Total Bond Market Portfolio; $15 million for the Short-Term
and Intermediate-Term Bond Portfolios; and $2 million for the Long-Term Bond Portfolio. See
Vanguard Bond Index Fund's Statement of Additional Information for further information.
(2) Shareholders are charged a 0.75% portfolio transaction fee, payable directly to the
Portfolio on each purchase of shares.
</TABLE>
5
<PAGE> 9
<TABLE>
<CAPTION>
TOTAL SHORT-
ANNUAL FUND BOND TERM INTERMEDIATE- LONG- TERM EMERGING TOTAL
OPERATING MARKET BOND TERM BOND BOND EUROPEAN PACIFIC MARKETS INTERNATIONAL
EXPENSES PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Management & Administrative
Expenses***.................. 0.14% 0.14% 0.14% 0.08% 0.26% 0.24% 0.23% 0.23%
Investment Advisory Fees....... 0.01 0.01 0.01 0.01 None None None None
12b-1 Fees..................... None None None None None None None None
Other Expenses
Distribution Costs........... 0.03 0.03 0.03 0.03 0.02 0.03 0.03 0.02
Miscellaneous Expenses....... 0.02 0.02 0.02 0.08 0.07 0.08 0.34 0.11
-------- -------- ---------- -------- -------- -------- -------- -----------
Total Other Expenses........... 0.05 0.05 0.05 0.11 0.09 0.11 0.37 0.13
-------- -------- ---------- -------- -------- -------- -------- -----------
TOTAL OPERATING
EXPENSES................. 0.20%(1) 0.20% 0.20% 0.20% 0.35% 0.35% 0.60% 0.38%
======== ======== ========== ======== ======== ======== ======== ===========
*** 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.
(1) The Portfolio's Institutional Class of shares are offered at an estimated expense ratio of 0.10% per year.
</TABLE>
The purpose of this table is to assist you in
understanding the various costs and expenses that you
would bear directly or indirectly as an investor in the
Funds.
SIX PORTFOLIOS ASSESS
PURCHASE TRANSACTION
FEES Shares of Vanguard Index Trust -- Extended Market and
Small Capitalization Stock Portfolios and Vanguard
International Equity Index Fund -- Pacific Portfolio
are subject to a 0.5% transaction fee on purchases.
Shares of Vanguard International Equity Index Fund --
European Portfolio are subject to a 1% transaction fee
on purchases. Shares of Vanguard International Equity
Index Fund -- Emerging Markets Portfolio are subject to
a 1.5% transaction fee on purchases. Shares of the
Total International Portfolio are subject to a 0.75%
transaction fee on purchases. The portfolio transaction
fees are paid to the respective Portfolio, not to
Vanguard. They are not sales charges.
The Portfolios of Vanguard Bond Index Fund may assess
portfolio transaction fees on certain large purchases.
Please see the Shareholder Transaction Expense table
and the Fund's Statement of Additional Information for
more details.
These fees apply to initial investments in the
respective Portfolios and all subsequent purchases
(including purchases made by exchange from another
Vanguard Fund or from other Portfolios within a Fund),
but not to reinvested dividend or capital gains
distributions. Portfolio transaction fees are deducted
automatically from the amount invested; they cannot be
paid separately.
The purpose of these transaction fees is to allocate
transaction costs associated with new purchases to
investors making those purchases, thus insulating
existing shareholders from those transaction costs.
These costs include: (1) brokerage costs; (2) market
impact costs -- i.e., the increase in market prices
which may result when the Portfolio purchases thinly
traded stocks; and, most importantly, (3) the effect of
the "bid-ask" spread in the over-the-counter market.
(Securities in the over-the-counter market are bought
at the "ask" or purchase price, but are valued in the
Portfolio at the mean of the "bid" or sale, and "ask"
prices).
6
<PAGE> 10
The fees represent Vanguard's estimate of the brokerage
and other transaction costs incurred by the Portfolios
in acquiring stocks in their respective markets.
Without the fees, the Portfolios, which incur these
costs directly, would experience reduced investment
performance for all shareholders in each Portfolio.
With the fees, the transaction costs of acquiring
additional stocks are borne not by all existing
shareholders, but by those investors making additional
purchases. Because the purchaser, not the Portfolios,
bears these costs, the Portfolios are expected to track
their respective benchmark indexes more closely.
THE EMERGING MARKETS
PORTFOLIO CHARGES A
1% REDEMPTION
TRANSACTION FEE The Emerging Markets Portfolio of Vanguard
International Equity Index Fund also assesses a 1%
transaction fee on redemptions. This 1% charge applies
to redemptions or exchanges from the Portfolio. The 1%
fee is deducted from redemption or exchange proceeds
and is paid directly to the Portfolio, not to Vanguard.
It is not a contingent deferred sales charge.
EACH PORTFOLIO CHARGES
A $10 ACCOUNT
MAINTENANCE FEE Each Portfolio assesses an annual account maintenance
fee of $10 to allocate part of the fixed costs of
maintaining shareholder accounts equally to all
accounts. This fee is deducted from each Portfolio's
dividend at a rate of $2.50 per quarter for accounts in
the 500, Total Stock Market, Value and Growth
Portfolios of Vanguard Index Trust, Vanguard Bond Index
Fund and Vanguard Balanced Index Fund. For accounts in
the Extended Market Portfolio of Vanguard Index Trust,
the European, Pacific and Emerging Markets Portfolios
of Vanguard International Equity Index Fund, and
Vanguard Total International Portfolio there is one $10
deduction per year. See "Dividends, Capital Gains and
Taxes" for more information on this fee. The $10 fee
amounts to 1.00% on a $1,000 investment in a Portfolio,
and 0.33% on a $3,000 investment. This fee will be
waived for shareholders with an account balance of
$10,000 or more.
The following example illustrates the expenses that you
would incur on a $1,000 investment over various time
periods, assuming (1) a 5% annual rate of return and
(2) redemption at the end of each period.
The $10 annual fee payable on accounts of less than
$10,000 is
not included.
<TABLE>
<CAPTION>
1 3 5 10
YEAR YEARS YEARS YEARS
--- ---- ---- ----
<S> <C> <C> <C> <C>
Total Bond Market Portfolio..... $ 2 $ 6 $11 $ 26
Short-Term Bond Portfolio....... $ 2 $ 6 $11 $ 26
Intermediate-Term Bond
Portfolio..................... $ 2 $ 6 $11 $ 26
Long-Term Bond Portfolio........ $ 2 $ 6 $11 $ 26
Balanced Index Fund............. $ 2 $ 6 $11 $ 26
500 Portfolio................... $ 2 $ 6 $11 $ 26
Extended Market Portfolio....... $ 8 $13 $19 $ 37
Total Stock Market Portfolio.... $ 2 $ 7 $12 $ 28
Value Portfolio................. $ 2 $ 6 $11 $ 26
Growth Portfolio................ $ 2 $ 6 $11 $ 26
Small Capitalization Stock
Portfolio..................... $ 8 $13 $19 $ 37
European Portfolio.............. $ 14 $21 $29 $ 54
Pacific Portfolio............... $ 9 $16 $25 $ 49
Emerging Markets Portfolio...... $ 31 $45 $60 $104
Total International Portfolio... $ 11 $20 $29 $ 55
</TABLE>
7
<PAGE> 11
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION
OF PAST OR FUTURE EXPENSES OR PERFORMANCE. ACTUAL
EXPENSES MAY BE HIGHER OR LOWER THAN THOSE SHOWN.
- --------------------------------------------------------------------------------
FINANCIAL
HIGHLIGHTS The following financial highlights for a share
outstanding throughout each period, insofar as they
relate to each of the respective periods in the period
ended December 31, 1996, have been audited by Price
Waterhouse LLP, independent accountants, whose reports
thereon were unqualified. This financial information
should be read in conjunction with each Fund's
financial statements and notes thereto, which, together
with the remaining portions of each Fund's 1996 Annual
Report to Shareholders, are incorporated by reference
in the Statements of Additional Information and in this
Prospectus, and which appear, along with the reports of
Price Waterhouse LLP, in each Fund's 1996 Annual Report
to Shareholders and inserts thereto. For a more
complete discussion of each Fund's performance, please
see the 1996 Annual Report of each Fund, which may be
obtained free of charge by writing to the Funds or
calling our Investor Information Department at
1-800-662-7447.
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------
TOTAL BOND MARKET PORTFOLIO
---------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING
OF YEAR..................... $10.14 $9.17 $10.06 $9.88 $9.99 $9.41 $9.44 $9.05 $9.20 $9.94
------ ------ ------ ----- ----- ----- ----- ----- ----- -----
INVESTMENT OPERATIONS
Net Investment Income....... .640 .650 .622 .638 .699 .766 .796 .797 .807 .834
Net Realized and Unrealized
Gain (Loss) on
Investments............... (.300) .970 (.888) .300 (.018) .605 (.030) .390 (.150) (.740)
------ ------ ------ ----- ----- ----- ----- ----- ----- -----
TOTAL FROM INVESTMENT
OPERATIONS........... .340 1.620 (.266) .938 .681 1.371 .766 1.187 .657 .094
- ---------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net
Investment Income......... (.640) (.650) (.622) (.638) (.699) (.766) (.796) (.797) (.807) (.834)
Distributions from Realized
Capital Gains............. -- -- (.002) (.120) (.092) (.025) -- -- -- --
------ ------ ------ ----- ----- ----- ----- ----- ----- -----
TOTAL DISTRIBUTIONS... (.640) (.650) (.624) (.758) (.791) (.791) (.796) (.797) (.807) (.834)
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF
PERIOD...................... $9.84 $10.14 $9.17 $10.06 $9.88 $9.99 $9.41 $9.44 $9.05 $9.20
=================================================================================================================================
TOTAL RETURN(1).............. 3.58% 18.18% (2.66)% 9.68% 7.14% 15.25% 8.65% 13.65% 7.35% 1.14%
=================================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period
(Millions).................. $2,962 $2,405 $1,731 $1,540 $1,066 $849 $277 $139 $58 $43
Ratio of Expenses to Average
Net Assets.................. 0.20% 0.20% 0.18% 0.18% 0.20% 0.16% 0.21% 0.24% 0.30% 0.14%
Ratio of Net Investment
Income to Average Net
Assets...................... 6.54% 6.66% 6.57% 6.24% 7.06% 7.95% 8.60% 8.49% 8.84% 9.01%
Portfolio Turnover Rate...... 39% 36% 33% 50% 49% 31% 29% 33% 21% 77%
(1) Total return figures do not reflect the annual account maintenance fee of $10.
</TABLE>
8
<PAGE> 12
<TABLE>
<CAPTION>
-------------------------------------------
SHORT-TERM
BOND PORTFOLIO
-------------------------------------------
YEAR ENDED DECEMBER 31,
----------------------- MAR. 1+, TO
1996 1995 DEC. 31, 1994
<S> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD........................................... $10.07 $ 9.50 $ 10.00
------ ------ ---------
INVESTMENT OPERATIONS
Net Investment Income......................................................... .587 .623 .463
Net Realized and Unrealized Gain (Loss) on Investments........................ (.146) .570 (.500)
----- ----- --------
TOTAL FROM INVESTMENT OPERATIONS........................................ .441 1.193 (.037)
- ----------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income.......................................... (.587) (.623) (.463)
Distributions from Realized Capital Gains..................................... (.004) -- --
----- ----- --------
TOTAL DISTRIBUTIONS..................................................... (.591) (.623) (.463)
- ----------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD................................................. $9.92 $10.07 $9.50
============================================================================================================================
TOTAL RETURN(1)................................................................ 4.55% 12.88% (0.37)%
============================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions)........................................... $328 $208 $77
Ratio of Expenses to Average Net Assets........................................ 0.20% 0.20% 0.18%*
Ratio of Net Investment Income to Average Net Assets........................... 5.93% 6.28% 5.77%*
Portfolio Turnover Rate........................................................ 65% 65% 53%
* Annualized.
(1) Total return figures do not reflect the annual account maintenance fee of $10.
+ Subscription period for the Portfolio was from January 18, 1994, through February 28, 1994, during which time all
assets were held in money market instruments.
</TABLE>
<TABLE>
<CAPTION>
------------------------------------------
INTERMEDIATE-TERM
BOND PORTFOLIO
------------------------------------------
YEAR ENDED DECEMBER 31, MAR. 1+, TO
------------------------ DEC. 31,
1996 1995 1994
<S> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD............................................. $10.37 $9.18 $ 10.00
------- ------- ---------
INVESTMENT OPERATIONS
Net Investment Income........................................................... .648 .661 .533
Net Realized and Unrealized Gain (Loss) on Investments.......................... (.406) 1.217 (.820)
------ ------ --------
TOTAL FROM INVESTMENT OPERATIONS.......................................... .242 1.878 (.287)
- ----------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income............................................ (.648) (.661) (.533)
Distributions from Realized Capital Gains....................................... (.004) (.027) --
------ ------ --------
TOTAL DISTRIBUTIONS....................................................... (.652) (.688) (.533)
- ----------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD................................................... $9.96 $10.37 $9.18
============================================================================================================================
TOTAL RETURN(1).................................................................. 2.55% 21.07% (2.88)%
============================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions)............................................. $460 $346 $71
Ratio of Expenses to Average Net Assets.......................................... 0.20% 0.20% 0.18%*
Ratio of Net Investment Income to Average Net Assets............................. 6.54% 6.55% 6.88%*
Portfolio Turnover Rate.......................................................... 80% 71% 63%
* Annualized.
(1) Total return figures do not reflect the annual account maintenance fee of $10.
+ Subscription period for the Portfolio was from January 18, 1994, through February 28, 1994, during which time all
assets were held in money market instruments.
</TABLE>
9
<PAGE> 13
<TABLE>
<CAPTION>
--------------------------------------------
LONG-TERM
BOND PORTFOLIO
--------------------------------------------
YEAR ENDED DECEMBER 31, MAR. 1+, TO
------------------------- DEC. 31,
1996 1995 1994
<S> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD........................................ $ 10.82 $8.96 $ 10.00
------ ------ ----------
INVESTMENT OPERATIONS
Net Investment Income...................................................... .674 .692 .586
Net Realized and Unrealized Gain (Loss) on Investments..................... (.731) 1.884 (1.040)
------ ------ ----------
TOTAL FROM INVESTMENT OPERATIONS..................................... (0.57) 2.576 (.454)
- ----------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income....................................... (.674) (.692) (.586)
Distributions from Realized Capital Gains.................................. (.009) (.024) --
------ ------ ----------
TOTAL DISTRIBUTIONS.................................................. (.683) (.716) (.586)
- ----------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD.............................................. $10.08 $10.82 $8.96
============================================================================================================================
TOTAL RETURN(1)............................................................. (0.26)% 29.72% (4.53)%
============================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions)........................................ $ 44 $24 $9
Ratio of Expenses to Average Net Assets..................................... 0.20% 0.20% 0.18%*
Ratio of Net Investment Income to Average Net Assets........................ 6.75% 6.90% 7.70%*
Portfolio Turnover Rate..................................................... 46% 45% 70%*
* Annualized.
(1) Total return figures do not reflect the annual account maintenance fee of $10.
+ Subscription period for the Portfolio was from January 18, 1994, through February 28, 1994, during which time all
assets were held in money market instruments.
</TABLE>
10
<PAGE> 14
<TABLE>
<CAPTION>
---------------------------------------------------
VANGUARD BALANCED INDEX FUND
---------------------------------------------------
SEPT. 28+,
YEAR ENDED DECEMBER 31, TO
--------------------------------- DEC. 31,
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD................................... $12.77 $10.34 $10.91 $10.31 $10.00
------ ------ ------ ------ ---------
INVESTMENT OPERATIONS
Net Investment Income................................................. .50 .45 .41 .39 .08
Net Realized and Unrealized Gain (Loss) on Investments................ 1.26 2.48 (.58) .63 .31
----- ----- ----- ----- --------
TOTAL FROM INVESTMENT OPERATIONS................................ 1.76 2.98 (.17) 1.02 .39
- -----------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income.................................. (.49) (.45) (.40) (.39) (.08)
Distributions from Realized Capital Gains............................. (.12) (.05) -- (.03) --
----- ----- ----- ----- --------
TOTAL DISTRIBUTIONS............................................. (.61) (.50) (.40) (.42) (.08)
- -----------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD......................................... $13.92 $12.77 $10.34 $10.91 $10.31
=============================================================================================================================
TOTAL RETURN**......................................................... 13.95% 28.64% (1.56)% 10.00% 3.69%
=============================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions)................................... $826 $590 $403 $367 $109
Ratio of Expenses to Average Net Assets................................ 0.20% 0.20% 0.20% 0.20% 0.22%*
Ratio of Net Investment Income to Average Net Assets................... 3.69% 3.85% 3.86% 3.53% 3.76%*
Portfolio Turnover Rate................................................ 37%++ 16% 16% 25% 17%
Average Commission Rate Paid........................................... $.0226 N/A N/A N/A N/A
* Annualized.
**Total return figures do not reflect the annual account maintenance fee of $10. Subscription
period for Fund was from September 28, 1992, to November 8, 1992, during which time all assets
were held in money market instruments. Performance measurement begins on November 9, 1992.
+ Commencement of operations.
++ Fund turnover rate excluding in-kind redemptions was 30%.
</TABLE>
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------
500 PORTFOLIO
---------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF
YEAR.............................. $57.60 $42.97 $43.83 $40.97 $39.32 $31.24 $33.64 $27.18 $24.65 $24.27
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
INVESTMENT OPERATIONS
Net Investment Income............. 1.28 1.22 1.18 1.13 1.12 1.15 1.17 1.20 1.08 .88
Net Realized and Unrealized Gain
(Loss) on Investments........... 11.82 14.76 (.67) 2.89 1.75 8.20 (2.30) 7.21 2.87 .36
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
TOTAL FROM INVESTMENT
OPERATIONS................. 13.10 15.98 .51 4.02 2.87 9.35 (1.13) 8.41 3.95 1.24
- -----------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment
Income.......................... (1.28) (1.22) (1.17) (1.13) (1.12) (1.15) (1.17) (1.20) (1.10) (.69)
Distributions from Realized
Capital Gains................... (.25) (.13) (.20) (.03) (.10) (.12) (.10) (.75) (.32) (.17)
----- ----- ----- ----- ----- ----- ----- ----- ----- -----
TOTAL DISTRIBUTIONS......... (1.53) (1.35) (1.37) (1.16) (1.22) (1.27) (1.27) (1.95) (1.42) (.86)
- -----------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD..... $69.17 $57.60 $42.97 $43.83 $40.97 $39.32 $31.24 $33.64 $27.18 $24.65
=============================================================================================================================
TOTAL RETURN*...................... 22.88% 37.45% 1.18% 9.89% 7.42% 30.22% (3.32)% 31.36% 16.22% 4.71%
=============================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period
(Millions)........................ $30,332 $17,372 $9,356 $8,273 $6,547 $4,345 $2,173 $1,804 $1,055 $826
Ratio of Expenses to Average
Net Assets........................ 0.20% 0.20% 0.19% 0.19% 0.19% 0.20% 0.22% 0.21% 0.22% 0.26%
Ratio of Net Investment Income to
Average Net Assets................ 2.04% 2.38% 2.72% 2.65% 2.81% 3.07% 3.60% 3.62% 4.08% 3.15%
Portfolio Turnover Rate............ 5%+ 4%+ 6%+ 6%+ 4%+ 5%+ 23%+ 8% 10% 15%
Average Commission Rate Paid....... $.0166 N/A N/A N/A N/A N/A N/A N/A N/A N/A
*Total return figures do not reflect the annual account maintenance fee of $10.
+Portfolio turnover rates excluding in-kind redemptions were 2%, 2%, 4%, 2%, 1%, 1%, and 6%, respectively.
</TABLE>
11
<PAGE> 15
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------
EXTENDED MARKET PORTFOLIO
-------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, DEC. 21+,
------------------------------------------------------------------------------------------ TO DEC.
1996 1995 1994 1993 1992 1991 1990 1989 1988 31, 1987
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------
NET ASSET
VALUE,
BEGINNING OF
PERIOD......... $24.07 $18.52 $19.43 $17.35 $15.82 $11.48 $13.92 $11.60 $9.99 $10.00
------ ------ ------ ------ ------ ------ ------ ------ ------ --------
INVESTMENT
OPERATIONS
Net
Investment
Income....... .34 .30 .28 .23 .24 .25 .30 .26 .34 .03
Net Realized
and
Unrealized
Gain (Loss)
on
Investments.. 3.85 5.95 (.62) 2.28 1.72 4.54 (2.25) 2.52 1.63 (.04)
----- ----- ----- ----- ----- ----- ----- ----- ----- -------
TOTAL FROM
INVESTMENT
OPERATIONS... 4.19 6.25 (.34) 2.51 1.96 4.79 (1.95) 2.78 1.97 (.01)
- --------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends
from Net
Investment
Income..... (.34) (.30) (.28) (.23) (.25) (.25) (.33) (.23) (.20) --
Distributions
from
Realized
Capital
Gains...... (1.72) (.40) (.29) (.20) (.18) (.20) (.16) (.23) (.16) --
----- ----- ----- ----- ----- ----- ----- ----- ----- -------
TOTAL
DISTRIBUTIONS... (2.06) (.70) (.57) (.43) (.43) (.45) (.49) (.46) (.36) --
- --------------------------------------------------------------------------------------------------------------------------
NET ASSET
VALUE, END OF
PERIOD....... $26.20 $24.07 $18.52 $19.43 $17.35 $15.82 $11.48 $13.92 $11.60 $9.99
==========================================================================================================================
TOTAL
RETURN*...... 17.65% 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)... $2,099 $1,523 $967 $928 $585 $372 $179 $147 $35 $5
Ratio of
Expenses to
Average Net
Assets....... 0.25% 0.25% 0.20% 0.20% 0.20% 0.19% 0.23% 0.23% 0.24% 0%
Ratio of Net
Investment
Income to
Average Net
Assets....... 1.42% 1.51% 1.51% 1.48% 1.73% 2.14% 2.68% 2.92% 2.90% 0%
Portfolio
Turnover
Rate......... 22% 15% 19% 13% 9% 11% 9% 14% 26% 3%
Average
Commission
Rate Paid.... $.0235 N/A N/A N/A N/A N/A N/A N/A N/A N/A
*Total return figures do not include transaction fees (0.5% in 1995 and 1996, 1% in 1991 through 1994) on purchases or the
$10 annual account maintenance fee.
+ Commencement of operations.
</TABLE>
<TABLE>
<CAPTION>
--------------------------------------------------------
TOTAL STOCK MARKET PORTFOLIO
--------------------------------------------------------
MARCH
16+,
YEAR ENDED DECEMBER 31, TO DEC.
------------------------------------------ 31,
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD............................ $15.04 $11.37 $11.69 $10.84 $10.00
------ ------ ------ ------ -------
INVESTMENT OPERATIONS
Net Investment Income.......................................... .29 .29 .27 .26 .23
Net Realized and Unrealized Gain (Loss) on Investments......... 2.84 3.75 (.29) .88 .84
----- ----- ----- ----- ------
TOTAL FROM INVESTMENT OPERATIONS............................. 3.13 4.04 (.02) 1.14 1.07
- ---------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income........................... (.29) (.28) (.27) (.26) (.23)
Distributions from Realized Capital Gains...................... (.11) (.09) (.03) (.03) --
----- ----- ----- ----- ------
TOTAL DISTRIBUTIONS.......................................... (.40) (.37) (.30) (.29) (.23)
- ---------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD.................................. $17.77 $15.04 $11.37 $11.69 $10.84
===========================================================================================================================
TOTAL RETURN**.................................................. 20.96% 35.79% (0.17)% 10.62% 10.41%
===========================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions)............................ $3,531 $1,571 $786 $512 $275
Ratio of Expenses to Average Net Assets......................... 0.22% 0.25% 0.20% 0.20% 0.21%*
Ratio of Net Investment Income to Average Net Assets............ 1.86% 2.14% 2.35% 2.31% 2.42%*
Portfolio Turnover Rate......................................... 3% 3% 2% 1% 3%
Average Commission Rate Paid.................................... $.0216 N/A N/A N/A N/A
* Annualized.
** Total return figures do not reflect the .25% transaction fee on purchases (eliminated at year-end 1995) or the $10
annual account maintenance fee. Subscription period for the Portfolio was from March 16, 1992, to April 26, 1992, during
which time all assets were held in money market instruments. Performance measurement begins on April 27, 1992.
+ Commencement of operations.
</TABLE>
12
<PAGE> 16
<TABLE>
<CAPTION>
---------------------------------------------------
GROWTH PORTFOLIO
---------------------------------------------------
YEAR ENDED DECEMBER 31, NOV. 2+,
------------------------------------ TO DEC. 31,
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD...................................... $13.97 $10.28 $10.20 $10.26 $10.00
------ ------ ------ ------ --------
INVESTMENT OPERATIONS
Net Investment Income.................................................... .22 .21 .21 .21 .06
Net Realized and Unrealized Gain (Loss) on Investments................... 3.07 3.68 .08 (.06) .26
----- ----- ----- ----- -------
TOTAL FROM INVESTMENT OPERATIONS....................................... 3.29 3.89 .29 .15 .32
- ------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income..................................... (.22) (.20) (.21) (.21) (.06)
Distributions from Realized Capital Gains................................ (.14) -- -- -- --
----- ----- ----- ----- -------
TOTAL DISTRIBUTIONS.................................................... (.36) (.20) (.21) (.21) (.06)
- ------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD............................................ $16.90 $13.97 $10.28 $10.20 $10.26
==============================================================================================================================
TOTAL RETURN**............................................................ 23.74% 38.06% 2.89% 1.53% 3.19%
==============================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions)...................................... $787 $271 $86 $51 $21
Ratio of Expenses to Average Net Assets................................... 0.20% 0.20% 0.20% 0.20% 0%
Ratio of Net Investment Income to
Average Net Assets....................................................... 1.57% 1.71% 2.08% 2.10% 2.85%*
Portfolio Turnover Rate................................................... 29% 24% 28% 36% 2%
Average Commission Rate Paid.............................................. $.0183 N/A N/A N/A N/A
* Annualized.
** Total return figures do not reflect the annual account maintenance fee of $10.
+ Commencement of operations.
</TABLE>
<TABLE>
<CAPTION>
---------------------------------------------------
VALUE PORTFOLIO
---------------------------------------------------
YEAR ENDED DECEMBER 31, NOV. 2+,
------------------------------------ TO DEC. 31,
1996 1995 1994 1993 1992
<S> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD...................................... $14.79 $11.12 $11.74 $10.30 $10.00
------ ------ ------ ------ --------
INVESTMENT OPERATIONS
Net Investment Income.................................................... .37 .41 .38 .38 .07
Net Realized and Unrealized Gain (Loss) on Investments................... 2.81 3.66 (.46) 1.50 .30
----- ----- ----- ----- -------
TOTAL FROM INVESTMENT OPERATIONS....................................... 3.18 4.07 (.08) 1.88 .37
- ------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income..................................... (.38) (.40) (.38) (.38) (.07)
Distributions from Realized Capital Gains................................ (.57) -- (.16) (.06) --
TOTAL DISTRIBUTIONS.................................................... (.95) (.40) (.54) (.44) (.07)
- ------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD............................................ $17.02 $14.79 $11.12 $11.74 $10.30
==============================================================================================================================
TOTAL RETURN**............................................................ 21.86% 36.94% (0.73)% 18.35% 3.70%
==============================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions)...................................... $1,016 $496 $297 $190 $24
Ratio of Expenses to Average Net Assets................................... 0.20% 0.20% 0.20% 0.20% 0%
Ratio of Net Investment Income to
Average Net Assets....................................................... 2.54% 3.06% 3.37% 3.26% 3.46%*
Portfolio Turnover Rate................................................... 29% 27% 32% 30% 4%
Average Commission Rate Paid.............................................. $.0188 N/A N/A N/A N/A
* Annualized.
** Total return figures do not reflect the annual account maintenance fee of $10.
+ Commencement of operations.
</TABLE>
13
<PAGE> 17
<TABLE>
<CAPTION>
----------------------------------------------------------------------------
SMALL CAPITALIZATION STOCK PORTFOLIO(1)
----------------------------------------------------------------------------
OCT. 1,
1993
FEB. 1 TO TO YEAR ENDED SEPTEMBER 30,
DEC. 31, JAN. 31, ---------------------------
1996 1995 1994** 1994** 1993 1992 1991
<S> <C> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD............. $18.61 $14.99 $16.24 $16.23 $12.63 $12.03 $8.55
------ -------- ------- ------ ------ ------ -------
INVESTMENT OPERATIONS
Net Investment Income (Loss).................... .26 .24 .20 .05 .20 .19 .20
Net Realized and Unrealized Gain (Loss) on
Investments................................... 3.07 4.06 (.86) .96 3.73 .88 3.60
----- ------- ------ ----- ----- ----- ------
TOTAL FROM INVESTMENT OPERATIONS.............. 3.33 4.30 (.66) 1.01 3.93 1.07 3.80
- ------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income............ (.27) (.23) (.22) (.18) (.18) (.18) (.18)
Distributions from Realized Capital Gains....... (1.44) (.45) (.37) (.82) (.15) (.29) (.14)
----- ------- ------ ----- ----- ----- ------
TOTAL DISTRIBUTIONS........................... (1.71) (.68) (.59) (1.00) (.33) (.47) (.32)
- -----------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD................... $20.23 $18.61 $14.99 $16.24 $16.23 $12.63 $12.03
==============================================================================================================================
TOTAL RETURN++................................... 18.12% 28.74% (4.00)% 6.65% 31.60% 9.34% 45.91%
==============================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions)............. $1,713 $971 $605 $533 $432 $202 $111
Ratio of Expenses to Average Net Assets.......... 0.25% 0.25% 0.17%* 0.18%* 0.18% 0.18% 0.21%
Ratio of Net Investment Income (Loss) to
Average Net Assets.............................. 1.51% 1.58% 1.50%* 1.16%* 1.47% 1.65% 2.11%
Portfolio Turnover Rate.......................... 28% 28% 25% 5% 26% 26% 33%
Average Commission Rate Paid..................... $.0245 N/A N/A N/A N/A N/A N/ A
</TABLE>
<TABLE>
<CAPTION>
----------------------------------------
SMALL CAPITALIZATION STOCK PORTFOLIO(1)
----------------------------------------
YEAR ENDED SEPTEMBER 30,
----------------------------------------
1990(2) 1989 1988 1987
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD............................................. $11.88 $11.96 $15.73 $13.24
------ ------ ------ ------
INVESTMENT OPERATIONS
Net Investment Income (Loss).................................................... .17 .10 .03 (.04)
Net Realized and Unrealized Gain (Loss) on Investments.......................... (3.46) 2.13 (2.59) 4.42
----- ----- ----- -----
TOTAL FROM INVESTMENT OPERATIONS.............................................. (3.29) 2.23 (2.56) 4.38
- ----------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income............................................ (.04) (.14) -- --
Distributions from Realized Capital Gains....................................... -- (2.17) (1.21) (1.89)
----- ----- ----- -----
TOTAL DISTRIBUTIONS........................................................... (.04) (2.31) (1.21) (1.89)
- ----------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD................................................... $8.55 $11.88 $11.96 $15.73
============================================================================================================================
TOTAL RETURN++................................................................... (27.73)% 18.83% (14.30)% 38.02%
============================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions)............................................. $40 $20 $27 $35
Ratio of Expenses to Average Net Assets.......................................... 0.31% 1.00% 0.95% 0.92%
Ratio of Net Investment Income (Loss) to Average Net Assets...................... 1.91% 0.65% 0.24% (0.25)%
Portfolio Turnover Rate.......................................................... 40% 160% 68% 92%
Average Commission Rate Paid..................................................... N/A N/A N/A N/A
* Annualized.
** Unaudited.
(1) Results prior to January 31, 1994 are for the former Vanguard Small Capitalization Stock Fund.
(2) Adjusted to reflect a 3-for-1 stock split as of February 3, 1990.
++ Total return figures do not reflect the annual account maintenance fees of $10 or the 1% portfolio transaction fee on
purchases.
</TABLE>
14
<PAGE> 18
<TABLE>
<CAPTION>
---------------------------------------------------------------------------
EUROPEAN PORTFOLIO
---------------------------------------------------------------------------
MAY 1+,
YEAR ENDED DECEMBER 31, TO
----------------------------------------------------------- DEC. 31,
1996 1995 1994 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD............. $14.02 $11.76 $11.88 $9.33 $9.92 $9.06 $10.00
------ ------ ------ ------ ------ ----- -------
INVESTMENT OPERATIONS
Net Investment Income........................... .34 .32 .28 .17 .25 .26 .16
Net Realized and Unrealized Gain (Loss) on
Investments................................... 2.63 2.30 (.06) 2.55 (.58) .86 (.94)
------ ------ ------ ------ ------ ----- -------
TOTAL FROM INVESTMENT OPERATIONS.............. 2.97 2.62 .22 2.72 (.33) 1.12 (.78)
- ------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income............ (.36) (.32) (.28) (.17) (.26) (.26) (.16)
Distributions from Realized Capital Gains....... (.06) (.04) (.06) -- -- -- --
------ ------ ------ ------ ------ ----- -------
TOTAL DISTRIBUTIONS........................... (.42) (.36) (.34) (.17) (.26) (.26) (.16)
- ------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD................... $16.57 $14.02 $11.76 $11.88 $9.33 $9.92 $9.06
==============================================================================================================================
TOTAL RETURN(1).................................. 21.26% 22.28% 1.88% 29.13% (3.32)% 12.40% (7.23)%
==============================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions)............. $1,595 $1,017 $715 $601 $256 $161 $96
Ratio of Expenses to Average Net Assets.......... 0.35% 0.35% 0.32% 0.32% 0.32% 0.33% 0.40%*
Ratio of Net Investment Income to Average Net
Assets.......................................... 2.45% 2.66% 2.41% 2.05% 3.05% 3.06% 3.68%*
Portfolio Turnover Rate.......................... 4% 2% 6% 4% 1% 15%** 3%
Average Commission Rate Paid..................... $.0395 N/A N/A N/A N/A N/A N/A
* Annualized.
** Portfolio turnover rates for 1991 excluding in-kind redemptions was 3% for the European Portfolio.
+ Commencement of operations.
(1) Total return figures do not reflect the 1% transaction fee on purchases or the annual account maintenance fee of $10.
Subscription period for Portfolio was May 1, 1990, to June 17, 1990, during which time all assets were held in money
market instruments. Performance measurement begins on June 18, 1990.
</TABLE>
<TABLE>
<CAPTION>
----------------------------------------------------------------------------
PACIFIC PORTFOLIO
----------------------------------------------------------------------------
MAY 1+,
YEAR ENDED DECEMBER 31, TO
----------------------------------------------------------- DEC. 31,
1996 1995 1994 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD............. $11.50 $11.31 $10.13 $7.56 $9.42 $8.56 $10.00
------ ------ ------ ------ ------ ----- -------
INVESTMENT OPERATIONS
Net Investment Income........................... .10 .10 .08 .06 .05 .05 .05
Net Realized and Unrealized Gain (Loss) on
Investments................................... (1.00) .21 1.24 2.62 (1.76) .86 (1.44)
------ ------ ------ ------ ------ ----- -------
TOTAL FROM INVESTMENT OPERATIONS.............. (.90) .31 1.32 2.68 (1.71) .91 (1.39)
- -------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income............ (.09) (.12) (.08) (.06) (.05) (.05) (.05)
Distributions from Realized Capital Gains....... -- -- (.06) (.05) (.10) -- --
------ ------ ------ ------ ------ ----- -------
TOTAL DISTRIBUTIONS........................... (.09) (.12) (.14) (.11) (.15) (.05) (.05)
- -------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD................... $10.51 $11.50 $11.31 $10.13 $7.56 $9.42 $8.56
===============================================================================================================================
TOTAL RETURN(1).................................. (7.82)% 2.75% 13.04% 35.46% (18.17)% 10.65% (14.01)%
===============================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions)............. $978 $831 $697 $493 $207 $84 $31
Ratio of Expenses to Average Net Assets.......... 0.35% 0.35% 0.32% 0.32% 0.32% 0.32% 0.35%*
Ratio of Net Investment Income to Average Net
Assets.......................................... 0.89% 0.97% 0.71% 0.75% 0.92% 0.70% 1.02%*
Portfolio Turnover Rate.......................... 9% 1% 4% 7% 3% 21%** 2%
Average Commission Rate Paid..................... $.0156 N/A N/A N/A N/A N/A N/A
* Annualized.
** Portfolio turnover rates for 1991 excluding in-kind redemptions was 1% for the Pacific Portfolio.
+ Commencement of operations.
(1) Total return figures do not reflect the 1% transaction fee on purchases or the annual account maintenance fee of $10.
Subscription period for Portfolio was May 1, 1990, to June 17, 1990, during which time all assets were held in money
market instruments. Performance measurement begins on June 18, 1990.
</TABLE>
15
<PAGE> 19
<TABLE>
<CAPTION>
-------------------------------------------
EMERGING MARKETS PORTFOLIO
-------------------------------------------
YEAR ENDED DECEMBER 31, MAY 4+ TO
------------------------- DEC. 31,
1996 1995 1994
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD........................................... $10.75 $10.37 $10.00
------ ------ -------
INVESTMENT OPERATIONS
Net Investment Income......................................................... .18 .15 .06
Net Realized and Unrealized Gain (Loss) on Investments........................ 1.52 (.09) .92
------ ------ -------
TOTAL FROM INVESTMENT OPERATIONS............................................ 1.70 .06 .98
- --------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income.......................................... (.17) (.18) (.07)
Distributions from Realized Capital Gains..................................... -- -- (.04)
------ ------ -------
TOTAL DISTRIBUTIONS......................................................... (.17) (.18) (.11)
- --------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD................................................. $12.28 $10.75 $10.87
==========================================================================================================================
TOTAL RETURN(1)................................................................ 15.83% .56% 9.81%
==========================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions)........................................... $637 $234 $83
Ratio of Expenses to Average Net Assets........................................ 0.60% 0.60% 0.60%*
Ratio of Net Investment Income to Average Net Assets........................... 1.69% 2.00% 1.32%*
Portfolio Turnover Rate........................................................ 1% 3% 6%
Average Commission Rate Paid................................................... $.0004 N/A N/A
* Annualized.
+ Commencement of operations.
(1) Total return does not reflect the 2% transaction fee on purchases, the 1% transaction fee on redemptions, or the annual
account maintenance fee of $10. Subscription period for Portfolio was April 18, 1994, to May 3, 1994, during which time
all assets were held in money market instruments. Performance measurement begins on May 4, 1994.
</TABLE>
<TABLE>
<CAPTION>
-----------------------------
TOTAL INTERNATIONAL PORTFOLIO
-----------------------------
APRIL 29+, TO
DECEMBER 31, 1996
<S> <C>
- -------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD............................................... $10.26
-----------------
INVESTMENT OPERATIONS
Income Dividends Received......................................................... .150
Capital Gain Distributions Received............................................... 0.15
-----------------
Total Distributions Received.................................................... .165
Net Realized and Unrealized Gain (Loss) on Investments............................ (.110)
-----------------
TOTAL FROM INVESTMENT OPERATIONS................................................ 0.55
- -------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income.............................................. (.160)
Distributions from Realized Capital Gains......................................... (0.15)
-----------------
TOTAL DISTRIBUTIONS............................................................. (.175)
- -------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD..................................................... $10.14
=========================================================================================================================
TOTAL RETURN**..................................................................... 0.55%
=========================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions)............................................... $280
Ratio of Expenses to Average Net Assets............................................ 0%
Ratio of Net Investment Income to Average Net Assets............................... 1.51%*
Portfolio Turnover Rate............................................................ 0%
Average Commission Rate Paid....................................................... N/A
* Annualized.
** Total return figures do not reflect the 1% transaction fee on purchases or the annual account maintenance fee of $10.
+ Commencement of operations.
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
16
<PAGE> 20
YIELD AND TOTAL
RETURN From time to time a Portfolio may advertise its yield
and total return. Both yield and total return figures
are based on historical earnings and are not intended
to indicate future performance. The "total return" of a
Portfolio refers to the average annual compounded rates
of return over one-, five- and ten-year periods or for
the life of the Portfolio (as stated in the
advertisement) that would equate an initial amount
invested at the beginning of a stated period to the
ending redeemable value of the investment, assuming the
reinvestment of all dividend and capital gains
distributions.
In accordance with industry guidelines set forth by the
U.S. Securities and Exchange Commission, the "30-day
yield" of a Portfolio is calculated by dividing the net
investment income per share earned during a 30-day
period by the net asset value per share on the last day
of the period. Net investment income includes interest
and dividend income earned on a Portfolio's securities;
it is net of all expenses and all recurring and
nonrecurring charges that have been applied to all
shareholder accounts. The yield calculation assumes
that net investment income earned over 30 days is
compounded monthly for six months and then annualized.
Methods used to calculate advertised yields are
standardized for all stock and bond mutual funds.
However, these methods differ from the accounting
methods used by a Portfolio to maintain its books and
records, and so the advertised 30-day yield may not
fully reflect the income paid to an investor's account.
- --------------------------------------------------------------------------------
INVESTMENT
OBJECTIVES Vanguard Bond Index Fund, Vanguard Balanced Index Fund,
Vanguard Index Trust and Vanguard International Equity
Index Fund are each open-end diversified investment
companies designed as "index" funds. The Total
International Portfolio is part of Vanguard STAR Fund,
an open-end non-diversified investment company. This
Portfolio is also designed as an index fund.
------------------------------------------------------------------------------
BOND INDEX FUND
EACH PORTFOLIO SEEKS
TO MATCH THE
INVESTMENT
PERFORMANCE OF ITS
RESPECTIVE INDEX The Fund consists of four Portfolios, each of which
seeks to match the investment results of a particular
investment grade bond index through the use of index
sampling techniques. The Total Bond Market Portfolio
seeks to replicate the performance of a broad market
weighted bond index, while the Short-Term Bond,
Intermediate-Term Bond and Long-Term Bond Portfolios
attempt to replicate the performance of market weighted
bond indexes with prescribed maturity standards. There
is no assurance that any of the Fund's Portfolios will
achieve its stated objective.
------------------------------------------------------------------------------
BALANCED INDEX
FUND
THE FUND SEEKS
TO TRACK THE
WILSHIRE 5000 AND THE
LEHMAN BROTHERS
INDEX The objective of the Fund is to replicate, with respect
to 60% of its assets, the investment performance of the
Wilshire 5000 Equity Index and, with respect to 40% of
its assets, the investment performance of the Lehman
Brothers Aggregate Bond Index (the "Lehman Brothers
Index"). There is no assurance that the Fund will
achieve its stated objective.
The Wilshire 5000 consists of all U.S. common stocks
that trade on a regular basis on the New York and
American Stock Exchanges and in the NASDAQ
over-the-counter market. The Lehman Brothers Index
measures the total return (capital change plus income)
provided by a universe of fixed-income securities,
weighted by market value. The
17
<PAGE> 21
securities included in the index generally have an
outstanding market value of at least $100 million, are
of investment grade quality and are readily available
in the marketplace.
------------------------------------------------------------------------------
INDEX TRUST
EACH PORTFOLIO SEEKS
TO MATCH THE
INVESTMENT
PERFORMANCE OF A
PARTICULAR STOCK
MARKET INDEX The Trust consists of six Portfolios, each of which
seeks to provide investment results that correspond to
a particular stock market index. The correlation
between the performance of each of the Trust's
Portfolios and the respective index that each Portfolio
attempts to match is expected to be at least 0.95. The
500, Extended Market, Total Stock Market and Small
Capitalization Stock Portfolios attempt to replicate
the investment performance of broad market indexes,
while the Value and Growth Portfolios attempt to
replicate indexes which possess certain "value" and
"growth" investment characteristics.
- The 500 PORTFOLIO seeks to replicate the aggregate
price and yield performance of the Standard & Poor's
500 Composite Stock Price Index (the "S&P 500
Index"), an index which emphasizes large-
capitalization companies.
- The EXTENDED MARKET PORTFOLIO seeks to replicate the
aggregate price and yield performance of the Wilshire
4500 Equity 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 Equity 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 Equity
4500 Index.
- The SMALL CAPITALIZATION STOCK PORTFOLIO seeks to
replicate the aggregate price and yield performance
of the Russell 2000 Index (the "Russell 2000"), a
broadly diversified small-capitalization stock index
consisting of approximately 2,000 common stocks.
- The VALUE PORTFOLIO seeks to replicate the aggregate
price and yield performance of the S&P/BARRA Value
Index, an index which includes stocks in the S&P 500
Index with lower than average ratios of market price
to book value. These types of stocks are often
referred to as "value" stocks.
- The GROWTH PORTFOLIO seeks to replicate the aggregate
price and yield performance of the S&P/BARRA Growth
Index, an index which includes stocks in the S&P 500
Index with higher than average ratios of market price
to book value. These types of stocks are often
referred to as "growth" stocks.
------------------------------------------------------------------------------
18
<PAGE> 22
INTERNATIONAL
EQUITY INDEX FUND
EACH PORTFOLIO SEEKS
TO MATCH THE
INVESTMENT
PERFORMANCE OF ITS
RESPECTIVE INDEX The Fund consists of three Portfolios, each of which
seeks to match the investment results of a Morgan
Stanley Capital International Index. The European
Portfolio seeks to replicate the aggregate price and
yield performance of the Morgan Stanley Capital
International-Europe (Free) Index ("MSCI-Europe
(Free)"), a diversified, capitalization weighted index
comprised of companies located in fourteen European
countries. The Pacific Portfolio seeks to replicate the
aggregate price and yield performance of the Morgan
Stanley Capital International-Pacific (Free) Index
("MSCI-Pacific (Free)"), a diversified, capitalization
weighted index consisting of companies located in
Australia, Japan, Hong Kong, New Zealand, Singapore and
Malaysia.
By combining the European and Pacific Portfolios in
appropriate proportions, an investor may create an
aggregate portfolio designed to approximate the total
return (income plus capital change) of the Morgan
Stanley Capital International-Europe, Australasia and
Far East (Free) Index ("EAFE Free"), a broadly
diversified international index consisting of more than
1,000 equity securities of companies in Europe and the
Pacific Rim. As of December, 31, 1996, the MSCI-Pacific
(Free) Index represented approximately 44% of the
market capitalization of EAFE (Free), while the
MSCI-Europe (Free) Index represented the remaining 56%.
The Emerging Markets Portfolio seeks, with respect to
95% of assets, to provide investment results that
parallel the Morgan Stanley Capital International
("MSCI")-Select Emerging Markets Free Index ("Index").
The MSCI-Select Emerging Markets Free Index is a
diversified index consisting of common stocks located
in 14 countries. This Index provides broader
diversification and more liquidity than other
"published" emerging markets indexes and also takes
into consideration the trading capabilities of
foreigners in emerging stock market countries.
The Fund is neither sponsored by nor affiliated with
Morgan Stanley Capital International.
------------------------------------------------------------------------------
VANGUARD TOTAL
INTERNATIONAL
PORTFOLIO The Total International Portfolio seeks to match the
performance of the Morgan Stanley Capital International
(MSCI) -- Europe, Australasia, and Far East + Select
Emerging Markets (Free) Index ("MSCI -- EAFE + Select
EMF Index") by investing in a combination of the
European, Pacific, and Emerging Markets Portfolios of
Vanguard International Equity Index Fund.
------------------------------------------------------------------------------
ALL PORTFOLIOS The investment objectives of each Portfolio of Vanguard
Bond Index Fund and Vanguard Index Trust are
fundamental and so cannot be changed without the
approval of a majority of a Portfolio's shareholders.
The investment objectives of Vanguard Balanced Index
Fund, each Portfolio of Vanguard International Equity
Index Fund and Vanguard Total International Portfolio
are not fundamental and may be changed by the Board of
Directors without shareholder approval. However,
shareholders would be notified prior to a material
change.
19
<PAGE> 23
There is no assurance that the Portfolios will achieve
their stated objectives.
- --------------------------------------------------------------------------------
INVESTMENT
POLICIES
EACH PORTFOLIO USES
A "PASSIVE"
INVESTMENT APPROACH The Portfolios are not managed according to traditional
methods of "active" investment management, which
involve the buying and selling of securities based upon
economic, financial and market analysis and investment
judgment. Instead, the Portfolios, utilizing a
"passive" or indexing investment approach, attempt to
approximate the investment performance of their
respective indexes through statistical procedures. The
Portfolios are managed without regard to tax
ramifications.
Each Portfolio is responsible for voting the shares of
all securities it holds.
The investment policies of the Portfolios are not
fundamental and so may be changed by the Board of
Directors (Trustees) without shareholder approval.
However, shareholders would be notified prior to a
material change.
------------------------------------------------------------------------------
BOND INDEX FUND
EACH PORTFOLIO INVESTS
IN FIXED INCOME
SECURITIES Each Portfolio will invest in a group of fixed-income
securities selected from its respective index which,
when taken together, are expected to perform similarly
to the index as a whole. This sampling technique is
expected to enable each Portfolio to track the dividend
income and price movements of its respective index,
while minimizing brokerage, custodial and accounting
costs.
The TOTAL BOND MARKET PORTFOLIO will invest in a
portfolio of fixed-income securities selected to match
the Lehman Brothers Aggregate Bond Index (the
"Aggregate Bond Index"). The Aggregate Bond Index is a
broad market weighted index which encompasses four
major classes of investment grade fixed-income
securities in the United States: U.S. Treasury and
agency securities, corporate bonds, international
(dollar-denominated) bonds, and mortgage-backed
securities, with maturities greater than one year.
The SHORT-TERM BOND PORTFOLIO will invest in a
portfolio of fixed-income securities selected to match
the Lehman Brothers Mutual Fund Short (1-5)
Government/Corporate Index (the "Short-Term Index").
The Short-Term Index is a market weighted index which
encompasses three major classes of investment grade
fixed-income securities: U.S. Treasury and, agency
securities, corporate bonds, and international (dollar-
denominated) bonds, all with maturities between 1 and 5
years.
The INTERMEDIATE-TERM BOND PORTFOLIO will invest in a
portfolio of fixed-income securities selected to match
the Lehman Brothers Mutual Fund Intermediate (5-10)
Government/Corporate Index (the "Intermediate-Term
Index"). The Intermediate-Term Index is a market
weighted index which encompasses three major classes of
investment grade fixed-income securities: U.S. Treasury
and agency securities, corporate bonds, and
international (dollar-denominated) bonds, all with
maturities between 5 and 10 years.
The LONG-TERM BOND PORTFOLIO will invest in a portfolio
of fixed-income securities selected to match the Lehman
Brothers Mutual Fund
20
<PAGE> 24
Long (10+) Government/Corporate Index (the "Long-Term
Index"). The Long-Term Index is a market weighted index
which encompasses three major classes of investment
grade fixed-income securities: U.S. Treasury and agency
securities, corporate bonds, and international (dollar-
denominated) bonds, all with maturities greater than 10
years.
Each Portfolio will invest 80% or more of its assets in
securities included in its respective index. As of
December 31, 1996, the major classes of fixed-income
securities represented the following proportions of the
respective indexes' total market values:
<TABLE>
<CAPTION>
AGGREGATE SHORT-TERM INTERMEDIATE- LONG-TERM
BOND INDEX INDEX TERM INDEX INDEX
<S> <C> <C> <C> <C>
-------------------------------------------------------------------------
U.S. Treasury and
agency securities 52% 86% 57% 66%
Corporate bonds 14% 12% 32% 28%
International
(dollar-
denominated) bonds 4% 2% 11% 6%
Mortgage-backed
securities 30% 0% 0% 0%
Dollar-weighted
Average Maturity
(Years) 8.7yrs 2.7yrs 7.6 yrs 23.3yrs
</TABLE>
The Total Bond Market and Short-Term Bond Portfolios of
the Fund may, from time to time, substitute one type of
investment grade bond for another. For instance, a
Portfolio may hold more short-term corporate bonds
(fewer short-term U.S. Treasury bonds) than represented
in the Index so as to increase income. This corporate
substitution strategy will entail the assumption of
additional credit risk; however, substantial
diversification within the corporate sector should
moderate issue-specific credit risk. In addition,
current investment policy restricts corporate
substitutions to issues with less than 4 years
remaining to maturity and in aggregate no more than 15%
of net assets. Overall, credit risk is expected to be
very low for each of the Portfolios.
Fixed-income securities will be primarily of investment
grade quality -- i.e., those rated at least Baa3 by
Moody's Investors Service, Inc. or BBB- by Standard &
Poor's Corporation. Securities rated Baa or BBB are
considered as medium grade obligations. Interest
payments and principal are regarded as adequate for the
present but certain protective elements found in higher
rated bonds may be lacking. Such bonds lack outstanding
investment characteristics and, in fact, have
speculative characteristics as well.
In its efforts to duplicate the investment performance
of the Index, each Portfolio will invest in
fixed-income securities approximating its relative
proportion of the Index's total market value. For the
Total Bond Market Portfolio, these investments will
include U.S. Treasury and agency securities,
mortgage-backed securities and corporate and
international (dollar-denominated) bonds. For the
Short-Term Bond, Intermediate-Term Bond and Long-Term
Bond Portfolios, these investments include U.S.
Treasury and agency securities, corporate debt and
international (dollar-denominated) debt. The Portfolios
may invest in U.S. Treasury bills, notes and bonds and
other "full faith and credit"
21
<PAGE> 25
obligations of the U.S. Government. The Portfolios may
also invest in U.S. Government agency securities, which
are debt obligations issued or guaranteed by agencies
or instrumentalities of the U.S. Government. Such
"agency" securities may not be backed by the "full
faith and credit" of the U.S. Government. Such U.S.
Government agencies may include the Federal Farm Credit
Banks, the Resolution Trust Corporation and in the case
of the Total Bond Market Portfolio, the Government
National Mortgage Association. Even though they all
carry top (AAA) credit ratings, "agency" obligations
are not explicitly guaranteed by the U.S. Government
and so are perceived as somewhat riskier than
comparable Treasury bonds.
Each Portfolio may also invest up to 20% of its assets
in short-term money market instruments, and may invest
in bond (interest rate) futures contracts and options
to a limited extent. Such securities will be held only
to invest uncommitted cash balances, to maintain
liquidity to meet shareholder redemptions, or to
minimize trading costs. The Portfolios will not invest
in such securities as part of a temporary defensive
strategy (such as altering the aggregate maturity of a
Portfolio) to protect the Fund against potential bond
market declines. Each Portfolio intends to remain fully
invested, to the extent practicable, in a pool of
securities which will duplicate the investment
characteristics of the respective index. See
"Implementation of Policies" for a description of other
investment practices of the Fund.
------------------------------------------------------------------------------
BALANCED INDEX
FUND
THE FUND INVESTS IN
STOCKS AND BONDS Under normal circumstances, the Fund will invest 60% of
its net assets in a portfolio of common stocks selected
to track the Wilshire 5000 and 40% of its net assets in
a portfolio of investment-grade bonds designed to track
the Lehman Brothers Aggregate Bond Index (the "Lehman
Brothers Index"). The Fund may also invest in certain
short-term fixed income securities as cash reserves,
although cash and cash equivalents are normally
expected to represent less than 1% of the Fund's
assets.
The Fund's common stock portfolio will invest in a
portfolio of common stocks selected to match the
Wilshire 5000. The Fund is expected to invest in
approximately 500 of the largest securities in the
Wilshire 5000 as measured by market capitalization and
a representative sample of the remainder. Typically,
the Fund will hold between 2,200 and 2,400 stocks,
which are selected primarily on the basis of market
capitalization and industry weightings.
The Fund's bond portfolio will invest in a portfolio of
fixed income securities selected to match the Lehman
Brothers Index, a broad market-weighted index which
encompasses four major classes of investment grade
fixed-income securities in the United States: U.S.
Treasury and agency securities, corporate bonds,
international (dollar-denominated) bonds, and
mortgage-backed securities, with maturities greater
than one year. The Fund will invest in a representative
sample of fixed-income securities in the Lehman
Brothers Index, which, taken together, are expected to
perform similarly to the Index.
The Fund may, from time to time, substitute one type of
investment grade bond for another. For instance, the
Fund may hold more short-term
22
<PAGE> 26
corporate bonds (fewer short-term U.S. Treasury bonds)
than represented in the Index so as to increase income.
This corporate substitution strategy will entail the
assumption of additional credit risk; however,
substantial diversification within the corporate sector
should moderate issue-specific credit risk. In
addition, current investment policy restricts corporate
substitutions to issues with less than 4 years
remaining to maturity and in aggregate no more than 15%
of net assets. Overall, credit risk is expected to be
very low for each of the Portfolios.
Fixed-income securities will be primarily of investment
grade quality -- i.e., those rated at least Baa3 by
Moody's Investors Service, Inc. or BBB- by Standard &
Poor's Corporation. Securities rated Baa or BBB are
considered medium grade obligations. Interest payments
and principal are regarded as adequate for the present
but certain protective elements found in higher rated
bonds may be lacking. Such bonds lack outstanding
investment characteristics and, in fact, have
speculative characteristics as well.
The Fund may also invest up to 30% of its assets in
stock or bond futures contracts and options in order to
invest uncommitted cash balances, to maintain liquidity
to meet shareholder redemptions, or to minimize trading
costs. The Fund will not invest in futures contracts,
options, or cash reserves as part of a temporary
defensive strategy, such as lowering the Fund's
investment allocation in common stocks to protect
against potential stock market declines. The Fund
intends to remain fully invested, to the extent
practicable, in a pool of securities which will
duplicate the investment characteristics of the
Wilshire 5000 and Lehman Brothers Indexes. See
"Implementation of Policies" for a description of these
and other investment practices of the Fund.
------------------------------------------------------------------------------
INDEX TRUST
ALL SIX PORTFOLIOS
INVEST IN
COMMON STOCKS The 500, Value, and Growth Portfolios each invest in
all the stocks included in each of their respective
indexes in approximately the same proportion as they
are represented in the index. The Extended Market,
Total Stock Market, and Small Capitalization Stock
Portfolios invest in statistically selected samples of
the stocks included in each of their respective
indexes. This sampling technique is expected to enable
each of these Portfolios to track the price movements
of its respective index, while minimizing the
brokerage, custodial, and accounting costs.
The 500 PORTFOLIO invests in all 500 stocks in the S&P
500 Index in approximately the same proportions as they
are represented in the Index.
The EXTENDED MARKET PORTFOLIO invests in a
statistically selected sample of the more than 5,000
stocks included in the Wilshire 4500 Index. Typically,
the Portfolio invests in approximately 2,000 stocks.
Stocks are selected for inclusion in the Portfolio
based primarily on market capitalization and industry
weightings. The Portfolio is constructed to have
aggregate investment characteristics similar to those
of the Wilshire 4500 Index.
The TOTAL STOCK MARKET PORTFOLIO invests in a
statistically selected sample of the more than 7,300
stocks included in the Wilshire 5000 Index. Typically,
the Portfolio invests in approximately 2,700 stocks.
Stocks are selected for inclusion in the Portfolio
based primarily on
23
<PAGE> 27
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
1,900 stocks included in the Russell 2000 Index.
Typically, the Portfolio invests in approximately 1,500
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, 1996, the S&P/BARRA Value
Index included 340 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, 1996, the
S&P/BARRA Growth Index included 160 of the stocks that
make up the S&P 500 Index, and 50% of the total market
value of the Index.
ALL SIX PORTFOLIOS
ATTEMPT TO REMAIN
FULLY INVESTED Each Portfolio attempts to remain fully invested in
common stocks. Under normal circumstances each
Portfolio will invest at least 95% of its assets in the
common stocks of its respective index and futures
contracts and options. Each Portfolio may invest in
certain short-term fixed income securities such as cash
reserves, although cash or cash equivalents are
normally expected to represent less than 1% of each
Portfolio's assets. Each Portfolio may also invest up
to 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.
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INTERNATIONAL
EQUITY INDEX FUND
EACH PORTFOLIO
INVESTS IN
INTERNATIONAL STOCKS Each of the three Portfolios invest in statistically
selected samples of the stocks included in each of
their respective indexes. This sampling technique is
expected to enable each Portfolio to track the price
movements of its respective index, while minimizing the
brokerage, custodial, and accounting costs.
The EUROPEAN PORTFOLIO invests in a statistically
selected sample of approximately 600 stocks included in
the MSCI-Europe (Free) Index, an index of equity
securities of companies located in fourteen European
24
<PAGE> 28
countries. Three countries, the United Kingdom, Germany
and France, dominate MSCI-Europe (Free), with 34%, 14%,
and 12% of the market capitalization of the Index,
respectively, as of December 31, 1996. The 11 other
countries are individually much less significant to the
Index and, consequently, the Portfolio. The "Free"
Index includes only shares that U.S. investors are
"free" to purchase.
The PACIFIC PORTFOLIO invests in a statistically
selected sample of the more than 500 stocks included in
the MSCI-Pacific (Free) Index, an index of equity
securities of Pacific Basin companies. The MSCI-Pacific
(Free) Index is dominated by the Japanese stock market,
which represented 74% of the market capitalization of
the Index as of December 31, 1996.
The Pacific, European and Emerging Markets Portfolios
are each expected to invest in approximately 400 stocks
or more. Stocks are selected for inclusion in each
Portfolio based on country, market capitalization,
industry weightings, and fundamental characteristics
such as return variability, earnings valuation, and
yield. Each Portfolio is constructed to have aggregate
investment characteristics similar to those of its
respective index. In order to parallel the performance
of its respective index, each Portfolio will invest in
each country in approximately the same percentage as
the country's weight in the index. The correlation
between the performance of each Portfolio and its
respective index is expected to be at least 0.95. (A
correlation of 1.00 would be perfect correlation.)
The EMERGING MARKETS PORTFOLIO invests in a
statistically selected sample of the approximately 500
stocks included in the MSCI -- Select Emerging Markets
(Free) Index, an index of equity securities of
companies located in the countries of 14 emerging
markets. Four countries, Malaysia, South Africa, Hong
Kong and Brazil, represent a majority of the
MSCI -- Select Emerging Markets (Free) Index, with 19%,
12%, 14% and 14% of the market capitalization of the
Index, respectively, as of December 31, 1996. The
fourteen countries of the Index and their percentage
weightings as of December 31, 1996, were:
<TABLE>
<S> <C> <C> <C>
Greece................. 1.3% Hong Kong.............. 13.6%
Portugal............... 2.2% Indonesia.............. 6.1%
Turkey................. 1.5% Malaysia............... 18.6%
EUROPE................. 5.0% Philippines (Free)..... 3.8%
Singapore.............. 6.4%
Argentina.............. 3.8% Thailand............... 5.4%
Brazil................. 13.8% Israel................. 2.3%
Mexico (Free).......... 9.0% ASIA................... 56.2%
LATIN AMERICA.......... 26.6% South Africa........... 12.2%
</TABLE>
The Index includes only shares that U.S. investors are
"free,"
or allowed by law, to purchase and sell and that have
sufficient
trading liquidity.
The Portfolio is expected to invest in approximately
500 stocks. Stocks are selected for inclusion in the
Portfolio in order to form a statistically
representative sample corresponding to the MSCI-Select
Emerging Markets Free Index. The Portfolio is
constructed to have aggregate
25
<PAGE> 29
investment characteristics (based on country, market
capitalization and industry weightings), fundamental
characteristics (such as return variability, earnings
valuation and yield) and liquidity measures, similar to
those of its Index.
The Portfolio's policy is to remain 95% invested in
common stocks. The remaining 5% of the Portfolio will
be invested in cash reserves in order to maintain a
higher degree of portfolio liquidity to meet daily
redemption requests.
Each of the Portfolio's policy is to remain fully
invested in common stocks. Under normal circumstances
at least 80% of the assets of each Portfolio will be
invested in stocks that are represented in its
respective index. Since the Total International
Portfolio will invest primarily in shares of the
underlying Portfolios, at least 80% of its equity
exposure will be to stocks that are included in the
MSCI -- EAFE + Select EMF Index. Each Portfolio may
invest in certain short-term fixed income securities
such as cash reserves, although cash or cash
equivalents are normally expected to represent less
than 1% of each Portfolio's assets. Each Portfolio may
also invest up to 50% of its assets in stock futures
contracts, options, warrants, convertible securities,
and swap agreements in order to invest uncommitted cash
balances, maintain liquidity to meet shareholder
redemptions, or minimize trading costs. Any investment
in futures contracts, options, warrants, convertible
securities or swap agreements over 20% of each
Portfolio's assets would be made in emergency
situations, for short-term purposes.
These Portfolios will not invest in cash reserves,
futures contracts, options or warrants as part of a
temporary defensive strategy, such as lowering a
Portfolio's investment in common stocks, to protect
against potential stock market declines. The Portfolios
intend to remain fully invested, to the extent
practicable, in a pool of securities which will
approximate the investment characteristics of their
respective indexes. The Portfolios may also enter into
forward foreign currency exchange contracts in order to
maintain the same currency exposure as their respective
indexes, but not as part of a defensive strategy to
protect against fluctuations in exchange rates.
See "Implementation of Policies" for a description of
these and other investment practices of the Portfolios.
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VANGUARD TOTAL
INTERNATIONAL
PORTFOLIO The TOTAL INTERNATIONAL PORTFOLIO allocates its assets
among the European, Pacific and Emerging Markets
Portfolios of Vanguard International Equity Index Fund
based on each market segment's contribution to the
market capitalization of the Morgan Stanley Capital
International -- Europe, Australasia, and Far East +
Select Emerging Markets (Free) Index. As of December
31, 1996, the European and Pacific markets contributed
approximately 49% and 38%, respectively, and the
Emerging Markets contributed 13% to the Index's market
capitalization.
See "Implementation of Policies" for a description of
these and other investment practices of the Portfolio.
- --------------------------------------------------------------------------------
26
<PAGE> 30
INVESTMENT
RISKS
EACH PORTFOLIO IS
SUBJECT TO MARKET RISK As mutual funds investing primarily in common stocks,
Vanguard Balanced Index Fund, the Portfolios of
Vanguard Index Trust and Vanguard International Equity
Index Fund and Vanguard Total International Portfolio
are subject to MARKET RISK -- i.e., the possibility
that common stock prices will decline over short or
even extended periods. Both U.S. and foreign stock
markets tend to be cyclical, with periods when stock
prices generally rise and periods when prices generally
decline.
Common stocks, as measured by the S&P 500 Index, have
provided annual total returns (capital appreciation
plus dividend income), averaging +10.8% for all 10-year
periods from 1926 to 1996. Average return may not be
useful for forecasting future returns in any particular
period, as stock returns are quite volatile from year
to year.
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BALANCED INDEX
FUND
INVESTORS ARE EXPOSED
TO STOCK MARKET AND
INTEREST RATE RISK As with any investment program, the Fund entails
certain risks. As a mutual fund investing 60% of its
assets in common stocks, the Fund is subject to STOCK
MARKET RISK -- i.e., the possibility that stock prices
in general will decline over short or even extended
periods. The stock market tends to be cyclical, with
periods when stock prices generally rise and periods
when stock prices generally decline.
Since the Fund also invests in bonds, investors in the
Fund are also exposed to INTEREST RATE RISK -- i.e.,
fluctuations in the market value of bonds due to
changing interest rates. Bond prices are influenced
primarily by changes in the level of interest rates.
When interest rates rise, the prices of bonds generally
fall; conversely, when interest rates fall, bond prices
generally rise. While bonds normally fluctuate less in
price than stocks, there have been extended periods of
cyclical increases in interest rates that have caused
significant declines in bond prices. For example, bond
prices fell 48% from December 1976 to September 1981.
However, a decline in the market value of bonds may be
offset in whole or in part by the high level of income
that bonds provide.
To a limited extent, the Fund is also subject to CREDIT
RISK -- i.e., the likelihood that a bond issuer will
fail to make timely payments of interest and principal
to the Fund. Such credit risk is expected to be low,
however, due to the credit quality and diversification
of the Fund's bond investments.
From time to time, the stock and bond markets may
fluctuate independently of one another. In other words,
a decline in the stock market may in certain instances
be offset by a rise in the bond market, or vice versa.
As a result, the Fund, with its balance of common stock
and bond investments, is expected to entail less
investment risk (and a potentially lower return) than a
mutual fund investing exclusively in common stocks.
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27
<PAGE> 31
INDEX TRUST
THE EXTENDED MARKET,
AND SMALL
CAPITALIZATION STOCK
PORTFOLIOS MAY EXHIBIT
GREATER VOLATILITY Historically, the mid- and small-cap stocks of the
Wilshire 4500 and Russell 2000 Indexes (the target
indexes for the Extended Market and Small
Capitalization Stock Portfolios, respectively) have
been more volatile than -- and at times have performed
quite differently from -- the large-cap stocks of the
S&P 500 Index. This is due to several factors,
including less-certain growth and dividend prospects
for small companies.
THE VALUE AND
GROWTH PORTFOLIOS
MAY FLUCTUATE
INDEPENDENTLY Even indexes that are subsets of the S&P 500
Index -- such as the S&P/BARRA Value Index and the
S&P/BARRA Growth Index (the target indexes for the
Value and Growth Portfolios) -- will not perform in the
same way as the broader S&P 500 Index. Historically,
stocks of the S&P/BARRA Value Index have been less
volatile than the stocks found in the broader S&P 500
Index Stocks of the S&P/BARRA Growth Index, on the
other hand, have displayed somewhat greater short-term
volatility than the S&P 500 Index's stocks. Historical
performance aside, however, both value and growth
stocks have the potential to be more volatile than the
broader market.
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INTERNATIONAL
EQUITY INDEX FUND
INTERNATIONAL STOCKS
MAY EXHIBIT GREATER
VOLATILITY THAN
U.S. STOCKS Investments in foreign stock markets can be as
volatile, if not more volatile, than investments in
U.S. markets.
The MSCI-Europe Index has provided annual total
returns, averaging +15.8% for all 10-year periods from
1969-1996, and the MSCI-Pacific Index has provided
annual total returns, averaging +17.1% during the same
periods. By comparison, the average annual total return
of U.S. stocks during this same period was +13.2% (as
measured by the Standard & Poor's 500 Composite Stock
Price Index). Note, however, that the period from 1969
to 1996 was a very favorable one for foreign stock
market investing. The figures on total return and stock
market volatility are provided here only as a guide to
potential market risk, and may not be useful for
forecasting future returns in any particular period.
THE JAPANESE STOCK
MARKET IS A MAJOR
COMPONENT OF THE
PACIFIC INDEX Investors should realize that Japanese securities
comprised 74% of the MSCI-Pacific (Free) Index as of
December 31, 1996, and that therefore stocks of
Japanese companies will represent a correspondingly
large component of the Pacific Portfolio's investment
assets. Such a large investment in the Japanese stock
market may entail a higher degree of risk than with
more diversified international portfolios, especially
considering that by fundamental measures of corporate
valuation, such as its high price-earnings ratios and
low dividend yields, the Japanese market as a whole may
appear expensive relative to other world stock markets.
STOCKS FROM THREE
COUNTRIES DOMINATE
THE EUROPE INDEX Stocks from the United Kingdom, Germany and France
comprised 34%, 14% and 12% of the MSCI-Europe Index,
respectively, as of December 31, 1996. The remaining 11
countries in the MSCI-Europe Index have much less
significant capitalization weightings in the Index and
will therefore have much less impact on the total
return of the Index and the European Portfolio.
28
<PAGE> 32
EMERGING MARKETS
MAY EXHIBIT GREATER
VOLATILITY THAN
DEVELOPED MARKETS Emerging markets, such as those invested in by the
Emerging Markets Portfolio, are associated with
substantial investment risks. These risks include
market volatility, investment illiquidity, currency
risk, political instability and unexpected changes in
economic policy including capital controls,
expropriation, taxes and hyper-inflation.
Investors should be aware that emerging markets can be
substantially more volatile than both U.S. and more
developed foreign markets. For example, from 1989-1996,
the average positive monthly return for the Wilshire
5000 Index, a broad measure of the U.S. equity market,
was +3.1%. The average negative monthly return for the
Wilshire 5000 Index was -2.6%. In contrast, from
1989-1996, the average positive monthly return of the
Morgan Stanley Capital International Emerging Markets
Free Index, a widely quoted emerging market benchmark,
was +4.5%; while the average negative monthly return
was -4.3%.
INVESTMENT ILLIQUIDITY
RISK Volatility in emerging markets may be exacerbated by
illiquidity. Average daily trading volume in all of the
emerging markets combined is a small fraction of the
average daily volume of the U.S. market. Small trading
volumes may result in investors being forced to
purchase securities at substantially higher prices than
the current market, or sell securities at much lower
prices than the current market.
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VANGUARD TOTAL
INTERNATIONAL
PORTFOLIO Because it invests its assets in the Europe, Pacific,
and Emerging Markets Portfolios of Vanguard
International Equity Index Fund, the Total
International Portfolio is subject to the same risks,
in varying degrees.
INTERNATIONAL STOCKS
ALSO EXPOSE INVESTORS
TO CURRENCY AND OTHER
RISKS For U.S investors, the returns of foreign investments,
such as those held by the three Portfolios, are
influenced by not only the returns on foreign common
stocks themselves, but also by the returns on the
currencies in which the stocks are denominated.
Currency risk is the risk that changes in foreign
exchange rates will affect, favorably or unfavorably,
the value of foreign securities held by a Portfolio. In
a period when the U.S. dollar generally rises against
foreign currencies, the returns on foreign stocks for a
U.S. investor will be diminished. By contrast, in a
period when the U.S. dollar generally declines, the
returns on foreign stocks will be enhanced. Currency
risk in emerging markets may be exacerbated by
unexpected exchange rate devaluations.
Other risks and considerations of international
investing include: differences in accounting, auditing
and financial reporting standards; generally higher
transaction costs on foreign portfolio transactions;
small trading volumes and generally lower liquidity of
foreign stock markets, which may result in greater
price volatility; foreign withholding taxes payable on
a Portfolio's foreign securities, which may reduce
dividend income payable to shareholders; the
possibility of expropriation or confiscatory taxation;
adverse change in investment or exchange control
regulations; difficulty in obtaining a judgment from a
foreign court; political instability which could affect
U.S. investment in foreign countries; and potential
restriction on the flow of international capital.
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29
<PAGE> 33
BOND INDEX FUND
THE PORTFOLIOS ARE
SUBJECT TO INTEREST
RATE RISK INTEREST RATE RISK is the potential for fluctuations in
bond prices due to changing interest rates. As a rule,
bond prices vary inversely with interest rates. If
interest rates rise, bond prices generally decline; if
interest rates fall, bond prices generally rise. In
addition, for a given change in interest rates,
longer-maturity bonds fluctuate more in price than
shorter-maturity bonds. To compensate investors for
these larger fluctuations, longer-maturity bonds
usually offer higher yields than shorter-maturity
bonds, other factors, including credit quality, being
equal.
These basic principles of bond prices also apply to
U.S. Government securities. A security backed by the
"full faith and credit" of the U.S. Government is
guaranteed only as to its stated interest rate and face
value at maturity, not its current market price. Just
like other fixed-income securities, government-
guaranteed securities will fluctuate in value when
interest rates change.
The TOTAL BOND MARKET and INTERMEDIATE-TERM BOND
PORTFOLIOS maintain an intermediate-term average
weighted maturity, and are therefore subject to a
moderate to high level of interest rate risk. Interest
rate risk for the SHORT-TERM BOND PORTFOLIO should be
modest. Because of the short-term average weighted
maturities, the Portfolio is expected to exhibit low to
moderate price fluctuations as interest rates change.
The LONG-TERM BOND PORTFOLIO is exposed to substantial
interest rate risk. The Portfolio is expected to have
an average maturity in excess of 15 years which exposes
it to high to very high price fluctuations due to
changing interest rates.
THE PORTFOLIOS ARE
SUBJECT TO INCOME RISK INCOME RISK is the potential for a decline in a
Portfolio's income due to falling market interest
rates. In relative terms, income risk will be higher
for the Fund's shorter-term Portfolios and lower for
the Fund's longer-term Portfolios.
THE LONG-TERM BOND
PORTFOLIO IS SUBJECT TO
CALL RISK An additional risk associated with long-term corporate
bonds is call risk. CALL RISK is the possibility that
corporate bonds held by the Portfolio will be repaid
prior to maturity. Call provisions, common in many
corporate bonds, allow bond issuers to redeem bonds
prior to maturity (at a specific price). When interest
rates are falling, bond issuers often exercise these
call provisions, paying off bonds that carry high
stated interest rates and often issuing new bonds at
lower rates. For the Portfolio, the result would be
that bonds with high interest rates are "called" and
must be replaced with lower-yielding instruments. In
these circumstances, the income of the Portfolio would
decline. Reflecting these additional credit and call
risks, the corporate portion of the portfolio will
generally offer higher yields than the government
portion.
THE TOTAL BOND
MARKET PORTFOLIO IS
SUBJECT TO
PREPAYMENT RISK As a mutual fund investing a portion of its assets in
mortgage-backed securities (see chart on page 21), the
Total Bond Market Portfolio is subject to prepayment
risk to a limited extent. PREPAYMENT RISK is the
possibility that, during periods of declining interest
rates, the principal invested in high-yielding
mortgage-backed securities will be repaid earlier than
scheduled, and the Fund will be forced to reinvest the
unanticipated payments at generally lower interest
rates.
30
<PAGE> 34
Prepayment risk has two important effects on the
Portfolio. First, when interest rates fall and
principal prepayments are reinvested at lower interest
rates, the income that the Portfolio derives from
mortgage-backed securities is reduced. Second, like
other fixed-income securities, mortgage-backed
securities generally decline in price when interest
rates rise. However, because of prepayment risk,
mortgage-backed securities (and thus in part the share
price of the Portfolio and the value of the Index) will
not enjoy as large a gain in market value as ordinary
bonds when interest rates fall. In part to compensate
for prepayment risk, mortgage-backed securities
generally offer higher yields than bonds of comparable
credit quality and maturity.
CREDIT RISK IS EXPECTED
TO BE LOW CREDIT RISK is the possibility that an issuer of
securities held by a Portfolio will be unable to make
payments of either interest or principal. The credit
risk of a Portfolio is a function of the credit quality
of its underlying securities.
The credit quality of each Portfolio is expected to be
very high, and thus credit risk should be low. As of
December 31, 1996, the average quality, as rated by
Moody's Investors Service, Inc., of each Portfolio's
benchmark index was as follows:
<TABLE>
<S> <C>
Aggregate Bond Index............................. Aaa
Short-Term Bond Index............................ Aaa
Intermediate-Term Bond Index..................... Aa1
Long-Term Bond Index............................. Aa2
</TABLE>
To a limited extent, the Portfolios are also exposed to
event risk, the possibility that corporate fixed-income
securities held by the Portfolios may suffer a
substantial decline in credit quality and market value
due to a corporate restructuring. Corporate
restructurings, such as mergers, leveraged buyouts,
takeovers or similar events, are often financed by a
significant expansion of corporate debt. As a result of
the added debt burden, the credit quality and market
value of a firm's existing debt securities may decline
significantly. While event risk may be high for certain
corporate and international (dollar-denominated)
securities held by the Portfolios, event risk for each
Portfolio in the aggregate should be low because of
each Portfolios diversified holdings and the small
percentage of the Portfolio assets invested in these
securities.
The corporate substitution strategy used by the Fund
(see discussion on page 21) will increase credit risk
somewhat, as short-term investment grade corporate
bonds are substituted for U.S. Treasury bonds and
notes; however, owing to the diversified nature of the
Portfolios, and policies limiting the maturity and
maximum amount of substitutions, the overall credit and
event risk of the Portfolio is expected to be low.
NO CURRENCY RISK IN
ANY PORTFOLIO While each of the chosen Lehman Index benchmarks do
have limited exposure to international bonds, there is
no currency risk associated with the investments since
they are all dollar-denominated.
- --------------------------------------------------------------------------------
WHO SHOULD
INVEST The Funds offer investors the advantage of a "passive"
approach to investing. These include low investment
costs, exceptional diversification among a wide range
of stocks and bonds, minimal portfolio
31
<PAGE> 35
turnover, and relative predictability. Unlike other
mutual funds, which generally attempt to "beat" market
averages with often unpredictable results, the
Portfolios of the Funds seek to "match" the performance
of their underlying indexes and thus are expected to
provide a highly predictable return relative to these
benchmarks.
However, shareholders should expect to be fully exposed
to the market risks inherent in investing in stocks and
bonds. As the prices of stocks and bonds may be
volatile, only investors able to tolerate short-term,
possibly substantial fluctuations in the value of their
investment, brought about by generally declining stock
or bond prices, should contemplate an investment in the
Funds.
Investors may wish to reduce the potential risk of
investing in a Portfolio by purchasing shares on a
regular, periodic basis (dollar-cost averaging) rather
than making an investment in one lump sum.
The Funds are intended to be a long-term investment
vehicle and not designed to provide investors with a
means of speculating on short-term market movements.
Investors who engage in excessive account activity
generate additional costs which are borne by all
shareholders. In order to minimize such costs the Funds
have adopted the following policies. The Funds reserve
the right to reject any purchase request (including
exchange purchases from other Vanguard portfolios) that
is reasonably deemed to be disruptive to efficient
portfolio management, either because of the timing of
the investment or previous excessive trading by the
investor. Additionally, the Funds have adopted exchange
privilege limitations as described in the section
"Exchange Privilege Limitations." Finally, the Funds
reserve the right to suspend the offering of their
shares.
Investors should not consider an investment in any one
Fund a complete investment program, but should maintain
holdings of securities with different risk
characteristics -- including common stocks, bonds and
money market instruments.
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BOND INDEX FUND
INVESTORS SEEKING TO
PARTICIPATE IN THE
"BOND MARKET" AS A
WHOLE OR ITS VARIOUS
MATURITY SEGMENTS The Portfolios are designed for individual and
institutional investors seeking well-diversified,
low-cost ways to participate in the U.S. fixed-income
markets. The Portfolios will be essentially fully
invested at all times. Because the Total Bond Market
Portfolio will represent all major sectors of the
investment grade fixed-income securities market, the
Portfolio is a suitable vehicle for those investors
seeking ownership in the "bond market" as a whole,
without regard to particular sectors. The Short-Term
Bond, Intermediate-Term Bond and Long-Term Bond
Portfolios are suitable vehicles for those investors
seeking ownership in specific maturity segments of the
"bond market." Each Portfolio concentrates on bonds of
various maturities as illustrated in the chart on page
21. Because of the risks associated with bond
investments, each Portfolio is intended to be a
long-term investment vehicle and is not designed to
provide investors with a means of speculating on short-
term bond market movements.
As with all longer-term, fixed-income investments, the
share price of the Total Bond Market, Intermediate-Term
Bond and Long-Term Bond Portfolios will vary, with the
Long-Term Bond Portfolio expected to
32
<PAGE> 36
exhibit the greatest volatility. Share price volatility
should be significantly less for the Short-Term Bond
Portfolio. Credit risk should be minimal for each
Portfolio. The investment risks are described on page
30.
The Portfolios are also suitable for those investors
with common stock holdings who are seeking a
complementary fixed-income investment to create a more
balanced asset mix. Because of potential share price
fluctuations, the Portfolios may be inappropriate for
investors who have short-term objectives or who require
stability of principal.
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BALANCED INDEX
FUND
INVESTORS SEEKING A
BALANCE BETWEEN
CURRENT INCOME AND
CAPITAL GROWTH The Fund is designed for conservative investors seeking
a long-term investment offering both current income and
the potential for capital growth. By balancing its
investments among common stocks and bonds, the Fund is
expected to provide lower investment risk and share
price volatility than a mutual fund which invests
exclusively in common stocks. The balanced investment
approach of the Fund tends to reduce exposure to stock
and bond market risks; it does not eliminate them. The
Fund is thus suitable for investors who wish to gain
exposure to the potential capital growth provided by
the stock market, while limiting investment risk. Such
a balanced investment program might be particularly
well-suited to long-term investment objectives such as
retirement savings.
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INDEX TRUST
LONG-TERM INVESTORS
SEEKING A "PASSIVE"
APPROACH FOR INVESTING
IN COMMON STOCKS All six Portfolios of the Trust are designed for
long-term investors seeking the advantages of investing
in a diversified portfolio of common stocks.
Four Portfolios of the Trust provide a vehicle for
investing in a broad market index:
- The 500 PORTFOLIO is designed for investors seeking
to replicate the total return of the S&P 500 Index,
an index emphasizing large capitalization common
stocks.
- The EXTENDED MARKET PORTFOLIO is designed for
investors seeking to replicate the total return of
the Wilshire 4500 Index, an index consisting of
small- and medium-capitalization companies.
- The TOTAL STOCK MARKET PORTFOLIO is designed for
investors seeking to replicate the total return of
the Wilshire 5000 Index, an index consisting of all
U.S. stocks that trade on a regular basis on either
the New York or American Stock Exchange or the NASDAQ
over-the-counter market. The Total Stock Market
Portfolio will therefore reflect the performance of
the entire U.S. stock market.
- The SMALL CAPITALIZATION STOCK PORTFOLIO is designed
for investors seeking to replicate the total return
of the Russell 2000 Small Stock Index, an index
consisting of approximately 2,000
small-capitalization stocks.
33
<PAGE> 37
Two Portfolios are designed for investors seeking to
emphasize certain investment characteristics while
continuing to utilize a "passive" investment approach:
- The VALUE PORTFOLIO is designed for investors seeking
to replicate the total return of the S&P/BARRA Value
Index, an index consisting of companies of the S&P
500 Index with lower than average market price to
book value ratios. Such a "value-oriented" Portfolio
may be appropriate for more conservative stock market
investors who are seeking higher dividend income and
somewhat below average stock market volatility.
- The GROWTH PORTFOLIO is designed for investors
seeking to replicate the total return of the
S&P/BARRA Growth Index, an index consisting of
companies of the S&P 500 Index with higher than
average market price to book value ratios. Such a
"growth-oriented" Portfolio may be appropriate for
investors who have little need for current dividend
income and who can tolerate somewhat above average
stock market volatility.
Taken together in appropriate proportions, the Value
and Growth Portfolios are expected to approximate the
total returns achieved by the 500 Portfolio.
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INTERNATIONAL
EQUITY INDEX FUND
LONG-TERM INVESTORS
SEEKING TO INVEST
IN INTERNATIONAL
COMMON STOCKS The Portfolios are designed for investors who seek a
low-cost "passive" approach for investing in a broadly
diversified portfolio of international common stocks.
Unlike other equity mutual funds, which generally seek
to "beat" market averages with often unpredictable
results, the Portfolios of the Fund seek to "match"
their respective indexes and thus are expected to
provide a predictable return relative to their
respective benchmarks. In particular, the European
Portfolio is designed for investors seeking to
approximate the total investment results (before fund
expenses and withholding taxes) of the MSCI-Europe
(Free) Index, a diversified index of European common
stocks. The Pacific Portfolio is designed for investors
seeking to approximate the total investment results
(before fund expenses and withholding taxes) of the
MSCI-Pacific (Free) Index, a diversified index of
Pacific Basin common stocks.
The European and Pacific Portfolios are also suitable
for investors seeking to create a portfolio which
parallels the performance of the MSCI-EAFE (Free)
Index, a broadly diversified index consisting of over
1,000 international equity securities. By investing in
the two portfolios in the appropriate percentages (44%
in the Pacific Portfolio and 56% in the European
Portfolio as of December 31, 1996), a portfolio
approximating the investment characteristics of
MSCI-EAFE (Free) may be created.
The Emerging Markets Portfolio is designed for
investors seeking to approximate the total investment
results (before fund expenses and withholding taxes) of
the MSCI-Select Emerging Markets Free Index, a
diversified index of common stocks of emerging market
countries.
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34
<PAGE> 38
TOTAL
INTERNATIONAL
PORTFOLIO The Total International Portfolio is designed for
investors seeking to approximate investment results
that parallel those of the MSCI-EAFE + Select EMF Index
through a combination of the Europe, Pacific, and
Emerging Markets Portfolios of Vanguard International
Equity Index Fund.
- --------------------------------------------------------------------------------
IMPLEMENTATION
OF POLICIES The Portfolios follow a variety of investment practices
in an effort to duplicate the total return of their
respective indexes.
------------------------------------------------------------------------------
BOND INDEX FUND
THE PORTFOLIOS INVEST
IN FIXED INCOME
SECURITIES Each Portfolio will invest at least 80% or more of its
assets in securities included in its benchmark Index.
The Indexes measure the total investment return
(capital change plus income) provided by a universe of
fixed-income securities, weighted by the market value
outstanding of each security. The securities included
in each Index generally meet the following criteria, as
defined by Lehman Brothers: an outstanding market value
of at least $100 million; and investment grade
quality -- i.e., rated a minimum of Baa by Moody's
Investors Service, Inc. or BBB by Standard & Poor's
Corporation. The maturities of securities included in
each index will vary as described on page 21.
THE PORTFOLIOS USE A
"SAMPLING" TECHNIQUE The Portfolios will be unable to hold all of the
individual issues which comprise the Indexes because of
the large number of securities involved. Instead, each
Portfolio will hold a representative sample of the
securities in its respective Index, selecting one or
two issues to represent entire "classes" or types of
securities in the Index. Each Portfolio will be
constructed so as to match the composition of its
benchmark index as described below after adjusting for
the corporate substitution strategy described on page
21 for the Total Bond Market and Short-Term Bond
Portfolios.
At the broadest level, each Portfolio will seek to hold
securities which reflect the weighting of the major
asset classes in its respective index. For the Total
Bond Market Portfolio, these classes include U.S.
Treasury and agency securities, corporate bonds, and
mortgage-backed securities. For the Short-Term Bond,
Intermediate-Term Bond and Long-Term Bond Portfolios,
the two major classes of securities include U.S.
Treasury and agency securities and corporate bonds.
Such a sampling technique is expected to be an
effective means of substantially duplicating the income
and capital returns provided by each Index. Over time,
the correlation between the performance of the Fund and
the Index is expected to be 0.95 or higher. A
correlation of 1.00 would indicate perfect correlation,
which would be achieved when the net asset value of a
Portfolio, including the value of its dividend and
capital gain distributions, increases or decreases in
exact proportion to changes in the Index. Because the
Portfolios of the Fund incur operating expenses, as
opposed to their respective indexes, which do not, a
perfect correlation of 1.00 is unlikely to be achieved.
THE TOTAL BOND
MARKET PORTFOLIO MAY
INVEST IN MORTGAGE-
BACKED SECURITIES As part of its effort to duplicate the investment
performance of its Index, the Total Bond Market
Portfolio may invest in mortgage-backed securities.
Mortgage-backed securities represent an interest in an
underlying pool of mortgages. Unlike ordinary
fixed-income securities,
35
<PAGE> 39
which generally pay a fixed rate of interest and return
principal upon maturity, mortgage-backed securities
repay both interest income and principal as part of
their periodic payments. Because the mortgages
underlying mortgage-backed certificates can be prepaid
at any time by homeowners or corporate borrowers,
mortgage-backed securities give rise to certain unique
"prepayment" risks. See "Investment Risks."
The Total Bond Market Portfolio may purchase
mortgage-backed securities issued by the Government
National Mortgage Association (GNMA), the Federal Home
Loan Mortgage Corporation (FHLMC), the Federal National
Mortgage Association (FNMA), and the Federal Housing
Authority (FHA). GNMA securities are guaranteed by the
U.S. Government as to the timely payment of principal
and interest; securities from other
Government-sponsored entities are generally not secured
by an explicit pledge of the U.S. Government. The
Portfolio may also invest in conventional mortgage
securities, which are packaged by private corporations
and are not guaranteed by the U.S. Government. Mortgage
securities that are guaranteed by the U.S. Government
are guaranteed only as to the timely payment of
principal and interest. The market value of such
securities is not guaranteed and may fluctuate.
------------------------------------------------------------------------------
BALANCED INDEX
FUND
THE FUND INVESTS IN
A SAMPLE OF ALL U.S.
COMMON STOCKS The Fund's common stock investments will be selected
from securities included in the Wilshire 5000, an index
of all regularly and publicly traded U.S. common stocks
that trade on the New York and American Stock Exchanges
and in the NASDAQ over-the-counter market.
Approximately 7,000 stocks, including large-, medium-,
and small-capitalization companies, are included in the
Wilshire 5000, which serves as a proxy for the complete
U.S. stock market.
Under normal circumstances, the Fund will invest 60% of
its net assets in common stocks included in the
Wilshire 5000. In an effort to replicate the investment
performance of the Wilshire 5000, the Fund's common
stock holdings will include approximately 500 of the
largest market capitalization stocks in the Index and
an additional representative sample of the remaining
stocks. The high transaction costs and illiquidity of
many of the smaller stocks in the Wilshire 5000 make
complete replication of the Index's holding
impractical.
COMMON STOCKS ARE
SELECTED USING
OPTIMIZATION
TECHNIQUES ("PORTFOLIO
OPTIMIZATION") The stocks of the Wilshire 5000 included in the Fund
are selected using a statistical technique known as
"optimization." This process selects stocks for the
Fund so that various industry weightings, market
capitalizations, and fundamental characteristics (e.g.,
price-to-book, price-to-earnings, and debt-to-asset
ratios, as well as dividend yields) match those of the
Wilshire 5000. For instance, if 10% of the
capitalization of the Wilshire 5000 consists of utility
companies with relatively large market capitalizations,
then the Fund's stock holdings are constructed so that
approximately 10% of the Fund's stocks represent
utilities with relatively large capitalizations.
The Fund is not sponsored, endorsed, sold or promoted
by Wilshire Associates. Wilshire(R) and Wilshire
5000(R) are registered service marks of Wilshire
Associates.
36
<PAGE> 40
THE FUND INVESTS IN A
SAMPLE OF ALL U.S.
INVESTMENT GRADE DEBT Under normal circumstances, the Fund will invest 40% of
its net assets in fixed income securities included in
the Lehman Brothers Index, an index of U.S.
investment-grade, fixed-income securities. More than
5,500 individual bond issues, including U.S. Treasury
and Government agency securities, corporate debt
obligations, and mortgage-backed securities are
included in the Lehman Brothers Index.
The securities included in the Lehman Brothers Index in
which the Fund may invest generally meet the following
criteria, as defined by Lehman Brothers: an effective
maturity of not less than one year; an outstanding
market value of at least $100 million; investment grade
quality -- i.e., rated a minimum of Baa by Moody's
Investors Service, Inc. or BBB by Standard & Poor's
Corporation; and general availability in the
marketplace. If a security held in the Fund's portfolio
is downgraded to a rating below these minimum
standards, the Fund may continue to hold it until such
time as the adviser deems it most advantageous to
dispose of the security.
BONDS ARE SELECTED
USING A STRATIFIED
SAMPLING TECHNIQUE The Fund will be unable to hold all of the individual
issues which comprise the Lehman Brothers Index because
of the large number of securities involved. Instead,
the Fund will hold a representative sample of the
securities in the Index, selecting a few issues to
represent entire "classes" or types of securities in
the Index. The Fund will be constructed so as to
approximately match the composition of its benchmark
index, after adjusting for the corporate substitution
policy described on page 21.
At the broadest level, and adjusted for the corporate
substitution strategy, the Fund will seek to hold
securities which reflect the weighting of the major
asset classes in the Lehman Brothers Index -- U.S.
Treasury and agency securities, corporate bonds, and
mortgage-backed securities. For example, if U.S.
Treasury and agency securities represent approximately
60% of the Index's interest rate risk, then
approximately 60% of the Fund's interest rate risk will
come from such securities. Similarly, if corporate
bonds represent 20% of the interest rate risk of the
Index, then they will represent approximately 20% of
the interest rate risk of the Fund.
Such a sampling technique is expected to be an
effective means of substantially duplicating the income
and capital returns provided by each index. Over time,
the correlation between the performance of the Fund and
the Index is expected to be 0.95 or higher. A
correlation of 1.00 would indicate perfect correlation,
which would be achieved when the net asset value of the
Fund, including the value of its dividend and capital
gains distributions, increases or decreases in exact
proportion to changes in the Index (without taking into
consideration the effect of the Fund's common stock
holdings). Because the Fund incurs operating expenses,
as opposed to its indexes, which do not, a perfect
correlation of 1.00 is unlikely to be achieved. The
performance of the Fund versus that of its respective
index is monitored daily. If a tracking error develops,
the Fund is rebalanced to bring it in line with the
Index.
37
<PAGE> 41
THE FUND'S RETURNS
SHOULD BE CLOSELY
CORRELATED WITH ITS
UNDERLYING INDEXES The sampling techniques utilized by the Fund are
expected to be an effective means of substantially
duplicating the investment performance (dividend income
plus capital change) of the Fund's underlying indexes:
the Wilshire 5000 (for the 60% of net assets invested
in common stocks) and the Lehman Brothers Index (for
the 40% of net assets invested in bonds). The
correlation between the performance of the Fund's stock
and bond investments and the Wilshire 5000 and Lehman
Brothers Indexes, respectively, is expected to be at
least 0.95.
Due to the use of sampling techniques, however, neither
the stock nor bond holdings of the Fund are expected to
track their target benchmarks with the degree of
accuracy that complete replication of the indexes would
have provided. The principal advantage of this sampling
approach is to provide an efficient means of investing
in a large universe of stocks and bonds. In particular,
the Fund is expected to provide exceptionally broad
diversification, and should operate at low costs due to
both its "passive" approach to portfolio management and
expected low portfolio turnover rate.
------------------------------------------------------------------------------
INDEX TRUST
THE 500 PORTFOLIO
INVESTS IN ALL 500 S&P
STOCKS The 500 Portfolio attempts to duplicate the investment
results of the S&P 500 Index by holding all 500 stocks
in approximately the same proportions as they are
represented in the Index. This indexing technique is
known as "complete replication."
The S&P 500 Index is composed of 500 common stocks,
which are chosen by Standard & Poor's Corporation on a
statistical basis to be included in the Index. The
inclusion of a stock in the S&P 500 Index in no way
implies that Standard & Poor's Corporation believes the
stock to be an attractive investment. The 500
securities, most of which trade on the New York Stock
Exchange, represented, as of December 31, 1996,
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 47% 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, 1996, the five largest companies in the
Index were: General Electric (2.9%), Coca Cola Company
(2.3%), Exxon Corporation (2.2%), Intel Corporation
(1.9%), and Microsoft Corporation (1.7%). The largest
industry categories were: banks (7.7%), telephone
companies (6.6%), pharmaceutical companies (6.4%),
international oil companies (5.8%) and computer
companies (4.6%).
THE EXTENDED MARKET
PORTFOLIO INVESTS IN
MEDIUM- AND SMALL-
SIZE COMPANY STOCKS While the S&P 500 Index includes the preponderance of
large market capitalization stocks, it excludes most of
the medium- and small-size companies which comprise the
remaining 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 6,800 stocks of medium- and small-capitalization
companies are included in the Wilshire 4500 Index.
38
<PAGE> 42
The Extended Market Portfolio will be unable to hold
all of the more than 6,800 issues which comprise the
Wilshire 4500 Index because of the costs involved and
the illiquidity of many of the securities. Instead, the
Portfolio will hold a representative sample of the
securities in the Wilshire 4500 Index.
THE TOTAL STOCK
MARKET PORTFOLIO
INVESTS IN A SAMPLE OF
ALL U.S. STOCKS Neither the S&P 500 Index nor the Wilshire 4500 Index
independently represents the U.S. stock market as a
whole. The Wilshire 5000 Index, which consists of all
regularly and publicly traded U.S. stocks, provides a
complete proxy for the U.S. stock market. More than
7,300 stocks, including large-, medium-, and
small-capitalization companies are included in the
Wilshire 5000 Index.
In an effort to replicate the investment performance of
the Wilshire 5000 Index, the Total Stock Market
Portfolio will invest in approximately 2,700 of the
largest stocks in the index and an additional
representative sample of the remaining stocks. As in
the case for the Extended Market Portfolio, the high
transaction costs and illiquidity of many of the
smaller stocks make complete replication of the
Wilshire 4500 Index's holdings impractical.
The Extended Market and Total Stock Market Portfolios
are not sponsored, endorsed, sold or promoted by
Wilshire Associates. Wilshire(R) and Wilshire 5000(R)
are registered service marks of Wilshire Associates.
THE SMALL
CAPITALIZATION STOCK
PORTFOLIO INVESTS IN
SMALL-SIZE COMPANY
STOCKS The Small Capitalization Stock Portfolio attempts to
duplicate the investment results of the Russell 2000
Index by investing in approximately 1,500 of the 2,000
stocks in the Russell 2000 Index. The Russell 2000
Index is composed of approximately 2,000
small-capitalization common stocks. A company's stock
market capitalization is the total market value of its
floating outstanding shares. As of December 31, 1996,
the average stock market capitalization of the Russell
2000 was $550 million. As in the case of the Extended
Market Portfolio, the high transaction costs and
illiquidity of many of the small stocks contained in
the Russell 2000 Index make complete replication of the
holdings impractical.
The Portfolio is neither sponsored by nor affiliated
with the Frank Russell Company. Frank Russell's only
relationship to the Portfolio is the licensing of the
use of the Russell 2000 Small Stock Index. Frank
Russell Company is the owner of the trademarks and
copyrights relating to the Russell indexes.
THE EXTENDED MARKET,
TOTAL STOCK MARKET
AND SMALL
CAPITALIZATION STOCK
PORTFOLIOS USE
SAMPLING TECHNIQUES The stocks of the Wilshire 4500 Index to be included in
the Extended Market, Total Stock Market and Small
Capitalization Stock Portfolios will be selected
utilizing a statistical sampling technique known as
"optimization."
This sampling technique, which is described on page 21,
is expected to be an effective means of substantially
duplicating the income and capital returns of the
Extended Market, Total Stock Market and Small
Capitalization Stock Portfolios' target benchmarks.
Over time, the correlation between the performance of
the Extended Market, Total Stock Market and Small
Capitalization Stock Portfolios and their respective
indexes, the Wilshire 4500 Index, Wilshire 5000 Index
and Russell 2000 Index, is expected to be at least
0.95. A correlation of 1.00
39
<PAGE> 43
would indicate perfect correlation, which would be
achieved when the net asset value of a Portfolio,
including the value of its dividend and capital gains
distributions, increases or decreases in exact
proportion to changes in the respective target
benchmark.
Due to the use of the sampling technique, neither the
Extended Market Portfolio, Total Stock Market Portfolio
nor the Small Capitalization Stock Portfolio is
expected to track its benchmark index with the same
degree of accuracy as evidenced by the high degree of
correlation between the 500 Portfolio and its
benchmark. However, the principal advantage of this
technique is to provide an efficient means to invest in
the universe of stocks. In particular, the three
Portfolios are expected to provide broad
diversification, and should operate at low costs due
both to their "passive" approach to portfolio
management and low portfolio turnover rate.
THE VALUE AND GROWTH
PORTFOLIOS EMPHASIZE
STOCKS WITH CERTAIN
INVESTMENT
CHARACTERISTICS In an effort to duplicate the investment results of
their respective indexes, the Value and Growth
Portfolios will utilize "complete replication," the
same indexing technique used for the 500 Portfolio.
Specifically, the Value and Growth Portfolios will hold
all of the stocks included in the S&P/BARRA Value and
Growth Indexes, respectively, in approximately the same
proportions as those stocks are represented in the
Indexes.
Standard & Poor's Corporation constructs the S&P/BARRA
Value and Growth Indexes semi-annually by ranking all
common stocks included in the S&P 500 Index by their
price-to-book ratios. The resulting list is then
divided in half by market capitalization. Those
companies representing half of the market
capitalization of the S&P 500 Index and having lower
price-to-book ratios are included in the S&P/BARRA
Value Index; the remaining companies are incorporated
in the S&P/BARRA Growth Index. On December 31, 1996,
after the semi-annual reconstitution of the indexes,
the S&P/BARRA Value Index consisted of 340 common
stocks in the S&P 500 Index, while the S&P/BARRA Growth
Index consisted of the remaining 160. 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, 1996, the five largest
companies in the S&P/BARRA Value Index were Exxon
Corp., Royal Dutch Petroleum Co., IBM, AT&T Corp., and
Citicorp, the five largest companies in the S&P/BARRA
Growth Index were General Electric Co., Coca Cola Co.,
Intel Corp., Microsoft Corp., and Merck & Co., Inc.
40
<PAGE> 44
The 500, Value and Growth Portfolios are not sponsored,
endorsed, sold or promoted by Standard & Poor's
Corporation ("S&P"). S&P makes no representations or
warranty, implied or expressed, to the purchasers of
the Portfolios or any member of the public regarding
the advisability of investing in index funds or the
ability of the S&P 500, S&P/BARRA Value and S&P/BARRA
Growth Indexes to track general stock market
performance or to track the general performance of
value and growth stocks. S&P does not guarantee the
accuracy and/or the completeness of the S&P 500,
S&P/BARRA Value and S&P/BARRA Growth Indexes or any
data included herein.
THE S&P MAKES NO WARRANTY, EXPRESS OR IMPLIED, AS TO
RESULTS TO BE OBTAINED BY LICENSEE, OWNERS OF THE
TRUST, ANY PERSON OR ENTITY FROM THE USE OF THE S&P 500
OR ANY DATA INCLUDED THEREIN IN CONNECTION WITH THE USE
LICENSED HEREUNDER, OR FOR ANY OTHER USE. S&P MAKES NO
EXPRESS OR IMPLIED WARRANTIES, AND HEREBY EXPRESSLY
DISCLAIMS ALL SUCH WARRANTIES OF MERCHANTABILITY OR
FITNESS FOR A PARTICULAR PURPOSE FOR USE WITH RESPECT
TO THE S&P 500 OR ANY DATA INCLUDED THEREIN.
S&P's only relationship to the Portfolios is the
licensing of the S&P marks and the S&P 500, S&P/BARRA
Value and S&P/BARRA Growth Indexes, which are
determined, composed and calculated by S&P without
regard to the 500, Value and Growth Portfolios.
------------------------------------------------------------------------------
INTERNATIONAL
EQUITY INDEX FUND
EUROPEAN PORTFOLIO,
PACIFIC PORTFOLIO,
AND EMERGING MARKETS
PORTFOLIO The MCSI-Europe (Free) Index consists of approximately
600 equity securities from Europe, and the MSCI-Pacific
(Free) Index consists of more than 500 equity
securities from Australia and the Far East, and the
MSCI -- Select Emerging Markets (Free) Index consists
of some 500 stocks from Asia, Latin America, Africa and
Europe. The stocks included in each index are chosen by
Morgan Stanley Capital International on a statistical
basis. Each stock in MSCI-Europe (Free) and
MSCI-Pacific (Free), and MSCI -- Select Emerging
Markets (Free) Indexes is weighted according to its
market value as a percentage of the total market value
of all stocks in the respective index. (A stock's
market value equals the number of shares outstanding
times the most recent price of the security). The
inclusion of a stock in the index in no way implies
that Morgan Stanley Capital International believes the
stock to be an attractive investment.
THE PORTFOLIOS INVEST
IN INTERNATIONAL
COMMON STOCKS USING
SAMPLING TECHNIQUES
("PORTFOLIO
OPTIMIZATION") The European, Pacific and Emerging Markets Portfolios
will be unable to hold all of the issues that comprise
their respective indexes because of the costs involved
and the illiquidity of many of the securities. Instead,
each Portfolio will attempt to hold a representative
sample of approximately 500 or more of the securities
in its respective Index, which will be selected
utilizing a mathematical technique known as "portfolio
optimization." Under this technique, each stock is
considered for inclusion in the Portfolio based on its
contribution to certain country, capitalization,
industry and fundamental investment characteristics.
Each Portfolio is constructed so that in the aggregate,
each Portfolio's country, capitalization, industry, and
fundamental investment characteristics resemble those
of its respective Index. Over time,
41
<PAGE> 45
portfolio composition is altered (or "rebalanced") to
reflect changes in the characteristics of the Indexes.
Due to the use of this sampling or "portfolio
optimization" technique, the Portfolios are not
expected to track their benchmark indexes with the same
degree of accuracy as large capitalization domestic
index funds. Over time, the correlation between the
performance of each Portfolio and its respective index
is expected to be greater than 0.95. A correlation of
1.00 would indicate perfect correlation, which would be
achieved when the net asset value of each Portfolio,
including the value of its dividend and capital gains
distributions, increases or decreases in exact
proportion to changes in its respective index.
------------------------------------------------------------------------------
FOUR PORTFOLIOS
MAY ENTER INTO
FORWARD CURRENCY
CONTRACTS The three Portfolios of Vanguard International Equity
Index Fund and the Total International Portfolio may
enter into foreign currency forward and foreign
currency futures contracts in order to maintain the
same currency exposure as their respective index. A
Portfolio may not enter into such contracts for
speculative purposes, or as a way of protecting against
anticipated adverse changes in exchange rates between
foreign currencies and the U.S. dollar. Specifically, a
Portfolio may invest up to 25% of its assets in foreign
currency forward contracts. A foreign currency forward
contract is an obligation to purchase or sell a
specific currency at a future date, which may be any
fixed number of days from the date of the contract
agreed upon by the parties, at a price set at the time
of the contract. These contracts may be bought or sold
to protect the Portfolio to a limited extent against
adverse changes in exchange rates between foreign
currencies and the U.S. dollar. Such contracts, which
protect the value of a Portfolio's investment
securities against a decline in the value of a
currency, do not eliminate fluctuations in the
underlying prices of the securities. They simply
establish an exchange rate at a future date. Also,
although such contracts tend to minimize the risk of
loss due to a decline in the value of the hedged
currency, at the same time they tend to limit any
potential gain that might be realized should the value
of such currency increase.
THE THREE VANGUARD
INTERNATIONAL EQUITY
INDEX PORTFOLIOS
MAY BORROW MONEY Each Portfolio may borrow money from a bank up to a
limit of 15% of the market value of its assets, but
only for temporary or emergency purposes. A Portfolio
may borrow money only to meet redemption requests prior
to the settlement of securities already sold or in the
process of being sold by the Portfolio. To the extent
that a Portfolio borrows money prior to selling
securities, the Portfolio may be leveraged; at such
times, the Portfolio may appreciate or depreciate in
value more rapidly than its benchmark index. The
Portfolios will repay any money borrowed in excess of
5% of the market value of their total assets prior to
purchasing additional portfolio securities.
ALL PORTFOLIOS MAY
INVEST IN SHORT-TERM
MONEY MARKET
INSTRUMENTS Although they normally seek to remain substantially
fully invested in securities in the respective indexes,
all Portfolios of the Funds may invest temporarily in
certain short-term money market instruments. Such
securities may be used to invest uncommitted cash
balances or to maintain liquidity to meet shareholder
redemptions. These securities
42
<PAGE> 46
include: obligations of the United States Government
and its agencies or instrumentalities; commercial
paper, bank certificates of deposit, and bankers'
acceptances; and repurchase agreements collateralized
by these securities.
The Funds may use futures contracts, options, warrants,
convertible securities and swap agreements.
BOND INDEX FUND The Portfolios of the Fund may utilize bond (interest
rate) futures contracts and options to a limited
extent. Specifically, each Portfolio may enter into
futures contracts provided that not more than 5% of its
assets are required as a futures contract deposit. In
addition, the Portfolios may enter into futures
contracts and options transactions only to the extent
that obligations under such contracts or transactions
represent not more than 20% of a Portfolio's assets.
------------------------------------------------------------------------------
BALANCED INDEX
FUND The Fund may utilize warrants, convertible securities
and swap agreements to a limited extent. The Fund's
investment in warrants will not exceed more than 5% of
its assets (2% with respect to warrants not listed on
the New York or American Stock Exchanges). The Fund
does not intend to invest more than 5% of its assets in
convertible securities.
------------------------------------------------------------------------------
INDEX TRUST Each Portfolio of the Trust may utilize stock futures
contracts, options, warrants, convertible securities
and swap agreements to a limited extent. Specifically,
each Portfolio may enter into futures contracts and
options provided that not more than 5% of its assets
are required as a margin deposit for futures contracts
or options and provided that not more than 20% of a
Portfolio's assets are invested in futures and options
at any time. Additionally, the Trust's investment in
warrants will not exceed more than 5% of its assets (2%
with respect to warrants not listed on the New York or
American Stock Exchanges). The Trust does not intend to
invest more than 5% of its assets in convertible
securities.
------------------------------------------------------------------------------
INTERNATIONAL
EQUITY INDEX FUND
TOTAL
INTERNATIONAL
PORTFOLIO The Portfolios may utilize stock futures contracts,
options, warrants, convertible securities and swap
agreements to a limited extent. Specifically, each
Portfolio may enter into futures contracts and options
provided that not more than 5% of its assets is
required as a margin deposit for futures contracts or
options. Additionally, the Fund's investment in
warrants will not exceed more than 5% of its assets
(for the European Portfolio and the Pacific Portfolio
2% with respect to warrants not listed on the New York
or American Stock Exchanges).
Futures contracts, options, warrants, convertible
securities and swap agreements may be used for several
reasons: to simulate full investment in the underlying
index while retaining a cash balance for fund
management purposes, to facilitate trading, to reduce
transaction costs or to seek higher investment returns
when a futures contract, option, warrant, convertible
security or swap agreement is priced more attractively
than the underlying equity security or index. While
each of these securities can be used as leveraged
investments, the Portfolios may not use them to
leverage their net assets.
43
<PAGE> 47
FUTURES CONTRACTS,
OPTIONS, WARRANTS,
CONVERTIBLE SECURITIES
AND SWAP AGREEMENTS
POSE CERTAIN RISKS The risk of loss associated with futures contracts in
some strategies can be substantial due both to the low
margin deposits required and the extremely high degree
of leverage involved in futures pricing. As a result, a
relatively small price movement in a futures contract
may result in an immediate and substantial loss or
gain. When investing in futures contracts, Portfolios
of the Vanguard Bond Index Fund will segregate cash or
cash equivalents in the amount of the underlying
obligation. The Portfolios of the Vanguard Balanced
Index Fund, Vanguard Index Trust and Vanguard
International Equity Index Fund will not use futures
contracts, options, warrants, convertible securities or
swap agreements for speculative purposes or to leverage
their net assets. Accordingly, the primary risks
associated with the use of futures contracts, options,
warrants, convertible securities or swap agreements by
the Portfolio are: (i) imperfect correlation between
the change in market value of the stocks held by the
Portfolio and the prices of futures contracts, options,
warrants, convertible securities or swap agreements;
(ii) possible lack of a liquid secondary market for a
futures contract and the resulting inability to close a
futures position prior to its maturity date; and (iii)
the risk of the counterparty or guaranteeing agent
defaulting. The risk of imperfect correlation will be
minimized by investing only in those contracts whose
behavior is expected to resemble that of the
Portfolio's underlying securities. The risk that the
Portfolio will be unable to close out a futures
position will be minimized by entering into such
transactions on an exchange with an active and liquid
secondary market. However, options, warrants,
convertible securities or swap agreements purchased or
sold over-the-counter may be less liquid than
exchange-traded securities. Illiquid securities, in
general, including swap agreements, may not represent
more than 15% of the net assets of the Portfolio.
Since there are no futures traded on the S&P/BARRA
Value and Growth Indexes, MSCI-Europe (Free), Pacific
(Free) Index or the MSCI-Select Emerging Markets (Free)
Index, it will be necessary for the Vanguard Index
Trust Value and Growth Portfolios and the Portfolios of
Vanguard International Equity Index Fund to utilize a
composite of other futures contracts to simulate the
performance of the Indexes. This process may magnify
the "tracking error" of a Portfolio's performance
compared to that of its Index, due to lower correlation
of the selected futures with its Index. The investment
adviser will attempt to reduce this tracking error by
investing in futures contracts whose behavior is
expected to resemble that of the underlying securities,
although there can be no assurance that these selected
futures will perfectly correlate with the performance
of any of the Indexes.
SWAP AGREEMENTS Swap agreements are contracts between parties in which
one party agrees to make payments to the other party
based on the change in market value of a specified
index or asset. In return, the other party agrees to
make payments to the first party based on the return of
a different specified index or asset. Although swap
agreements entail the risk that a party will default on
its payment obligations thereunder, the Portfolio will
minimize this risk by entering into agreements that
mark to market no less frequently than quarterly.
However, the Portfolio's
44
<PAGE> 48
daily share price will take into account the daily
price movement of any swap agreement entered into by
the Portfolio. Swap agreements also bear the risk that
the Portfolio will not be able to meet its obligation
to the counterparty. This risk will be mitigated by
investing the Portfolio in the specific asset for which
it is obligated to pay a return.
ALL PORTFOLIOS MAY
LEND THEIR SECURITIES All Portfolios may lend their investment securities to
qualified institutional investors for either short-term
or long-term purposes of realizing additional income.
Loans of securities by the Portfolio will be
collateralized by cash, letters of credit, or
securities issued or guaranteed by the U.S. Government
or its agencies. The collateral will equal at least
100% of the current market value of the loaned
securities.
PORTFOLIO TURNOVER FOR
ALL PORTFOLIOS IS
EXPECTED TO BE LOW Although they generally seek to invest for the long
term, each Portfolio of Vanguard Bond Index Fund,
Vanguard Balanced Index Fund, Vanguard Index Trust, and
Vanguard International Equity Index Fund retains the
right to sell securities irrespective of how long they
have been held. It is anticipated that the annual
portfolio turnover of each Portfolio of the Funds
(except Vanguard Balanced Index Fund) will not exceed
50%. The annual portfolio turnover rate for the
Vanguard Balanced Index Fund is not expected to exceed
100%. A turnover rate of 50% would occur, for example,
if one half of the securities of a Portfolio were
replaced within one year.
- --------------------------------------------------------------------------------
INVESTMENT
LIMITATIONS
EACH PORTFOLIO HAS
ADOPTED CERTAIN
FUNDAMENTAL
LIMITATIONS Each Portfolio of the Funds has adopted certain
limitations on its investment practices. Specifically,
each Portfolio will not:
(a) invest more than 25% of its assets in any one
industry (except for the Total International
Portfolio which may invest more than 25% of its
assets in the investment companies which are its
underlying Portfolios);
(b) borrow money, except that the Funds may borrow
from banks (or through reverse repurchase
agreements), for temporary or emergency (not
leveraging) purposes, including the meeting of
redemption requests which might otherwise require
the untimely disposition of securities, in an
amount not exceeding 15% of the value of the
Funds' net assets. Whenever borrowing exceeds 5%
of the value of the Funds' net assets, the Funds
will not make any additional investments.
Each Portfolio of Vanguard Bond Index Fund will not:
(a) invest more than 5% of its assets in the
securities of any single issuer except obligations
of the United States Government or government
agencies;
(b) purchase more than 5% of the voting securities of
any issuer;
(c) pledge, mortgage or hypothecate its assets to an
extent greater than 5% of the value of its total
assets.
45
<PAGE> 49
Each Portfolio of Vanguard Balanced Index Fund,
Vanguard Index Trust, and Vanguard International Equity
Index Fund, and Vanguard Total International Portfolio
will not:
(a) with respect to 75% of its assets, purchase
securities of any issuer (except obligations of
the U.S. Government and its instrumentalities) if,
as a result, more than 5% of the value of the
Fund's assets would be invested in the securities
of each issuer; or purchase more than 10% of the
voting securities of any issuer.
These investment limitations are considered at the time
investment securities are purchased. The limitations
described here and in the Statement of Additional
Information may be changed for a specific Fund only
with the approval of a majority of the shareholders.
- --------------------------------------------------------------------------------
MANAGEMENT OF
THE FUNDS
VANGUARD ADMINISTERS
AND DISTRIBUTES
THE FUNDS The Funds are members of The Vanguard Group of
Investment Companies, a family of more than 30
investment companies with more than 90 distinct
portfolios and total assets in excess of $250 billion.
Through their jointly owned subsidiary, The Vanguard
Group, Inc. ("Vanguard"), they and the other funds in
the Group obtain at cost virtually all of their
corporate management, administrative, shareholder
accounting and distribution services. Vanguard also
provides investment advisory services on an at-cost
basis to certain Vanguard funds. As a result of
Vanguard's unique corporate structure, the Vanguard
funds have costs substantially lower than those of most
competing mutual funds. In 1996, the average expense
ratio (annual costs including advisory fees divided by
total net assets) for the Vanguard funds amounted to
approximately .29% compared to an average of 1.22% for
the mutual fund industry (data provided by Lipper
Analytical Services).
The Officers of the Funds manage their day to day
operations and are responsible to the Funds' Boards of
Directors (Trustees). The Directors (Trustees) set
broad policies for the Funds and choose their Officers.
A list of the Directors (Trustees) and Officers of the
Funds and a statement of their present positions and
principal occupations during the past five years can be
found in each of the Fund's Statements of Additional
Information.
Vanguard employs a supporting staff of management and
administrative personnel needed to provide the
requisite services to the funds and also furnishes the
funds with necessary office space, furnishings and
equipment. Each fund pays its share of Vanguard's net
expenses, which are allocated among the funds under
methods approved by the Board of Directors (Trustees)
of each fund. In addition, each fund bears its own
direct expenses, such as legal, auditing and custodian
fees.
Vanguard also provides distribution and marketing
services to the Vanguard funds. The funds are available
on a no-load basis (i.e., there are no sales
commissions or 12b-1 fees). However, each fund bears
its share of the Group's distribution costs.
- --------------------------------------------------------------------------------
46
<PAGE> 50
INVESTMENT
ADVISERS
VANGUARD'S FIXED
INCOME GROUP
MANAGES SOME OF THE
FUNDS' INVESTMENTS Each Portfolio of Vanguard Bond Index Fund and the bond
portion of Vanguard Balanced Index Fund receive all
investment advisory services from Vanguard's Fixed
Income Group. The Fixed Income Group provides
investment advisory services to more than 40 Vanguard
money market and bond portfolios, both taxable and
tax-exempt. Total assets under management by Vanguard's
Fixed Income Group were $79 billion as of December 31,
1996. The Portfolios are not actively managed, but are
instead administered by the Fixed Income Group using
computerized, quantitative techniques. The Fixed Income
Group is supervised by the Officers of the Fund. Ian A.
MacKinnon, Senior Vice President of Vanguard, has been
in charge of the Group since its inception in 1981.
Mr. MacKinnon is responsible for setting the broad
investment strategies employed by the Fund, and for
overseeing the portfolio manager who implements those
strategies on a day-to-day basis.
The portfolio manager for Vanguard Bond Index Fund and
the bond portion of Vanguard Balanced Index Fund is
Kenneth E. Volpert, a Principal of Vanguard, who also
serves as portfolio manager of the Vanguard Variable
Insurance Fund -- High-Grade Portfolio and the bond
portion of the Balanced Portfolio. Mr. Volpert began
managing the Vanguard Bond Index fund in 1992. For six
years prior to joining Vanguard, Mr. Volpert was
associated with Mellon Bond Associates.
The Fixed Income Group places all orders for purchases
and sales of portfolio securities. Purchases of
portfolio securities are made either directly from the
issuer or from securities dealers. The Fixed Income
Group may sell portfolio securities prior to their
maturity if circumstances and considerations warrant
and if it believes such dispositions advisable. The
Group seeks to obtain the best available net price and
most favorable execution for all portfolio
transactions.
VANGUARD'S CORE
MANAGEMENT GROUP
MANAGES SOME OF THE
FUNDS, ON AN AT-COST
BASIS Each Portfolio of Index Trust and International Equity
Index Fund, the Total International Portfolio, and the
equity portion of Balanced Index Fund receive their
investment advisory services on an at-cost basis from
Vanguard's Core Management Group, which also provides
investment advisory services to Vanguard Institutional
Index Fund, a portion of the assets of Vanguard/Windsor
II and Vanguard Morgan Growth Fund, the Equity Index
Portfolio of Vanguard Variable Insurance Fund, Vanguard
Tax-Managed Fund, and several indexed separate
accounts. Total indexed assets under management as of
December 31, 1996 were $57 billion. The Portfolios of
the Fund are not actively managed, but are instead
administered by the Core Management Group using
computerized, quantitative techniques. The Group is
supervised by the Officers of the Fund.
In placing portfolio transactions, Vanguard's Core
Management Group uses its best judgment to choose the
broker most capable of providing the brokerage services
necessary to obtain the best available price and most
favorable execution at the lowest commission rate. The
full range and quality of brokerage services available
are considered in making these determinations. In those
instances where it is reasonably determined that more
than one broker can offer the services needed to obtain
the best
47
<PAGE> 51
available price and most favorable execution,
consideration may be given to those brokers which
supply statistical information and provide other
services in addition to execution services to the Fund.
- --------------------------------------------------------------------------------
DIVIDENDS,
CAPITAL GAINS
AND TAXES
FOUR PORTFOLIOS PAY
QUARTERLY DIVIDENDS;
TWO PAY DIVIDENDS
ONCE A YEAR Vanguard Index Trust distributes substantially all of
its net investment income in the form of dividends. The
500, Total Stock Market, Value and Growth Portfolios
pay quarterly dividends, while the Extended Market and
Small Capitalization Stock Portfolios pay annual
dividends. For all six Portfolios, net capital gains,
if any, are distributed annually.
The Total International Portfolio and each Portfolio of
the International Equity Index Fund intend to
distribute substantially all of their ordinary income
in the form of dividends. The Portfolios pay annual
dividends. Capital gains distributions, if any, are
also made annually.
The Balanced Index Fund will distribute substantially
all of its net investment income in the form of
quarterly dividends.
Dividends consisting of virtually all of the ordinary
income of each Portfolio of Bond Index Fund are
declared daily and are payable to shareholders of
record at the time of declaration. Such dividends are
paid on the first business day of each month. Capital
gains distributions, if any, are made annually.
A Portfolio's dividend and capital gains distributions
may be reinvested in additional shares or received in
cash. See "Choosing a Distribution Option" for a
description of these distribution methods. Shareholders
of Bond Index Fund who choose to reinvest their
dividend distributions will receive a quarterly (not
monthly) confirmation statement.
Pursuant to the Internal Revenue Code, certain dividend
and capital gains distributions declared by each
Portfolio during December, if received by shareholders
by January 31, are deemed to have been paid by the
Funds and received by shareholders on December 31 of
the prior year.
Each Portfolio of the Funds intends to continue to
qualify for taxation as a "regulated investment
company" under the Internal Revenue Code so that each
Portfolio will not be subject to federal income tax to
the extent its income is distributed to shareholders.
Dividends paid by each Portfolio from net investment
income, whether received in cash or reinvested in
additional shares, will be taxable to shareholders as
ordinary income. For corporate investors, dividends
from net investment income will generally qualify in
part for the intercorporate dividends-received
deduction. However, the portion of the dividends so
qualified depends on the aggregate taxable qualifying
dividend income received by a Portfolio from domestic
(U.S.) sources.
Distributions paid by a Portfolio from long-term
capital gains, whether received in cash or reinvested
in additional shares, are taxable as long-term capital
gains, regardless of the length of time a shareholder
has 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
48
<PAGE> 52
are a by-product of portfolio management activities.
Consequently, capital gains distributions may be
expected to vary considerably from year to year; there
will be no capital gains distributions in years when a
Portfolio realizes net capital losses.
Note that if you elect to receive capital gains
distributions in cash, instead of reinvesting them in
additional shares, you are in effect reducing the
capital at work for you in a Portfolio. Also, keep in
mind that if you purchase shares in a Portfolio shortly
before the record date for a dividend or capital gains
distribution, a portion of your investment will be
returned to you as a taxable distribution, regardless
of whether you are reinvesting your distributions or
receiving them in cash.
The Funds will notify you annually as to the tax status
of dividend and capital gains distributions paid by
each Portfolio.
EACH PORTFOLIO OF
INTERNATIONAL EQUITY
INDEX FUND MAY
"PASS THROUGH"
FOREIGN TAXES Each Portfolio may elect to "pass through" to its
shareholders the amount of foreign income taxes paid by
a Portfolio. The Portfolios will make such an election
only if it is deemed to be in the best interests of the
shareholders. If this election is made, shareholders of
a Portfolio will be required to include in their gross
income their pro rata share of foreign taxes paid by
the Portfolio. However, shareholders will be able to
treat their pro rata share of foreign taxes as either
an itemized deduction or a foreign tax credit against
U.S. income taxes (but not both) on their federal
income tax return.
Any foreign tax credits would not "pass through" to
Total International Portfolio shareholders.
A CAPITAL GAIN OR LOSS
MAY BE REALIZED UPON
EXCHANGE OR
REDEMPTION A sale of shares of a Portfolio is a taxable event, and
may result in a capital gain or loss. A capital gain or
loss may be realized from an ordinary redemption of
shares or an exchange of shares between two mutual
funds (or two portfolios of the same fund).
Dividend distributions, capital gains distributions,
and capital gains or losses from redemptions and
exchanges may be subject to state and local taxes.
Each Portfolio of the Funds is required to withhold 31%
of taxable dividends, capital gains distributions, and
redemptions paid to shareholders who have not complied
with IRS taxpayer identification regulations. You may
avoid this withholding requirement by certifying on
your Account Registration Form your proper Social
Security or Employer Identification number and by
certifying that you are not subject to backup
withholding.
Vanguard Index Trust and Vanguard Total International
Portfolio are organized as Pennsylvania business trusts
and, in the opinion of counsel, are not liable for any
income or franchise tax in the Commonwealth of
Pennsylvania. The Trust and Portfolio will be subject
to Pennsylvania county personal property tax in the
county which is the site of its principal office.
Shareholders who are Pennsylvania residents will not be
subject to county personal property taxes, with the
exception
49
<PAGE> 53
of non-exempt holders who are residents of the City and
School District of Pittsburgh.
The International Equity Index, Balanced Index and Bond
Index Funds have obtained Certificates of Authority to
do business as foreign corporations in Pennsylvania and
do business and maintain offices in that state. In the
opinion of counsel, the shares of each of the Funds are
exempt from Pennsylvania personal property taxes.
The tax discussion set forth above is included for
general information only. Prospective investors should
consult their own tax advisers concerning the tax
consequences of an investment in the Funds.
- --------------------------------------------------------------------------------
THE SHARE
PRICE OF
EACH PORTFOLIO Each Portfolio's share price or 'net asset value' per
share is calculated by dividing the total assets of the
Portfolio, less all liabilities, by the total number of
shares outstanding. The net asset value is determined
as of the close of the New York Stock Exchange
(generally 4:00 p.m. Eastern time) on each day that 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 of
Vanguard Index Trust, Vanguard International Equity
Index Fund, and each Portfolio of Vanguard Bond Index
Fund, unlisted securities for which market quotations
are readily available are valued at the latest quoted
bid price. For the Extended Market, Total Stock Market
and Small Capitalization Stock Portfolios, and Vanguard
Balanced Index Fund, unlisted securities for which
market quotations are readily available are valued at
the mean of the bid and ask prices. Short-term
instruments (those with remaining maturities of 60 days
or less) may be valued at cost, plus or minus any
amortized discount or premium which approximates
market. For all Funds, securities for which no current
quotations are readily available are valued at fair
market value as determined in good faith by the
Directors (Trustees). Securities may be valued on the
basis of prices provided by a pricing service when such
prices are believed to reflect the fair market value of
such securities.
Each Portfolios's share price can be found daily in the
mutual fund listings of most major newspapers under the
heading of Vanguard Group.
- --------------------------------------------------------------------------------
GENERAL
INFORMATION Vanguard Bond Index, Vanguard Balanced Index and
Vanguard International Equity Index Funds are organized
as Maryland corporations. The Articles of Incorporation
permit the Directors to issue 1,000,000,000 shares of
common stock of each Fund, with a $.001 par value. The
Board of Directors has the power to designate one or
more classes ("series") of shares of common stock and
to classify or reclassify any unissued shares with
respect to such series. Currently, Vanguard Bond Index
Fund is offering shares of four series, Vanguard
Balanced Index Fund is offering shares of one series
and Vanguard International Equity Index Fund is
offering shares of three series.
50
<PAGE> 54
Vanguard Index Trust is a Pennsylvania business trust.
The Declaration of Trust permits the Trustees to issue
an unlimited number of shares of beneficial interest
with no par value. The Board of Trustees has the power
to designate one or more classes or series of shares of
common stock and to classify or reclassify any unissued
shares with respect to such series. Currently, the
Trust is offering shares of six series.
The Total International Portfolio is an independent
series of Vanguard STAR Fund, a Pennsylvania business
trust.
The shares of each series of the Funds are fully paid
and non-assessable; have no preference as to
conversion, exchange, dividends, retirement or other
features; and have no preemptive rights. Such shares
have non-cumulative voting rights, meaning that the
holders of more than 50% of the shares voting for the
election of Directors (Trustees) can elect 100% of the
Directors (Trustees) if they so choose.
Annual meetings of shareholders will not be held except
as required by the Investment Company Act of 1940 and
other applicable law. An annual meeting will be held to
vote on the removal of a Director (Trustee) or
Directors (Trustees) of a Fund if requested in writing
by the holders of not less than 10% of the outstanding
shares of such Fund.
All securities and cash for the Total Bond Market
Portfolio of Vanguard Bond Index Fund are held by
Morgan Guaranty Trust Company, New York, NY. All
securities and cash for the Short-Term Bond,
Intermediate-Term Bond and Long-Term Bond Portfolios
are held by State Street Bank and Trust Company ("State
Street Bank"), Boston, MA. All securities and cash for
Vanguard Balanced Index Fund and for Vanguard Total
International Portfolio are held by CoreStates Bank,
N.A. ("CoreStates"), Philadelphia, PA. All Securities
and cash for Vanguard International Equity Index Fund
are held by Morgan Stanley Trust Company. All
securities and cash for the 500, Extended Market, and
Total Stock Market Portfolios of Vanguard Index Trust
are held by State Street Bank and Trust Company. All
securities and cash for the Small Capitalization Stock
and the Value and Growth Portfolios are held by
CoreStates Bank.
The Vanguard Group, Inc., Valley Forge, PA, serves as
the Funds' Transfer and Dividend Disbursing Agent.
Price Waterhouse LLP, serves as independent accountants
for the Funds and will audit their financial statements
annually. The Funds are not involved in any litigation.
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51
<PAGE> 55
SHAREHOLDER GUIDE
OPENING AN
ACCOUNT AND
PURCHASING
SHARES You may open a regular (non-retirement) account, either
by mail or wire. Simply complete and return an Account
Registration Form and any required legal documentation,
indicating the Portfolio you have chosen and amount you
wish to invest. Your purchase must be equal to or
greater than the $3,000 minimum initial investment
requirement in any Portfolio ($1,000 for Uniform
Gifts/Transfers to Minors Act accounts). You must open
a new Individual Retirement Account by mail (IRAs may
not be opened by wire) using a Vanguard IRA Adoption
Agreement. Your purchase must be equal to or greater
than the $1,000 minimum initial investment requirement,
but no more than $2,000 if you are making a regular IRA
contribution. Rollover contributions are generally
limited to the amount withdrawn within the past 60 days
from an IRA or other qualified retirement plan. If you
need assis-
tance with the Account Registration Form or have any
questions about the Fund, please call our Investor
Information Department (1-800-662-7447). NOTE: For
other types of account registrations (e.g.,
corporations, associations, other organizations, trusts
or powers of attorney), please call us to determine
which additional forms you may need.
PURCHASE
RESTRICTIONS Each Portfolio's shares are purchased at the
next-determined net asset value after your investment
has been received in the form of Federal Funds. See
"When Your Account Will Be Credited." The Fund is
offered on a no-load basis (i.e., there are no sales
commissions or 12b-1 fees).
1) Because of the risks associated with bond and stock
investments, each Portfolio is intended to be a
long-term investment vehicle and is not designed to
provide investors with a means of speculating on
short-term bond market movements. Consequently, the
Fund reserves the right to reject any specific
purchase (and exchange purchase) request. The Fund
also reserves the right to suspend the offering of
shares for a period of time.
2) Vanguard will not accept third-party checks to
purchase shares of the Fund. Please be sure your
purchase check is made payable to The Vanguard
Group.
52
<PAGE> 56
IMPORTANT NOTE
ON EXPENSES Transaction fees are charged by Portfolios as follows:
<TABLE>
<CAPTION>
FEES ON FEES ON
PURCHASES REDEMPTIONS
--------- -----------
<S> <C> <C>
Vanguard Bond Index Fund............ None None
Vanguard Balanced Fund.............. None None
Vanguard Index Trust
500 Portfolio..................... None None
Extended Market Portfolio......... 0.5% None
Small Capitalization Stock
Portfolio...................... 0.5% None
Value Portfolio................... None None
Growth Portfolio.................. None None
Vanguard International Equity Index Fund
European Portfolio................ 1% None
Pacific Portfolio................. 0.5% None
Emerging Markets Portfolio........ 1.5% 1%
Vanguard Total International
Portfolio......................... 0.75% None
</TABLE>
Additionally, each Portfolio of all of the Funds and
the Trust assesses a $10 annual account maintenance
fee. The $10 annual account maintenance fee will be
waived for shareholders with an account balance of
$10,000 or more. See "Portfolio Expenses" for more
information.
ADDITIONAL
INVESTMENTS Subsequent investments may be made by mail ($100
minimum per Portfolio), wire ($1,000 minimum), written
exchange from another Vanguard Fund account ($100
minimum per Portfolio), or Vanguard Fund Express.
Subsequent investments to Individual Retirement
Accounts may be made by mail ($100 minimum) or exchange
from another Vanguard Fund account. In some instances,
contributions may be made by wire or Vanguard Fund
Express. Please call us for more information on these
options.
------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ADDITIONAL INVESTMENTS
NEW ACCOUNT TO EXISTING ACCOUNTS
PURCHASING BY MAIL Please include the amount Additional investments
of your initial investment should include the
Complete and sign the and the name of the Invest-by-Mail remittance
enclosed Account Portfolios you have form attached to your Fund
Registration Form selected on the registra- confirmation statements.
tion form, make your check Please make your check
payable to The Vanguard payable to The Vanguard
Group (Portfolio Number), Group (Portfolio Number),
see page 54 for the write your account number
appropriate number and on your check, and using
mail to: the return envelope
provided, mail to the
VANGUARD FINANCIAL CENTER address indicated on the
P.O. BOX 2600 Invest-by-Mail Form. See
VALLEY FORGE, PA page 54 for the ap-
19482-2600 propriate Portfolio
number.
</TABLE>
53
<PAGE> 57
<TABLE>
<S> <C> <C>
For express or VANGUARD FINANCIAL CENTER All written requests
registered mail, 455 DEVON PARK DRIVE should be mailed to one of
send to: WAYNE, PA 19087-1815 the addresses indicated
for new accounts. Do not
send registered or ex-
press mail to the post
office box address.
PORTFOLIO NUMBERS
--------------------------
VANGUARD BOND VANGUARD INDEX TRUST
INDEX FUND 500 Portfolio -- 40
Total Bond Market Extended Market
Portfolio -- 84 Portfolio -- 98
Short-Term Bond Total Stock Market
Portfolio -- 132 Portfolio -- 85
Intermediate-Term Bond Small Capitalization Stock
Portfolio -- 314 Portfolio -- 48
Long-Term Bond Value Portfolio -- 06
Portfolio -- 522 Growth Portfolio -- 09
VANGUARD BALANCED VANGUARD INTERNATIONAL
INDEX FUND -- 02 EQUITY INDEX FUND
VANGUARD TOTAL European Portfolio -- 79
INTERNATIONAL Pacific Portfolio -- 72
PORTFOLIO -- 113 Emerging Markets
Portfolio -- 533
--------------------------------------------------------------
PURCHASING BY WIRE CORESTATES BANK, N.A.
ABA 031000011
Money should be CORESTATES ACCT NO 0101 9897
wired to: ATTN VANGUARD
NAME OF FUND OR TRUST
BEFORE WIRING NAME OF PORTFOLIO
ACCOUNT NUMBER
Please contact ACCOUNT REGISTRATION
Client Services
(1-800-662-2739) To assure proper receipt, please be sure your bank includes
the name of the Portfolio, the account number Vanguard has
assigned to you and the eight digit CoreStates number. If you
are opening a new account, please complete the Account
Registration Form and mail it to the "New Account" address
above after completing your wire arrangement. NOTE: Federal
Funds wire purchase orders will be accepted only when the Fund
and Custodian Bank are open for business.
</TABLE>
------------------------------------------------------------------------------
PURCHASING BY
EXCHANGE (from a
Vanguard account) You may open an account or purchase additional shares
by making an exchange from an existing Vanguard Fund
account. However, the Funds reserve the right to refuse
any exchange purchase request. Call our Client Services
Department (1-800-662-2739) for assistance. The new
account will have the same registration as the existing
account.
54
<PAGE> 58
Telephone exchanges are not accepted for the Portfolios
of Vanguard Balanced Index Fund, Vanguard Index Trust,
and Vanguard International Equity Index Fund. You may,
however, open an account by exchange by providing the
appropriate information on the Account Registration
Form.
------------------------------------------------------------------------------
PURCHASING BY
FUND EXPRESS
Automatic Investment
and Special Purchase The Fund Express Automatic Investment option lets you
move money from your bank account to your Vanguard
account on the schedule (monthly, bimonthly [every
other month], quarterly, semiannually, or annually) you
select. Additionally, the Fund Express Special Purchase
option which is only available for Portfolios of the
Vanguard Bond Index Fund lets you move money from your
bank account to your Vanguard account on an "as needed"
basis. To establish this option, please provide the
appropriate information on the Account Registration
Form. We will send you a confirmation of your Fund
Express enrollment; please wait two weeks before using
the service.
- --------------------------------------------------------------------------------
CHOOSING A
DISTRIBUTION
OPTION You must select one of three distribution options:
1. AUTOMATIC REINVESTMENT OPTION -- Both dividends and
capital gains distributions will be reinvested in
additional Fund shares. This option will be selected
for you automatically unless you specify one of the
other options.
2. CASH DIVIDEND OPTION -- Your dividends will be paid
in cash and your capital gains will be reinvested in
additional Fund shares.
3. ALL CASH OPTION -- Both dividend and capital gains
distributions will be paid in cash.
You may change your option by calling our Client
Services Department (1-800-662-2739).
In addition, an option to invest your cash dividends
and/or capital gains distributions in another Vanguard
Fund account is available. Please call our Client
Services Department (1-800-662-2739) for information.
You may also elect Vanguard Dividend Express which
allows you to transfer your cash dividends and/or
capital gains distributions automatically to your bank
account. Please see "Other Vanguard Services" for more
information.
- --------------------------------------------------------------------------------
TAX CAUTION
INVESTORS SHOULD ASK
ABOUT THE TIMING OF
CAPITAL GAINS AND
DIVIDEND DISTRIBUTIONS
BEFORE INVESTING Under Federal tax laws, the Fund is required to
distribute net capital gains and dividend income to
Fund shareholders. These distributions are made to all
shareholders who own Fund shares as of the
distribution's record date, regardless of how long the
shares have been owned. Purchasing shares just prior to
the record date could have a significant impact on your
tax liability for the year. For example, if you
purchase shares immediately prior to the record date of
a sizable capital gain distribution, you will be
assessed taxes on the amount of the capital gain
distribution later paid even though you owned the Fund
shares for just a short period of time. (Taxes are due
on the distributions even if the dividend or gain is
reinvested in additional Fund shares.) While the total
value of your investment will be the same after the
capital gain distribution -- the amount of the capital
gain distribution will offset
55
<PAGE> 59
the drop in the net asset value of the shares -- you
should be aware of the tax implications the timing of
your purchase may have.
Prospective investors should, therefore, inquire about
potential distributions before investing. Each Fund's
annual capital gains distributions normally occurs in
December. Income dividends are generally paid on the
first day of each month for the four Portfolios of
Vanguard Bond Index Fund, annually in December for the
three Portfolios of Vanguard International Equity Index
Fund and Vanguard Total International Portfolio, and
the Extended Market and Small Capitalization Stock
Portfolio of Vanguard Index Trust, and quarterly in
March, June, September and December for Vanguard
Balanced Index Fund, and the 500, Total Stock Market,
and the Value and Growth Portfolios of Vanguard Index
Trust. In addition, the Portfolios may occasionally be
required to make supplemental dividend or capital gains
distributions at some other time of year. For
additional information on distributions and taxes, see
the section titled "Dividends, Capital Gains, and
Taxes."
- --------------------------------------------------------------------------------
IMPORTANT
INFORMATION
ESTABLISHING OPTIONAL
SERVICES The easiest way to establish optional Vanguard services
on your account is to select the options you desire
when you complete your Account Registration Form. IF
YOU WISH TO ADD OPTIONS LATER, YOU MAY NEED TO PROVIDE
VANGUARD WITH ADDITIONAL INFORMATION AND A SIGNATURE
GUARANTEE. PLEASE CALL OUR CLIENT SERVICES DEPARTMENT
(1-800-662-2739) FOR FURTHER ASSISTANCE.
SIGNATURE
GUARANTEES For our mutual protection, we may require a signature
guarantee on certain written transaction requests. A
signature guarantee verifies the authenticity of your
signature and may be obtained from banks, brokers and
any other guarantor that Vanguard deems acceptable. A
SIGNATURE GUARANTEE CANNOT BE PROVIDED BY A NOTARY
PUBLIC.
CERTIFICATES Share certificates will be issued upon request for
Portfolios of Vanguard Bond Index Fund, Vanguard Index
Trust, and the European and Pacific Portfolios of
Vanguard International Equity Index Fund. If a
certificate is lost, you may incur an expense to
replace it. Share certificates will not be available
for Vanguard Balanced Index Fund, the Total
International Portfolio of Vanguard STAR Fund and the
Emerging Markets Portfolio of Vanguard International
Equity Index Fund.
BROKER-DEALER
PURCHASES If you purchase shares in Vanguard Funds through a
registered broker-dealer or investment adviser, the
broker-dealer or adviser may charge a service fee.
CANCELLING
TRADES The Fund will not cancel any trade (e.g., a purchase,
exchange or redemption) believed to be authentic,
received in writing or by telephone, once the trade
request has been received.
ELECTRONIC
PROSPECTUS
DELIVERY You may receive a prospectus for the Fund or any of the
Vanguard Funds in an electronic format. Please call
1-800-231-7870 for additional information or see "Other
Vanguard Services -- Computer Access." You may also
receive a paper copy of the prospectus, by calling
1-800-662-7447.
- --------------------------------------------------------------------------------
56
<PAGE> 60
WHEN YOUR
ACCOUNT WILL
BE CREDITED The trade date is the date on which your account is
credited.
For the Vanguard Bond Index Fund, the trade date is
generally the day on which the Fund receives your
investment in the form of Federal Funds (monies
credited to the Fund's Custodian Bank by a Federal
Reserve Bank). Your trade date varies according to your
method of payment for your shares.
Purchases of Fund shares by check will receive a trade
date the day the funds are received in good order by
Vanguard. Thus, if your purchase by check is received
by the close of regular trading on the New York Stock
Exchange (generally 4:00 p.m. Eastern time), your trade
date is the business day your check is received in good
order. If your purchase is received after the close of
the Exchange, your trade date is the business day
following receipt of your check.
For purchases by Federal Funds wire or exchange, the
Fund is credited immediately with Federal Funds. Thus,
if your purchase by Federal Funds wire or exchange is
received by the close of the Exchange, your trade date
is the day of receipt. If your purchase is received
after the close of the Exchange, your trade date is the
business day following receipt of your wire or
exchange.
For Vanguard Balanced Fund, Vanguard Index Trust and
Vanguard International Equity Index Fund, if your
purchase is made by check, Federal Funds wire or
exchange, and is received by the close of regular
trading on the New York Stock Exchange (generally 4:00
p.m. Eastern time), your trade date is the day of
receipt. If your purchase is received after the close
of the Exchange, your trade date is the next business
day. Shares of the Funds are purchased at the net asset
value determined on your trade date. Shares of Vanguard
Index Trust -- Extended Market and Small Capitalization
Stock Portfolios, and Vanguard International Equity
Index Fund -- Pacific Portfolio are subject to a 0.5%
transaction fee on purchases. Shares of Vanguard
International Equity Index Fund -- European Portfolio
are subject to a 1% transaction fee on purchases.
Shares of Vanguard International Equity Index
Fund -- Emerging Markets Portfolio are subject to a
1.5% transaction fee on purchases. Shares of the Total
International Portfolio are subject to a 0.75%
transaction fee on purchases. See "Fund Expenses" for
additional information.
In order to prevent lengthy processing delays caused by
the clearing of foreign checks, Vanguard will only
accept a foreign check which has been drawn in U.S.
dollars and has been issued by a foreign bank with a
U.S. correspondent bank. The name of the U.S.
correspondent bank must be printed on the face of the
foreign check.
Your shares are purchased at the next-determined net
asset value after your investment has been received in
the form of Federal Funds. You will begin to earn
dividends on the calendar day following the trade date.
(For a Friday trade date, you will begin earning
dividends on Saturday.)
- --------------------------------------------------------------------------------
57
<PAGE> 61
SELLING YOUR
SHARES You may withdraw any portion of the funds in your
account by redeeming shares at any time. You generally
may initiate a request by writing or by telephoning.
Your redemption proceeds are normally mailed, credited
or wired -- depending upon the method of withdrawal you
have PREVIOUSLY chosen -- within two business days
after the receipt of the request in Good Order.
------------------------------------------------------------------------------
SELLING BY WRITING
A CHECK Redemption by check is only available to shareholders
of Vanguard Bond Index Fund. You may withdraw funds
from your Vanguard Bond Index account by writing a
check payable in the amount of $250 or more. When a
check is presented for payment to the Fund's agent,
CoreStates Bank, the Fund will redeem sufficient shares
in your account at the next-determined net asset value
to cover the amount of the check.
In order to establish the checkwriting option on your
account, all registered shareholders must sign a
signature card. After your completed signature card is
received by the Fund, an initial supply of checks will
be mailed within 10 business days. There is no charge
for checks or for their clearance. CORPORATIONS, TRUSTS
AND OTHER ORGANIZATIONS SHOULD CALL OR WRITE OUR CLIENT
SERVICES DEPARTMENT (1-800-662-2739) BEFORE SUBMITTING
SIGNATURE CARDS, AS ADDITIONAL DOCUMENTS MAY BE
REQUIRED TO ESTABLISH THE CHECKWRITING SERVICE.
Before establishing the checkwriting option, you should
be aware that:
1. Writing a check (a redemption of shares) is a
taxable event.
2. The Fund does not allow an account to be closed
through the checkwriting option.
3. Vanguard cannot guarantee a stop payment on any
check. If you wish to reverse a stop payment order,
you must do so in writing.
4. Shares held in certificate form cannot be redeemed
using the checkwriting option.
5. The Fund reserves the right to terminate or alter
this service at any time.
------------------------------------------------------------------------------
SELLING BY MAIL Requests should be mailed to VANGUARD FINANCIAL CENTER,
VANGUARD INDEX FUNDS, P.O. BOX 1120, VALLEY FORGE, PA
19482. (For express or registered mail, send your
request to Vanguard Financial Center, Vanguard Index
Funds, 455 Devon Park Drive, Wayne, PA 19087.)
The redemption price of shares will be the Portfolio's
net asset value next determined after Vanguard has
received all required documents in Good Order.
------------------------------------------------------------------------------
DEFINITION OF
GOOD ORDER GOOD ORDER means that the request includes the
following:
1. The account number and Portfolio name.
2. The amount of the transaction (specified in dollars
or shares).
3. The signatures of all owners EXACTLY as they are
registered on the account.
4. Any required signature guarantees.
5. Other supporting legal documentation that might be
required, in the case of estates, corporations,
trusts, and certain other accounts.
58
<PAGE> 62
6. Any certificates you are holding for the account.
IF YOU HAVE QUESTIONS ABOUT THIS DEFINITION AS IT
PERTAINS TO YOUR REQUEST, PLEASE CALL OUR CLIENT
SERVICES DEPARTMENT (1-800-662-2739).
------------------------------------------------------------------------------
SELLING BY
TELEPHONE To sell shares by telephone, you or your pre-authorized
representative may call our Client Services Department
at 1-800-662-2739. For telephone redemptions, you may
have the proceeds sent to you either by mail or by
wire. In addition to the details below, please see
"Important Information About Telephone Transactions."
BY MAIL: Telephone mail redemption is automatically
established on your account unless you indicate
otherwise on your Account Registration Form. You may
redeem any amount by calling Vanguard. The proceeds
will be paid to the registered shareholders and mailed
to the address of record. PLEASE NOTE: As a protection
against fraud, your telephone mail redemption privilege
will be suspended for 15 calendar days following any
expedited address change to your account. An expedited
address change is one that is made by telephone, or, in
writing, without the signatures of all account owners.
BY WIRE: Telephone wire redemption must be specifically
elected for your account. The best time to elect
telephone wire redemption is at the time you complete
your Account Registration Form. If you do not presently
have telephone wire redemption and wish to establish
it, please contact Client Services.
With the wire redemption option, you may withdraw a
minimum of $1,000 and have the amount wired directly to
your bank account. Wire redemptions less than $5,000
are subject to a $5 charge deducted by Vanguard. There
is no Vanguard charge for wire redemptions of $5,000 or
more. However, your bank may assess a separate fee to
accept incoming wires.
A request to change the bank associated with your wire
redemption option must be received in writing, signed
by each registered shareholder, and accompanied by a
voided check or preprinted deposit slip. A signature
guarantee is required if your bank registration is not
identical to your Vanguard Fund account registration.
------------------------------------------------------------------------------
SELLING BY FUND
EXPRESS
Automatic Withdrawal
& Special Redemption If you select the Fund Express Automatic Withdrawal
option, money will be automatically moved from your
Vanguard Fund account to your bank account according to
the schedule you have selected. The Special Redemption
option (only available to Vanguard Bond Index Fund
Shareholders) lets you move money from your Vanguard
account to your bank account on an "as needed" basis.
To establish these Fund Express options, please provide
the appropriate information on the Account Registration
Form. We will send you a confirmation of your Fund
Express service; please wait two weeks before using the
service.
------------------------------------------------------------------------------
SELLING BY
EXCHANGE You may sell shares of the Portfolio by making an
exchange into another Vanguard Fund account. Exchanges
to and from Vanguard Balanced Fund, Vanguard Index
Trust and Vanguard International Equity Index Fund may
59
<PAGE> 63
be made only by mail. Send your exchange request to
Vanguard Financial Center, Vanguard (insert Fund name),
P.O. Box 1120, Valley Forge, PA 19482. Please see
"Exchanging Your Shares" for details.
------------------------------------------------------------------------------
IMPORTANT REDEMPTION
INFORMATION Shares purchased by check or Fund Express may be
redeemed at any time. However, your redemption proceeds
will not be paid until payment for the purchase is
collected, which may take up to ten calendar days.
------------------------------------------------------------------------------
DELIVERY OF
REDEMPTION
PROCEEDS Redemption requests received by telephone prior to the
close of the New York Stock Exchange (generally 4:00
p.m. Eastern time), are processed on the day of receipt
and the redemption proceeds are normally sent on the
following business day.
Redemption requests received by telephone after the
close of the Exchange are processed on the business day
following receipt and the proceeds are normally sent on
the second business day following receipt.
Redemption proceeds must be sent to you within seven
days of receipt of your request in Good Order except as
described above in "Important Redemption Information."
If you experience difficulty in making a telephone
redemption during periods of drastic economic or market
changes, your redemption request may be made by regular
or express mail. It will be implemented at the net
asset value next determined after your request has been
received by Vanguard in Good Order. The Fund reserves
the right to revise or terminate the telephone
redemption privilege at any time.
The Fund may suspend the redemption right or postpone
payment at times when the New York Stock Exchange is
closed or under any emergency circumstances as
determined by the United States Securities and Exchange
Commission.
If the Board of Directors (Trustees) determines that it
would be detrimental to the best interests of the
Fund's remaining shareholders to make payment in cash,
the Fund may pay redemption proceeds in whole or in
part by a distribution in kind of readily marketable
securities.
------------------------------------------------------------------------------
VANGUARD'S AVERAGE
COST STATEMENT If you make a redemption from a qualifying account,
Vanguard will send you an Average Cost Statement which
provides you with the tax basis of the shares you
redeemed. Please see "Statements and Reports" for
additional information.
------------------------------------------------------------------------------
LOW BALANCE FEE AND
MINIMUM ACCOUNT
BALANCE REQUIREMENT Due to the relatively high cost of maintaining smaller
accounts, each Fund will automatically deduct a $10
annual fee from non-retirement accounts with balances
falling below $2,500 ($500 for Uniform Gifts/ Transfers
to Minors Act accounts). This fee deduction will occur
mid-year, beginning in 1996. The fee generally will be
waived for investors whose aggregate Vanguard assets
exceed $50,000.
In addition, each Fund reserves the right to liquidate
any non-retirement account that is below the minimum
initial investment amount of $3,000. If at any time the
total investment does not have a value of at least
$3,000, you may be notified that your account is below
the Fund's
60
<PAGE> 64
minimum account balance requirement. You would then be
allowed 60 days to make an additional investment before
the account is liquidated. Proceeds would be promptly
paid to the registered shareholder.
Vanguard will not liquidate your account if it has
fallen below $3,000 solely as a result of declining
markets (i.e., a decline in a Portfolio's net asset
value).
- --------------------------------------------------------------------------------
EXCHANGING
YOUR SHARES
EXCHANGING BY
TELEPHONE
Call Client Services
(1-800-662-2739) Should your investment goals change, you may exchange
your shares for those of other available Vanguard
Funds.
Vanguard Bond Index Fund is the only Vanguard Index
Fund that allows telephone exchanges. When exchanging
shares by telephone, please have ready the Portfolio
name, account number, Social Security Number or
employer identification number listed on the account,
and exact name and address in which the account is
registered. Only the registered shareholder may
complete such an exchange. Requests for telephone
exchanges received prior to the close of the New York
Stock Exchange (generally 4:00 p.m. Eastern time) are
processed at the close of business that same day.
Requests received after the close of the Exchange are
processed the next business day. TELEPHONE EXCHANGES
ARE NOT ACCEPTED INTO OR FROM NON-RETIREMENT
INVESTMENTS IN VANGUARD BALANCED INDEX FUND, VANGUARD
INDEX TRUST, VANGUARD REIT INDEX PORTFOLIO, VANGUARD
INTERNATIONAL EQUITY INDEX FUND, VANGUARD TOTAL
INTERNATIONAL PORTFOLIO, AND VANGUARD QUANTITATIVE
PORTFOLIOS. If you experience difficulty in making a
telephone exchange, your exchange request may be made
by regular or express mail, and it will be implemented
at the closing net asset value on the date received by
Vanguard provided the request is received in Good
Order.
Neither the Funds nor Vanguard is responsible for the
authenticity of exchange instructions received by
telephone. Investors bear the full risk of any loss
arising from unauthorized telephone exchanges. To
prohibit telephone exchanges on your account, please
notify the Fund in writing. Otherwise, the telephone
exchange privilege will be automatically established
for your account.
------------------------------------------------------------------------------
EXCHANGING BY MAIL Please be sure to include on your exchange request the
name and account number of your current Portfolio, the
name of the Fund you wish to exchange into, the amount
you wish to exchange, and the signatures of all
registered account holders. Send your request to
VANGUARD FINANCIAL CENTER, VANGUARD INDEX FUNDS, P.O.
BOX 1120, VALLEY FORGE, PA 19482. (For express or
registered mail, send your request to Vanguard
Financial Center, Vanguard Index Funds, 455 Devon Park
Drive, Wayne, PA 19087.)
------------------------------------------------------------------------------
EXCHANGING
ON-LINE You may use your personal computer to exchange shares
of most Vanguard funds by accessing Vanguard's website
(http://
www.vanguard.com). To establish this service on your
account, you must first register through our website.
We will then send to you by mail, an account access
password that will enable you to make on-line
exchanges.
61
<PAGE> 65
The Vanguard funds that you cannot purchase or sell
through on-line exchange are VANGUARD INDEX TRUST,
VANGUARD BALANCED INDEX FUND, VANGUARD INTERNATIONAL
EQUITY INDEX FUND, VANGUARD REIT INDEX PORTFOLIO,
VANGUARD TOTAL INTERNATIONAL PORTFOLIO, and VANGUARD
GROWTH AND INCOME PORTFOLIO (formerly known as Vanguard
Quantitative Portfolios). These funds do permit on-line
exchanges within IRAs and other retirement accounts.
------------------------------------------------------------------------------
IMPORTANT EXCHANGE
INFORMATION Before you make an exchange, you should consider the
following:
- Please read the Fund's prospectus before making an
exchange. For a copy and for answers to any questions
you may have, call our Investor Information
Department (1-800-662-7447).
- An exchange is treated as a redemption and a
purchase. Therefore, you could realize a taxable gain
or loss on the transaction.
- Exchanges are accepted only if the registrations and
the taxpayer identification numbers of the two
accounts are identical.
- New accounts are not currently accepted in
Vanguard/Windsor Fund.
- The redemption price of shares redeemed by exchange
is the net asset value next determined after Vanguard
has received all required documentation in Good
Order.
- When opening a new account by exchange, you must meet
the minimum investment requirement of the new Fund.
Every effort will be made to maintain the exchange
privilege. However, the Fund reserves the right to
revise or terminate its provisions, limit the amount of
or reject any exchange, as deemed necessary, at any
time.
The exchange privilege is only available in states in
which the shares of the Funds are registered for sale.
The Funds shares are currently registered for sale in
all 50 states and each Fund intends to maintain such
registration.
- --------------------------------------------------------------------------------
EXCHANGE
PRIVILEGE
LIMITATIONS The Fund's exchange privilege is not intended to afford
shareholders a way to speculate on short-term movements
in the market. Accordingly, in order to prevent
excessive use of the exchange privilege that may
potentially disrupt the management of the Fund and
increase transaction costs, the Fund has established a
policy of limiting excessive exchange activity.
Exchange activity generally will not be deemed
excessive if limited to TWO SUBSTANTIVE EXCHANGE
REDEMPTIONS (AT LEAST 30 DAYS APART) from a Portfolio
of the Fund during any twelve month period.
Notwithstanding these limitations, the Fund reserves
the right to reject any purchase request (including
exchange purchases from other Vanguard portfolios) that
is reasonably deemed to be disruptive to efficient
portfolio management.
- --------------------------------------------------------------------------------
62
<PAGE> 66
IMPORTANT
INFORMATION
ABOUT TELEPHONE
TRANSACTIONS The ability to initiate redemptions (except wire
redemptions) and exchanges by telephone is
automatically established on your account unless you
request in writing that telephone transactions on your
account not be permitted. The ability to initiate wire
redemptions by telephone will be established on your
account only if you specifically elect this option in
writing.
To protect your account from losses resulting from
unauthorized or fraudulent telephone instructions,
Vanguard adheres to the following security procedures:
1. SECURITY CHECK. To request a transaction by
telephone, the caller must know (i) the name of the
Portfolio; (ii) the 10-digit account number; (iii)
the exact name and address used in the registration;
and (iv) the Social Security or employer
identification number listed on the account.
2. PAYMENT POLICY. The proceeds of any telephone
redemption by mail will be made payable to the
registered shareowner and mailed to the address of
record, only. In the case of a telephone redemption
by wire, the wire transfer will be made only in
accordance with the shareowner's prior written
instructions.
Neither the Fund nor Vanguard will be responsible for
the authenticity of transaction instructions received
by telephone, provided that reasonable security
procedures have been followed. Vanguard believes that
the security procedures described above are reasonable,
and that if such procedures are followed, you will bear
the risk of any losses resulting from unauthorized or
fraudulent telephone transactions on your account.
- --------------------------------------------------------------------------------
TRANSFERRING
REGISTRATION You may transfer the registration of any of your Fund
shares to another person by completing a transfer form
and sending it to: VANGUARD FINANCIAL CENTER, P.O. BOX
1110, VALLEY FORGE, PA 19482, ATTENTION: TRANSFER
DEPARTMENT. The request must be in Good Order. To
obtain a transfer form, please call our Client Services
Department (1-800-662-2739).
- --------------------------------------------------------------------------------
STATEMENTS AND
REPORTS Vanguard will send you a confirmation statement each
time you initiate a transaction in your account. You
will also receive a comprehensive account statement at
the end of each calendar quarter. The fourth-quarter
statement will be a year-end statement, listing all
transaction activity for the entire calendar year.
Vanguard's Average Cost Statement provides you with the
average cost of shares redeemed from your account
during the calendar year, 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.
63
<PAGE> 67
Financial reports on the Fund will be mailed to you
semi-annually, according to the Fund's fiscal year-end.
- --------------------------------------------------------------------------------
OTHER VANGUARD
SERVICES For more information about any of these services,
please call our Investor Information Department at
1-800-662-7447.
VANGUARD DIRECT
DEPOSIT SERVICE With Vanguard's Direct Deposit Service, most U.S.
Government checks (including Social Security and
military pension checks) and private payroll checks may
be automatically deposited into your Vanguard Fund
account. Separate brochures and forms are available for
direct deposit of U.S. Government and private payroll
checks.
VANGUARD AUTOMATIC
EXCHANGE SERVICE Vanguard's Automatic Exchange Service allows you to
move money automatically among your Vanguard Fund
accounts. For instance, the service can be used to
"dollar cost average" from a money market portfolio
into a stock or bond fund or to contribute to an IRA or
other retirement plan. Please contact our Client
Services Department at 1-800-662-2739 for additional
information.
VANGUARD FUND
EXPRESS Vanguard's Fund Express allows you to transfer money
between your Fund account and your account at a bank,
savings and loan association, or a credit union that is
a member of the Automated Clearing House (ACH) system.
You may elect this service on the Account Registration
Form or call our Investor Information Department
(1-800-662-7447) for a Fund Express application.
Special rules govern how your Fund Express purchases or
redemptions are credited to your account. In addition,
some services of Fund Express cannot be used with
specific Vanguard Funds. For more information, please
refer to the Vanguard Fund Express brochure.
VANGUARD DIVIDEND
EXPRESS Vanguard's Dividend Express allows you to transfer your
dividends and/or capital gains distributions
automatically from your Fund account, one business day
after the Fund's payable date, to your account at a
bank, savings and loan association, or a credit union
that is a member of the Automated Clearing House (ACH)
system. You may elect this service on the Account
Registration Form or call our Investor Information
Department (1-800-662-7447) for a Vanguard Dividend
Express application.
VANGUARD
TELE-ACCOUNT Vanguard Tele-Account is a convenient, automated
service that provides share price, price change and
yield quotations on Vanguard Funds through any
TouchToneTM telephone. This service also lets you
obtain information about your account balance, your
last transaction, and your most recent dividend or
capital gains payment. In addition, you may perform
investment exchanges of Vanguard Fund shares and
redemption by check using Tele-Account. 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).
COMPUTER ACCESS
VANGUARD ON THE
WORLD WIDE WEB
KEYWORD: VANGUARD Vanguard sponsors an education-oriented website
offering news and information about Vanguard Funds and
services, as well as interactive, easy-to-use
investment planning tools.
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THE VANGUARD GROUP
OF INVESTMENT
COMPANIES
Vanguard Financial Center
P.O. Box 2600
Valley Forge, PA 19482
INVESTOR INFORMATION
DEPARTMENT:
1-800-662-7447 (SHIP)
CLIENT SERVICES
DEPARTMENT:
1-800-662-2739 (CREW)
TELE-ACCOUNT FOR
24-HOUR ACCESS:
1-800-662-6273 (ON-BOARD)
TELECOMMUNICATION SERVICE
FOR THE HEARING-IMPAIRED:
1-800-662-2738
TRANSFER AGENT:
The Vanguard Group, Inc.
Vanguard Financial Center
Valley Forge, PA 19482
P009
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