<PAGE> 1
================================================================================
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. 51
AND
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY
ACT OF 1940
AMENDMENT NO. 53
VANGUARD INDEX TRUST
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
P.O. BOX 2600, VALLEY FORGE, PA 19482
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)
REGISTRANT'S TELEPHONE NUMBER (610) 669-1000
RAYMOND J. KLAPINSKY, ESQUIRE
P.O. BOX 876
VALLEY FORGE, PA 19482
IT IS PROPOSED THAT THIS AMENDMENT BECOME EFFECTIVE
on April 20, 1998 pursuant to paragraph (b) 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. WE FILED OUR RULE
24f-2 NOTICE FOR THE YEAR ENDED DECEMBER 31, 1997 ON MARCH --, 1998.
================================================================================
<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............................................. Portfolio Profile; Portfolio Expenses
Item 3. Condensed Financial Information...................... Financial Highlights
Item 4. General Description of Registrant.................... The Portfolios' Objective; Investment
Limitations; Investment Strategy;
Investment Policies; A Word About
Risk; Investment Performance; General
Information
Item 5. Management of the Fund............................... The Trust and Vanguard; Investment
Adviser
Item 5A. Management's Discussion of Fund Performance.......... Herein incorporated by reference to
Registrant's Annual Report to
Shareholders dated December 31, 1997
filed with the Securities & Exchange
Commission's EDGAR system on March 2,
1998
Item 6. Capital Stock and Other Securities................... Buying Shares; Redeeming Shares;
Share Price; Dividends, Capital
Gains, and Taxes; General Information
Item 7. Purchase of Securities Being Offered................. Buying Shares; How to Exchange Shares
Item 8. Redemption or Repurchase............................. Redeeming Shares
Item 9. Pending Legal Proceedings............................ Not Applicable
</TABLE>
<TABLE>
<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 of Performance Data...................... Yield and Total Return; Performance
Measures
Item 23. Financial Statements................................. Financial Statements
</TABLE>
<PAGE> 3
VANGUARD INDEX TRUST
PROSPECTUS SUPPLEMENT
APRIL 20, 1998
On April 20, 1998, a subscription period will begin for three new Portfolios of
Vanguard Index Trust: the Mid Capitalization Stock Portfolio, Small
Capitalization Value Stock Portfolio, and Small Capitalization Growth Stock
Portfolio. The subscription period, held for the purpose of accumulating capital
prior to the start of investment activities, will last through May 20, 1998.
Fund assets will be invested in money market instruments throughout the
subscription period. For the duration of this period, the Portfolios will charge
no transaction fees.
Beginning May 21, each Portfolio will charge an automatic transaction fee
on purchases of shares (including exchanges from other Vanguard funds, but not
including reinvested dividends and capital gains). The fees are 0.25% for the
Mid Capitalization Stock Portfolio and 1.00% for the Small Capitalization Value
Stock and Small Capitalization Growth Stock Portfolios. These fees, paid
directly to the Portfolios, are designed to offset the higher costs of
purchasing certain types of securities.
<PAGE> 4
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS
DATED JANUARY 9, 1998
VANGUARD
INDEX TRUST
PROSPECTUS
APRIL 20, 1998
TOTAL STOCK MARKET
PORTFOLIO
500 PORTFOLIO
EXTENDED MARKET
PORTFOLIO
MID CAPITALIZATION
STOCK PORTFOLIO
SMALL CAPITALIZATION
STOCK PORTFOLIO
VALUE PORTFOLIO
SMALL CAPITALIZATION
VALUE STOCK PORTFOLIO
GROWTH PORTFOLIO
SMALL CAPITALIZATION
GROWTH STOCK PORTFOLIO
This prospectus contains
financial data for the
Trust through the
fiscal year ended
December 31, 1997.
[GRAPHIC OF SHIP]
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION BUT HAS NOT YET BECOME EFFECTIVE. THE
INVESTOR AND INSTITUTIONAL SHARES OF THE MID CAPITALIZATION STOCK PORTFOLIO, THE
SMALL CAPITALIZATION VALUE STOCK PORTFOLIO, AND THE SMALL CAPITALIZATION GROWTH
STOCK PORTFOLIO, AS WELL AS THE INSTITUTIONAL SHARES OF THE VALUE PORTFOLIO AND
THE GROWTH PORTFOLIO, MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO
THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS COMMUNICATION SHALL
NOT CONSTITUTE AN OFFER TO SELL OR SOLICITATION OF AN OFFER TO BUY, NOR SHALL
THERE BE ANY SALE OF THESE SECURITIES IN ANY STATES IN WHICH SUCH OFFER,
SOLICITATION, OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION QUALIFICATION
UNDER THE SECURITIES LAWS OF ANY SUCH STATE. TO OBTAIN A CURRENTLY EFFECTIVE
PROSPECTUS FOR THE EXISTING PORTFOLIOS OF VANGUARD INDEX TRUST, PLEASE CONTACT
VANGUARD'S INVESTOR INFORMATION DEPARTMENT AT 1-800-662-7447.
[VANGUARD GROUP LOGO]
<PAGE> 5
VANGUARD INDEX TRUST
A Stock Index Mutual Fund
<TABLE>
<CAPTION>
CONTENTS
<S> <C>
Portfolio Profile 1
Portfolio Expenses 4
Financial Highlights 6
A Word About Risk 10
The Portfolios'
Objective 10
Who Should Invest 12
Investment Strategy 13
Investment Policies 17
Investment Limitations 18
Investment
Performance 18
Share Price 19
Dividends, Capital
Gains, and Taxes 20
The Trust and
Vanguard 21
Investment Adviser 21
General Information 22
Investing
with Vanguard 23
Services and
Account Features 23
Types of Accounts 24
Distribution Options 25
Buying Shares 26
Redeeming Shares 27
Transferring
Registration 30
Portfolio and
Account Updates 30
Prospectus Postscript 32
Glossary Inside Back Cover
</TABLE>
INVESTMENT OBJECTIVES AND POLICIES
Vanguard Index Trust (the Trust) is an open-end investment company that includes
nine separate, diversified mutual fund portfolios: Total Stock Market, 500,
Extended Market, Mid Capitalization Stock, Small Capitalization Stock, Value,
Small Capitalization Value Stock, Growth, and Small Capitalization Growth Stock.
The Mid Capitalization Stock, Small Capitalization Value Stock, and Small
Capitalization Growth Stock Portfolios have been added as new Portfolios
effective April 20, 1998.
Each Portfolio seeks to match, as closely as possible, the performance of a
different stock market benchmark, or index. One index reflects the entire U.S.
stock market; the eight other indexes focus on specific stock market segments.
Long-term capital growth (and, for some Portfolios, dividend income) may be
achieved as the Portfolios track their respective indexes.
You can buy shares in any of the nine Portfolios that meet your investment
needs; you do not have to buy shares in all nine.
IT IS IMPORTANT TO NOTE THAT NONE OF THE PORTFOLIOS' SHARES IS GUARANTEED OR
INSURED BY THE FDIC OR ANY OTHER AGENCY OF THE U.S. GOVERNMENT. AS WITH ANY
INVESTMENT IN COMMON STOCKS, WHICH ARE SUBJECT TO WIDE FLUCTUATIONS IN MARKET
VALUE, YOU COULD LOSE MONEY BY INVESTING IN ANY OF THE PORTFOLIOS.
FEES AND EXPENSES
The Portfolios are offered on a no-load basis, which means that you pay no sales
commissions or 12b-1 marketing fees. You will, however, incur expenses for
investment advisory, management, administrative, and distribution services,
which are included in each Portfolio's expense ratio.
Each Portfolio charges a $10 annual account maintenance fee for accounts with
balances of less than $10,000 at the time of the quarterly or annual deduction.
Five Portfolios charge a fee on purchases: 0.25% for the Extended Market and
Mid Capitalization Stock Portfolios, 0.5% for the Small Capitalization Stock
Portfolio, and 1.00% for the Small Capitalization Value Stock and Small
Capitalization Growth Stock Portfolios.
ADDITIONAL INFORMATION ABOUT THE TRUST
A Statement of Additional Information (dated April 20, 1998) containing more
information about the Trust is, by reference, part of this prospectus and may be
obtained without charge by writing to Vanguard, calling our Investor Information
Department at 1-800-662-7447, or visiting the Securities and Exchange
Commission's website (www.sec.gov).
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
4-5
<PAGE> 6
NOTE TO LARGE INVESTORS
The Total Stock Market Portfolio, Extended Market Portfolio, Mid Capitalization
Stock Portfolio, Small Capitalization Stock Portfolio, Value Portfolio, Small
Capitalization Value Stock Portfolio, Growth Portfolio, and Small Capitalization
Growth Stock Portfolio each offers two separate classes of shares. This
prospectus, and a separate prospectus for institutional clients and participants
in employer-sponsored retirement plans, describe the "Investor Shares" of these
Portfolios, which have a minimum initial investment requirement of $3,000
($1,000 for IRAs). The Portfolios' "Institutional Shares," which we offer
through another prospectus, are designed for investors who meet the investment
minimum requirement of $10 million and generally do not require special employee
benefit plan services. To obtain a prospectus for the Institutional Shares,
please call Vanguard's Institutional Investor Group at 1-800-523-1036. Note that
the Portfolios' separate share classes have different expenses; as a result,
their investment performance will vary.
WHY READING THIS PROSPECTUS IS IMPORTANT
This prospectus explains the objective, risks, and strategy of each Portfolio of
Vanguard Index Trust. To highlight terms and concepts important to mutual fund
investors, we have provided "Plain Talk" explanations along the way. Reading the
prospectus will help you decide which Portfolios, if any, are the right
investment for you. We suggest that you keep it for future reference.
PORTFOLIO PROFILE Vanguard Index Trust
WHO SHOULD INVEST (PAGE 12)
- - Investors looking for a simple way to match the performance of a
specific stock market index.
- - Investors seeking a stock mutual fund as part of a balanced and
diversified investment program.
- - Investors seeking growth of their capital over the long term--at least
five years.
WHO SHOULD NOT INVEST
- - Investors unwilling to accept significant fluctuations in share price.
- - Investors hoping to beat the stock market.
RISKS OF THE PORTFOLIOS (PAGES 10-18)
The Portfolios' total returns will fluctuate within a wide range, so an investor
could lose money over short or even extended periods. All nine Portfolios are
subject to market risk (the chance that stock prices in general will fall,
sometimes suddenly and sharply) and objective risk (the chance that a specific
segment of the stock market will not perform as well as the overall market).
More detailed information about risk--including risks specific to each
Portfolio--is provided beginning on page 10.
DIVIDENDS AND CAPITAL GAINS (PAGE 20)
The Total Stock Market, 500, Value, and Growth Portfolios pay dividends in
March, June, September, and December. The Extended Market, Mid Capitalization
Stock, Small Capitalization Stock, Small Capitalization Value Stock, and Small
Capitalization Growth Stock Portfolios pay dividends in December. All nine of
the Trust's Portfolios pay capital gains, if any, in December.
In evaluating past performance, remember that it is not indicative of future
performance and that returns from stocks before adjusting for inflation were
relatively high during the periods shown. Performance figures include the
reinvestment of any dividend and capital gains distributions. The returns shown
are net of expenses, but they do not reflect income taxes an investor would have
incurred. Note, too, that both the return and principal value of an investment
will fluctuate so that investors' shares, when redeemed, may be worth more or
less than their original cost.
1
<PAGE> 7
PORTFOLIO PROFILE (continued)
INVESTMENT ADVISER (page 21)
Vanguard Core Management Group, Valley Forge, Pa., manages each of the nine
Portfolios.
MINIMUM INITIAL INVESTMENT FOR EACH PORTFOLIO: $3,000; $1,000 for IRAs and
custodial accounts for minors
ACCOUNT FEATURES (page 23)
- - Telephone Redemption (sales, not exchanges)
- - Vanguard Direct Deposit Service(TM)
- - Vanguard Automatic Exchange Service(sm)
- - Vanguard Fund Express(R)
- - Vanguard Dividend Express(sm)
Vanguard Index Trust
AVERAGE ANNUAL TOTAL RETURNS--
YEARS ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
1 YEAR 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Total Stock Market 31.0% 18.9% 18.5%*
Wilshire 5000 Index 31.4 19.3 18.9
500 33.2% 20.1% 17.8%
S&P 500 Index 33.4 20.3 18.1
Extended Market** 26.7% 17.5% 16.4%
Wilshire 4500 Index 25.7 17.0 16.3
SmallCap Stock** 24.6% 17.5% 15.8%
Russell 2000 Index 22.4 16.4 15.8
Value 29.8% 20.5% 20.7%*
S&P/BARRA Value Index 30.0 20.7 20.9*
Growth 36.3% 19.5% 19.5%*
S&P/BARRA Growth Index 36.5 19.6 19.8*
- --------------------------------------------------------------------------------
</TABLE>
Note: The Mid Capitalization Stock, Small Capitalization Value Stock, and Small
Capitalization Growth Stock Portfolios did not begin operations until April 20,
1998.
*Since inception; see pages 2 and 3.
**Does not include transaction fee; see pages 2 and 3.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
TOTAL STOCK EXTENDED
MARKET 500 MARKET
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INCEPTION DATE: 4/27/1992 8/31/1976 12/21/1987
NET ASSETS AS OF 12/31/1997: $5.09 billion $49.40 billion $2.72 billion
PORTFOLIO EXPENSE RATIO FOR THE
YEAR ENDED 12/31/1997: 0.20% 0.19% 0.23%
FEES
LOADS, 12b-1 MARKETING FEE: None None None
ANNUAL ACCOUNT MAINTENANCE FEE*: $10 $10 $10
TRANSACTION FEE ON PURCHASES: None None 0.25%
SUITABLE FOR IRAS: Yes Yes Yes
NEWSPAPER ABBREVIATION: TotSt 500 Extnd
VANGUARD FUND NUMBER: 085 040 098
CUSIP NUMBER: 922908306 922908108 922908207
QUOTRON SYMBOL: VTSMX.Q VFINX.Q VEXMX.Q
- -------------------------------------------------------------------------------------------------
</TABLE>
*Waived for accounts with balances of $10,000 or more at the time of the
quarterly or annual deduction.
2
<PAGE> 8
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
MIDCAP SMALLCAP
STOCK STOCK VALUE
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INCEPTION DATE: 4/20/1998 10/3/1960 11/2/1992
NET ASSETS AS OF 12/31/1997: None $2.70 billion $1.80 billion
PORTFOLIO EXPENSE RATIO FOR THE
YEAR ENDED 12/31/1997: N/A 0.23% 0.20%
FEES
LOADS, 12b-1 MARKETING FEE: None None None
ANNUAL ACCOUNT MAINTENANCE FEE*: $10 $10 $10
TRANSACTION FEE ON PURCHASES: 0.25% 0.5% None
SUITABLE FOR IRAS: Yes Yes Yes
NEWSPAPER ABBREVIATION: MidCap SmCap Value
VANGUARD FUND NUMBER: 859 048 006
CUSIP NUMBER: 922908843 922908702 922908405
QUOTRON SYMBOL: N/A NAESX.Q VIVAX.Q
- -------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
SmallCap SmallCap
Value Growth Growth
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INCEPTION DATE: 4/20/1998 11/2/1992 4/20/1998
NET ASSETS AS OF 12/31/1997: None $2.40 billion None
PORTFOLIO EXPENSE RATIO FOR THE
YEAR ENDED 12/31/1997: N/A 0.20% N/A
FEES
LOADS, 12b-1 MARKETING FEE: None None None
ANNUAL ACCOUNT MAINTENANCE FEE*: $10 $10 $10
TRANSACTION FEE ON PURCHASES: 1.00% None 1.00%
SUITABLE FOR IRAS: Yes Yes Yes
NEWSPAPER ABBREVIATION: SmValue Growth SmGrowth
VANGUARD FUND NUMBER: 860 009 861
CUSIP NUMBER: 922908793 922908504 922908827
QUOTRON SYMBOL: N/A VIGRX.Q N/A
- -------------------------------------------------------------------------------------------------
</TABLE>
*Waived for accounts with balances of $10,000 or more at the time of the
quarterly or annual deduction.
3
<PAGE> 9
PLAIN TALK ABOUT
VANGUARD'S FEES
Some of Vanguard's index portfolios charge a transaction fee on purchases of
portfolio shares to offset the higher costs of trading certain securities,
particularly small-company and international stocks. The transaction fee ensures
that these higher costs are borne by the investors making the transactions--and
not by shareholders already in the portfolio. In addition, most of Vanguard's
index portfolios charge an account maintenance fee on accounts under $10,000 to
divide the costs of maintaining accounts equitably among shareholders.
At Vanguard, all fees are paid directly to the portfolio itself (unlike a
sales charge or load, which--for many fund companies--ends up in the pocket of
the sponsor, adviser, or sales representative). Without transaction fees, an
index portfolio would have trouble tracking its target index.
PORTFOLIO EXPENSES
The examples below are designed to help you understand the costs you would bear
as an investor in one of the Portfolios.
SHAREHOLDER TRANSACTION EXPENSES AND FEES
<TABLE>
<S> <C>
Sales Load Imposed on Purchases: None
Transaction Fee on Purchases*
Extended Market Portfolio: 0.25%
Mid Capitalization Stock Portfolio: 0.25%
Small Capitalization Stock Portfolio: 0.50%
Small Capitalization Value Stock Portfolio: 1.00%
Small Capitalization Growth Stock Portfolio: 1.00%
Total Stock Market, 500, Value, and Growth Portfolios: None
Sales Load Imposed on Reinvested Dividends: None
Redemption Fees: None
Exchange Fees: None
</TABLE>
*The transaction fee is deducted from all purchases (including exchanges from
other Vanguard funds) but not from reinvested dividends and capital gains.
For accounts with current balances of less than $10,000, an account
maintenance fee is deducted from a Portfolio's dividends ($2.50 each quarter for
the Total Stock Market, 500, Value, and Growth Portfolios; and $10 each December
for the Extended Market, Small Capitalization Stock, Mid Capitalization Stock,
Small Capitalization Value Stock, and Small Capitalization Growth Stock
Portfolios). If you receive a distribution that is less than the fee, shares
will be automatically redeemed to make up the difference.
The next tables illustrate the expenses that you are expected to incur,
outside of transaction and maintenance fees, as a Portfolio shareholder. These
expenses are deducted from the Portfolio's income before it is paid to you.
Expenses include investment advisory fees as well as fees for administering the
Portfolio, providing services, and other activities. The expenses for the Total
Stock Market, 500, Extended Market, Small Capitalization Stock, Value, and
Growth Portfolios, as shown in the table, are based upon those incurred in the
fiscal year ended December 31, 1997. The expenses shown for the Mid
Capitalization Stock, Small Capitalization Value Stock, and Small Capitalization
Growth Stock Portfolios are estimates for these Portfolios' first full year of
operations.
4
<PAGE> 10
PORTFOLIO OPERATING EXPENSES
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------
TOTAL STOCK EXTENDED
MARKET 500 MARKET
- ------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Management and
Administrative Expenses: 0.17% 0.16% 0.20%
Investment Advisory Expenses: None None None
12b-1 Marketing Fees: None None None
Other Expenses
Marketing and Distribution
Expenses: 0.03% 0.02% 0.02%
Miscellaneous Expenses
(e.g., Taxes, Auditing): 0.00% 0.01% 0.01%
- ------------------------------------------------------------------------
Total Other Expenses: 0.03% 0.03% 0.03%
- ------------------------------------------------------------------------
TOTAL OPERATING EXPENSES
(EXPENSE RATIO): 0.20% 0.19% 0.23%
========================================================================
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------
MIDCAP SMALLCAP
STOCK STOCK VALUE
- -------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Management and
Administrative Expenses: 0.22% 0.20% 0.17%
Investment Advisory Expenses: None None None
12b-1 Marketing Fees: None None None
Other Expenses
Marketing and Distribution
Expenses: 0.02% 0.02% 0.02%
Miscellaneous Expenses
(e.g., Taxes, Auditing): 0.01% 0.01% 0.01%
- --------------------------------------------------------------------------
Total Other Expenses: 0.03% 0.03% 0.03%
- --------------------------------------------------------------------------
TOTAL OPERATING EXPENSES
(EXPENSE RATIO): 0.25% 0.23% 0.20%
==========================================================================
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------
SMALLCAP SMALLCAP
VALUE GROWTH GROWTH
- ---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Management and
Administrative Expenses: 0.22% 0.17% 0.22%
Investment Advisory Expenses: None None None
12b-1 Marketing Fees: None None None
Other Expenses
Marketing and Distribution
Expenses: 0.02% 0.02% 0.02%
Miscellaneous Expenses
(e.g., Taxes, Auditing): 0.01% 0.01% 0.01%
- ---------------------------------------------------------------------------
Total Other Expenses: 0.03% 0.03% 0.03%
- ---------------------------------------------------------------------------
TOTAL OPERATING EXPENSES
(EXPENSE RATIO): 0.25% 0.20% 0.25%
===========================================================================
</TABLE>
PLAIN TALK ABOUT
FUND EXPENSES
All mutual funds have operating expenses. These expenses, which are deducted
from a fund's gross income, are expressed as a percentage of the net assets of
the fund. For instance, the Total Stock Market Portfolio's expense ratio in
fiscal year 1997 was 0.20%, or $2 per $1,000 of average net assets. The average
equity index fund had expenses in 1997 of -%, or $- per $1,000 of average net
assets, according to Lipper Analytical Services, which reports on the mutual
fund industry.
5
<PAGE> 11
PLAIN TALK ABOUT
HOW TO READ THE FINANCIAL HIGHLIGHTS TABLE
This explanation uses the Total Stock Market Portfolio as an example. The
Portfolio began fiscal 1997 with a net asset value (price) of $17.77 per share.
During the year, the Portfolio earned $.319 per share from investment income
(interest and dividends) and $5.143 per share from investments that had
appreciated in value or were sold for a price higher than the Portfolio paid for
them. This resulted in total earnings of $5.462 per share. Of those earnings,
$.592 per share was returned to shareholders in distributions ($.322 in
dividends, $.270 in capital gains). The earnings ($5.462 per share) less
distributions ($.592 per share) resulted in a share price of $22.64 at the end
of the fiscal year, an increase of $4.87 per share (from $17.77 at the start of
the period to $22.64 at the end of the period). Assuming the shareholder had
reinvested the distributions in the purchase of more shares, total return from
the Portfolio was 30.99% for the year.
As of December 31, 1997, the Portfolio had $5.09 billion in net assets; an
expense ratio of 0.20% ($2 per $1,000 of net assets); and net investment income
amounting to 1.65% of its average net assets. It sold and replaced securities
valued at 2% of its total net assets.
The following examples are intended to help you compare the cost of investing
in one of the Portfolios with the cost of investing in other mutual funds, by
illustrating the hypothetical expenses that you would incur on a $1,000
investment in each Portfolio over various periods. These examples assume that
(1) each Portfolio provides a return of 5% a year and (2) you redeem your
investment at the end of each period. A $10 annual fee payable on accounts with
current balances of less than $10,000 is not included.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------
PORTFOLIO 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total Stock Market $ 2 $ 6 $11 $26
500 2 6 11 24
Extended Market 5 10 15 32
MidCap Stock 5 11 17 34
SmallCap Stock 7 12 18 34
Value 2 6 11 26
SmallCap Value Stock 13 18 24 42
Growth 2 6 11 26
SmallCap Growth Stock 13 18 24 42
- ------------------------------------------------------------------
</TABLE>
THESE EXAMPLES SHOULD NOT BE CONSIDERED TO REPRESENT ACTUAL EXPENSES OR
PERFORMANCE FROM THE PAST OR FOR THE FUTURE, WHICH MAY BE HIGHER OR LOWER THAN
THOSE SHOWN.
FINANCIAL HIGHLIGHTS
The following financial highlights tables show the results for a share
outstanding of the Total Stock Market, 500, Extended Market, Small
Capitalization Stock, Value, and Growth Portfolios* for each of the fiscal years
in the decade ended December 31, 1997 (or each year since the Portfolio's
inception date). The financial statements that include these financial
highlights for the periods ended December 31 were audited by Price Waterhouse
LLP, independent accountants. You should read this information in conjunction
with each Portfolio's financial statements and accompanying notes, which appear,
along with the audit report from Price Waterhouse, in the Trust's most recent
annual report to shareholders. The annual report is incorporated by reference in
the Statement of Additional Information and in this prospectus, and contains a
more complete discussion of each Portfolio's performance. You may have the
report sent to you without charge by writing to Vanguard or by calling our
Investor Information Department.
*The Mid Capitalization Stock, Small Capitalization Value Stock, and
Small Capitalization Growth Stock Portfolios did not begin operations until
April 20, 1998.
6
<PAGE> 12
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL STOCK MARKET PORTFOLIO
---------------------------------------------------------
YEAR ENDED DECEMBER 31,
--------------------------------------------------------- MAR. 16*-
1997 1996 1995 1994 1993 DEC. 31, 1992
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 17.77 $ 15.04 $ 11.37 $ 11.69 $ 10.84 $ 10.00
-------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .319 .29 .29 .27 .26 .23
Net Realized and Unrealized Gain (Loss) on Investments 5.143 2.84 3.75 (.29) .88 .84
-------------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 5.462 3.13 4.04 (.02) 1.14 1.07
- ------------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.322) (.29) (.28) (.27) (.26) (.23)
Distributions from Realized Capital Gains (.270) (.11) (.09) (.03) (.03) --
-------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (.592) (.40) (.37) (.30) (.29) (.23)
- ------------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 22.64 $ 17.77 $ 15.04 $ 11.37 $ 11.69 $ 10.84
====================================================================================================================================
TOTAL RETURN** 30.99% 20.96% 35.79% -0.17% 10.62% 10.41%
====================================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $ 5,092 $ 3,531 $ 1,571 $ 786 $ 512 $ 275
Ratio of Total Expenses to Average Net Assets 0.20% 0.22% 0.25% 0.20% 0.20% 0.21%+
Ratio of Net Investment Income to Average Net Assets 1.65% 1.86% 2.14% 2.35% 2.31% 2.42%+
Portfolio Turnover Rate 2% 3% 3% 2% 1% 3%
Average Commission Rate Paid $ .0177 $ .0216 N/A N/A N/A N/A
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Inception date.
**Total return figures do not reflect the 0.25% transaction fee on purchases
through 1995, or the annual account maintenance fee of $10. Subscription
period for the Portfolio was from March 16 to April 26, 1992, during which
time all assets were held in money market instruments. Performance measurement
began on April 27, 1992.
+ Annualized.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
500 PORTFOLIO
- ---------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992 1991 1990
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $ 69.17 $ 57.60 $ 42.97 $ 43.83 $ 40.97 $ 39.32 $ 31.24 $ 33.64
---------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income 1.31 1.28 1.22 1.18 1.13 1.12 1.15 1.17
Net Realized and Unrealized
Gain (Loss) on Investments 21.50 11.82 14.76 (.67) 2.89 1.75 8.20 (2.30)
---------------------------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 22.81 13.10 15.98 .51 4.02 2.87 9.35 (1.13)
- ------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (1.32) (1.28) (1.22) (1.17) (1.13) (1.12) (1.15) (1.17)
Distributions from Realized
Capital Gains (.59) (.25) (.13) (.20) (.03) (.10) (.12) (.10)
---------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (1.91) (1.53) (1.35) (1.37) (1.16) (1.22) (1.27) (1.27)
- ------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $ 90.07 $ 69.17 $ 57.60 $ 42.97 $ 43.83 $ 40.97 $ 39.32 $ 31.24
==============================================================================================================================
TOTAL RETURN* 33.19% 22.88% 37.45% 1.18% 9.89% 7.42% 30.22% -3.32%
==============================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $49,358 $30,332 $17,372 $ 9,356 $ 8,273 $ 6,547 $ 4,345 $ 2,173
Ratio of Total Expenses to
Average Net Assets 0.19% 0.20% 0.20% 0.19% 0.19% 0.19% 0.20% 0.22%
Ratio of Net Investment Income to
Average Net Assets 1.66% 2.04% 2.38% 2.72% 2.65% 2.81% 3.07% 3.60%
Portfolio Turnover Rate 5%+ 5%+ 4%+ 6%+ 6%+ 4%+ 5%+ 23%+
Average Commission Rate Paid $ .0181 $ .0166 N/A N/A N/A N/A N/A N/A
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------
500 PORTFOLIO
- -------------------------------------------------------------
YEAR ENDED DECEMBER 31,
-----------------------
1989 1988
- -----------------------------------------------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $ 27.18 $ 24.65
------------------
INVESTMENT OPERATIONS
Net Investment Income 1.20 1.08
Net Realized and Unrealized
Gain (Loss) on Investments 7.21 2.87
------------------
TOTAL FROM INVESTMENT OPERATIONS 8.41 3.95
- -----------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (1.20) (1.10)
Distributions from Realized
Capital Gains (.75) (.32)
------------------
TOTAL DISTRIBUTIONS (1.95) (1.42)
- -----------------------------------------------------------
NET ASSET VALUE, END OF YEAR $ 33.64 $ 27.18
===========================================================
TOTAL RETURN* 31.36% 16.22%
===========================================================
</TABLE>
7
<PAGE> 13
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
EXTENDED MARKET PORTFOLIO
- ------------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
- ------------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992 1991 1990
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $ 26.20 $ 24.07 $ 18.52 $ 19.43 $ 17.35 $ 15.82 $ 11.48 $ 13.92
-----------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .351 .34 .30 .28 .23 .24 .25 .30
Net Realized and Unrealized
Gain (Loss) on Investments 6.479 3.85 5.95 (.62) 2.28 1.72 4.54 (2.25)
-----------------------------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 6.830 4.19 6.25 (.34) 2.51 1.96 4.79 (1.95)
- ------------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.360) (.34) (.30) (.28) (.23) (.25) (.25) (.33)
Distributions from Realized Capital Gains (1.910) (1.72) (.40) (.29) (.20) (.18) (.20) (.16)
-----------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (2.270) (2.06) (.70) (.57) (.43) (.43) (.45) (.49)
- ------------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $ 30.76 $ 26.20 $ 24.07 $ 18.52 $ 19.43 $ 17.35 $ 15.82 $ 11.48
====================================================================================================================================
TOTAL RETURN* 26.73% 17.65% 33.80% -1.76% 14.49% 12.47% 41.85% -14.05%
====================================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $ 2,723 $ 2,099 $ 1,523 $ 967 $ 928 $ 585 $ 372 $ 179
Ratio of Total Expenses to
Average Net Assets 0.23% 0.25% 0.25% 0.20% 0.20% 0.20% 0.19% 0.23%
Ratio of Net Investment Income to
Average Net Assets 1.30% 1.42% 1.51% 1.51% 1.48% 1.73% 2.14% 2.68%
Portfolio Turnover Rate 15%** 22% 15% 19% 13% 9% 11% 9%
Average Commission Rate Paid $ .0228 $ .0235 N/A N/A N/A N/A N/A N/A
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
EXTENDED MARKET PORTFOLIO
- --------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
- --------------------------------------------------------------------
1989 1988
---------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $ 11.60 $ 9.99
---------------------
INVESTMENT OPERATIONS
Net Investment Income .26 .34
Net Realized and Unrealized
Gain (Loss) on Investments 2.52 1.63
---------------------
TOTAL FROM INVESTMENT OPERATIONS 2.78 1.97
- ----------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.23) (.20)
Distributions from Realized Capital Gains (.23) (.16)
---------------------
TOTAL DISTRIBUTIONS (.46) (.36)
- ----------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $ 13.92 $ 11.60
================================================================
TOTAL RETURN* 24.10% 19.75%
================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $ 147 $ 35
Ratio of Total Expenses to
Average Net Assets 0.23% 0.24%
Ratio of Net Investment Income to
Average Net Assets 2.92% 2.90%
Portfolio Turnover Rate 14% 26%
Average Commission Rate Paid N/A N/A
- ----------------------------------------------------------------
</TABLE>
*Total return figures do not reflect transaction fees on purchases (0.25% from
November 3, 1997, through December 31, 1997; 0.5% in 1995 through October 31,
1997; 1.0% in 1992 through 1994) or the annual account maintenance fee of $10.
**Portfolio turnover rate excluding in-kind redemptions was 14%.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
SMALL CAPITALIZATION
STOCK PORTFOLIO*
- ---------------------------------------------------------------------------------------------------------------------------
YEAR ENDED
DECEMBER 31,
---------------------------------- FEB. 1- OCT. 1, 1993-
1997 1996 1995 DEC. 31, 1994 JAN. 31, 1994
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 20.23 $ 18.61 $ 14.99 $ 16.24 $ 16.23
------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .277 .26 .24 .20 .05
Net Realized and Unrealized Gain
(Loss) on Investments 4.632 3.07 4.06 (.86) .96
------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 4.909 3.33 4.30 (.66) 1.01
- -------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.274) (.27) (.23) (.22) (.18)
Distributions from Realized Capital Gains (1.115) (1.44) (.45) (.37) (.82)
------------------------------------------------------------
TOTAL DISTRIBUTIONS (1.389) (1.71) (.68) (.59) (1.00)
- -------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 23.75 $ 20.23 $ 18.61 $ 14.99 $ 16.24
===================================================================================================================
TOTAL RETURN** 24.59% 18.12% 28.74% -4.00% 6.65%
===================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $ 2,652 $ 1,713 $ 971 $ 605 $ 533
Ratio of Total Expenses to Average Net Assets 0.23% 0.25% 0.25% 0.17%+ 0.18%+
Ratio of Net Investment Income to Average Net Assets 1.38% 1.51% 1.58% 1.50%+ 1.16%+
Portfolio Turnover Rate 29% 28% 28% 25% 5%
Average Commission Rate Paid $ .0226 $ .0245 N/A N/A N/A
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
*Returns prior to January 31, 1994, are for the former Vanguard Small
Capitalization Stock Fund.
**Total return figures do not reflect transaction fees on purchases (0.5% in
1997, 1.0% in 1994 through 1996) or the annual account maintenance fee of $10.
+ Annualized. (continued)
- --------------------------------------------------------------------------------
8
<PAGE> 14
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
SMALL CAPITALIZATION
STOCK PORTFOLIO*
(continued)
----------------------------------------------------------------------------
YEAR ENDED SEPTEMBER 30,
----------------------------------------------------------------------------
1993 1992 1991 1990++ 1989 1988
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $ 12.63 $ 12.03 $ 8.55 $ 11.88 $ 11.96 $ 15.73
---------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .20 .19 .20 .17 .10 .03
Net Realized and Unrealized Gain (Loss) on Investments 3.73 .88 3.60 (3.46) 2.13 (2.59)
---------------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 3.93 1.07 3.80 (3.29) 2.23 (2.56)
- -----------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.18) (.18) (.18) (.04) (.14) --
Distributions from Realized Capital Gains (.15) (.29) (.14) -- (2.17) (1.21)
---------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (.33) (.47) (.32) (.04) (2.31) (1.21)
- -----------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $ 16.23 $ 12.63 $ 12.03 $ 8.55 $ 11.88 $ 11.96
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN** 31.60% 9.34% 45.91% -27.73% 18.83% -14.30%
- -----------------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $ 432 $ 202 $ 111 $ 40 $ 20 $ 27
Ratio of Total Expenses to Average Net Assets 0.18% 0.18% 0.21% 0.31% 1.00% 0.95%
Ratio of Net Investment Income to Average Net Assets 1.47% 1.65% 2.11% 1.91% .65% .24%
Portfolio Turnover Rate 26% 26% 33% 40% 160% 68%
Average Commission Rate Paid N/A N/A N/A N/A N/A N/A
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Returns prior to January 31, 1994, are for the former Vanguard Small
Capitalization Stock Fund.
**Total return figures do not reflect transaction fees on purchases (0.5% in
1997, 1.0% in 1994 through 1996) or the annual account maintenance fee of $10.
++ Adjusted to reflect a 3-for-1 stock split as of February 3, 1990.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
VALUE PORTFOLIO
- ------------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
- ------------------------------------------------------------------------------------------------------------------- Nov. 2*-
1997 1996 1995 1994 1993 Dec. 31, 1992
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 17.02 $ 14.79 $ 11.12 $ 11.74 $ 10.30 $ 10.00
- ---------------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .38 .37 .41 .38 .38 .07
Net Realized and Unrealized Gain (Loss) on Investments 4.57 2.81 3.66 (.46) 1.50 .30
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 4.95 3.18 4.07 (.08) 1.88 .37
- ---------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.37) (.38) (.40) (.38) (.38) (.07)
Distributions from Realized Capital Gains (.75) (.57) -- (.16) (.06) --
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (1.12) (.95) (.40) (.54) (.44) (.07)
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 20.85 $ 17.02 $ 14.79 $ 11.12 $ 11.74 $ 10.30
=================================================================================================================================
TOTAL RETURN** 29.77% 21.86% 36.94% -0.73% 18.35% 3.70%
=================================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $ 1,796 $ 1,016 $ 496 $ 297 $ 190 $ 24
Ratio of Total Expenses to Average Net Assets 0.20% 0.20% 0.20% 0.20% 0.20% 0%+
Ratio of Net Investment Income to Average Net Assets 2.05% 2.54% 3.06% 3.37% 3.26% 3.46%+
Portfolio Turnover Rate 25% 29% 27% 32% 30% 4%
Average Commission Rate Paid $ .0149 $ .0188 N/A N/A N/A N/A
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Inception date
**Total return figures do not reflect the annual account maintenance fee of $10.
+ Annualized.
- --------------------------------------------------------------------------------
9
<PAGE> 15
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
GROWTH PORTFOLIO
- ---------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
- ---------------------------------------------------------------------------------------------------------------- Nov. 2*-
1997 1996 1995 1994 1993 Dec. 31, 1992
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 16.90 $ 13.97 $ 10.28 $ 10.20 $ 10.26 $ 10.00
- ------------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .23 .22 .21 .21 .21 .06
Net Realized and Unrealized Gain (Loss) on Investments 5.88 3.07 3.68 .08 (.06) .26
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 6.11 3.29 3.89 .29 .15 .32
- ------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.23) (.22) (.20) (.21) (.21) (.06)
Distributions from Realized Capital Gains (.25) (.14) -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (.48) (.36) (.20) (.21) (.21) (.06)
- ------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 22.53 $ 16.90 $ 13.97 $ 10.28 $ 10.20 $ 10.26
==============================================================================================================================
TOTAL RETURN** 36.34% 23.74% 38.06% 2.89% 1.53% 3.19%
==============================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $ 2,365 $ 787 $ 271 $ 86 $ 51 $ 21
Ratio of Total Expenses to Average Net Assets 0.20% 0.20% 0.20% 0.20% 0.20% 0%
Ratio of Net Investment Income to Average Net Assets 1.19% 1.57% 1.71% 2.08% 2.10% 2.85%+
Portfolio Turnover Rate 26% 29% 24% 28% 36% 2%
Average Commission Rate Paid $ .0134 $ .0183 N/A N/A N/A N/A
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Inception date.
**Total return figures do not reflect the annual account maintenance fee of $10.
+ Annualized.
- --------------------------------------------------------------------------------
From time to time, the Vanguard funds advertise yield and total return
figures. Yield is a historical measure of dividend income, and total return is a
measure of past dividend income (assuming that it has been reinvested) plus
realized and unrealized capital appreciation (depreciation). Neither yield nor
total return should be used to predict the future performance of a fund.
================================================================================
A WORD ABOUT RISK
This prospectus describes the risks you would face as an investor in the
Portfolios of Vanguard Index Trust. It is important to keep in mind one of the
main axioms of investing: The higher the risk of losing money, the higher the
potential reward. The reverse, also, is generally true: The lower the risk, the
lower the potential reward. As you consider an investment in one or more of the
Trust's Portfolios, you should take into account your personal tolerance for the
daily fluctuations of the stock market. Remember, too, that each Portfolio seeks
to match a different stock market index; therefore, investment risk will vary
from Portfolio to Portfolio.
Look for this "warning flag" symbol [FLAG] throughout the prospectus. It is
used to mark detailed information about each type of risk that you, as a
shareholder of any of the nine Portfolios, would confront.
================================================================================
THE PORTFOLIOS' OBJECTIVE
Each Portfolio seeks to match, as closely as possible, the performance of a
specific stock market index. This objective is funda-
10
<PAGE> 16
mental, which means that it cannot be changed unless a majority of Portfolio
shareholders vote to do so.
[FLAG] BECAUSE OF THE SEVERAL TYPES OF RISK DESCRIBED ON THE FOLLOWING PAGES,
YOUR INVESTMENT IN ANY OF THE PORTFOLIOS, AS WITH ANY INVESTMENT IN
COMMON STOCKS, COULD LOSE MONEY.
The TOTAL STOCK MARKET PORTFOLIO seeks to parallel the performance of the
Wilshire 5000 Equity Index, which consists of all of the U.S. stocks regularly
traded on the New York and American Stock Exchanges and the Nasdaq
over-the-counter market.
The 500 PORTFOLIO seeks to track the performance of the Standard & Poor's 500
Composite Stock Price Index, which emphasizes stocks of large U.S. companies.
The EXTENDED MARKET PORTFOLIO seeks to track the performance of the Wilshire
4500 Equity Index, a broadly diversified index of stocks of medium-size and
small U.S. companies (none of which is included in the S&P 500 Index).
The MID CAPITALIZATION STOCK PORTFOLIO seeks to parallel the performance of
the Standard & Poor's MidCap 400 Index, which comprises a market-weighted group
of medium-sized U.S. companies.
The SMALL CAPITALIZATION STOCK PORTFOLIO seeks to match the performance of
the Russell 2000 Index, which is made up of stocks of small, generally
unseasoned U.S. companies.
The VALUE PORTFOLIO seeks to replicate the performance of the Standard &
Poor's/BARRA Value Index, which includes those stocks of the S&P 500 Index that
offer higher-than-average dividend yields and are often considered out of favor
with investors.
The SMALL CAPITALIZATION VALUE STOCK PORTFOLIO seeks to replicate the
performance of the Standard & Poor's SmallCap 600/BARRA Value Index, which
includes those stocks of the S&P SmallCap 600 Index with lower-than-average
price/earnings and price/book ratios.
The GROWTH PORTFOLIO seeks to parallel the performance of the Standard &
Poor's/BARRA Growth Index, which is made up of those stocks of the S&P 500 Index
with lower-than-average dividend yields and higher-than-average price/earnings
and price/book ratios.
The SMALL CAPITALIZATION GROWTH STOCK PORTFOLIO seeks to track the
performance of the Standard & Poor's SmallCap 600/BARRA Growth Index, which
includes those stocks of the S&P SmallCap 600 Index with higher-than-average
price/earnings and price/book ratios.
[FLAG] AN INDEX FUND HAS OPERATING EXPENSES; A MARKET INDEX DOES NOT.
THEREFORE, AN INDEX FUND--WHILE EXPECTED TO TRACK ITS TARGET INDEX AS
CLOSELY AS POSSIBLE--WILL NOT BE ABLE TO MATCH THE PERFORMANCE OF THE
INDEX EXACTLY.
PLAIN TALK ABOUT
INDEXES
An index is a group of securities whose overall performance is used as a
standard to measure investment performance.
PLAIN TALK ABOUT
VALUE FUNDS AND
GROWTH FUNDS
Value investing and growth investing are two styles employed by stock fund
managers. Value funds generally emphasize companies that, considering their
assets and earnings history, are attractively priced; these companies often pay
regular dividend income to shareholders. Growth funds generally focus on
companies that, due to their strong earnings and revenue potential, offer
above-average prospects for capital growth, with less emphasis on dividend
income. Value and growth stocks have, in the past, produced similar long-term
returns, though each has periods when it outperforms the other. In general,
value funds are appropriate for investors who want some dividend income and the
potential for capital gains but are less tolerant of share-price fluctuations.
Growth funds, by contrast, appeal to investors who will accept more volatility
in hopes of a greater increase in share price or who prefer a higher portion of
the fund's returns as capital gains, which may be taxed at lower rates than
dividend income.
11
<PAGE> 17
PLAIN TALK ABOUT
INVESTING FOR THE LONG TERM
Each Portfolio is intended to be a long-term investment vehicle; none is
designed to provide investors with a means of speculating on short-term
fluctuations in the stock market.
PLAIN TALK ABOUT
COSTS AND MARKET-TIMING
Some investors try to profit from a strategy called "market-timing"--switching
money into investments when they expect prices to rise, and taking money out
when they expect the market to fall. As money is shifted in and out, a fund
incurs expenses for buying and selling securities. These costs are borne by all
fund shareholders, including the long-term investors who do not generate the
costs. Therefore, the Trust discourages short-term trading by, among other
things, limiting the number of exchanges it permits and not offering telephone
exchanges for nonretirement accounts.
The Portfolios of Vanguard Index Trust are not sponsored, sold, promoted, or
endorsed by Standard & Poor's Corporation, BARRA Associates, Wilshire
Associates, or the Frank Russell Company.
WHO SHOULD INVEST
Any of the Portfolios of Vanguard Index Trust may be a suitable investment for
you if you are looking for a U.S. stock portfolio that follows a simple,
cost-effective index-matching strategy and, in doing so, provides the potential
for growth in the value of your investment over the long term. However, one
Portfolio may more closely meet your personal investment objectives than the
others.
For instance, the Total Stock Market Portfolio may be suitable for you
if:
- - You are looking for an investment that reflects the performance of the
entire U.S. stock market.
- - You are seeking some dividend income. The 500 and Value Portfolios may
be suitable for you if:
- - You want to invest in large companies.
- - You are seeking some dividend income.
The Extended Market, Mid Capitalization Stock, and Small Capitalization
Stock Portfolios may be suitable for you if:
- - You want to focus on the stocks of medium-sized and/or small companies.
- - You can accept greater share-price volatility than the Trust's other
portfolios tend to experience.
The Small Capitalization Value Stock Portfolio may be suitable for
you if:
- - You are seeking exposure to the stocks of small companies that are
often considered out of favor in the market.
- - You are comfortable with a higher level of share-price volatility than
that experienced by the Trust's other Portfolios.
- - You are willing to forgo dividend income.
The Growth Portfolio may be suitable for you if:
- - You want to invest in large companies, but you are not seeking dividend
income.
- - You are looking for more growth potential than the 500 and Value
Portfolios offer--and are willing to accept greater fluctuations in
share price.
The Small Capitalization Growth Stock Portfolio may be suitable for
you if:
- - You want to focus on small-company stocks.
- - You are seeking a portfolio of stocks considered to have
higher-than-average price/earnings and price/book ratios.
- - You are willing to accept a high level of share-price fluctuation.
None of the Portfolios would be an appropriate investment if you are a
market-timer. Investors who engage in excessive in-and-out trading activity
generate additional costs that are borne by all of the shareholders in a
portfolio. To minimize such costs, which
12
<PAGE> 18
reduce the ultimate returns achieved by you and other shareholders, the Trust
has adopted the following policies:
- - The Trust reserves the right to reject any purchase request into any of
its Portfolios--including exchanges from other Vanguard funds--that it
regards as disruptive to the efficient management of the Portfolio.
This could be because of the timing of the investment or because of a
history of excessive trading by the investor.
- - Five of the Trust's Portfolios (Extended Market, Mid Capitalization
Stock, Small Capitalization Stock, Small Capitalization Value Stock,
and Small Capitalization Growth Stock) charge a transaction fee on
purchases.
- - Telephone exchanges are not accepted for non-IRAs.
- - There is a limit on the number of times you can exchange into or out of
each Portfolio (see "Redeeming Shares" in the INVESTING WITH VANGUARD
section).
- - The Trust reserves the right to stop offering shares at any time.
INVESTMENT STRATEGY
This section explains how the investment adviser pursues the Portfolios'
objective of matching the performance of specific stock indexes. It also
explains the market and objective risks faced by Portfolio shareholders. Unlike
each Portfolio's investment objectives, the adviser's investment strategy is not
fundamental and can be changed by the Trust's Board of Trustees without
shareholder approval. However, before making any important change in its
strategy, a Portfolio will give shareholders 30 days' notice, in writing.
MARKET EXPOSURE
To track their target indexes as closely as possible, the Portfolios attempt to
remain fully invested in stocks.
[FLAG] EACH PORTFOLIO IS SUBJECT TO MARKET RISK, WHICH IS THE POSSIBILITY THAT
STOCK PRICES OVERALL WILL DECLINE OVER SHORT OR EVEN EXTENDED PERIODS.
STOCK MARKETS TEND TO MOVE IN CYCLES, WITH PERIODS OF RISING STOCK
PRICES AND PERIODS OF FALLING STOCK PRICES.
To illustrate the volatility of stock prices, the following table shows the
best, worst, and average total returns (dividend income plus change in market
value) for the U.S. stock market over various periods as measured by the S&P 500
Index, which--in addition to being the target index for the 500 Portfolio--is a
widely used barometer of stock market activity. Note that the returns shown do
not include the costs of buying and selling stocks or other expenses that a
real-world investment portfolio would incur. Note, also, that the gap between
the best and worst tends to narrow over the long term.
13
<PAGE> 19
PLAIN TALK ABOUT
LARGE-CAP, MID-CAP, AND SMALL-CAP STOCKS
Stocks of publicly traded companies--and mutual funds that hold these
stocks--can be classified by the companies' market value, or capitalization.
Vanguard defines large-capitalization, or large-cap, funds as those holding
stocks of companies with a median total market value exceeding $7.5 billion.
Mid-cap funds hold stocks of companies with a median market value between $1
billion and $7.5 billion. Small-cap funds hold stocks of companies with a median
market value of less than $1 billion. Historically, large-cap funds have
exhibited lower volatility than mid-cap and small-cap funds. Note that a fund's
capitalization parameters (that is, what constitutes a large-, mid-, or
small-cap stock) may vary from the parameters set by a particular index.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------
U.S. STOCK MARKET RETURNS (1926-1997)
- ---------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS 20 YEARS
- ---------------------------------------------------------------------
<S> <C> <C> <C> <C>
Best 53.9% 23.9% 20.1% 16.9%
Worst -43.3 -12.5 -0.9 3.1
Average 13.0 10.5 10.9 10.9
- ---------------------------------------------------------------------
</TABLE>
The table covers all of the 1-, 5-, 10-, and 20-year periods from 1926
through 1997. For example, while the average return on stocks for all of the
5-year periods was 10.5%, returns for these 5-year periods ranged from a -12.5%
average (from 1928 through 1932) to 23.9% (from 1950 through 1954). These
average returns reflect past performance on common stocks and should not be
regarded as an indication of future returns from either the stock market as a
whole or any of the Trust's Portfolios in particular.
Keep in mind that the S&P 500 Index tracks mainly large-cap stocks.
Historically, the mid- and small-cap stocks of the Wilshire 4500, S&P MidCap
400, and Russell 2000 Indexes (the target indexes for the Extended Market, Mid
Capitalization Stock, 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 smaller companies.
Even indexes that are subsets of the S&P 500 Index--such as the
S&P/BARRA Value Index, the S&P/BARRA Growth Index--will not perform in the same
way as the broader S&P 500 Index. Historically, stocks of the S&P/BARRA Value
Index has been less volatile than the stocks found in the broader S&P 500
Index; stocks of the S&P/BARRA Growth Index and the S&P SmallCap 600/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.
[FLAG] THE PORTFOLIOS ARE SUBJECT, IN VARYING
DEGREES, TO OBJECTIVE RISK, WHICH IS THE POSSIBILITY THAT RETURNS FROM A
SPECIFIC TYPE OF STOCK (FOR INSTANCE, SMALL-CAP OR VALUE) WILL TRAIL RETURNS
FROM THE OVERALL STOCK MARKET. EACH TYPE OF STOCK TENDS TO GO THROUGH CYCLES OF
OUTPERFORMANCE AND UNDERPERFORMANCE IN COMPARISON TO THE STOCK MARKET IN
GENERAL. THESE PERIODS HAVE, IN THE PAST, LASTED FOR AS LONG AS SEVERAL YEARS.
SECURITY SELECTION
Each Portfolio of Vanguard Index Trust employs a "passively" managed
investment--or index--approach. Vanguard Core Man-
14
<PAGE> 20
agement Group, the Portfolios' adviser, creates a mix of securities that will
match the performance of a benchmark index.
The 500, Mid Capitalization Stock, Value, Small Capitalization Value Stock,
Growth, and Small Capitalization Growth Stock Portfolios hold each stock found
in their respective benchmark indexes in roughly the same proportions as
represented in the indexes themselves. For example, if 5% of the S&P 500 Index
were made up of the assets of a specific company, the 500 Portfolio would invest
the same percentage of its assets in that company.
The Total Stock Market, Extended Market, and Small Capitalization Stock
Portfolios use a different selection process. Because it would be very expensive
to buy and sell all of the stocks in each Portfolio's target index (the Total
Stock Market Portfolio's target index, for example, includes more than 7,400
stocks), these three Portfolios use a "sampling" technique. Using a
sophisticated computer program, each Portfolio selects stocks that will recreate
its target index in terms of industry, size, and other characteristics (such as
projected earnings, financial strength, and debt). For instance, if 10% of the
Wilshire 4500 Index were made up of utility stocks, the Extended Market
Portfolio would invest 10% of its assets in the utility stocks of the Wilshire
4500 Index with similar characteristics.
The following table shows the number of stocks generally held by the Total
Stock Market, 500, Extended Market, Small Capitalization Stock, Value, and
Growth Portfolios as of December 31, 1997. The Mid Capitalization Stock, Small
Capitalization Value Stock, and Small Capitalization Growth Stock Portfolios did
not begin operations until April 20, 1998.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
Number of Number of Stocks
Portfolio Stocks Held in Target Index
- ----------------------------------------------------------------------
<S> <C> <C>
Total Stock Market 2,800 7,400
500 500 500
Extended Market 2,150 6,900
MidCap Stock N/A 400
SmallCap Stock 1,700 1,900
Value 360 360
SmallCap Value Stock N/A 380
Growth 140 140
SmallCap Growth Stock N/A 220
- ----------------------------------------------------------------------
</TABLE>
PLAIN TALK ABOUT
ACTIVE VERSUS PASSIVE MANAGEMENT
Index portfolios are not actively managed by investment advisers who buy and
sell securities based on research and analysis. Instead, a "passively managed"
portfolio tries to match, as closely as possible, the performance of a target
index by holding either all--or a representative sample--of the securities in
the index. Indexing appeals to many investors because of its simplicity
(indexing is a straightforward market-matching strategy); diversification
(indexes generally cover a wide variety of companies and industries); relative
performance predictability (an index portfolio is expected to move in the same
direction--up or down--as its target index); low cost (index funds do not have
many of the expenses of an actively managed fund--such as research--and keep
trading activity--and, thus, brokerage commissions--to a minimum); and low
realization of capital gains.
15
<PAGE> 21
PLAIN TALK ABOUT
PORTFOLIO DIVERSIFICATION
In general, the more diversified a fund's portfolio of stocks, the less likely
that a specific stock's poor performance will hurt the fund. One measure of a
fund's level of diversification is the percentage of total net assets
represented by its ten largest holdings. The average U.S. equity mutual fund has
about 30% of its assets invested in its ten largest holdings, while some
less-diversified mutual funds have more than 50% of their assets invested in the
stocks of just ten companies.
The top ten holdings for the Total Stock Market, 500, Extended Market,
Small Capitalization Stock, Value, and Growth Portfolios as of December 31,
1997, follow. The Mid Capitalization Stock, Small Capitalization Value Stock,
and Small Capitalization Growth Stock Portfolios did not begin operations until
April 20, 1998.
TOTAL STOCK MARKET PORTFOLIO
1. General Electric Co.
2. The Coca-Cola Co.
3. Microsoft Corp.
4. Exxon Corp.
5. Merck & Co., Inc.
6. Intel Corp.
7. Philip Morris Cos., Inc.
8. Procter & Gamble Co.
9. International Business
Machines Corp.
10. AT&T Corp.
13% of the Portfolio's total net assets.
500 PORTFOLIO
1. General Electric Co.
2. The Coca-Cola Co.
3. Microsoft Corp.
4. Exxon Corp.
5. Merck & Co., Inc.
6. Royal Dutch Petroleum Co.
7. Intel Corp.
8. Philip Morris Cos., Inc.
9. Procter & Gamble Co.
10. International Business
Machines Corp.
18% of the Portfolio's total net assets.
EXTENDED MARKET PORTFOLIO
1. Berkshire Hathaway
2. Electronic Data Systems
3. Carnival Corp. Class A
4. Safeway, Inc.
5. The Coca-Cola Co.
6. RJR Nabisco Holdings Corp.
7. Franklin Resources Corp.
8. Republic Industries, Inc.
9. Cox Communications
Class A
10. The Equitable Cos.
6% of the Portfolio's total net assets.
SMALLCAP STOCK PORTFOLIO
1. Associated Banc-Corp.
2. US Office Products Co.
3. Jacor Comm. Warrants
4. Allied Waste Industries
5. Brooks Fiber Properties
6. Keystone Financial, Inc.
7. Mack-Cali Realty Corp.
8. Arterial Vascular
Engineering, Inc.
9. Citrix Systems, Inc.
10. Sovereign Bancorp, Inc.
2% of the Portfolio's total net assets.
VALUE PORTFOLIO
1. Exxon Corp.
2. Royal Dutch Petroleum Co.
3. International Business
Machines Corp.
4. AT&T Corp.
5. The Walt Disney Co.
6. Travelers Group Inc.
7. Ford Motor Co.
8. Citicorp
9. Mobil Corp.
10. BellSouth Corp.
22% of the Portfolio's total net assets.
GROWTH PORTFOLIO
1. General Electric Co.
2. The Coca-Cola Co.
3. Microsoft Corp.
4. Merck & Co., Inc.
5. Intel Corp.
6. Philip Morris Cos., Inc.
7. Procter & Gamble Co.
8. Pfizer, Inc.
9. Bristol-Myers Squibb Co.
10. Wal-Mart Stores, Inc.
34% of the Portfolio's total net assets.
16
<PAGE> 22
Keep in mind that, because the makeup of a Portfolio changes daily, these
listings are only "snapshots" at one point in time. Note, too, that portfolios
that track indexes made up of a relatively small number of securities tend to be
less diversified than portfolios whose target indexes contain thousands of
securities. For instance, the Growth Portfolio, which seeks to parallel an index
of about 140 stocks, has far more of its assets invested in its top ten holdings
(34%) than the Total Stock Market Portfolio (13%), which seeks to track a much
larger universe of more than 7,400 stocks. This means that the Growth Portfolio
stands a greater chance than the Total Stock Market Portfolio of being hurt by
the poor performance of a single stock.
PORTFOLIO TURNOVER
Although each seeks to invest for the long term, the Portfolios retain the right
to sell securities regardless of how long they have been held. Generally, a
passively managed fund sells securities only to respond to redemption requests
or to adjust the number of shares held to reflect a change in the portfolio's
target index. Because of this, the turnover rate for the Portfolios has been
extremely low, with averages over the past five years (or since inception)
ranging from 2% for the Total Stock Market Portfolio to 29% for the Small
Capitalization Stock Portfolio. (A turnover rate of 100% would occur, for
example, if a portfolio sold and replaced securities valued at 100% of its total
net assets within a one-year period.)
INVESTMENT POLICIES
Besides investing in the stocks found in its target index, each Portfolio may
follow a number of other investment policies to achieve its objective.
[FLAG] THE PORTFOLIOS RESERVE THE RIGHT TO INVEST, TO A LIMITED EXTENT, IN
STOCK FUTURES AND OPTIONS CONTRACTS, WARRANTS, CONVERTIBLE SECURITIES,
AND SWAP AGREEMENTS, WHICH ARE TYPES OF DERIVATIVES.
Losses (or gains) involving futures contracts can sometimes be
substantial--in part because a relatively small price movement in a futures
contract may result in an immediate and substantial loss (or gain) for a
Portfolio. Similar risks exist for warrants (securities that permit their owners
to purchase a specific number of shares of stock at a predetermined price),
convertible securities (securities that may be exchanged for another asset), and
swap agreements (contracts between two parties in which each agrees to make
payments to the other based on the return of a specified index or asset).
For this reason, the Portfolios will not use futures, options, warrants,
convertible securities, or swap agreements for speculative purposes or as
leveraged investments that magnify the gains or
PLAIN TALK ABOUT
PORTFOLIO TURNOVER
Before investing in a mutual fund, you should review its portfolio turnover rate
for an indication of the potential effect of transaction costs on the fund's
future returns. In general, the greater the volume of buying and selling by the
fund, the greater the impact that brokerage commissions and other transaction
costs will have on its return. Also, funds with high portfolio turnover rates
may be more likely than low-turnover funds to generate capital gains that must
be distributed to shareholders as taxable income. The average turnover rate for
passively managed domestic index funds investing in common stocks is roughly
10%; for all domestic stock funds, the average turnover rate is approximately
80%.
PLAIN TALK ABOUT
DERIVATIVES
A derivative is a financial contract whose value is based on (or "derived" from)
a traditional security (such as a stock or a bond), an asset (such as a
commodity like gold), or a market index (such as the S&P 500 Index). For
instance, futures and options are derivatives that have been trading on
regulated exchanges for more than two decades. These "traditional" derivatives
are standardized contracts that can be easily bought and sold, and whose market
values are determined and published daily. It is these characteristics that
differentiate futures and options from the relatively new types of
derivatives--some of which can carry considerable risks.
17
<PAGE> 23
PLAIN TALK ABOUT
CASH RESERVES
With mutual funds, holding cash reserves--or "cash"--does not mean literally
that the fund holds a stack of currency. Rather, cash reserves refer to
short-term, interest-bearing securities that can easily and quickly be converted
to cash. (Most mutual funds keep at least a small percentage of assets in cash
to accommodate shareholder redemptions.) While some funds like index funds
strive to keep cash levels at a minimum and to always remain fully invested in
stocks, others allow investment advisers to hold up to 20% of a fund's assets in
cash reserves.
losses of an investment. Rather, each Portfolio will keep separate cash reserves
or other liquid portfolio securities in the amount of the obligation underlying
the contract. Only a limited percentage of each Portfolio's assets--5%--may be
applied towards the deposits required on futures contracts, and the value of all
futures contracts in which the Portfolio acquires an interest cannot exceed 20%
of the Portfolio's total assets.
The reasons for which a Portfolio will invest in futures, options, warrants,
convertible securities, and swap agreements are:
- - To keep cash on hand to meet shareholder redemptions or other needs
while simulating full investment in stocks.
- - To reduce the Portfolio's transaction costs and add incremental value
by buying futures instead of actual stocks.
- - To add value to the Portfolio by buying assets that mimic the
performance of particular stocks, but trade at a discount because of a
short term market inefficiency.
INVESTMENT LIMITATIONS
The Portfolios have adopted limitations on some of their investment policies.
Some of these limitations are that each Portfolio will not:
- - Invest more than 25% of its assets in any one industry.
- - Borrow money, except for temporary or emergency purposes in an amount
not exceeding 15% of its assets. Whenever the Portfolio's outstanding
borrowing is more than 5% of its assets, it will stop making
investments.
With respect to 75% of its assets, a Portfolio will not:
- - Invest more than 5% in the outstanding securities of any one company.
- - Buy more than 10% of the outstanding voting securities of any company.
A complete list of each Portfolio's investment limitations can be found
in the Statement of Additional Information. These limitations are fundamental
and may be changed only by approval of a majority of the Portfolio's
shareholders.
INVESTMENT PERFORMANCE
Each Portfolio's performance is expected to mirror the performance of a specific
U.S. stock market segment (or, in the case of the Total Stock Market Portfolio,
the entire stock market). Historically, stock market performance has been
characterized by sharp up-and-down swings in the short term and by more stable
growth over the long term.
18
<PAGE> 24
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
FOR YEARS ENDED DECEMBER 31, 1997
- -------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS 20 YEARS
- -------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total Stock Market 31.0% 18.9% 18.5%* --
Wilshire 5000 Index 31.4 19.3 18.9* --
- -------------------------------------------------------------------------
500 33.2% 20.1% 17.8% *%
S&P 500 Index 33.4 20.3 18.1 *
- -------------------------------------------------------------------------
Extended Market** 26.7% 17.5% 16.4%* --
Wilshire 4500 Index 25.7 17.0 16.3* --
- -------------------------------------------------------------------------
SmallCap Stock** 24.6% 17.5% 15.8%* --
Russell 2000 Index 22.4 16.4 15.8* --
- -------------------------------------------------------------------------
Value 29.8% 20.5%* 20.7%* --
S&P/BARRA Value Index 30.0 20.7* 20.9* --
- -------------------------------------------------------------------------
Growth 36.3% 19.5% 19.5%* --
S&P/BARRA Growth Index 36.5 19.6 19.8* --
- -------------------------------------------------------------------------
</TABLE>
Note: The Mid Capitalization Stock, Small Capitalization Value Stock, and Small
Capitalization Growth Stock Portfolios did not begin operations until April 20,
1998.
*Since inception; see pages 2 and 3.
**Does not include transaction fee; see pages 2 and 3.
The results shown represent each Portfolio's "average annual total return"
performance, which assumes that any distributions of capital gains and dividends
were reinvested for the indicated periods. Also included is comparative
information on the appropriate unmanaged benchmark index. The Portfolios'
returns are not adjusted for the annual account maintenance fee (as well as the
purchase fee for the Extended Market and Small Capitalization Stock Portfolios,
or the purchase fee for the Total Stock Market Portfolio that was eliminated at
year-end 1995), nor has an allowance been made for federal, state, or local
income taxes that shareholders must pay on a current basis. Note also that the
Mid Capitalization Stock, Small Capitalization Value Stock, and Small
Capitalization Growth Stock Portfolios began operations on April 20, 1998.
SHARE PRICE
Each Portfolio's share price, called its net asset value, or NAV, is calculated
each business day after the close of trading on the New York Stock Exchange,
generally 4 p.m. Eastern time. Each Portfolio's net asset value per share is
calculated by adding up the total assets of the Portfolio, subtracting all of
its liabilities, or debts, and then dividing by the total number of Portfolio
shares outstanding:
TOTAL ASSETS - LIABILITIES
-------------------------------------
NET ASSET VALUE =
NUMBER OF SHARES OUTSTANDING
The daily net asset value, is useful to you as a shareholder because the NAV
multiplied by the number of Portfolio shares
PLAIN TALK ABOUT
PAST PERFORMANCE
Whenever you see information on a fund's performance, do not consider the
figures to be an indication of the performance you could expect by making an
investment in the fund today. The past is an imperfect guide to the future;
history does not repeat itself in neat, predictable patterns.
19
<PAGE> 25
PLAIN TALK ABOUT
DISTRIBUTIONS
As a shareholder, you are entitled to your share of the fund's income from
interest and dividends, and gains from the sale of investments. You receive such
earnings as either an income dividend or capital gains distribution. Income
dividends come from the dividends that the fund earns from its holdings as well
as interest it receives from its money market and bond investments. Capital
gains are realized whenever the fund sells securities for higher prices than it
paid for them. These capital gains are either short-term or long-term, depending
on whether the fund held the securities for less than or more than one year.
PLAIN TALK ABOUT
"BUYING A DIVIDEND"
Unless you are investing in a tax-deferred retirement account (such as an IRA),
it is not to your advantage to buy shares of a fund shortly before it makes a
distribution, because part of your investment will come back to you as a taxable
distribution. This is known as "buying a dividend." For example: on December 15,
you invest $5,000, buying 250 shares for $20 each. If the fund pays a
distribution of $1 per share on December 16, its share price would drop to $19
(not counting market change). You would still have only $5,000 (250 shares x $19
= $4,750 in share value, plus 250 shares x $1 = $250 in distributions), but you
would owe tax on the $250 distribution you received, even if you had reinvested
the dividends in more shares. To avoid "buying a dividend," check a fund's
distribution schedule before you invest.
you own, gives you the dollar amount you would have received had you sold your
shares back to the Portfolio that day.
Each Portfolio's share price can be found daily in the mutual fund listings
of most major newspapers under the heading Vanguard Index Funds. Different
newspapers use different abbreviations for each Portfolio, but the most common
are TOTST, 500, EXTND, MIDCAP, SMCAP, VALUE, SMVALUE, GROWTH, and SMGROWTH.
DIVIDENDS, CAPITAL GAINS, AND TAXES
Each March, June, September, and December, the Total Stock Market, 500, Value,
and Growth Portfolios distribute virtually all of their income from interest and
dividends to their shareholders; the Extended Market, Mid Capitalization Stock,
Small Capitalization Stock, Small Capitalization Value Stock, and Small
Capitalization Growth Stock Portfolios distribute their income in December. All
nine Portfolios distribute any capital gains realized from the sale of
securities in December. In addition, the Portfolios may occasionally be required
to make supplemental dividend or capital gains distributions at some other time
during the year. Keep in mind that index portfolios tend to provide less in
capital gains distributions than actively managed funds generally do.
You can choose to receive your distributions of income and capital gains (or
of income alone) in cash, or you can have them automatically invested in more
shares of the Portfolio. In either case, these distributions are taxable to you.
It is important to note that distributions of dividends and capital gains that
are declared in December -- if paid to you by the end of January -- are taxed as
if they had been paid to you in December. Vanguard will send you a statement
each year showing the tax status of all your distributions.
- - The dividends and short-term capital gains that you receive are taxable to
you as ordinary dividend income. Any distributions of net long-term capital
gains by a Portfolio are taxable to you as long-term capital gains, no matter
how long you've owned shares in the Portfolio. Long-term capital gains may be
taxed at different rates depending on how long the Portfolio held the
securities. Both dividend and capital gains distributions are taxable to you
whether received in cash or reinvested in additional shares. Although the
Portfolios do not seek to realize any particular amount of capital gains
during a year, such gains are realized from time to time as by-products of
the ordinary investment activities of the Portfolios. Consequently,
distributions may vary considerably from year to year.
- - If you sell or exchange shares, any gain or loss you have is a taxable event,
which means that you may have a capital gain to report as income, or a
capital loss to report as a deduction, when you complete your federal income
tax return.
20
<PAGE> 26
- - Distributions of dividends or capital gains, and capital gains or losses from
your sale or exchange of Portfolio shares, may be subject to state and local
income taxes as well.
The tax information in this prospectus is provided as general information and
will not apply to you if you are investing in a tax-deferred account such as an
IRA. You should consult your tax adviser about the tax consequences of an
investment in one or more of the Trust's Portfolios.
THE TRUST AND VANGUARD
Vanguard Index Trust is a member of The Vanguard Group, a family of more than 30
investment companies with more than 95 distinct investment portfolios and total
net assets of more than $350 billion. All of the Vanguard funds share in the
expenses associated with business operations, such as personnel, office space,
equipment, and advertising.
Vanguard also provides marketing services to the funds. Although shareholders
do not pay sales commissions or 12b-1 marketing fees, each fund pays its
allocated share of The Vanguard Group's costs.
A list of the Trustees and officers, and their present positions and
principal occupations during the past five years, can be found in the Statement
of Additional Information.
INVESTMENT ADVISER
Vanguard Core Management Group, P.O. Box 2600, Valley Forge, PA 19482, provides
advisory services on an at-cost basis to the Portfolios of Vanguard Index Trust.
For the fiscal year ended December 31, 1997, the Portfolios paid a total of $-
in investment advisory expenses (the Value Portfolio paid $-; the Growth
Portfolio paid $-; the Total Stock Market and Extended Market Portfolios each
paid $-; and the 500 and the Small Capitalization Stock Portfolios each paid
$-). The Mid Capitalization Stock, Small Capitalization Value Stock, and Small
Capitalization Growth Stock Portfolios did not begin operations until April 20,
1998.
The Group is authorized to choose brokers or dealers to handle the purchase
and sale of the Portfolios' securities, and is directed to get the best
available price and most favorable execution from these brokers with respect to
all transactions. However, the Group will not pay higher commissions
specifically for the purpose of obtaining research services. The Portfolios may
direct the Core Management Group to use a particular broker for certain
transactions in exchange for commission rebates or research services provided to
the Portfolios.
PLAIN TALK ABOUT
VANGUARD'S UNIQUE
CORPORATE STRUCTURE
The Vanguard Group, Inc., is the only MUTUAL mutual fund company. It is owned
jointly by the funds it oversees and by the shareholders in those funds. Other
mutual funds are operated by for-profit management companies that may be owned
by one person, by a group of individuals, or by investors who bought the
management company's publicly traded stock. Because of its structure, Vanguard
operates its funds at cost. Instead of distributing profits from operations to a
separate management company, Vanguard returns profits to fund shareholders in
the form of lower operating expenses.
PLAIN TALK ABOUT
THE PORTFOLIOS' ADVISER
Vanguard Core Management Group provides investment advisory services to many
Vanguard funds; as of December 31, 1997, the Group managed more than $99 billion
in total assets. The individual primarily responsible for overseeing each
Portfolio's investments is:
GEORGE U. SAUTER, Managing Director of Vanguard; has worked in investment
management since 1985; with Vanguard since 1987, including primary
responsibility for Vanguard Core Management Group since 1987; A.B., Dartmouth
College, M.B.A., University of Chicago.
21
<PAGE> 27
GENERAL INFORMATION
Vanguard Index Trust is organized as a Pennsylvania business trust.
Shareholders of each Portfolio have rights and privileges similar to those
enjoyed by other corporate and trust shareholders. For example, shareholders
will not be responsible for any liabilities of the Trust. If any matters are to
be voted on by shareholders (such as a change in a fundamental investment
objective or the election of Trustees), each Portfolio share outstanding at that
point would be entitled to one vote. Annual meetings will not be held by the
Portfolios except as required by the Investment Company Act of 1940. A meeting
will be scheduled to vote on the removal of a Trustee if the holders of at least
10% of the Trust's shares request a meeting in writing.
Vanguard Index Trust is not sponsored, endorsed, sold or promoted by Standard &
Poor's Corporation ("S&P"). S&P makes no representation or warranty, implied or
express, to the purchasers of the Trust or any member of the public regarding
the advisability of investing in index funds or the ability of the S&P 500 Index
to track general stock market performance. S&P does not guarantee the accuracy
and/or the completeness of the S&P 500 Index or any data included therein. S&P
MAKES NO WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS TO BE OBTAINED BY THE
TRUST, OWNERS OF THE TRUST, OR ANY PERSON OR ENTITY FROM THE USE OF THE S&P 500
INDEX OR ANY DATA INCLUDED THEREIN. 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 INDEX OR ANY DATA
INCLUDED THEREIN. S&P's only relationship to the Trust is the licensing of the
S&P marks and S&P 500, which is determined, composed, and calculated by S&P
without regard to the Trust. "Standard & Poor's 500," "S&P 500(R)," "Standard &
Poor's(R)," "S&P(R)," and "500" are trademarks of The McGraw-Hill Companies,
Inc. "Wilshire 4500" and "Wilshire 5000" are registered trademarks of Wilshire
Associates. Frank Russell Company is the owner of the trademarks and copyrights
relating to the Russell Indexes.
22
<PAGE> 28
INVESTING WITH VANGUARD
Are you looking for the most convenient way to open or add money to a Vanguard
account? Obtain instant access to fund information? Establish an account for a
minor child or for your retirement savings?
Vanguard can help. Our goal is to make it easy and pleasant for you to do
business with us.
The following sections of the prospectus briefly explain the many services we
offer you as a shareholder of a Vanguard Index Trust Portfolio. Booklets
providing detailed information are available on the services marked with a
[BOOK GRAPHIC]. Please call us to request copies.
SERVICES AND ACCOUNT FEATURES
Vanguard offers many services that make it convenient to buy, sell, or exchange
shares.
<TABLE>
<S> <C>
TELEPHONE REDEMPTIONS Automatically set up for each Portfolio unless you notify us otherwise.
(SALES AND EXCHANGES)
(Sales for nonretirement accounts
only; exchanges for retirement
accounts only.)
VANGUARD DIRECT DEPOSIT Automatic method for depositing your paycheck or U.S. government payment
SERVICE(TM) (including Social Security and government pension checks) into your account.
[BOOK GRAPHIC]
VANGUARD AUTOMATIC EXCHANGE SERVICE(SM) Automatic method for moving a fixed amount of money from one Vanguard fund
[BOOK GRAPHIC] account to another.*
VANGUARD FUND EXPRESS(R) Electronic method for buying or selling shares. You can transfer money between
[BOOK GRAPHIC] your Vanguard fund account and an account at your bank, savings and loan, or
credit union on a systematic schedule.*
VANGUARD DIVIDEND EXPRESS(SM) Electronic method for transferring dividend and/or capital gains distributions
[BOOK GRAPHIC] directly from your Vanguard fund account to your bank, savings and loan, or
credit union account.
VANGUARD BROKERAGE SERVICES A cost-effective way to trade stocks, bonds, and options on major exchanges,
(VBS) Nasdaq, and other domestic over-the-counter markets at reduced rates, and to buy
[BOOK GRAPHIC] and sell shares of non-Vanguard mutual funds. Call VBS (1-800-992-8327) for
additional information and the appropriate forms.
*Can be used to "dollar-cost average" [BOOK GRAPHIC] or to contribute to an IRA
or other retirement plan.
</TABLE>
23
Investor Information 1-800-662-7447
Client Services 1-800-662-2739
Tele-Account 1-800-662-6273
<PAGE> 29
TYPES OF ACCOUNTS
INDIVIDUAL OR OTHER ENTITY
Vanguard's account registration form can be used to establish a variety of
nonretirement accounts.
<TABLE>
<S> <C>
FOR ONE OR MORE PEOPLE To open an account in the name of one (individual) or more (joint tenants)
people. $3,000 minimum initial investment.
FOR A MINOR CHILD To open an account as an UGMA/UTMA (Uniform Gifts/Transfers to Minors Act). Age
[BOOK GRAPHIC] of majority and other requirements are set by state law. $1,000 minimum initial
investment.
FOR A MINOR CHILD To open an account as an Education IRA. Eligibility and other requirements are
(Vanguard Fiduciary Trust established by federal tax law. (Note: You should establish this type of account
Company is the custodian.) with a Vanguard adoption agreement -- not an account registration form.) Please
[BOOK GRAPHIC] call Investor Information to request the appropriate brochure and forms. $500
minimum initial investment.
FOR HOLDING TRUST ASSETS To invest assets held in an existing trust. $3,000 minimum initial
[BOOK GRAPHIC] investment.
FOR THIRD-PARTY TRUSTEE To open an account as a retirement trust or plan based on an existing corporate
RETIREMENT INVESTMENTS or institutional plan. These accounts are established by the custodian or
(Vanguard is not the custodian trustee of the existing plan. $1,000 minimum initial investment.
or trustee.)
1-800-662-2003
Individual Retirement Plans
FOR AN ORGANIZATION To open an account as a corporation, partnership, or other entity. These
accounts may require a corporate resolution or other documents to name the
individuals authorized to act. $3,000 minimum initial investment.
</TABLE>
RETIREMENT
You establish these accounts with a Vanguard adoption agreement -- not a
Vanguard account registration form. To request the appropriate adoption
agreement and forms, or to ask questions about investing for retirement, call
Investor Information.
<TABLE>
<S> <C>
FOR A TRADITIONAL INDIVIDUAL To open a retirement account in the name of an individual. Traditional IRAs can
RETIREMENT ACCOUNT be established with a contribution, a direct rollover from an employer's plan,
(TRADITIONAL IRA) such as a 401(k), or an asset transfer or rollover from another financial
(Vanguard Fiduciary Trust institution, such as a bank or mutual fund company. $1,000 minimum initial
Company is the custodian.) investment.
FOR A ROTH INDIVIDUAL To open an after-tax retirement savings account in the name of an individual.
RETIREMENT ACCOUNT Roth IRAs can be established with an after-tax contribution, an asset transfer
(ROTH IRA) or rollover from another financial institution such as a bank or mutual fund
(Vanguard Fiduciary Trust company, or a conversion of an existing IRA. Eligibility and other requirements
Company is the custodian.) are established by federal tax law. $1,000 minimum initial investment.
</TABLE>
Investor Information 1-800-662-7447
Client Services 1-800-662-2739
Tele-Account 1-800-662-6273
24
<PAGE> 30
TYPES OF ACCOUNTS (continued)
<TABLE>
<S> <C>
FOR A SIMPLIFIED EMPLOYEE To open a retirement account in the name of an employee. SEPs allow employers to
PENSION PLAN ACCOUNT (SEP - IRA) make deductible contributions directly to IRAs established by their employees. A
(Vanguard Fiduciary Trust SEP can be established by people who are self-employed, small-business owners,
Company is the custodian.) partnerships, or corporations.
1-800-662-2003
Individual Retirement Plans
FOR A SAVINGS INCENTIVE MATCH To open a retirement account in the name of an employee. Created as part of the
PLAN FOR EMPLOYEES ACCOUNT Small Business Job Protection Act of 1996, SIMPLEs replace SAR - SEPs. SIMPLEs
(SIMPLE IRA) are exclusively for employers that had 100 or fewer employees in the most recent
(Vanguard Fiduciary Trust calendar year and that do not maintain another employer-sponsored retirement
Company is the custodian.) plan. A SIMPLE can be established by people who are self-employed,
1-800-662-2003 small-business owners, partnerships, or corporations. Salary reduction
Individual Retirement Plans contributions may be made by the employee, with matching or nonmatching
contributions from the employer.
FOR A QUALIFIED RETIREMENT To open a retirement account that allows small-business owners or people who are
PROGRAM ACCOUNT self-employed to make tax-deductible retirement contributions for themselves and
(Vanguard Fiduciary Trust their employees into Profit-Sharing and Money Purchase Pension (Keogh) plans.
Company can be the trustee.)
1-800-662-2003
Individual Retirement Plans
FOR A 403(b)(7) CUSTODIAL ACCOUNT To open a retirement account that allows employees of tax-exempt institutions
(Vanguard Fiduciary Trust (for example, schools or hospitals) to make pretax retirement contributions.
Company is the custodian.)
1-800-662-2003
Individual Retirement Plans
</TABLE>
DISTRIBUTION OPTIONS
You can receive distributions of dividends and/or capital gains in a number of
ways:
<TABLE>
<S> <C>
REINVESTMENT Dividends and capital gains are automatically reinvested in additional shares of
the Fund unless you request a different distribution method.
DIVIDENDS IN CASH Dividends are paid by check and mailed to your account's address of record, and
capital gains are reinvested in additional shares of the Portfolio.
CAPITAL GAINS IN CASH Capital gains distributions are paid by check and mailed to your account's
address of record, and dividends are reinvested in additional shares of the
Portfolio.
DIVIDENDS AND CAPITAL GAINS Both dividends and capital gains distributions are paid by check and mailed to
IN CASH your account's address of record.
</TABLE>
To electronically transfer cash dividends and/or capital gains to your bank,
savings and loan, or credit union account, see Vanguard Dividend Express under
"Services and Account Features." To transfer cash dividends and/or capital gains
to another Vanguard fund, call Client Services.
Investor Information 1-800-662-7447
Client Services 1-800-662-2739
Tele-Account 1-800-662-6273
25
<PAGE> 31
DISTRIBUTION OPTIONS (continued)
If you have elected to receive dividend and/or capital gains distributions in
cash, but the Postal Service is unable to make delivery to your address of
record, your distribution option will be changed to reinvestment. No interest
will accrue on amounts represented by uncashed distribution checks.
BUYING SHARES
You buy your shares at the Portfolio's next-determined net asset value after
Vanguard receives your request, provided we receive your request before the
close of trading on the New York Stock Exchange (the "Exchange"), generally 4
p.m. Eastern time. All of the Trust's Portfolios are offered on a no-load basis,
meaning that you do not pay sales commissions or 12b-1 marketing fees.
<TABLE>
<CAPTION>
OPEN A NEW ACCOUNT ADD TO AN EXISTING ACCOUNT
<S> <C> <C>
MINIMUM INVESTMENT $3,000 (regular account); $1,000 $100 by mail or exchange;
(Traditional IRAs, Roth IRAs, $1,000 by wire.
and custodial accounts for minors);
$500 (Education IRAs).
BY MAIL Complete and sign the application Mail your check with an Invest-
[ENVELOPE] form. By-Mail form detached from
FIRST-CLASS mail to: your confirmation statement to the
The Vanguard Group address listed on the form.
P.O. Box 2600 Make your check payable to: Make your check payable to:
Valley Forge, PA 19482-2600 The Vanguard Group - (insert The Vanguard Group - (insert
appropriate Portfolio Number, appropriate Portfolio Number, see
see below) below)
EXPRESS or REGISTERED mail to:
The Vanguard Group Total Stock Market 85 Total Stock Market 85
455 Devon Park Drive 500 40 500 40
Wayne, PA 19087-1815 Extended Market 98 Extended Market 98
MidCap Stock 859 MidCap Stock 859
SmallCap Stock 48 SmallCap Stock 48
Value 06 Value 06
SmallCap Value Stock 860 SmallCap Value Stock 860
Growth 09 Growth 09
SmallCap Growth Stock 861 SmallCap Growth Stock 861
All purchases must be made in All purchases must be made in
U.S. dollars, and checks must be U.S. dollars, and checks must be
drawn on U.S. banks. drawn on U.S. banks.
</TABLE>
IMPORTANT NOTE: To prevent check fraud, Vanguard will not accept checks made
payable to third parties.
<TABLE>
<CAPTION>
<S> <C> <C>
BY TELEPHONE FOR RETIREMENT ACCOUNTS ONLY: FOR RETIREMENT ACCOUNTS ONLY:
[TELEPHONE RECEIVER] Call Vanguard Tele-Account* 24 Call Vanguard Tele-Account* 24
1-800-662-6273 hours a day -- or Client Services hours a day -- or Client Services
Vanguard Tele-Account(R) during business hours -- to exchange during business hours -- to exchange
from another Vanguard fund account from another Vanguard fund account
1-800-662-2739 with the same registration (name, with the same registration (name,
Client Services address, taxpayer I.D., and address, taxpayer I.D., and
account type). account type).
*You must obtain a Personal Identification Number through Tele-Account at least
seven days before you request your first exchange.
</TABLE>
Investor Information 1-800-662-7447
Client Services 1-800-662-2739
Tele-Account 1-800-662-6273
26
<PAGE> 32
BUYING SHARES (continued)
IMPORTANT NOTE: Once a telephone transaction has been approved by you and a
confirmation number assigned, it cannot be revoked. We reserve the right to
refuse any purchase.
<TABLE>
<CAPTION>
OPEN A NEW ACCOUNT ADD TO AN EXISTING ACCOUNT
<S> <C> <C>
BY WIRE Call Client Services to arrange Call Client Services to arrange
[WIRE GRAPHIC] your wire transaction. your wire transaction.
Wire to:
CoreStates Bank, N.A.
ABA 031000011
CoreStates No. 0101 9897 Wire transactions are not available Wire transactions are not available
[Temporary Account Number] for retirement accounts, except for for retirement accounts, except for
Vanguard Index Trust asset transfers and direct rollovers. asset transfers and direct rollovers.
[Portfolio Name]
[Account Registration]
Attention: Vanguard
AUTOMATICALLY -- Vanguard offers a variety of ways
[ARROWS GRAPHIC] that you can add to your account
automatically. See "Services and
Account Features."
</TABLE>
You can redeem (that is, sell or exchange) shares purchased by check or Vanguard
Fund Express at any time. However, while your redemption request will be
processed at the next-determined net asset value after it is received, your
redemption proceeds will not be available until payment for your purchase is
collected, which may take up to ten calendar days.
NOTE: If you buy Portfolio shares through a registered broker/dealer or
investment adviser, the broker/dealer or adviser may charge you a service fee.
It is important that you call Vanguard before you invest a large dollar
amount by wire or check. We must consider the interests of all Portfolio
shareholders and so reserve the right to delay or refuse any purchase that will
disrupt the Portfolio's operation or performance.
REDEEMING SHARES
IMPORTANT TAX NOTE: Any sale or exchange of shares in a nonretirement account
could result in a taxable gain or loss.
The ability to sell Portfolio shares by telephone is automatically established
for your nonretirement account unless you tell us in writing that you do not
want this option.
To protect your account from unauthorized or fraudulent telephone
instructions, Vanguard follows specific security procedures. When we receive a
call requesting an account transaction, we require the caller to provide:
- Portfolio name.
- 10-digit account number.
- Name and address exactly as registered on that account.
- Social Security or employer identification number as registered on that
account.
If you call to sell shares, the sale proceeds will be made payable to you, as
the registered shareholder, and mailed to your account's address of record.
Investor Information 1-800-662-7447
Client Services 1-800-662-2739
Tele-Account 1-800-662-6273
27
<PAGE> 33
REDEEMING SHARES (continued)
If we follow reasonable security procedures, neither the Trust nor Vanguard
will be responsible for the authenticity of transaction instructions received by
telephone. We believe that these procedures are reasonable and that, if we
follow them, you bear the risk of any losses resulting from unauthorized or
fraudulent telephone transactions on your account.
HOW TO SELL SHARES
You may withdraw any part of your account, at any time, by selling shares. Sale
proceeds are normally mailed within two business days after Vanguard receives
your request. The sale price of your shares will be the Portfolio's
next-determined net asset value after Vanguard receives all required documents
in good order.
Good order means that the request includes:
- Portfolio name and account number.
- Amount of the transaction (in dollars or shares).
- Signatures of all owners exactly as registered on the account.
- Signature guarantees (if required).
- Any supporting legal documentation that may be required.
- Any certificates you are holding for the account.
Sales or exchange requests received after the close of trading on the
Exchange are processed at the next business day's net asset value. No interest
will acrue on amounts represented by uncashed redemption checks. The Portfolios
will not cancel any trade (e.g., purchase, redemption, or exchange) believed to
be authentic, once the trade request has been received in writing or by
telephone.
The Portfolios reserve the right to close any nonretirement or UGMA/UTMA
account whose balance falls below the minimum initial investment. Each Portfolio
will deduct a $10 annual fee in either June or December if your nonretirement
account balance falls below $2,500 or if your UGMA/UTMA account balance falls
below $500. The fee is waived if your total Vanguard account assets are $50,000
or more.
SOME WRITTEN REQUESTS REQUIRE A SIGNATURE GUARANTEE FROM A BANK, BROKER, OR
OTHER ACCEPTABLE FINANCIAL INSTITUTION. A NOTARY PUBLIC CANNOT PROVIDE A
SIGNATURE GUARANTEE.
HOW TO EXCHANGE SHARES
An exchange is the selling of shares of one Vanguard fund to purchase shares of
another.
Although we make every effort to maintain the exchange privilege, Vanguard
reserves the right to revise or terminate the exchange privilege, limit the
amount of an exchange, or reject any exchange, at any time, without notice.
Because excessive exchanges can potentially disrupt the management of the
Trust's Portfolios and increase transaction costs, Vanguard limits exchange
activity to TWO SUBSTANTIVE EXCHANGE REDEMPTIONS (at least 30 days apart) from
any Portfolio during any 12-month period. "Substantive" means either a dollar
amount or a series of movements between Vanguard funds that Vanguard determines,
in its sole discretion, could have an adverse impact on the management of the
Portfolio.
Before you exchange into a new Vanguard fund, be sure to read its prospectus.
For a copy and for answers to questions you might have, call Investor
Information.
INVESTOR INFORMATION 1-800-662-7447 - CLIENT SERVICES 1-800-662-2739
- - TELE-ACCOUNT 1-800-662-6273
28
<PAGE> 34
REDEEMING SHARES (continued)
<TABLE>
<CAPTION>
SELLING OR EXCHANGING SHARES ACCOUNT TYPE
<S> <C>
BY TELEPHONE ALL TYPES EXCEPT RETIREMENT:
[TELEPHONE RECEIVER GRAPHIC] Call Vanguard Tele-Account* 24 hours a day -- or Client Services
1-800-662-6273 during business hours -- to sell shares. You cannot exchange
Vanguard Tele-Account shares of any Trust Portfolio by telephone.
1-800-662-2739 RETIREMENT:
Client Services You can exchange -- but not sell -- shares by calling
Tele-Account or Client Services.
*You must obtain a Personal Identification Number through
Tele-Account at least seven days before you request your first
redemption.
BY MAIL ALL TYPES EXCEPT RETIREMENT:
[ENVELOPE GRAPHIC] Send a letter of instruction signed by all registered account
FIRST-CLASS mail to: holders. Include the portfolio name and account number and (if
The Vanguard Group you are selling) a dollar amount or number of shares OR (if you
Vanguard Index Trust are exchanging) the name of the fund you want to exchange into
P.O. Box 1120 and a dollar amount or number of shares. To exchange into an
Valley Forge, PA 19482-1120 account with a different registration (including a different
name, address, or taxpayer identification number), you must
provide Vanguard with written instructions that include the
guaranteed signatures of all current account owners.
EXPRESS or REGISTERED mail to:
The Vanguard Group RETIREMENT:
Vanguard Index Trust For information on how to request distributions from:
455 Devon Park Drive - Traditional IRAs, Roth IRAs, Education IRAs -- call Client Services.
Wayne, PA 19087-1815 - SEP - IRAs, SIMPLE IRAs, 403(b)(7) custodial accounts, and
Profit-Sharing and Money Purchase Pension (Keogh) Plans -- call
Individual Retirement Plans at 1-800-662-2003.
Depending on your account registration type, additional documentation
may be required.
EXCHANGING SHARES ONLINE You may use your personal computer to exchange shares of most
[PC GRAPHIC] Vanguard funds by accessing our website (www.vanguard.com). To
establish this service for your account, you must first register
through the website. We will then send to you, by mail, an
account access password that will enable you to make online
exchanges.
The Vanguard funds that you cannot purchase or sell through
online 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 online exchanges
within IRAs and other retirement accounts.
AUTOMATICALLY ALL TYPES EXCEPT RETIREMENT:
[ARROWS GRAPHIC] Vanguard offers several ways to sell or exchange shares
automatically (see "Services and Account Features"). Call
Investor Information for the appropriate booklet and application
if you did not elect this feature when you opened your account.
</TABLE>
INVESTOR INFORMATION 1-800-662-7447 - CLIENT SERVICES 1-800-662-2739
- - TELE-ACCOUNT 1-800-662-6273
29
<PAGE> 35
REDEEMING SHARES (continued)
It is important that you call Vanguard before you redeem a large dollar
amount. We must consider the interests of all Trust shareholders and so reserve
the right to delay delivery of your redemption proceeds -- up to seven days --
if the amount will disrupt the Trust's operation or performance.
A NOTE ON UNUSUAL CIRCUMSTANCES
Vanguard reserves the right to revise or terminate the telephone redemption
privilege at any time, with out notice. In addition, Vanguard can stop selling
shares 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 you experience difficulty making a
telephone redemption during periods of drastic economic or market change, you
can send us your request by regular or express mail. Follow the instructions on
selling or exchanging shares by mail in the "Redeeming Shares" section.
TRANSFERRING REGISTRATION
HOW TO TRANSFER SHARES
You may transfer the registration of your Fund shares to another owner by
completing a transfer form and sending it to: The Vanguard Group, Attention:
Transfer Department, P.O. Box 1110, Valley Forge, PA 19482-1110.
PORTFOLIO AND ACCOUNT UPDATES
STATEMENTS AND REPORTS
We will send you clear, concise account and tax statements to help you keep
track of your Vanguard Index Trust account throughout the year as well as when
you are preparing your income tax returns.
In addition, you will receive financial reports about each Trust Portfolio
twice a year. These comprehensive reports include an assessment of the
Portfolio's performance (and a comparison to its industry benchmark), an
overview of the markets, a report from the adviser, as well as a listing of its
holdings and other financial statements. To keep the Portfolio's costs as low as
possible (so that you and other shareholders can keep more of the Portfolio's
investment earnings), Vanguard attempts to eliminate duplicate mailings to the
same address. When we find that two or more Portfolio shareholders have the same
last name and address, we send just one Portfolio report to that address
- --instead of mailing separate reports to each shareholder. If you want us to
send separate reports, however, you may notify our Investor Information
Department at 1-800-662-7447.
INVESTOR INFORMATION 1-800-662-7447 - CLIENT SERVICES - 1-800-662-2739
- - TELE-ACCOUNT 1-800-662-6273
30
<PAGE> 36
PORTFOLIO AND ACCOUNT UPDATES (continued)
<TABLE>
<CAPTION>
<S> <C>
CONFIRMATION STATEMENT Sent each time you buy, sell, or exchange shares; confirms the
trade date and the amount of your transaction.
PORTFOLIO SUMMARY Mailed quarterly; shows the market value of your account at the
[BOOK GRAPHIC] close of the statement period, as well as distributions,
purchases, sales, and exchanges for the current calendar year.
PORTFOLIO FINANCIAL REPORTS Mailed in February and August for all nine Trust Portfolios.
TAX STATEMENTS Generally mailed in January; report previous year's dividend
distributions, proceeds from the sale of shares, and
distributions from IRAs or other retirement accounts.
AVERAGE COST STATEMENT Issued quarterly for most taxable accounts (accompanies your
[BOOK GRAPHIC] Portfolio Summary); shows the average cost of shares that you
redeemed during the calendar year, using the average cost single
category method.
AUTOMATED TELEPHONE ACCESS Toll-free access to Vanguard fund and account information -- as
VANGUARD TELE-ACCOUNT well as some transactions -- through any Touch-Tone(TM)
1-800-662-6273 telephone. TeleAccount provides total return, share price, price
Any time, seven days a week, change, and yield quotations for all Vanguard funds; gives your
from anywhere in the continental account balances and history (e.g., last transaction, latest
United States. dividend distribution); and allows you to sell Portfolio shares.
[BOOK GRAPHIC]
COMPUTER ACCESS
VANGUARD ONLINE(R) Use your personal computer to learn more about Vanguard's funds
www.vanguard.com and services; keep in touch with your Vanguard accounts; map out
a long-term investment strategy; initiate certain transactions;
and ask questions, make suggestions, and send messages to
Vanguard.
Our education-oriented website provides timely news and
information about Vanguard's funds and services; an online
"university" that offers a variety of mutual fund classes; and
easy-to-use, interactive tools to help you create your own
investment and retirement strategies.
</TABLE>
INVESTOR INFORMATION 1-800-662-7447 - CLIENT SERVICES 1-800-662-2739
- - TELE-ACCOUNT 1-800-662-6273
31
<PAGE> 37
PLAIN TALK ABOUT
KEEPING YOUR PROSPECTUS
Reading this prospectus will help you to decide whether one or more of the
Portfolios is suitable for your investment goals. If you decide to invest, don't
throw the prospectus out; you will no doubt need it for future reference.
PROSPECTUS POSTSCRIPT
This prospectus is designed to provide you with pertinent information about the
Portfolios of Vanguard Index Trust, including their investment objective, risks,
strategy, and expenses, as well as services available to you as a shareholder.
It is important that you understand these facts so that you can decide
whether an investment in any of the Portfolios is right for you. The following
questions offer a quick review of some of the subjects covered by this
prospectus.
IN READING THE PROSPECTUS, DID YOU LEARN:
- Each Portfolio's objective? (pages 10 and 11)
- Each Portfolio's investment strategy? (page 13)
- Who should invest in each Portfolio? (page 12)
- The risks associated with each Portfolio? (pages 10 - 17)
- Whether each Portfolio is federally insured?
(inside front cover)
- Each Portfolio's expenses? (pages 4 - 6)
- The background of the Portfolios' investment manager?
(page 21)
- How to open an account? (pages 26 - 27)
- How to sell or exchange shares? (pages 27 - 30)
- How often you'll receive statements and financial reports?
(page 31)
32
<PAGE> 38
GLOSSARY OF INVESTMENT TERMS
ACTIVE MANAGEMENT
An investment approach that seeks to exceed the average returns of the financial
markets. Active managers rely on research, market forecasts, and their own
judgment and experience in selecting securities to buy and sell.
CAPITAL GAINS DISTRIBUTION
Payment to mutual fund shareholders of gains realized during the year on
securities that the fund has sold at a profit, minus any realized losses.
CASH RESERVES
Cash deposits as well as short-term bank deposits, money market instruments,
U.S. Treasury bills, bank certificates of deposit (CDs), repurchase agreements,
commercial paper, and banker's acceptances.
COMMON STOCK
A security representing ownership rights in a corporation. A stockholder is
entitled to share in the company's profits, some of which may be paid out as
dividends.
DIVIDEND INCOME
Payment to shareholders of income from interest or dividends generated by a
fund's investments.
DOLLAR-COST AVERAGING
Investing equal amounts of money at regular intervals on an ongoing basis. This
technique ensures that an investor buys fewer shares when prices are high and
more shares when prices are low.
EXPENSE RATIO
The percentage of a fund's average net assets used to pay its expenses. The
expense ratio includes account management fees, administrative fees, and any
12b-1 marketing fees.
INDEX
An unmanaged group of securities whose overall performance is used as a standard
to measure investment performance.
INVESTMENT ADVISER
An organization that makes the day-to-day decisions regarding a portfolio's
investments.
MUTUAL FUND
An investment company that pools the money of many people and invests it in a
variety of securities in an effort to achieve a specific objective over time.
NET ASSET VALUE (NAV)
The market value of a mutual fund's total assets, minus liabilities, divided by
the number of shares outstanding. The value of a single share is called its
share value or share price.
PASSIVE MANAGEMENT
A low-cost investment strategy in which a mutual fund attempts to match --
rather than outperform -- a particular stock or bond market index. Also known as
indexing.
PORTFOLIO DIVERSIFICATION
Holding a variety of securities so that a portfolio's return is not hurt by the
poor performance of a single security or industry.
PRICE/EARNINGS (P/E) RATIO
The current price of a stock, divided by its per-share earnings (profits) from
the past year. A stock selling for $20, with earnings of $2 per share, has a
price/earnings ratio of 10.
PRINCIPAL
The amount of your own money you put into an investment.
SECURITIES
Stocks, bonds, and other investment vehicles.
TOTAL RETURN
A percentage change, over a specified time period, in a mutual fund's net asset
value, with the ending net asset value adjusted to account for the reinvestment
of all distributions of dividends and capital gains.
VOLATILITY
The fluctuations in value of a mutual fund or other security. The greater a
fund's volatility, the wider the fluctuations between its high and low prices.
YIELD
Current income (interest or dividends) earned by an investment, expressed as a
percentage of the investment's price.
<PAGE> 39
[SHIP GRAPHIC]
THE VANGUARD GROUP
Post Office Box 2600
Valley Forge, PA 19482
<TABLE>
<S> <C> <C>
INVESTOR INFORMATION VANGUARD BROKERAGE ELECTRONIC ACCESS TO THE
DEPARTMENT SERVICES VANGUARD MUTUAL FUND
1-800-662-7447 (SHIP) 1-800-992-8327 EDUCATION AND INFORMATION
TEXT TELEPHONE: For information on trading CENTER
1-800-952-3335 stocks, bonds, and options World Wide Web
For information on our funds, at reduced commissions www.vanguard.com
fund services, and retirement
accounts; requests for VANGUARD TELE-ACCOUNT(R)
literature 1-800-662-6273 (ON-BOARD)
For 24-hour automated access E-mail
CLIENT SERVICES DEPARTMENT to price and yield, information [email protected]
1-800-662-2739 (CREW) on your account, and certain
TEXT TELEPHONE: transactions
1-800-662-2738
For information on your
account, account transactions,
and account statements
</TABLE>
(c) 1998 Vanguard Marketing Corporation, Distributor
P040N
2-3
<PAGE> 40
Subject to Completion
Preliminary Prospectus
Dated January 9, 1998
VANGUARD
INDEX TRUST
Institutional Prospectus
April 20, 1998
TOTAL STOCK MARKET PORTFOLIO
500 PORTFOLIO
EXTENDED MARKET PORTFOLIO
MID CAPITALIZATION
STOCK PORTFOLIO
SMALL CAPITALIZATION STOCK PORTFOLIO
VALUE PORTFOLIO
SMALL CAPITALIZATION
VALUE STOCK PORTFOLIO
GROWTH PORTFOLIO
SMALL CAPITALIZATION
GROWTH STOCK PORTFOLIO
[GRAPHIC OF SHIP]
This prospectus contains financial data for the Trust through the fiscal year
ended December 31, 1997.
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION BUT HAS NOT YET BECOME EFFECTIVE. THE
INVESTOR AND INSTITUTIONAL SHARES OF THE MID CAPITALIZATION STOCK PORTFOLIO, THE
SMALL CAPITALIZATION VALUE STOCK PORTFOLIO, AND THE SMALL CAPITALIZATION GROWTH
STOCK PORTFOLIO, AS WELL AS THE INSTITUTIONAL SHARES OF THE VALUE PORTFOLIO AND
THE GROWTH PORTFOLIO, MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO
THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS COMMUNICATION SHALL
NOT CONSTITUTE AN OFFER TO SELL OR SOLICITATION OF AN OFFER TO BUY, NOR SHALL
THERE BE ANY SALE OF THESE SECURITIES IN ANY STATES IN WHICH SUCH OFFER,
SOLICITATION, OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION QUALIFICATION
UNDER THE SECURITIES LAWS OF ANY SUCH STATE. TO OBTAIN A CURRENTLY EFFECTIVE
PROSPECTUS FOR THE EXISTING PORTFOLIOS OF VANGUARD INDEX TRUST, PLEASE CONTACT
VANGUARD'S INVESTOR INFORMATION DEPARTMENT AT 1-800-662-7447.
[VANGUARD LOGO]
<PAGE> 41
VANGUARD INDEX TRUST
A Stock Index Mutual Fund
CONTENTS
Portfolio Profile 1
Portfolio Expenses 4
Financial Highlights 6
A Word About Risk 10
The Portfolios'
Objective 10
Who Should Invest 11
Investment Strategy 12
Investment Policies 16
Investment Limitations 17
Investment
Performance 18
Share Price 19
Dividends, Capital
Gains, and Taxes 19
The Trust and
Vanguard 20
Investment Adviser 20
General Information 21
Investing
with Vanguard
- - For Plan Participants 22
- - For Other
Institutional
Investors 22
Accessing Fund
Information by
Computer 23
Prospectus Postscript 24
Glossary Inside Back Cover
INVESTMENT OBJECTIVES AND POLICIES
Vanguard Index Trust (the Trust) is an open-end investment company that includes
nine separate, diversified mutual fund portfolios: Total Stock Market, 500,
Extended Market, Mid Capitalization Stock, Small Capitalization Stock, Value,
Small Capitalization Value Stock, Growth, and Small Capitalization Growth Stock.
The Mid Capitalization Stock, Small Capitalization Value Stock, and Small
Capitalization Growth Stock Portfolios have been added as new Portfolios
effective April 20, 1998.
Each Portfolio seeks to match, as closely as possible, the performance of a
different stock market benchmark, or index. One index reflects the entire U.S.
stock market; the eight other indexes focus on specific stock market segments.
Long-term capital growth (and, for some Portfolios, dividend income) may be
achieved as the Portfolios track their respective indexes.
You can buy shares in any of the nine Portfolios.
IT IS IMPORTANT TO NOTE THAT NONE OF THE PORTFOLIOS' SHARES IS GUARANTEED OR
INSURED BY THE FDIC OR ANY OTHER AGENCY OF THE U.S. GOVERNMENT. AS WITH ANY
INVESTMENT IN COMMON STOCKS, WHICH ARE SUBJECT TO WIDE FLUCTUATIONS IN MARKET
VALUE, YOU COULD LOSE MONEY BY INVESTING IN ANY OF THE PORTFOLIOS.
IMPORTANT NOTE
This prospectus is intended for institutional clients and for participants in
employer-sponsored retirement or savings plans. Another version -- for investors
who would like to open a personal investment account -- can be obtained by
calling Vanguard at 1-800-662-7447.
FEES AND EXPENSES
The Portfolios are offered on a no-load basis, which means that you pay no sales
commissions or 12b-1 marketing fees. You will, however, incur expenses for
investment advisory, management, administrative, and distribution services,
which are included in each Portfolio's expense ratio.
Five Portfolios charge a fee on purchases: 0.25% for the Extended Market and
Mid Capitalization Stock Portfolios, 0.5% for the Small Capitalization Stock
Portfolio, and 1.00% for the Small Capitalization Value Stock and Small
Capitalization Growth Stock Portfolios.
ADDITIONAL INFORMATION ABOUT THE TRUST
A Statement of Additional Information (dated April 20, 1998) containing more
information about the Trust is, by reference, part of this prospectus and may be
obtained without charge by contacting Vanguard (see back cover), or visiting the
Securities and Exchange Commission's website (www.sec.gov).
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE> 42
NOTE TO LARGE INVESTORS
The Total Stock Market Portfolio, Extended Market Portfolio, Mid Capitalization
Stock Portfolio, Small Capitalization Stock Portfolio, Value Portfolio, Small
Capitalization Value Stock Portfolio, Growth Portfolio, and Small Capitalization
Growth Stock Portfolio each offers two separate classes of shares. This
prospectus, and a separate prospectus for individual clients, describe the
"Investor Shares" of these Portfolios, which have a minimum initial investment
requirement of $3,000 ($1,000 for IRAs). The Portfolios' "Institutional Shares,"
which we offer through another prospectus, are designed for investors who meet
the investment minimum requirement of $10 million and generally do not require
special employee benefit plan services. To obtain a prospectus for the
Institutional Shares, please call Vanguard's Institutional Investor Group at
1-800-523-1036. Note that the Portfolios' separate share classes have different
expenses; as a result, their investment performance will vary.
WHY READING THIS PROSPECTUS IS IMPORTANT
This prospectus explains the objective, risks, and strategy of each Portfolio of
Vanguard Index Trust. To highlight terms and concepts important to mutual fund
investors, we have provided "Plain Talk" explanations along the way. Reading the
prospectus will help you decide which Portfolios, if any, are the right
investment for you. We suggest that you keep it for future reference.
PORTFOLIO PROFILE Vanguard Index Trust
WHO SHOULD INVEST (PAGE 11)
- - Investors looking for a simple way to match the performance of a specific
stock market index.
- - Investors seeking a stock mutual fund as part of a balanced and diversified
investment program.
- - Investors seeking growth of their capital over the long term -- at least
five years.
WHO SHOULD NOT INVEST
- - Investors unwilling to accept significant fluctuations in share price.
- - Investors hoping to beat the stock market.
RISKS OF THE PORTFOLIOS (PAGES 10 - 17)
The Portfolios' total returns will fluctuate within a wide range, so an investor
could lose money over short or even extended periods. All nine Portfolios are
subject to market risk (the chance that stock prices in general will fall,
sometimes suddenly and sharply) and objective risk (the chance that a specific
segment of the stock market will not perform as well as the overall market).
More detailed information about risk -- including risks specific to each
Portfolio -- is provided beginning on page 10.
In evaluating past performance, remember that it is not indicative of future
performance and that returns from stocks before adjusting for inflation were
relatively high during the periods shown. Performance figures include the
reinvestment of any dividend and capital gains distributions. The returns shown
are net of expenses, but they do not reflect income taxes an investor would have
incurred. Note, too, that both the return and principal value of an investment
will fluctuate so that investors' shares, when redeemed, may be worth more or
less than their original cost.
1
<PAGE> 43
PORTFOLIO PROFILE (CONTINUED) Vanguard Index Trust
DIVIDENDS AND CAPITAL GAINS (PAGE 19)
The Total Stock Market, 500, Value, and Growth Portfolios pay dividends in
March, June, September, and December. The Extended Market, Mid Capitalization
Stock, Small Capitalization Stock, Small Capitalization Value Stock, and Small
Capitalization Growth Stock Portfolios pay dividends in December. All nine of
the Trust's Portfolios pay capital gains, if any, in December. In participant
accounts, all distributions are automatically reinvested.
INVESTMENT ADVISER (PAGE 20)
Vanguard Core Management Group, Valley Forge, Pa., manages each of the nine
Portfolios.
AVERAGE ANNUAL TOTAL RETURNS --
YEARS ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
1 Year 5 Years 10 Years
--------------------------------------
<S> <C> <C> <C>
Total Stock Market 31.0% 18.9% 18.5%*
Wilshire 5000 Index 31.4 19.3 18.9
500 33.2% 20.1% 17.8%
S&P 500 Index 33.4 20.3 18.1
Extended Market** 26.7% 17.5% 16.4%
Wilshire 4500 Index 25.7 17.0 16.3
SmallCap Stock** 24.6% 17.5% 15.8%
Russell 2000 Index 22.4 16.4 15.8
Value 29.8% 20.5% 20.7%*
S&P/BARRA Value Index 30.0 20.7 20.9*
Growth 36.3% 19.5% 19.5%*
S&P/BARRA Growth Index 36.5 19.6 19.8*
</TABLE>
Note: The Mid Capitalization Stock, Small Capitalization Value Stock, and Small
Capitalization Growth Stock Portfolios did not begin operations until April 20,
1998.
*Since inception; see pages 2 and 3.
**Does not include transaction fee; see pages 2 and 3.
<TABLE>
<CAPTION>
TOTAL STOCK EXTENDED
MARKET 500 MARKET
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
INCEPTION DATE: 4/27/1992 8/31/1976 12/21/1987
NET ASSETS AS OF 12/31/1997: $5.09 billion $49.40 billion $2.72 billion
PORTFOLIO EXPENSE RATIO FOR THE
YEAR ENDED 12/31/1997: 0.20% 0.19% 0.23%
TRANSACTION FEE ON PURCHASES: None None 0.25%
NEWSPAPER ABBREVIATION: TotSt 500 Extnd
VANGUARD FUND NUMBER: 085 040 098
CUSIP NUMBER: 922908306 922908108 922908207
QUOTRON SYMBOL: VTSMX.Q VFINX.Q VEXMX.Q
</TABLE>
<TABLE>
<CAPTION>
MIDCAP SMALLCAP
STOCK STOCK VALUE
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
INCEPTION DATE: 4/20/1998 10/3/1960 11/2/1992
NET ASSETS AS OF 12/31/1997: None $2.70 billion $1.80 billion
PORTFOLIO EXPENSE RATIO FOR THE
YEAR ENDED 12/31/1997: N/A 0.23% 0.20%
TRANSACTION FEE ON PURCHASES: 0.25% 0.5% None
NEWSPAPER ABBREVIATION: MidCap SmCap Value
VANGUARD FUND NUMBER: 859 048 006
CUSIP NUMBER: 922908843 922908702 922908405
QUOTRON SYMBOL: N/A NAESX.Q VIVAX.Q
</TABLE>
2
<PAGE> 44
<TABLE>
<CAPTION>
SMALLCAP SMALLCAP
VALUE GROWTH GROWTH
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
INCEPTION DATE: 4/20/1998 11/2/1992 4/20/1998
NET ASSETS AS OF 12/31/1997: None $2.40 billion None
PORTFOLIO EXPENSE RATIO FOR THE
YEAR ENDED 12/31/1997: N/A 0.20% N/A
TRANSACTION FEE ON PURCHASES: 1.00% None 1.00%
NEWSPAPER ABBREVIATION: SmValue Growth SmGrowth
VANGUARD FUND NUMBER: 860 009 861
CUSIP NUMBER: 922908793 922908504 922908827
QUOTRON SYMBOL: N/A VIGRX.Q N/A
</TABLE>
3
<PAGE> 45
PLAIN TALK ABOUT
VANGUARD'S FEES
Some of Vanguard's index portfolios charge a transaction fee on purchases of
portfolio shares to offset the higher costs of trading certain securities,
particularly small-company and international stocks. The transaction fee ensures
that these higher costs are borne by the investors making the transactions
- -- and not by shareholders already in the portfolio.
At Vanguard, all fees are paid directly to the portfolio itself (unlike a
sales charge or load, which -- for many fund companies -- ends up in the pocket
of the sponsor, adviser, or sales representative). Without transaction fees, an
index portfolio would have trouble tracking its target index.
PLAIN TALK ABOUT
FUND EXPENSES
All mutual funds have operating expenses. These expenses, which are deducted
from a fund's gross income, are expressed as a percentage of the net assets of
the fund. For instance, the Total Stock Market Portfolio's expense ratio in
fiscal year 1997 was 0.20%, or $2 per $1,000 of average net assets. The average
equity index fund had expenses in 1997 of -%, or $- per $1,000 of average net
assets, according to Lipper Analytical Services, which reports on the mutual
fund industry.
PORTFOLIO EXPENSES
The examples below are designed to help you understand the costs you would bear
as an investor in one of the Portfolios.
SHAREHOLDER TRANSACTION EXPENSES AND FEES
<TABLE>
<CAPTION>
<S> <C>
Sales Load Imposed on Purchases: None
Transaction Fee on Purchases*
Extended Market Portfolio: 0.25%
Mid Capitalization Stock Portfolio: 0.25%
Small Capitalization Stock Portfolio: 0.50%
Small Capitalization Value Stock Portfolio: 1.00%
Small Capitalization Growth Stock Portfolio: 1.00%
Total Stock Market, 500, Value, and Growth Portfolios: None
Sales Load Imposed on Reinvested Dividends: None
Redemption Fees: None
Exchange Fees: None
</TABLE>
*The transaction fee is deducted from all purchases (including exchanges from
other Vanguard funds) but not from reinvested dividends and capital gains.
The next tables illustrate the expenses that you are expected to incur,
outside of transaction and maintenance fees, as a Portfolio shareholder. These
expenses are deducted from the Portfolio's income before it is paid to you.
Expenses include investment advisory fees as well as fees for administering the
Portfolio, providing services, and other activities. The expenses for the Total
Stock Market, 500, Extended Market, Small Capitalization Stock, Value, and
Growth Portfolios, as shown in the table, are based upon those incurred in the
fiscal year ended December 31, 1997. The expenses shown for the Mid
Capitalization Stock, Small Capitalization Value Stock, and Small Capitalization
Growth Stock Portfolios are estimates for these Portfolios' first full year of
operations.
PORTFOLIO OPERATING EXPENSES
<TABLE>
<CAPTION>
TOTAL STOCK EXTENDED
MARKET 500 MARKET
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Management and
Administrative Expenses: 0.17% 0.16% 0.20%
Investment Advisory Expenses: None None None
12b-1 Marketing Fees: None None None
Other Expenses
Marketing and Distribution
Expenses: 0.03% 0.02% 0.02%
Miscellaneous Expenses
(e.g., Taxes, Auditing): 0.00% 0.01% 0.01%
---- ---- ----
Total Other Expenses: 0.03% 0.03% 0.03%
---- ---- ----
TOTAL OPERATING EXPENSES
(EXPENSE RATIO): 0.20% 0.19% 0.23%
==== ==== ====
</TABLE>
4
<PAGE> 46
<TABLE>
<CAPTION>
MIDCAP SMALLCAP
STOCK STOCK VALUE
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Management and
Administrative Expenses: 0.22% 0.20% 0.17%
Investment Advisory Expenses: None None None
12b-1 Marketing Fees: None None None
Other Expenses
Marketing and Distribution
Expenses: 0.02% 0.02% 0.02%
Miscellaneous Expenses
(e.g., Taxes, Auditing): 0.01% 0.01% 0.01%
---- ---- ----
Total Other Expenses: 0.03% 0.03% 0.03%
---- ---- ----
TOTAL OPERATING EXPENSES
(EXPENSE RATIO): 0.25% 0.23% 0.20%
==== ==== ====
</TABLE>
<TABLE>
<CAPTION>
SMALLCAP SMALLCAP
VALUE GROWTH GROWTH
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Management and
Administrative Expenses: 0.22% 0.17% 0.22%
Investment Advisory Expenses: None None None
12b-1 Marketing Fees: None None None
Other Expenses
Marketing and Distribution
Expenses: 0.02% 0.02% 0.02%
Miscellaneous Expenses
(e.g., Taxes, Auditing): 0.01% 0.01% 0.01%
---- ---- ----
Total Other Expenses: 0.03% 0.03% 0.03%
---- ---- ----
TOTAL OPERATING EXPENSES
(EXPENSE RATIO): 0.25% 0.20% 0.25%
==== ==== ====
</TABLE>
The following examples are intended to help you compare the cost of investing
in one of the Portfolios with the cost of investing in other mutual funds, by
illustrating the hypothetical expenses that you would incur on a $1,000
investment in each Portfolio over various periods. These examples assume that
(1) each Portfolio provides a return of 5% a year and (2) you redeem your
investment at the end of each period.
<TABLE>
<CAPTION>
PORTFOLIO 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- ----------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total Stock Market $ 2 $ 6 $ 11 $ 26
500 2 6 11 24
Extended Market 5 10 15 32
MidCap Stock 5 11 17 34
SmallCap Stock 7 12 18 34
Value 2 6 11 26
SmallCap Value Stock 13 18 24 42
Growth 2 6 11 26
SmallCap Growth Stock 13 18 24 42
</TABLE>
5
<PAGE> 47
PLAIN TALK ABOUT
HOW TO READ THE FINANCIAL
HIGHLIGHTS TABLE
This explanation uses the Total Stock Market Portfolio as an example. The
Portfolio began fiscal 1997 with a net asset value (price) of $17.77 per share.
During the year, the Portfolio earned $.319 per share from investment income
(interest and dividends) and $5.143 per share from investments that had
appreciated in value or were sold for a price higher than the Portfolio paid for
them. This resulted in total earnings of $5.462 per share. Of those earnings,
$.592 per share was returned to shareholders in distributions ($.322 in
dividends, $.270 in capital gains). The earnings ($5.462 per share) less
distributions ($.592 per share) resulted in a share price of $22.64 at the end
of the fiscal year, an increase of $4.87 per share (from $17.77 at the start of
the period to $22.64 at the end of the period). Assuming the shareholder had
reinvested the distributions in the purchase of more shares, total return from
the Portfolio was 30.99% for the year. As of December 31, 1997, the Portfolio
had $5.09 billion in net assets; an annualized expense ratio of 0.20% ($2 per
$1,000 of net assets); and net investment income amounting to 1.65% of its
average net assets. It sold and replaced securities valued at 2% of its total
net assets.
THESE EXAMPLES SHOULD NOT BE CONSIDERED TO REPRESENT ACTUAL EXPENSES OR
PERFORMANCE FROM THE PAST OR FOR THE FUTURE, WHICH MAY BE HIGHER OR LOWER THAN
THOSE SHOWN.
FINANCIAL HIGHLIGHTS
The following financial highlights tables show the results for a share
outstanding of the Total Stock Market, 500, Extended Market, Small
Capitalization Stock, Value, and Growth Portfolios* for each of the fiscal years
in the decade ended December 31, 1997 (or each year since the Portfolio's
inception date). The financial statements that include the financial highlights
for the periods ended December 31 were audited by Price Waterhouse LLP,
independent accountants. You should read this information in conjunction with
each Portfolio's financial statements and accompanying notes, which appear,
along with the audit report from Price Waterhouse, in the Trust's most recent
annual report to shareholders. The annual report is incorporated by reference in
the Statement of Additional Information and in this prospectus, and contains a
more complete discussion of each Portfolio's performance. You may have the
report sent to you without charge by contacting Vanguard (see back cover).
*The Mid Capitalization Stock, Small Capitalization Value Stock, and Small
Capitalization Growth Stock Portfolios did not begin operations until April 20,
1998.
<TABLE>
<CAPTION>
TOTAL STOCK MARKET PORTFOLIO
--------------------------------------------------------------------
Year Ended December 31,
----------------------------------------------------- Mar. 16* -
1997 1996 1995 1994 1993 Dec. 31, 1992
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $17.77 $15.04 $11.37 $ 11.69 $ 10.84 $ 10.00
----------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .319 .29 .29 .27 .26 .23
Net Realized and Unrealized Gain (Loss) on Investments 5.143 2.84 3.75 (.29) .88 .84
----------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 5.462 3.13 4.04 (.02) 1.14 1.07
- ----------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.322) (.29) (.28) (.27) (.26) (.23)
Distributions from Realized Capital Gains (.270) (.11) (.09) (.03) (.03) --
----------------------------------------------------------------
TOTAL DISTRIBUTIONS (.592) (.40) (.37) (.30) (.29) (.23)
- ----------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $22.64 $17.77 $15.04 $ 11.37 $ 11.69 $ 10.84
===========================================================================================================================
TOTAL RETURN** 30.99% 20.96% 35.79% - 0.17% 10.62% 10.41%
===========================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $5,092 $3,531 $1,571 $ 786 $ 512 $ 275
Ratio of Total Expenses to Average Net Assets 0.20% 0.22% 0.25% 0.20% 0.20% 0.21%+
Ratio of Net Investment Income to Average Net Assets 1.65% 1.86% 2.14% 2.35% 2.31% 2.42%+
Portfolio Turnover Rate 2% 3% 3% 2% 1% 3%
Average Commission Rate Paid $.0177 $.0216 N/A N/A N/A N/A
</TABLE>
*Inception date
**Total return figures do not reflect the 0.25% transaction fee on purchases
through 1995. Subscription period for the Portfolio was from March 16 to April
26, 1992, during which time all assets were held in money market instruments.
Performance measurement began on April 27, 1992.
+Annualized.
6
<PAGE> 48
<TABLE>
<CAPTION>
500 PORTFOLIO
-----------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992 1991
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $ 69.17 $ 57.60 $ 42.97 $ 43.83 $ 40.97 $ 39.32 $ 31.24
INVESTMENT OPERATIONS
Net Investment Income 1.31 1.28 1.22 1.18 1.13 1.12 1.15
Net Realized and Unrealized
Gain (Loss) on Investments 21.50 11.82 14.76 (.67) 2.89 1.75 8.20
-----------------------------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 22.81 13.10 15.98 .51 4.02 2.87 9.35
- ----------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (1.32) (1.28) (1.22) (1.17) (1.13) (1.12) (1.15)
Distributions from Realized
Capital Gains (.59) (.25) (.13) (.20) (.03) (.10) (.12)
-----------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (1.91) (1.53) (1.35) (1.37) (1.16) (1.22) (1.27)
- ----------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $ 90.07 $ 69.17 $ 57.60 $ 42.97 $ 43.83 $ 40.97 $ 39.32
==================================================================================================================================
TOTAL RETURN 33.19% 22.88% 37.45% 1.18% 9.89% 7.42% 30.22%
==================================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $ 49,358 $ 30,332 $ 17,372 $ 9,356 $ 8,273 $ 6,547 $ 4,345
Ratio of Total Expenses to
Average Net Assets 0.19% 0.20% 0.20% 0.19% 0.19% 0.19% 0.20%
Ratio of Net Investment Income to
Average Net Assets 1.66% 2.04% 2.38% 2.72% 2.65% 2.81% 3.07%
Portfolio Turnover Rate 5%* 5%* 4%* 6%* 6%* 4%* 5%*
Average Commission Rate Paid $ .0181 $ .0166 N/A N/A N/A N/A N/A
</TABLE>
<TABLE>
<CAPTION>
500 PORTFOLIO
-------------------------------
YEAR ENDED DECEMBER 31,
-------------------------------
1990 1989 1988
- --------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $ 33.64 $ 27.18 $ 24.65
INVESTMENT OPERATIONS
Net Investment Income 1.17 1.20 1.08
Net Realized and Unrealized
Gain (Loss) on Investments (2.30) 7.21 2.87
---------------------------------
TOTAL FROM INVESTMENT OPERATIONS (1.13) 8.41 3.95
- --------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (1.17) (1.20) (1.10)
Distributions from Realized
Capital Gains (.10) (.75) (.32)
---------------------------------
TOTAL DISTRIBUTIONS (1.27) (1.95) (1.42)
- --------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $ 31.24 $ 33.64 $ 27.18
==========================================================================
TOTAL RETURN - 3.32% 31.36% 16.22%
==========================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $ 2,173 $ 1,804 $ 1,055
Ratio of Total Expenses to
Average Net Assets 0.22% 0.21% 0.22%
Ratio of Net Investment Income to
Average Net Assets 3.60% 3.62% 4.08%
Portfolio Turnover Rate 23%* 8% 10%
Average Commission Rate Paid N/A N/A N/A
</TABLE>
*Portfolio turnover rates excluding in-kind redemptions were 3%, 2%, 2%, 4%, 2%,
1%, 1%, and 6%, respectively.
<TABLE>
<CAPTION>
EXTENDED MARKET PORTFOLIO
---------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992 1991
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $ 26.20 $ 24.07 $ 18.52 $ 19.43 $ 17.35 $ 15.82 $ 11.48
---------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .351 .34 .30 .28 .23 .24 .25
Net Realized and Unrealized
Gain (Loss) on Investments 6.479 3.85 5.95 (.62) 2.28 1.72 4.54
---------------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 6.830 4.19 6.25 (.34) 2.51 1.96 4.79
- -------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.360) (.34) (.30) (.28) (.23) (.25) (.25)
Distributions from Realized Capital Gains (1.910) (1.72) (.40) (.29) (.20) (.18) (.20)
---------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (2.270) (2.06) (.70) (.57) (.43) (.43) (.45)
- -------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $ 30.76 $ 26.20 $ 24.07 $ 18.52 $ 19.43 $ 17.35 $ 15.82
=========================================================================================================================
TOTAL RETURN* 26.73% 17.65% 33.80% - 1.76% 14.49% 12.47% 41.85%
=========================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $ 2,723 $ 2,099 $ 1,523 $ 967 $ 928 $ 585 $ 372
Ratio of Total Expenses to
Average Net Assets 0.23% 0.25% 0.25% 0.20% 0.20% 0.20% 0.19%
Ratio of Net Investment Income to
Average Net Assets 1.30% 1.42% 1.51% 1.51% 1.48% 1.73% 2.14%
Portfolio Turnover Rate 15%** 22% 15% 19% 13% 9% 11%
Average Commission Rate Paid $ .0228 $ .0235 N/A N/A N/A N/A N/A
</TABLE>
<TABLE>
<CAPTION>
EXTENDED MARKET PORTFOLIO
-----------------------------
YEAR ENDED DECEMBER 31,
-----------------------------
1990 1989 1988
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $ 13.92 $ 11.60 $ 9.99
------------------------------
INVESTMENT OPERATIONS
Net Investment Income .30 .26 .34
Net Realized and Unrealized
Gain (Loss) on Investments (2.25) 2.52 1.63
------------------------------
TOTAL FROM INVESTMENT OPERATIONS (1.95) 2.78 1.97
- ---------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.33) (.23) (.20)
Distributions from Realized Capital Gains (.16) (.23) (.16)
------------------------------
TOTAL DISTRIBUTIONS (.49) (.46) (.36)
- ---------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $ 11.48 $ 13.92 $ 11.60
===========================================================================
TOTAL RETURN* - 14.05% 24.10% 19.75%
===========================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $ 179 $ 147 $ 35
Ratio of Total Expenses to
Average Net Assets 0.23% 0.23% 0.24%
Ratio of Net Investment Income to
Average Net Assets 2.68% 2.92% 2.90%
Portfolio Turnover Rate 9% 14% 26%
Average Commission Rate Paid N/A N/A N/A
</TABLE>
* Total return figures do not reflect transaction fees on purchases (0.25% from
November 3, 1997, through December 31, 1997; 0.5% in 1995 through October 31,
1997; 1.0% in 1992 through 1994).
**Portfolio turnover rate excluding in-kind redemptions was 14%.
7
<PAGE> 49
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
SMALL CAPITALIZATION
STOCK PORTFOLIO*
------------------------------------------------------------------
YEAR ENDED
DECEMBER 31, FEB. 1- OCT. 1, 1993-
---------------------------------
1997 1996 1995 DEC. 31, 1994 JAN. 31, 1994
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 20.23 $18.61 $14.99 $ 16.24 $16.23
------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .277 .26 .24 .20 .05
Net Realized and Unrealized Gain (Loss) on Investments 4.632 3.07 4.06 (.86) .96
------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 4.909 3.33 4.30 (.66) 1.01
------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.274) (.27) (.23) (.22) (.18)
Distributions from Realized Capital Gains (1.115) (1.44) (.45) (.37) (.82)
------------------------------------------------------------------
TOTAL DISTRIBUTIONS (1.389) (1.71) (.68) (.59) (1.00)
------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 23.75 $20.23 $18.61 $ 14.99 $16.24
==================================================================
TOTAL RETURN** 24.59% 18.12% 28.74% -4.00% 6.65%
==================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $ 2,652 $1,713 $ 971 $ 605 $ 533
Ratio of Total Expenses to Average Net Assets 0.23% 0.25% 0.25% 0.17%+ 0.18%+
Ratio of Net Investment Income to Average Net Assets 1.38% 1.51% 1.58% 1.50%+ 1.16%+
Portfolio Turnover Rate 29% 28% 28% 25% 5%
Average Commission Rate Paid $ .0226 $.0245 N/A N/A N/A
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Returns prior to January 31, 1994, are for the former Vanguard Small
Capitalization Stock Fund.
**Total return figures do not reflect transaction fees on purchases (0.5% in
1997, 1.0% in 1994 through 1996).
+Annualized. (continued)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
SMALL CAPITALIZATION
STOCK PORTFOLIO*
(continued)
- ---------------------------------------------------------------------------------------------------------------------------
YEAR ENDED SEPTEMBER 30,
- ---------------------------------------------------------------------------------------------------------------------------
1993 1992 1991 1990+ 1989 1988
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $ 12.63 $ 12.03 $ 8.55 $ 11.88 $ 11.96 $ 15.73
-----------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .20 .19 .20 .17 .10 .03
Net Realized and Unrealized Gain (Loss)
on Investments 3.73 .88 3.60 (3.46) 2.13 (2.59)
-----------------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 3.93 1.07 3.80 (3.29) 2.23 (2.56)
-----------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.18) (.18) (.18) (.04) (.14) --
Distributions from Realized Capital Gains (.15) (.29) (.14) -- (2.17) (1.21)
-----------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (.33) (.47) (.32) (.04) (2.31)
(1.21)
-----------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $ 16.23 $ 12.63 $ 12.03 $ 8.55 $ 11.88 $ 11.96
=============================================================================
TOTAL RETURN** 31.60% 9.34% 45.91% -27.73% 18.83% -14.30%
=============================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $ 432 $ 202 $ 111 $ 40 $ 20 $ 27
Ratio of Total Expenses to Average Net Assets 0.18% 0.18% 0.21% 0.31% 1.00% 0.95%
Ratio of Net Investment Income to Average
Net Assets 1.47% 1.65% 2.11% 1.91% .65% .24%
Portfolio Turnover Rate 26% 26% 33% 40% 160% 68%
Average Commission Rate Paid N/A N/A N/A N/A N/A N/A
--------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Returns prior to January 31, 1994, are for the former Vanguard Small
Capitalization Stock Fund.
**Total return figures do not reflect transaction fees on purchases (0.5% in
1997, 1.0% in 1994 through 1996).
+Adjusted to reflect a 3-for-1 stock split as of February 3, 1990.
- --------------------------------------------------------------------------------
8
<PAGE> 50
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
VALUE PORTFOLIO
----------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
----------------------------------------------------------- NOV. 2*-
1997 1996 1995 1994 1993 DEC. 31, 1992
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 17.02 $ 14.79 $ 11.12 $ 11.74 $ 10.30 $ 10.00
----------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .38 .37 .41 .38 .38 .07
Net Realized and Unrealized Gain (Loss) on
Investments 4.57 2.81 3.66 (.46) 1.50 .30
----------------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 4.95 3.18 4.07 (.08) 1.88 .37
----------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.37) (.38) (.40) (.38) (.38) (.07)
Distributions from Realized Capital Gains (.75) (.57) -- (.16) (.06) --
----------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (1.12) (.95) (.40) (.54) (.44) (.07)
----------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 20.85 $ 17.02 $ 14.79 $ 11.12 $ 11.74 $ 10.30
============================================================================
TOTAL RETURN 29.77% 21.86% 36.94% -0.73% 18.35% 3.70%
============================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $ 1,796 $ 1,016 $ 496 $ 297 $ 190 $ 24
Ratio of Total Expenses to Average Net Assets 0.20% 0.20% 0.20% 0.20% 0.20% 0%**
Ratio of Net Investment Income to Average Net
Assets 2.05% 2.54% 3.06% 3.37% 3.26% 3.46%**
Portfolio Turnover Rate 25% 29% 27% 32% 30% 4%
Average Commission Rate Paid $ .0149 $ .0188 N/A N/A N/A N/A
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
*Inception date.
**Annualized.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
GROWTH PORTFOLIO
---------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
------------------------------------------------------------ NOV. 2*-
1997 1996 1995 1994 1993 DEC. 31, 1992
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 16.90 $ 13.97 $ 10.28 $ 10.20 $ 10.26 $ 10.00
---------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .23 .22 .21 .21 .21 .06
Net Realized and Unrealized Gain (Loss) on
Investments 5.88 3.07 3.68 .08 (.06) .26
---------------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 6.11 3.29 3.89 .29 .15 .32
---------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.23) (.22) (.20) (.21) (.21) (.06)
Distributions from Realized Capital Gains (.25) (.14) -- -- -- --
---------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (.48) (.36) (.20) (.21) (.21) (.06)
---------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 22.53 $ 16.90 $ 13.97 $ 10.28 $ 10.20 $ 10.26
===========================================================================
TOTAL RETURN 36.34% 23.74% 38.06% 2.89% 1.53% 3.19%
===========================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $ 2,365 $ 787 $ 271 $ 86 $ 51 $ 21
Ratio of Total Expenses to Average Net Assets 0.20% 0.20% 0.20% 0.20% 0.20% 0%**
Ratio of Net Investment Income to Average
Net Assets 1.19% 1.57% 1.71% 2.08% 2.10% 2.85%**
Portfolio Turnover Rate 26% 29% 24% 28% 36% 2%
Average Commission Rate Paid $ .0134 $ .0183 N/A N/A N/A N/A
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Inception date
**Annualized.
- --------------------------------------------------------------------------------
From time to time, the Vanguard funds advertise yield and total return
figures. Yield is a historical measure of dividend income, and total return is a
measure of past dividend income (assuming that it has been reinvested) plus
realized and unrealized capital appreciation (depreciation). Neither yield nor
total return should be used to predict the future performance of a fund.
9
<PAGE> 51
PLAIN TALK ABOUT
INDEXES
An index is a group of securities whose overall performance is used as a
standard to measure investment performance.
A WORD ABOUT RISK
This prospectus describes the risks you would face as an investor in the
Portfolios of Vanguard Index Trust. It is important to keep in mind one of the
main axioms of investing: The higher the risk of losing money, the higher the
potential reward. The reverse, also, is generally true: The lower the risk, the
lower the potential reward. As you consider an investment in one or more of the
Trust's Portfolios, you should take into account your personal tolerance for the
daily fluctuations of the stock market. Remember, too, that each Portfolio seeks
to match a different stock market index; therefore, investment risk will vary
from Portfolio to Portfolio.
Look for this "warning flag" symbol [FLAG] throughout the prospectus. It is
used to mark detailed information about each type of risk that you, as a
shareholder of any of the nine Portfolios, would confront.
THE PORTFOLIOS' OBJECTIVE
Each Portfolio seeks to match, as closely as possible, the performance of a
specific stock market index. This objective is fundamental, which means that it
cannot be changed unless a majority of Portfolio shareholders vote to do so.
[FLAG] BECAUSE OF THE SEVERAL TYPES OF RISK DESCRIBED ON THE FOLLOWING PAGES,
YOUR INVESTMENT IN ANY OF THE PORTFOLIOS, AS WITH ANY INVESTMENT IN
COMMON STOCKS, COULD LOSE MONEY.
The TOTAL STOCK MARKET PORTFOLIO seeks to parallel the performance of the
Wilshire 5000 Equity Index, which consists of all of the U.S. stocks regularly
traded on the New York and American Stock Exchanges and the Nasdaq
over-the-counter market.
The 500 PORTFOLIO seeks to track the performance of the Standard & Poor's 500
Composite Stock Price Index, which emphasizes stocks of large U.S. companies.
The EXTENDED MARKET PORTFOLIO seeks to track the performance of the Wilshire
4500 Equity Index, a broadly diversified index of stocks of medium-size and
small U.S. companies (none of which is included in the S&P 500 Index).
The MID CAPITALIZATION STOCK PORTFOLIO seeks to parallel the performance of
the Standard & Poor's MidCap 400 Index, which comprises a market-weighted group
of medium-sized U.S. companies.
The SMALL CAPITALIZATION STOCK PORTFOLIO seeks to match the performance of the
Russell 2000 Index, which is made up of stocks of small, generally unseasoned
U.S. companies.
The VALUE PORTFOLIO seeks to replicate the performance of the Standard &
Poor's/BARRA Value Index, which includes those
10
<PAGE> 52
PLAIN TALK ABOUT
VALUE FUNDS AND
GROWTH FUNDS
Value investing and growth investing are two styles employed by stock fund
managers. Value funds generally emphasize companies that, considering their
assets and earnings history, are attractively priced; these companies often pay
regular dividend income to shareholders. Growth funds generally focus on
companies that, due to their strong earnings and revenue potential, offer
above-average prospects for capital growth, with less emphasis on dividend
income. Value and growth stocks have, in the past, produced similar long-term
returns, though each has periods when it outperforms the other. In general,
value funds are appropriate for investors who want some dividend income and the
potential for capital gains but are less tolerant of share-price fluctuations.
Growth funds, by contrast, appeal to investors who will accept more volatility
in hopes of a greater increase in share price.
PLAIN TALK ABOUT
INVESTING FOR THE LONG TERM
Each Portfolio is intended to be a long-term investment vehicle; none is
designed to provide investors with a means of speculating on short-term
fluctuations in the stock market.
stocks of the S&P 500 Index that offer higher-than-average dividend yields and
are often considered out of favor with investors.
The SMALL CAPITALIZATION VALUE STOCK PORTFOLIO seeks to replicate the
performance of the Standard & Poor's SmallCap 600/BARRA Value Index, which
includes those stocks of the S&P SmallCap 600 Index with lower-than-average
price/earnings and price/book ratios.
The GROWTH PORTFOLIO seeks to parallel the performance of the Standard &
Poor's/BARRA Growth Index, which is made up of those stocks of the S&P 500 Index
with lower-than-average dividend yields and higher-than-average price/earnings
and price/book ratios.
The SMALL CAPITALIZATION GROWTH STOCK PORTFOLIO seeks
to track the performance of the Standard & Poor's SmallCap 600/BARRA Growth
Index, which includes those stocks of the S&P SmallCap 600 Index with
higher-than-average price/earnings and price/book ratios.
[FLAG] AN INDEX FUND HAS OPERATING EXPENSES; A MARKET INDEX DOES NOT.
THEREFORE, AN INDEX FUND--WHILE EXPECTED TO TRACK ITS TARGET INDEX AS
CLOSELY AS POSSIBLE--WILL NOT BE ABLE TO MATCH THE PERFORMANCE OF THE
INDEX EXACTLY.
The Portfolios of Vanguard Index Trust are not sponsored, sold, promoted, or
endorsed by Standard & Poor's Corporation, BARRA Associates, Wilshire
Associates, or the Frank Russell Company.
WHO SHOULD INVEST
Any of the Portfolios of Vanguard Index Trust may be a suitable investment for
you if you are looking for a U.S. stock portfolio that follows a simple,
cost-effective index-matching strategy and, in doing so, provides the potential
for growth in the value of your investment over the long term. However, one
Portfolio may more closely meet your personal investment objectives than the
others.
For instance, the Total Stock Market Portfolio may be suitable for you if:
- - You are looking for an investment that reflects the performance of the
entire U.S. stock market.
The 500 and Value Portfolios may be suitable for you if:
- - You want to invest in large companies.
The Extended Market, Mid Capitalization Stock, and Small Capitalization Stock
Portfolios may be suitable for you if:
- - You want to focus on the stocks of medium-sized and/or small companies.
- - You can accept greater share-price volatility than the Trust's other
portfolios tend to experience.
The Small Capitalization Value Stock Portfolio may be suitable for you if:
11
<PAGE> 53
PLAIN TALK ABOUT
COSTS AND MARKET-TIMING
Some investors try to profit from a strategy called "market-timing"--switching
money into investments when they expect prices to rise, and taking money out
when they expect the market to fall. As money is shifted in and out, a fund
incurs expenses for buying and selling securities. These costs are borne by all
fund shareholders, including the long-term investors who do not generate the
costs. Therefore, the Trust discourages short-term trading by, among other
things, closely monitoring daily transactions.
- - You are seeking exposure to the stocks of small companies that are
often considered out of favor in the market.
- - You are comfortable with a higher level of share-price volatility than
that experienced by the Trust's other Portfolios.
- - You are willing to forgo dividend income.
The Growth Portfolio may be suitable for you if:
- - You want to invest in large companies, but you are looking for more
growth potential than the 500 and Value Portfolios offer--and are
willing to accept greater fluctuations in share price.
The Small Capitalization Growth Stock Portfolio may be suitable for
you if:
- - You want to focus on small-company stocks.
- - You are seeking a portfolio of stocks considered to have
higher-than-average price/earnings and price/book ratios.
- - You are willing to accept a high level of share-price fluctuation.
None of the Portfolios would be an appropriate investment if you are
a market-timer. Investors who engage in excessive in-and-out trading activity
generate additional costs that are borne by all of the shareholders in a
portfolio. To minimize such costs, which reduce the ultimate returns achieved by
you and other shareholders, the Trust has adopted the following policies:
- - The Trust reserves the right to reject any purchase request into any of
its Portfolios--including exchanges from other Vanguard funds--that it
regards as disruptive to the efficient management of the Portfolio.
This could be because of the timing of the investment or because of a
history of excessive trading by the investor.
- - Five of the Trust's Portfolios (Extended Market, Mid Capitalization
Stock, Small Capitalization Stock, Small Capitalization Value Stock,
and Small Capitalization Growth Stock) charge a transaction fee on
purchases.
- - There is a limit on the number of times you can exchange into or out of
each Portfolio (see "Exchanges" in the INVESTING WITH VANGUARD
section). If you own shares of any of the Trust's Portfolios as an
investment option in an employer-sponsored retirement or savings plan,
your plan dictates the rules governing exchanges. Contact your plan
administrator for details.
- - The Trust reserves the right to stop offering shares at any time.
INVESTMENT STRATEGY
This section explains how the investment adviser pursues the Portfolios'
objective of matching the performance of specific stock indexes. It also
explains the market and objective risks faced by Portfolio shareholders. Unlike
each Portfolio's investment objective, the adviser's investment strategy is not
fundamental and can be changed by the Trust's Board of Trustees without
shareholder approval. However, before making any important change in its
strategy, a Portfolio will give shareholders 30 days' notice, in writing.
12
<PAGE> 54
MARKET EXPOSURE
To track their target indexes as closely as possible, the Portfolios attempt to
remain fully invested in stocks.
[FLAG] EACH PORTFOLIO IS SUBJECT TO MARKET RISK, WHICH IS THE POSSIBILITY THAT
STOCK PRICES OVERALL WILL DECLINE OVER SHORT OR EVEN EXTENDED PERIODS.
STOCK MARKETS TEND TO MOVE IN CYCLES, WITH PERIODS OF RISING STOCK
PRICES AND PERIODS OF FALLING STOCK PRICES.
To illustrate the volatility of stock prices, the following table shows the
best, worst, and average total returns (dividend income plus change in market
value) for the U.S. stock market over various periods as measured by the S&P 500
Index, which--in addition to being the target index for the 500 Portfolio--is a
widely used barometer of stock market activity. Note that the returns shown do
not include the costs of buying and selling stocks or other expenses that a
real-world investment portfolio would incur. Note, also, that the gap between
the best and worst tends to narrow over the long term.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------
U.S. STOCK MARKET RETURNS (1926-1997)
- ----------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS 20 YEARS
- ----------------------------------------------------------------
<S> <C> <C> <C> <C>
Best 53.9% 23.9% 20.1% 16.9%
Worst -43.3 -12.5 -0.9 3.1
Average 13.0 10.5 10.9 10.9
- ----------------------------------------------------------------
</TABLE>
The table covers all of the 1-, 5-, 10-, and 20-year periods from 1926 through
1997. For example, while the average return on stocks for all of the 5-year
periods was 10.5%, returns for these 5-year periods ranged from a -12.5% average
(from 1928 through 1932) to 23.9% (from 1950 through 1954). These average
returns reflect past performance on common stocks and should not be regarded as
an indication of future returns from either the stock market as a whole or any
of the Trust's Portfolios in particular.
Keep in mind that the S&P 500 Index tracks mainly large-cap stocks.
Historically, the mid- and small-cap stocks of the Wilshire 4500, S&P MidCap
400, and Russell 2000 Indexes (the target indexes for the Extended Market, Mid
Capitalization Stock, 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 smaller companies.
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,
PLAIN TALK ABOUT
LARGE-CAP, MID-CAP, AND SMALL-CAP STOCKS
Stocks of publicly traded companies--and mutual funds that hold these
stocks--can be classified by the companies' market value, or capitalization.
Vanguard defines large-capitalization, or large-cap, funds as those holding
stocks of companies with a median total market value exceeding $7.5 billion.
Mid-cap funds hold stocks of companies with a median market value between $1
billion and $7.5 billion. Small-cap funds hold stocks of companies with a median
market value of less than $1 billion. Historically, large-cap funds have
exhibited lower volatility than mid-cap and small-cap funds. Note that a fund's
capitalization parameters (that is, what constitutes a large-, mid-, or
small-cap stock) may vary from the parameters set by a particular index.
13
<PAGE> 55
PLAIN TALK ABOUT
ACTIVE VERSUS PASSIVE MANAGEMENT
Index portfolios are not actively managed by investment advisers who buy and
sell securities based on research and analysis. Instead, a "passively managed"
portfolio tries to match, as closely as possible, the performance of a target
index by holding either all--or a representative sample--of the securities in
the index. Indexing appeals to many investors because of its simplicity
(indexing is a straightforward market-matching strategy); diversification
(indexes generally cover a wide variety of companies and industries); relative
performance predictability (an index portfolio is expected to move in the same
direction--up or down--as its target index); and low cost (index funds do not
have many of the expenses of an actively managed fund--such as research--and
keep trading activity--and, thus, brokerage commissions--to a minimum).
- --will not perform in the same way as the broader S&P 500 Index. Historically,
stocks of the S&P/BARRA Value Index and the has been less volatile than the
stocks found in the broader S&P 500 Index; stocks of the S&P/BARRA Growth Index
and the S&P SmallCap 600/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.
[FLAG] THE PORTFOLIOS ARE SUBJECT, IN VARYING DEGREES, TO OBJECTIVE RISK,
WHICH IS THE POSSIBILITY THAT RETURNS FROM A SPECIFIC TYPE OF STOCK
(FOR INSTANCE, SMALL-CAP OR VALUE) WILL TRAIL RETURNS FROM THE OVERALL
STOCK MARKET. EACH TYPE OF STOCK TENDS TO GO THROUGH CYCLES OF
OUTPERFORMANCE AND UNDERPERFORMANCE IN COMPARISON TO THE STOCK MARKET
IN GENERAL. THESE PERIODS HAVE, IN THE PAST, LASTED FOR AS LONG AS
SEVERAL YEARS.
SECURITY SELECTION
Each Portfolio of Vanguard Index Trust employs a "passively" managed
investment--or index--approach. Vanguard Core Management Group, the Portfolios'
adviser, creates a mix of securities that will match the performance of a
benchmark index.
The 500, Mid Capitalization Stock, Value, Small Capitalization Value Stock,
Growth, and Small Capitalization Growth Stock Portfolios hold each stock found
in their respective benchmark indexes in roughly the same proportions as
represented in the indexes themselves. For example, if 5% of the S&P 500 Index
were made up of the assets of a specific company, the 500 Portfolio would invest
the same percentage of its assets in that company.
The Total Stock Market, Extended Market, and Small Capitalization Stock
Portfolios use a different selection process. Because it would be very expensive
to buy and sell all of the stocks in each Portfolio's target index (the Total
Stock Market Portfolio's target index, for example, includes more than 7,400
stocks), these three Portfolios use a "sampling" technique. Using a
sophisticated computer program, each Portfolio selects stocks that will recreate
its target index in terms of industry, size, and other characteristics (such as
projected earnings, financial strength, and debt). For instance, if 10% of the
Wilshire 4500 Index were made up of utility stocks, the Extended Market
Portfolio would invest 10% of its assets in the utility stocks of the Wilshire
4500 Index with similar characteristics.
The following table shows the number of stocks generally held by the Total
Stock Market, 500, Extended Market, Small Capitalization Stock, Value, and
Growth Portfolios as of December 31, 1997. The Mid Capitalization Stock, Small
Capitalization Value Stock, and Small Capitalization Growth Stock Portfolios did
not begin operations until April 20, 1998.
14
<PAGE> 56
<TABLE>
<CAPTION>
- ------------------------------------------------------------------
NUMBER OF NUMBER OF STOCKS
PORTFOLIO STOCKS HELD IN TARGET INDEX
- ------------------------------------------------------------------
<S> <C> <C>
Total Stock Market 2,800 7,400
500 500 500
Extended Market 2,150 6,900
MidCap Stock N/A 400
SmallCap Stock 1,700 1,900
Value 360 360
SmallCap Value Stock N/A 380
Growth 140 140
SmallCap Growth Stock N/A 220
</TABLE>
The top ten holdings for the Total Stock Market, 500, Extended Market, Small
Capitalization Stock, Value, and Growth Portfolios as of December 31, 1997,
follow. The Mid Capitalization Stock, Small Capitalization Value Stock, and
Small Capitalization Growth Stock Portfolios did not begin operations until
April 20, 1998.
TOTAL STOCK MARKET PORTFOLIO
1. General Electric Co.
2. The Coca-Cola Co.
3. Microsoft Corp.
4. Exxon Corp.
5. Merck & Co., Inc.
6. Intel Corp.
7. Philip Morris Cos., Inc.
8. Procter & Gamble Co.
9. International Business
Machines Corp.
10. AT&T Corp.
13% of the Portfolio's total net assets.
500 PORTFOLIO
1. General Electric Co.
2. The Coca-Cola Co.
3. Microsoft Corp.
4. Exxon Corp.
5. Merck & Co., Inc.
6. Royal Dutch Petroleum Co.
7. Intel Corp.
8. Philip Morris Cos., Inc.
9. Procter & Gamble Co.
10. International Business
Machines Corp.
18% of the Portfolio's total net assets.
EXTENDED MARKET PORTFOLIO
1. Berkshire Hathaway
2. Electronic Data Systems
3. Carnival Corp. Class A
4. Safeway, Inc.
5. The Coca-Cola Co.
6. RJR Nabisco Holdings Corp.
7. Franklin Resources Corp.
8. Republic Industries, Inc.
9. Cox Communications
Class A
10. The Equitable Cos.
6% of the Portfolio's total net assets.
SMALLCAP STOCK PORTFOLIO
1. Associated Banc-Corp.
2. US Office Products Co.
3. Jacor Comm. Warrants
4. Allied Waste Industries
5. Brooks Fiber Properties
6. Keystone Financial, Inc.
7. Mack-Cali Realty Corp.
8. Arterial Vascular
Engineering, Inc.
9. Citrix Systems, Inc.
10. Sovereign Bancorp, Inc.
2% of the Portfolio's total net assets.
PLAIN TALK ABOUT
PORTFOLIO DIVERSIFICATION
In general, the more diversified a fund's portfolio of stocks, the less likely
that a specific stock's poor performance will hurt the fund. One measure of a
fund's level of diversification is the percentage of total net assets
represented by its ten largest holdings. The average U.S. equity mutual fund has
about 30% of its assets invested in its ten largest holdings, while some
less-diversified mutual funds have more than 50% of their assets invested in the
stocks of just ten companies.
15
<PAGE> 57
PLAIN TALK ABOUT
PORTFOLIO TURNOVER
Before investing in a mutual fund, you should review its portfolio turnover rate
for an indication of the potential effect of transaction costs on the fund's
future returns. In general, the greater the volume of buying and selling by the
fund, the greater the impact that brokerage commissions and other transaction
costs will have on its return. The average turnover rate for passively managed
domestic index funds investing in common stocks is roughly 10%; for all domestic
stock funds, the average turnover rate is approximately 80%.
VALUE PORTFOLIO
1. Exxon Corp.
2. Royal Dutch Petroleum Co.
3. International Business
Machines Corp.
4. AT&T Corp.
5. The Walt Disney Co.
6. Travelers Group Inc.
7. Ford Motor Co.
8. Citicorp
9. Mobil Corp.
10. BellSouth Corp.
22% of the Portfolio's total net assets.
GROWTH PORTFOLIO
1. General Electric Co.
2. The Coca-Cola Co.
3. Microsoft Corp.
4. Merck & Co., Inc.
5. Intel Corp.
6. Philip Morris Cos., Inc.
7. Procter & Gamble Co.
8. Pfizer, Inc.
9. Bristol-Myers Squibb Co.
10. Wal-Mart Stores, Inc.
34% of the Portfolio's total net assets.
Keep in mind that, because the makeup of a Portfolio changes daily, these
listings are only "snapshots" at one point in time. Note, too, that portfolios
that track indexes made up of a relatively small number of securities tend to be
less diversified than portfolios whose target indexes contain thousands of
securities. For instance, the Growth Portfolio, which seeks to parallel an index
of about 140 stocks, has far more of its assets invested in its top ten holdings
(34%) than the Total Stock Market Portfolio (13%), which seeks to track a much
larger universe of more than 7,400 stocks. This means that the Growth Portfolio
stands a greater chance than the Total Stock Market Portfolio of being hurt by
the poor performance of a single stock.
PORTFOLIO TURNOVER
Although each seeks to invest for the long term, the Portfolios retain the right
to sell securities regardless of how long they have been held. Generally, a
passively managed fund sells securities only to respond to redemption requests
or to adjust the number of shares held to reflect a change in the portfolio's
target index. Because of this, the turnover rate for the Portfolios has been
extremely low, with averages over the past five years (or since inception)
ranging from 2% for the Total Stock Market Portfolio to 29% for the Small
Capitalization Stock Portfolio. (A turnover rate of 100% would occur, for
example, if a portfolio sold and replaced securities valued at 100% of its total
net assets within a one-year period.)
INVESTMENT POLICIES
Besides investing in the stocks found in its target index, each Portfolio may
follow a number of other investment policies to achieve its objective.
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<PAGE> 58
THE PORTFOLIOS RESERVE THE RIGHT TO INVEST, TO A LIMITED EXTENT, IN
STOCK FUTURES AND OPTIONS CONTRACTS, WARRANTS, CONVERTIBLE SECURITIES,
AND SWAP AGREEMENTS, WHICH ARE TYPES OF DERIVATIVES.
Losses (or gains) involving futures contracts can sometimes be substantial --
in part because a relatively small price movement in a futures contract may
result in an immediate and substantial loss (or gain) for a Portfolio. Similar
risks exist for warrants (securities that permit their owners to purchase a
specific number of shares of stock at a predetermined price), convertible
securities (securities that may be exchanged for another asset), and swap
agreements (contracts between two parties in which each agrees to make payments
to the other based on the return of a specified index or asset).
For this reason, the Portfolios will not use futures, options, warrants,
convertible securities, or swap agreements for speculative purposes or as
leveraged investments that magnify the gains or losses of an investment. Rather,
each Portfolio will keep separate cash reserves or other liquid portfolio
securities in the amount of the obligation underlying the contract. Only a
limited percentage of each Portfolio's assets -- 5% -- may be applied towards
the deposits required on futures contracts, and the value of all futures
contracts in which the Portfolio acquires an interest cannot exceed 20% of the
Portfolio's total assets.
The reasons for which a Portfolio will invest in futures, options, warrants,
convertible securities, and swap agreements are:
- - To keep cash on hand to meet shareholder redemptions or other needs while
simulating full investment in stocks.
- - To reduce the Portfolio's transaction costs and add incremental value by
buying futures instead of actual stocks.
- - To add value to the Portfolio by buying assets that mimic the performance of
particular stocks, but trade at a discount because of a short term market
inefficiency.
INVESTMENT LIMITATIONS
The Portfolios have adopted limitations on some of their investment policies.
Some of these limitations are that each Portfolio will not:
- - Invest more than 25% of its assets in any one industry.
- - Borrow money, except for temporary or emergency purposes in an amount not
exceeding 15% of its assets. Whenever the Portfolio's outstanding borrowing
is more than 5% of its assets, it will stop making investments.
With respect to 75% of its assets, a Portfolio will not:
- - Invest more than 5% in the outstanding securities of any one company.
- - Buy more than 10% of the outstanding voting securities of any company.
PLAIN TALK ABOUT
DERIVATIVES
A derivative is a financial contract whose value is based on (or "derived" from)
a traditional security (such as a stock or a bond), an asset (such as a
commodity like gold), or a market index (such as the S&P 500 Index). For
instance, futures and options are derivatives that have been trading on
regulated exchanges for more than two decades. These "traditional" derivatives
are standardized contracts that can be easily bought and sold, and whose market
values are determined and published daily. It is these characteristics that
differentiate futures and options from the relatively new, exotic types of
derivatives -- some of which can carry considerable risks.
PLAIN TALK ABOUT
CASH RESERVES
With mutual funds, holding cash reserves -- or "cash" -- does not mean literally
that the fund holds a stack of currency. Rather, cash reserves refer to
short-term, interest-bearing securities that can easily and quickly be converted
to cash. (Most mutual funds keep at least a small percentage of assets in cash
to accommodate shareholder redemptions.) While some funds like index funds
strive to keep cash levels at a minimum and to always remain fully invested in
stocks, others allow investment advisers to hold up to 20% of a fund's assets in
cash reserves.
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<PAGE> 59
PLAIN TALK ABOUT
PAST PERFORMANCE
Whenever you see information on a fund's performance, do not consider the
figures to be an indication of the performance you could expect by making an
investment in the fund today. The past is an imperfect guide to the future;
history does not repeat itself in neat, predictable patterns.
A complete list of each Portfolio's investment limitations can be found in
the Statement of Additional Information. These limitations are fundamental and
may be changed only by approval of a majority of the Portfolio's shareholders.
INVESTMENT PERFORMANCE
Each Portfolio's performance is expected to mirror the performance of a specific
U.S. stock market segment (or, in the case of the Total Stock Market Portfolio,
the entire stock market). Historically, stock market performance has been
characterized by sharp up-and-down swings in the short term and by more stable
growth over the long term.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS
FOR YEARS ENDED 12/31/97
- ------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS 20 YEARS
- ------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total Stock Market 31.0% 18.9% 18.5%* --
Wilshire 5000 Index 31.4 19.3 18.9* --
500 33.2% 20.1% 17.8% -%
S&P 500 Index 33.4 20.3 18.1 *
Extended Market** 26.7% 17.5% 16.4%* --
Wilshire 4500 Index 25.7 17.0 16.3* --
SmallCap Stock** 24.6% 17.5% 15.8%* --
Russell 2000 Index 22.4 16.4 15.8* --
Value 29.8% 20.5% 20.7%* --
S&P/BARRA Value Index 30.0 20.7 20.9* --
Growth 36.3% 19.5% 19.5%* --
S&P/BARRA Growth Index 36.5 19.6 19.8* --
</TABLE>
Note: The Mid Capitalization Stock, Small Capitalization Value Stock, and Small
Capitalization Growth Stock Portfolios did not begin operations until April 20,
1998.
*Since inception; see pages 2 and 3.
**Does not include transaction fee; see pages 2 and 3.
The results shown represent each Portfolio's "average annual total return"
performance, which assumes that any distributions of capital gains and dividends
were reinvested for the indicated periods. Also included is comparative
information on the appropriate unmanaged benchmark index. The Portfolios'
returns are not adjusted for the purchase fee for the Extended Market and Small
Capitalization Stock Portfolios, or the purchase fee for the Total Stock Market
Portfolio that was eliminated at year-end 1995, nor has an allowance been made
for federal, state, or local income taxes that shareholders must pay on a
current basis. Note also that the Mid Capitalization Stock, Small Capitalization
Value Stock, and Small Capitalization Growth Stock Portfolios began operations
on April 20, 1998.
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<PAGE> 60
SHARE PRICE
Each Portfolio's share price, called its net asset value, or NAV, is calculated
each business day after the close of trading on the New York Stock Exchange,
generally 4 p.m. Eastern time. Each Portfolio's net asset value per share is
calculated by adding up the total assets of the Portfolio, subtracting all of
its liabilities, or debts, and then dividing by the total number of Portfolio
shares outstanding:
TOTAL ASSETS - LIABILITIES
NET ASSET VALUE = -------------------------------
NUMBER OF SHARES OUTSTANDING
The daily net asset value, is useful to you as a shareholder because the NAV,
multiplied by the number of Portfolio shares you own, gives you the dollar
amount you would have received had you sold your shares back to the Portfolio
that day.
Each Portfolio's share price can be found daily in the mutual fund listings
of most major newspapers under the heading Vanguard Index Funds. Different
newspapers use different abbreviations for each Portfolio, but the most common
are TotSt, 500, Extnd, MidCap, SmCap, Value, SmValue, Growth, and SmGrowth.
DIVIDENDS, CAPITAL GAINS, AND TAXES
Each March, June, September, and December, the Total Stock Market, 500, Value,
and Growth Portfolios distribute virtually all of their income from interest and
dividends to their shareholders; the Extended Market, Mid Capitalization Stock,
Small Capitalization Stock, Small Capitalization Value Stock, and Small
Capitalization Growth Stock Portfolios distribute their income in December. All
nine Portfolios distribute any capital gains realized from the sale of
securities in December. In addition, the Portfolios may occasionally be required
to make supplemental dividend or capital gains distributions at some other time
during the year. Keep in mind that index portfolios tend to provide less in
capital gains distributions than actively managed funds generally do.
If you own shares of any of the Trust's Portfolios as an investment option in
an employer-sponsored retirement or savings plan, these dividend and capital
gains distributions will be reinvested in additional Portfolio shares and
accumulate on a tax-deferred basis. You will not owe taxes on these
distributions until you begin withdrawals. You should consult your plan
administrator, your plan's Summary Plan Document, or your tax adviser about the
tax consequences of an investment in the Portfolio and of any plan withdrawals.
If your investment in a Portfolio of Vanguard Index Trust is not part of an
employer-sponsored plan, you can receive distributions of income or capital
gains in cash, or you may have them automatically reinvested in more shares of
the Portfolio. Both dividend
PLAIN TALK ABOUT
DISTRIBUTIONS
As a shareholder, you are entitled to your share of the fund's income from
interest and dividends, and gains from the sale of investments. You receive such
earnings as either an income dividend or capital gains distribution. Income
dividends come from the dividends that the fund earns from its holdings as well
as interest it receives from its money market and bond investments. Capital
gains are realized whenever the fund sells securities for higher prices than it
paid for them. These capital gains are either short-term or long-term, depending
on whether the fund held the securities for less than or more than one year.
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PLAIN TALK ABOUT
VANGUARD'S UNIQUE
CORPORATE STRUCTURE
The Vanguard Group, Inc., is the only MUTUAL mutual fund company. It is owned
jointly by the funds it oversees and by the shareholders in those funds. Other
mutual funds are operated by for-profit management companies that may be owned
by one person, by a group of individuals, or by investors who bought the
management company's publicly traded stock. Because of its structure, Vanguard
operates its funds at cost. Instead of distributing profits from operations to a
separate management company, Vanguard returns profits to fund shareholders in
the form of lower operating expenses.
PLAIN TALK ABOUT
THE PORTFOLIOS' ADVISER
Vanguard Core Management Group provides investment advisory services to many
Vanguard funds; as of December 31, 1997, the Group managed more than $99 billion
in total assets. The individual primarily responsible for overseeing each
Portfolio's investments is:
GEORGE U. SAUTER, Managing Director of Vanguard; has worked in investment
management since 1985; with Vanguard since 1987, including primary
responsibility for Vanguard Core Management Group since 1987; A.B., Dartmouth
College, M.B.A., University of Chicago.
and capital gains distributions--whether received in cash or reinvested in
additional shares--are subject to federal (and possibly state and local)
income taxes, no matter how long you have held the shares in the Portfolio. You
should consult your tax adviser about other tax consequences of an investment in
the Portfolio.
THE TRUST AND VANGUARD
Vanguard Index Trust is a member of The Vanguard Group, a family of more than 30
investment companies with more than 95 distinct investment portfolios and total
net assets of more than $350 billion. All of the Vanguard funds share in the
expenses associated with business operations, such as personnel, office space,
equipment, and advertising.
Vanguard also provides marketing services to the funds. Although shareholders
do not pay sales commissions or 12b-1 marketing fees, each fund pays its
allocated share of The Vanguard Group's costs.
A list of the Trustees and officers, and their present positions and
principal occupations during the past five years, can be found in the Statement
of Additional Information.
INVESTMENT ADVISER
Vanguard Core Management Group, P.O. Box 2600, Valley Forge, PA 19482, provides
advisory services on an at-cost basis to the Portfolios of Vanguard Index Trust.
For the fiscal year ended December 31, 1997, the Portfolios paid a total of $-
in investment advisory expenses (the Value Portfolio paid $-; the Growth
Portfolio paid $-; the Total Stock Market and Extended Market Portfolios each
paid $-; and the 500 and the Small Capitalization Stock Portfolios each paid
$-). The Mid Capitalization Stock, Small Capitalization Value Stock, and Small
Capitalization Growth Stock Portfolios did not begin operations until April 20,
1998.
The Group is authorized to choose brokers or dealers to handle the purchase
and sale of the Portfolios' securities, and is directed to get the best
available price and most favorable execution from these brokers with respect to
all transactions. However, the Group will not pay higher commissions
specifically for the purpose of obtaining research services. The Portfolios may
direct the Core Management Group to use a particular broker for certain
transactions in exchange for commission rebates or research services provided to
the Portfolios.
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<PAGE> 62
GENERAL INFORMATION
Vanguard Index Trust is organized as a Pennsylvania business trust.
Shareholders of each Portfolio have rights and privileges similar to those
enjoyed by other corporate and trust shareholders. For example, shareholders
will not be responsible for any liabilities of the Trust. If any matters are to
be voted on by shareholders (such as a change in a fundamental investment
objective or the election of Trustees), each Portfolio share outstanding at that
point would be entitled to one vote. Annual meetings will not be held by the
Portfolios except as required by the Investment Company Act of 1940. A meeting
will be scheduled to vote on the removal of a trustee if the holders of at least
10% of the Trust's shares request a meeting in writing.
Vanguard Index Trust is not sponsored, endorsed, sold or promoted by Standard &
Poor's Corporation ("S&P"). S&P makes no representation or warranty, implied or
express, to the purchasers of the Trust or any member of the public regarding
the advisability of investing in index funds or the ability of the S&P 500 Index
to track general stock market performance. S&P does not guarantee the accuracy
and/or the completeness of the S&P 500 Index or any data included therein. S&P
MAKES NO WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS TO BE OBTAINED BY THE
TRUST, OWNERS OF THE TRUST, OR ANY PERSON OR ENTITY FROM THE USE OF THE S&P 500
INDEX OR ANY DATA INCLUDED THEREIN. 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 INDEX OR ANY DATA
INCLUDED THEREIN. S&P's only relationship to the Trust is the licensing of the
S&P marks and S&P 500, which is determined, composed, and calculated by S&P
without regard to the Trust. "Standard & Poor's 500," "S&P 500(R)," "Standard &
Poor's(R)," "S&P(R)," and "500" are trademarks of The McGraw-Hill Companies,
Inc. "Wilshire 4500" and "Wilshire 5000" are registered trademarks of Wilshire
Associates. Frank Russell Company is the owner of the trademarks and copyrights
relating to the Russell Indexes.
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INVESTING WITH VANGUARD
FOR PLAN PARTICIPANTS
One or more of the nine Portfolios described in this prospectus is an
investment option in your retirement or savings plan. Your plan administrator
or your employee benefits office can provide you with detailed information on
how to participate in your plan and how to elect a Portfolio as an investment
option.
- - If you have any questions about a Portfolio or Vanguard, including the
Portfolio's investment objective, strategy, or risks, contact Vanguard's
Participant Services Center, toll-free, at 1-800-523-1188.
- - If you have questions about your account, contact your plan administrator or
the organization that provides recordkeeping services for your plan.
INVESTMENT OPTIONS AND ALLOCATIONS
Your plan's specific provisions may allow you to change your investment
selections, the amount of your contributions, or how your contributions are
allocated among the investment choices available to you. Contact your plan
administrator or employee benefits office for more details.
TRANSACTIONS
Contributions, exchanges, or redemptions of a Portfolio's shares are processed
as soon as they have been received by Vanguard in good order. Good order means
that your request includes complete information on your contribution,
exchange, or redemption, and that Vanguard has received the appropriate
assets.
EXCHANGES
The exchange privilege (your ability to redeem shares from one fund to
purchase shares of another fund) may be available to you through your plan.
Although we make every effort to maintain the exchange privilege, Vanguard
reserves the right to revise or terminate the exchange privilege, limit the
amount of an exchange, or reject any exchange at any time, without notice.
Because excessive exchanges can potentially disrupt the management of a
Portfolio and increase its transaction costs, Vanguard limits exchange
activity to TWO SUBSTANTIVE EXCHANGE REDEMPTIONS (at least 30 days apart) from
any Portfolio during any 12-month period. "Substantive" means either a dollar
amount or a series of movements between Vanguard funds that Vanguard
determines, in its sole discretion, could have an adverse impact on the
management of the Portfolio. In addition, certain investment options,
particularly funds made up of company stock or investment contracts, may be
subject to unique restrictions. Contact your plan administrator for details on
the exchange policies that apply to your plan.
Before making an exchange, you should consider the following:
- - Before you exchange to another Vanguard fund available in your plan, you
should read that fund's prospectus. Contact Vanguard's Participant Services
Center, toll-free, at 1-800-523-1188 for a copy.
- - Vanguard can accept exchanges only as permitted by your plan. Your plan
administrator can explain how frequently exchanges are allowed.
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<PAGE> 64
INVESTING WITH VANGUARD (CONTINUED)
FOR OTHER INSTITUTIONAL INVESTORS
If you have questions about one of the Portfolios of Vanguard Index Trust,
including how to establish an account, call Vanguard, toll-free, at
1-800-523-1036.
If you have questions about an existing account, contact your Vanguard
account administrator.
TRANSACTIONS
Purchases, exchanges, or redemptions of a Portfolio's shares are processed as
soon as they have been received by Vanguard in good order. Good order means
that your request includes complete information on your purchase, exchange, or
redemption, and that Vanguard has received the appropriate assets. The price
of shares bought, exchanged, or sold will be the Portfolio's next-determined
net asset value after Vanguard has processed your request, provided your
request has been received before the close of trading on the New York Stock
Exchange (generally 4 p.m. Eastern time).
Vanguard must consider the interests of all Portfolio shareholders and so
reserves the right to:
- - Delay or reject any purchase or exchange request that may disrupt the
portfolio's operation or performance.
- - Revise or terminate the exchange privilege or limit the amount of an
exchange, at any time, without notice.
- - Take up to seven days to deliver your redemption proceeds.
- - Pay redemption proceeds -- in whole or in part -- through a distribution in
kind of readily marketable securities.
ACCESSING FUND INFORMATION BY COMPUTER
VANGUARD ONLINE(R) Use your personal computer to learn more about Vanguard's
www.vanguard.com funds and services; keep in touch with your Vanguard
accounts; map out a long-term investment strategy; initiate
certain transactions; and ask questions, make suggestions,
and send messages to Vanguard.
Our education-oriented website provides timely news and
information about Vanguard's funds and services; an online
"university" that offers a variety of mutual fund classes;
and easy-to-use, interactive tools to help you create your
own investment and retirement strategies.
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<PAGE> 65
PLAIN TALK ABOUT
KEEPING YOUR PROSPECTUS
Reading this prospectus will help you to decide whether one or more of the
Portfolios is suitable for your investment goals. If you decide to invest, don't
throw the prospectus out; you will no doubt need it for future reference.
PROSPECTUS POSTSCRIPT
This prospectus is designed to provide you with pertinent information about the
Portfolios of Vanguard Index Trust, including their investment objective, risks,
strategy, and expenses, as well as services available to you as a shareholder.
It is important that you understand these facts so that you can decide
whether an investment in any of the Portfolios is right for you. The following
questions offer a quick review of some of the subjects covered by this
prospectus.
IN READING THE PROSPECTUS, DID YOU LEARN:
[ ] Each Portfolio's objective? (pages 10 and 11)
[ ] Each Portfolio's investment strategy? (page 12)
[ ] Who should invest in each Portfolio? (page 12)
[ ] The risks associated with each Portfolio? (pages 10 - 17)
[ ] Whether each Portfolio is federally insured?
(inside front cover)
[ ] Each Portfolio's expenses? (pages 4 and 5)
[ ] The background of the Portfolios' investment manager?
(page 20)
<PAGE> 66
GLOSSARY OF INVESTMENT TERMS
ACTIVE MANAGEMENT
An investment approach that seeks to exceed the average returns of the financial
markets. Active managers rely on research, market forecasts, and their own
judgment and experience in selecting securities to buy and sell.
CAPITAL GAINS DISTRIBUTION
Payment to mutual fund shareholders of gains realized during the year on
securities that the fund has sold at a profit, minus any realized losses.
CASH RESERVES
Cash deposits as well as short-term bank deposits, money market instruments,
U.S. Treasury bills, bank certificates of deposit (CDs), repurchase agreements,
commercial paper, and banker's acceptances.
COMMON STOCK
A security representing ownership rights in a corporation. A stockholder is
entitled to share in the company's profits, some of which may be paid out as
dividends.
DIVIDEND INCOME
Payment to shareholders of income from interest or dividends generated by a
fund's investments.
DOLLAR-COST AVERAGING
Investing equal amounts of money at regular intervals on an ongoing basis. This
technique ensures that an investor buys fewer shares when prices are high and
more shares when prices are low.
EXPENSE RATIO
The percentage of a fund's average net assets used to pay its expenses. The
expense ratio includes account management fees, administrative fees, and any
12b-1 marketing fees.
INDEX
An unmanaged group of securities whose overall performance is used as a standard
to measure investment performance.
INVESTMENT ADVISER
An organization that makes the day-to-day decisions regarding a portfolio's
investments.
MUTUAL FUND
An investment company that pools the money of many people and invests it in a
variety of securities in an effort to achieve a specific objective over time.
NET ASSET VALUE (NAV)
The market value of a mutual fund's total assets, minus liabilities, divided by
the number of shares outstanding. The value of a single share is called its
share value or share price.
PASSIVE MANAGEMENT
A low-cost investment strategy in which a mutual fund attempts to match --
rather than outperform -- a particular stock or bond market index. Also known as
indexing.
PORTFOLIO DIVERSIFICATION
Holding a variety of securities so that a portfolio's return is not hurt by the
poor performance of a single security or industry.
PRICE/EARNINGS (P/E) RATIO
The current price of a stock, divided by its per-share earnings (profits) from
the past year. A stock selling for $20, with earnings of $2 per share, has a
price/earnings ratio of 10.
PRINCIPAL
The amount of your own money you put into an investment.
SECURITIES
Stocks, bonds, and other investment vehicles.
TOTAL RETURN
A percentage change, over a specified time period, in a mutual fund's net asset
value, with the ending net asset value adjusted to account for the reinvestment
of all distributions of dividends and capital gains.
VOLATILITY
The fluctuations in value of a mutual fund or other security. The greater a
fund's volatility, the wider the fluctuations between its high and low prices.
YIELD
Current income (interest or dividends) earned by an investment, expressed as a
percentage of the investment's price.
<PAGE> 67
[VANGUARD LOGO]
Institutional Division
Post Office Box 2900
Valley Forge, PA 19482
<TABLE>
<S> <C> <C>
FOR PARTICIPANTS IN FOR OTHER INSTITUTIONAL ELECTRONIC ACCESS TO THE
EMPLOYER-SPONSORED PLANS INVESTORS VANGUARD MUTUAL FUND
1-800-523-1036 EDUCATION AND INFORMATION
PARTICIPANT SERVICES CENTER For information on Vanguard CENTER
1-800-523-1188 funds and services World Wide Web
TEXT TELEPHONE:
1-800-523-8004 www.vanguard.com
For information on the E-mail
Vanguard funds in your plan, [email protected]
Monday through Friday
8:30 a.m. to 9 p.m.,
Eastern time
</TABLE>
(C) 1998 Vanguard Marketing
Corporation, Distributor
I040N
<PAGE> 68
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS
DATED JANUARY 9, 1998
VANGUARD INSTITUTIONAL
INDEX FUND
VANGUARD
INDEX TRUST
Prospectus
April 20, 1998
VANGUARD INSTITUTIONAL
INDEX FUND
INSTITUTIONAL SHARES
INSTITUTIONAL PLUS SHARES
VANGUARD INDEX TRUST
INSTITUTIONAL SHARES OF
TOTAL STOCK MARKET
PORTFOLIO
EXTENDED MARKET
PORTFOLIO
MID CAPITALIZATION
STOCK PORTFOLIO
SMALL CAPITALIZATION
STOCK PORTFOLIO
VALUE PORTFOLIO
SMALL CAPITALIZATION
VALUE STOCK PORTFOLIO
GROWTH PORTFOLIO
SMALL CAPITALIZATION
GROWTH STOCK PORTFOLIO
This prospectus contains
financial data for the Fund
and the Trust through
the fiscal year ended
December 31, 1997.
[GRAPHIC OF SHIP]
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION BUT HAS NOT YET BECOME EFFECTIVE. THE
INVESTOR AND INSTITUTIONAL SHARES OF THE MID CAPITALIZATION STOCK PORTFOLIO, THE
SMALL CAPITALIZATION VALUE STOCK PORTFOLIO, AND THE SMALL CAPITALIZATION GROWTH
STOCK PORTFOLIO, AS WELL AS THE INSTITUTIONAL SHARES OF THE VALUE PORTFOLIO AND
THE GROWTH PORTFOLIO, MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO
THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS COMMUNICATION SHALL
NOT CONSTITUTE AN OFFER TO SELL OR SOLICITATION OF AN OFFER TO BUY, NOR SHALL
THERE BE ANY SALE OF THESE SECURITIES IN ANY STATES IN WHICH SUCH OFFER,
SOLICITATION, OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION QUALIFICATION
UNDER THE SECURITIES LAWS OF ANY SUCH STATE. TO OBTAIN A CURRENTLY EFFECTIVE
PROSPECTUS FOR THE EXISTING PORTFOLIOS OF VANGUARD INDEX TRUST, PLEASE CONTACT
VANGUARD'S INVESTOR INFORMATION DEPARTMENT AT 1-800-662-7447.
[VANGUARD GROUP LOGO]
<PAGE> 69
VANGUARD INSTITUTIONAL INDEX FUND Stock Index Mutual Funds
VANGUARD INDEX TRUST
<TABLE>
<CAPTION>
CONTENTS
<S> <C>
Funds Profile 1
Fund Expenses 5
Financial Highlights 9
A Word About Risk 15
The Funds' Objective 15
Who Should Invest 16
Investment Strategy 17
Investment Policies 22
Investment
Limitations 23
Investment
Performance 23
Share Price 25
Dividends, Capital
Gains, and Taxes 25
The Funds and
Vanguard 26
Investment Adviser 26
General Information 27
Investing with
Vanguard 29
- - For Plan
Participants 29
- - For Other
Institutional
Investors 30
Accessing Fund
Information by
Computer 30
Prospectus Postscript 31
Risk Quiz 32
Glossary Inside Back Cover
</TABLE>
INVESTMENT OBJECTIVE AND POLICIES
The Vanguard index funds (the "Funds") offered in this prospectus are Vanguard
Institutional Index Fund and eight Portfolios of Vanguard Index Trust.
Vanguard Institutional Index Fund is an open-end investment company that
seeks to match the investment performance of the Standard & Poor's 500 Composite
Stock Price Index.
Vanguard Index Trust is an open-end investment company that includes eight*
separate, diversified mutual fund portfolios: Total Stock Market, Extended
Market, Mid Capitalization Stock, Small Capitalization Stock, Value, Small
Capitalization Value Stock, Growth, and Small Capitalization Growth Stock. The
Mid Capitalization Stock, Small Capitalization Value Stock, and Small
Capitalization Growth Stock Portfolios did not begin operations until April 20,
1998; the Value and Growth Portfolios did not begin issuing Institutional Shares
until April 20, 1998. Each Trust Portfolio seeks to match, as closely as
possible, the performance of a different stock market index. One index reflects
the entire U.S. stock market; the seven other indexes focus on specific stock
market segments. You can buy shares in any of the eight Portfolios that meet
your investment needs; you do not have to buy shares in all eight.
Long-term capital growth (and, for some Portfolios, dividend income) may be
achieved as the Funds track their respective indexes.
You should note that none of the Funds' shares are guaranteed or insured by
the FDIC or any other agency of the U.S. government. As with any investment in
common stocks, which are subject to wide fluctuations in market value, you could
lose money by investing in the Funds.
FEES AND EXPENSES
The Funds are offered on a no-load basis, which means that you pay no sales
commissions or 12b-1 marketing fees. You will, however, incur expenses for
investment advisory, management, administrative, and distribution services,
which are included in the expense ratios of the Funds.
Five Portfolios charge a fee on purchases: 0.25% for the Extended Market and
Mid Capitalization Stock Portfolios, 0.5% for the Small Capitalization Stock
Portfolio, and 1.00% for the Small Capitalization Value Stock and Small
Capitalization Growth Stock Portfolios (fees apply to both Institutional Shares
and Investor Shares).
ADDITIONAL INFORMATION ABOUT THE FUNDS
Statements of Additional Information (dated April 20, 1998) containing more
information about the Funds are, by reference, part of this prospectus and may
be obtained without charge by contacting Vanguard (see back cover) or visiting
the Securities and Exchange Commission's website (www.sec.gov).
*The 500 Portfolio of Vanguard Index Trust is not included in this prospectus
since it does not offer Institutional Shares.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE> 70
IMPORTANT NOTE
Vanguard Institutional Index Fund offers two separate classes of shares:
Institutional and Institutional Plus. The Institutional Shares are designed for
investors who meet the investment minimum of $10 million and generally do not
require special employee benefit plan services. The Institutional Plus Shares
are designed for investors who meet the investment minimum of $200 million and
generally do not require special employee benefit plan services.
Each Portfolio of Vanguard Index Trust also offers two separate classes of
shares: Institutional and Investor. This prospectus is intended for investors
who qualify for Institutional Shares, which have an investment minimum of $10
million and generally do not require special employee benefit services. Each
Portfolio also offers Investor Shares, which have an investment minimum of
$3,000 and are offered by a separate prospectus (you can obtain a copy of this
prospectus by calling Vanguard). Certain information on Vanguard Index Trust's
Investor Shares is also included in this prospectus.
Note that the Fund's and the Portfolios' separate share classes have
different expenses; as a result, their investment performance will vary.
WHY READING THIS PROSPECTUS IS IMPORTANT
This prospectus explains the objective, risks, and strategy of Vanguard
Institutional Index Fund and of each Portfolio of Vanguard Index Trust. To
highlight terms and concepts important to mutual fund investors, we have
provided "Plain Talk" explanations along the way. Reading the prospectus will
help you decide whether the Funds are the right investment for you. We suggest
that you keep it for future reference.
Vanguard Institutional Index Fund
Vanguard Index Trust
FUND PROFILE
WHO SHOULD INVEST (page 16)
- - Investors looking for a simple way to match the performance of a
specific stock market index.
- - Investors seeking a stock mutual fund as part of a balanced and
diversified investment program.
- - Investors seeking growth of their capital over the long term -- at
least five years.
WHO SHOULD NOT INVEST
- - Investors unwilling to accept significant fluctuations in share price.
- - Investors hoping to beat the stock market.
RISKS OF THE FUNDS (pages 15-23)
The total returns of the Funds will fluctuate within a wide range, so an
investor could lose money over short or even extended periods. The Funds are
subject to market risk (the chance that stock prices in general will fall,
sometimes suddenly and sharply) and objective risk (the chance that a specific
segment of the stock market will not perform as well as the overall market).
More detailed information about risk -- including risks specific to each Fund
- --is provided beginning on page 15.
DIVIDENDS AND CAPITAL GAINS (page 25)
Vanguard Institutional Index Fund and three of Vanguard Index Trust's Portfolios
- -- the Total Stock Market, Value, and Growth Portfolios -- pay dividends in
March, June, September, and December. The Extended Market, Mid Capitalization
Stock, Small Capitalization Stock, Small Capitalization Value Stock, and Small
Capitalization Growth Stock Portfolios pay dividends in December. The Funds pay
capital gains, if any, in December.
INVESTMENT ADVISER (page 26)
Vanguard Core Management Group, Valley Forge, Pa., manages the Funds.
1
<PAGE> 71
Vanguard Institutional Index Fund
Vanguard Index Trust
FUND PROFILE (continued)
AVERAGE ANNUAL TOTAL RETURNS --
INSTITUTIONAL SHARES
PERIODS ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
1 YEAR 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Institutional Index Fund --
Institutional Shares 33.4% 20.3% 17.6%*
S&P 500 Index [BULLET] [BULLET] [BULLET]
Institutional Index Fund --
Institutional Plus Shares 7.3* -- --
S&P 500 Index [BULLET]
Total Stock Market 8.6* -- --
Wilshire 5000 Index 8.9* -- --
Extended Market** 11.8* -- --
Wilshire 4500 Index 12.1* -- --
SmallCap Stock** 11.4* -- --
Russell 2000 Index 11.1* -- --
- --------------------------------------------------------------------------------
</TABLE>
Note: The Mid Capitalization Stock, Small Capitalization Value Stock, and Small
Capitalization Growth Stock Portfolios did not begin operations until April 20,
1998; the Value and Growth Portfolios did not begin offering Institutional
Shares until April 20, 1998.
*Since inception; see pages 2 and 3.
**Does not include transaction fee; see pages 2 and 3.
AVERAGE ANNUAL TOTAL RETURNS --
INVESTOR SHARES
PERIODS ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
1 YEAR 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Total Stock Market 31.0% 18.9% 18.5%*
Wilshire 5000 Index 31.4 19.3 18.9
Extended Market** 26.7% 17.5% 16.4%
Wilshire 4500 Index 25.7 17.0 16.3
SmallCap Stock** 24.6% 17.5% 15.8%
Russell 2000 Index 22.4 16.4 15.8
Value 29.8% 20.5% 20.7%*
S&P/BARRA Value Index 30.0 20.7 20.9*
Growth 36.3% 19.5% 19.5%*
S&P/BARRA Growth Index 36.5 19.6 19.8*
- --------------------------------------------------------------------------------
</TABLE>
Note: The Mid Capitalization Stock, Small Capitalization Value Stock, and Small
Capitalization Growth Stock Portfolios did not begin operations until April 20,
1998.
*Since inception; see pages 2 and 3.
**Does not include transaction fee; see pages 2 and 3.
IN EVALUATING PAST PERFORMANCE, REMEMBER THAT IT IS NOT INDICATIVE OF FUTURE
PERFORMANCE AND THAT RETURNS FROM STOCKS BEFORE ADJUSTING FOR INFLATION WERE
RELATIVELY HIGH DURING THE PERIODS SHOWN. PERFORMANCE FIGURES INCLUDE THE
REINVESTMENT OF ANY DIVIDEND AND CAPITAL GAINS DISTRIBUTIONS. THE RETURNS SHOWN
ARE NET OF EXPENSES, BUT THEY DO NOT REFLECT INCOME TAXES AN INVESTOR WOULD HAVE
INCURRED. NOTE, TOO, THAT BOTH THE RETURN AND PRINCIPAL VALUE OF AN INVESTMENT
WILL FLUCTUATE SO THAT INVESTORS' SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR
LESS THAN THEIR ORIGINAL COST.
INSTITUTIONAL INDEX FUND
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
INSTITUTIONAL INSTITUTIONAL
SHARES PLUS SHARES
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
INCEPTION DATE: 7/31/1990 7/7/1997
NET ASSETS AS OF 12/31/1997: $15.34 $3.50
PORTFOLIO EXPENSE RATIO FOR THE YEAR ENDED 12/31/1997: 0.06% 0.025%
TRANSACTION FEE ON PURCHASES: None* None*
NEWSPAPER ABBREVIATION: InstIdx InstPlus
VANGUARD FUND NUMBER: 094 854
CUSIP NUMBER: 922040100 922040209
QUOTRON SYMBOL: VINIX.Q VIIIX.Q
</TABLE>
*Vanguard Institutional Index Fund reserves the right to deduct a transaction
fee, ranging from 0.08% to 0.20%, from purchases of shares.
2
<PAGE> 72
Vanguard Institutional Index Fund
Vanguard Index Trust
FUND PROFILE (continued)
INDEX TRUST -- INSTITUTIONAL SHARES
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
TOTAL STOCK EXTENDED MIDCAP
MARKET MARKET STOCK
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INCEPTION DATE: 7/7/1997 7/7/1997 4/20/1998
NET ASSETS AS OF 12/31/1997: $1.50 billion $415 million None
PORTFOLIO EXPENSE RATIO FOR THE
YEAR ENDED 12/31/1997 (Annualized): 0.10% 0.10% N/A
TRANSACTION FEE ON PURCHASES: None* 0.25% 0.25%
NEWSPAPER ABBREVIATION: TotStIst ExtndIst MidCapIst
VANGUARD FUND NUMBER: 855 856 864
CUSIP NUMBER: 922908801 922908884 922908835
QUOTRON SYMBOL: VITSX.Q VIEIX.Q N/A
- -------------------------------------------------------------------------------------------------
</TABLE>
*The Total Stock Market Portfolio -- Institutional Shares reserves the right to
deduct a transaction fee, ranging from 0.08% to 0.20%, from purchases of shares.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
SMALLCAP SMALLCAP
STOCK VALUE VALUE
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INCEPTION DATE: 7/7/1997 4/20/1998 4/20/1998
NET ASSETS AS OF 12/31/1997: $137 million None None
PORTFOLIO EXPENSE RATIO FOR THE
YEAR ENDED 12/31/1997 (Annualized): 0.12% N/A N/A
TRANSACTION FEE ON PURCHASES: 0.5% None 1.00%
NEWSPAPER ABBREVIATION: SmCapIst ValIst SmValIst
VANGUARD FUND NUMBER: 857 867 865
CUSIP NUMBER: 922908876 922908850 922908785
QUOTRON SYMBOL: VSCIX.Q N/A N/A
- -------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
SMALLCAP
GROWTH GROWTH
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
INCEPTION DATE: 4/20/1998 4/20/1998
NET ASSETS AS OF 12/31/1997: None None
PORTFOLIO EXPENSE RATIO FOR THE YEAR ENDED 12/31/1997: N/A N/A
TRANSACTION FEE ON PURCHASES: None 1.00%
NEWSPAPER ABBREVIATION: GroIst SmGroIst
VANGUARD FUND NUMBER: 868 866
CUSIP NUMBER: 922908868 922908819
QUOTRON SYMBOL: N/A N/A
- -------------------------------------------------------------------------------------------------
</TABLE>
3
<PAGE> 73
Vanguard Institutional Index Fund
Vanguard Index Trust
FUND PROFILE (continued)
INDEX TRUST -- INVESTOR SHARES
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
TOTAL STOCK EXTENDED MIDCAP
MARKET MARKET STOCK
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INCEPTION DATE: 4/27/1992 12/21/1987 4/20/1998
NET ASSETS AS OF 12/31/1997: $5.09 billion $2.72 billion None
PORTFOLIO EXPENSE RATIO FOR THE
YEAR ENDED 12/31/1997: 0.20% 0.23% N/A
TRANSACTION FEE ON PURCHASES: None 0.25% 0.25%
NEWSPAPER ABBREVIATION: TotSt Extnd MidCap
VANGUARD FUND NUMBER: 085 098 859
CUSIP NUMBER: 922908306 922908207 922908843
QUOTRON SYMBOL: VTSMX.Q VEXMX.Q N/A
- -------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
SMALLCAP SMALLCAP
STOCK VALUE VALUE
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INCEPTION DATE: 10/3/1960 11/2/1992 4/20/1998
NET ASSETS AS OF 12/31/1997: $2.70 Billion $1.80 Billion None
PORTFOLIO EXPENSE RATIO FOR THE
YEAR ENDED 12/31/1997: 0.23% 0.20% N/A
TRANSACTION FEE ON PURCHASES: 0.5% None 1.00%
NEWSPAPER ABBREVIATION: SmCap Value SmValue
VANGUARD FUND NUMBER: 048 006 860
CUSIP NUMBER: 922908702 922908405 922908793
QUOTRON SYMBOL: NAESX.Q VIVAX.Q N/A
- -------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
SMALLCAP
GROWTH GROWTH
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
INCEPTION DATE: 11/2/1997 4/20/1998
NET ASSETS AS OF 12/31/1997: $2.40 billion None
PORTFOLIO EXPENSE RATIO FOR THE YEAR ENDED 12/31/1997: 0.20% N/A
TRANSACTION FEE ON PURCHASES: None 1.00%
NEWSPAPER ABBREVIATION: Growth SmGrowth
VANGUARD FUND NUMBER: 009 861
CUSIP NUMBER: 922908504 922908827
QUOTRON SYMBOL: VIGRX.Q N/A
- ------------------------------------------------------------------------------------------------
</TABLE>
4
<PAGE> 74
FUND EXPENSES
The examples below are designed to help you understand the costs you would bear
as an investor in the Funds.
SHAREHOLDER TRANSACTION EXPENSES AND FEES
INSTITUTIONAL INDEX FUND*
<TABLE>
<S> <C>
Sales Load Imposed on Purchases: None
Transaction Fee on Purchases: None**
Sales Load Imposed on Reinvested Dividends: None
Redemption Fees: None
Exchange Fees: None
</TABLE>
* Applies to both Institutional Shares and Institutional Plus Shares.
** Vanguard Institutional Index Fund reserves the right to deduct a transaction
fee, ranging from 0.08% to 0.20%, from purchases of shares.
INDEX TRUST*
<TABLE>
<S> <C>
Sales Load Imposed on Purchases: None
Transaction Fee on Purchases:**
Extended Market Portfolio: 0.25%
Mid Capitalization Stock Portfolio: 0.25%
Small Capitalization Stock Portfolio: 0.50%
Small Capitalization Value Stock Portfolio: 1.00%
Small Capitalization Growth Stock Portfolio: 1.00%
Total Stock Market,*** Value, and Growth Portfolios: None
Sales Load Imposed on Reinvested Dividends: None
Redemption Fees: None
Exchange Fees: None
</TABLE>
* Applies to both Institutional Shares and Investor Shares.
** The transaction fee is deducted from all purchases (including exchanges from
other Vanguard funds) but not from reinvested dividends and capital gains.
*** The Total Stock Market Portfolio (Institutional Shares) reserves the right
to deduct a transaction fee, ranging from 0.08% to 0.20%, from purchases of
shares.
The next tables illustrate the expenses that you can incur, outside of
transaction and maintenance fees, as a shareholder in either of the Funds. These
expenses are deducted from the Funds' income before it is paid to you. Expenses
include investment advisory fees as well as fees for administering the Funds,
providing services, and other activities. The expenses for Vanguard
Institutional Index Fund; the Total Stock Market, Extended Market, and Small
Capitalization Stock Portfolios; and the Investor Shares of the Value Portfolio
and the Growth Portfolio, as shown in the table, are based upon those incurred
in the fiscal year ended December 31, 1997. The expenses shown for the Mid
Capitalization Stock, Small Capitalization Value Stock, and Small Capitalization
Growth Stock Portfolios (Institutional and Investor Shares), as well as for the
Institutional Shares of the Value Portfolio and the Growth Portfolio, are
estimates for their first full year of operations.
PLAIN TALK ABOUT
VANGUARD'S FEES
Some of Vanguard's index portfolios charge a transaction fee on purchases of
portfolio shares to offset the higher costs of trading certain securities,
particularly small-company and international stocks. The transaction fee ensures
that these higher costs are borne by the investors making the transactions --
and not by shareholders already in the portfolio.
At Vanguard, all fees are paid directly to the portfolio itself (unlike a
sales charge or load, which -- for many fund companies -- ends up in the pocket
of the sponsor, adviser, or sales representative). Without transaction fees, an
index portfolio would have trouble tracking its target index.
PLAIN TALK ABOUT
FUND EXPENSES
All mutual funds have operating expenses. These expenses, which are deducted
from a fund's gross income, are expressed as a percentage of the net assets of
the fund. For instance, the Institutional Index Fund's (Institutional Shares)
expense ratio in fiscal year 1997 was 0.06%, or $0.60 per $1,000 of average net
assets. The average equity index fund had expenses in 1997 of 0.33%, or $3.30
per $1,000 of average net assets, according to Lipper Analytical Services, Inc.,
which reports on the mutual fund industry.
5
<PAGE> 75
FUND OPERATING EXPENSES
INSTITUTIONAL INDEX FUND
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
INSTITUTIONAL INSTITUTIONAL
SHARES PLUS SHARES
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Management and
Administrative Expenses: 0.06% .025%
Investment Advisory Expenses: None None
12b-1 Marketing Fees None None
Other Expenses
Marketing and Distribution Expenses: 0.00% 0.00%
Miscellaneous Expenses
(e.g., Taxes, Auditing): 0.00% 0.00%
---- ----
Total Other Expenses: 0.00% 0.00%
---- ----
TOTAL OPERATING EXPENSES (EXPENSE RATIO): 0.06% .025%
==== ====
</TABLE>
INDEX TRUST -- INSTITUTIONAL SHARES
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
TOTAL STOCK EXTENDED MIDCAP
MARKET MARKET STOCK
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Management and
Administrative Expenses: 0.08% 0.08% 0.09%
Investment Advisory Expenses: None None None
12b-1 Marketing Fees: None None None
Other Expenses
Marketing and Distribution
Expenses: 0.02% 0.02% 0.02%
Miscellaneous Expenses
(e.g., Taxes, Auditing): 0.00% 0.00% 0.01%
---- ---- ----
Total Other Expenses: 0.02% 0.02% 0.03%
---- ---- ----
TOTAL OPERATING EXPENSES:
(EXPENSE RATIO): 0.10% 0.10% 0.12%
==== ==== ====
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
SMALLCAP SMALLCAP
STOCK VALUE VALUE
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Management and
Administrative Expenses: 0.10% 0.08% 0.09%
Investment Advisory Expenses: None None None
12b-1 Marketing Fees: None None None
Other Expenses
Marketing and Distribution
Expenses: 0.02% 0.02% 0.02%
Miscellaneous Expenses
(e.g., Taxes, Auditing): 0.00% 0.02% 0.01%
---- ---- ----
Total Other Expenses: 0.02% 0.04% 0.03%
---- ---- ----
TOTAL OPERATING EXPENSES
(EXPENSE RATIO): 0.12% 0.12% 0.12%
==== ==== ====
</TABLE>
6
<PAGE> 76
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
SMALLCAP
GROWTH GROWTH
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Management and
Administrative Expenses: 0.08% 0.09%
Investment Advisory Expenses: None None
12b-1 Marketing Fees: None None
Other Expenses
Marketing and Distribution Expenses: 0.02% 0.02%
Miscellaneous Expenses
(e.g., Taxes, Auditing): 0.02% 0.01%
---- ----
Total Other Expenses: 0.04% 0.03%
---- ----
TOTAL OPERATING EXPENSES (EXPENSE RATIO): 0.12% 0.12%
==== ====
</TABLE>
INDEX TRUST -- INVESTOR SHARES
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
TOTAL STOCK EXTENDED MIDCAP
MARKET MARKET STOCK
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Management and
Administrative Expenses: 0.17% 0.20% 0.22%
Investment Advisory Expenses: None None None
12b-1 Marketing Fees: None None None
Other Expenses
Marketing and Distribution
Expenses: 0.03% 0.02% 0.02%
Miscellaneous Expenses
(e.g., Taxes, Auditing): 0.00% 0.01% 0.01%
---- ---- ----
Total Other Expenses: 0.03% 0.03% 0.03%
TOTAL OPERATING EXPENSES ---- ---- ----
(EXPENSE RATIO): 0.20% 0.23% 0.25%
==== ==== ====
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
SMALLCAP SMALLCAP
STOCK VALUE VALUE
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Management and
Administrative Expenses: 0.20% 0.17% 0.22%
Investment Advisory Expenses: None None None
12b-1 Marketing Fees: None None None
Other Expenses
Marketing and Distribution
Expenses: 0.02% 0.02% 0.02%
Miscellaneous Expenses
(e.g., Taxes, Auditing): 0.01% 0.01% 0.01%
---- ---- ----
Total Other Expenses: 0.03% 0.03% 0.03%
---- ---- ----
TOTAL OPERATING EXPENSES
(EXPENSE RATIO): 0.23% 0.20% 0.25%
==== ==== ====
</TABLE>
7
<PAGE> 77
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
SMALLCAP
GROWTH GROWTH
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Management and
Administrative Expenses: 0.17% 0.22%
Investment Advisory Expenses: None None
12b-1 Marketing Fees: None None
Other Expenses
Marketing and Distribution Expenses: 0.02% 0.02%
Miscellaneous Expenses
(e.g., Taxes, Auditing): 0.01% 0.01%
---- ----
Total Other Expenses: 0.03% 0.03%
---- ----
TOTAL OPERATING EXPENSES (EXPENSE RATIO): 0.20% 0.25%
==== ====
</TABLE>
The following examples are intended to help you compare the cost of investing
in the Funds with the cost of investing in other mutual funds, by illustrating
the hypothetical expenses that you would incur on a $1,000 investment in a Fund
over various periods. These examples assume that (1) the Fund provides a return
of 5% a year, and (2) you redeem your investment at the end of each period.
INSTITUTIONAL INDEX FUND
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Institutional Shares $1 $2 $3 $8
Institutional Plus Shares $0 $1 $1 $3
- --------------------------------------------------------------------------------
</TABLE>
INDEX TRUST -- INSTITUTIONAL SHARES
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total Stock Market $ 1 $ 3 $ 6 $13
Extended Market 4 6 8 15
MidCap Stock 4 6 9 18
SmallCap Stock 6 9 12 20
Value 1 4 7 15
SmallCap Value Stock 11 14 17 25
Growth 1 4 7 15
SmallCap Growth Stock 11 14 17 25
</TABLE>
INDEX TRUST -- INVESTOR SHARES
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total Stock Market $ 2 $ 6 $11 $26
Extended Market 5 10 15 32
MidCap Stock 5 11 17 34
SmallCap Stock 7 12 18 34
Value 2 6 11 26
SmallCap Value Stock 13 18 24 42
Growth 2 6 11 26
SmallCap Growth Stock 13 18 24 42
</TABLE>
THESE EXAMPLES SHOULD NOT BE CONSIDERED TO REPRESENT ACTUAL EXPENSES OR
PERFORMANCE FROM THE PAST OR FOR THE FUTURE, WHICH MAY BE HIGHER OR LOWER THAN
THOSE SHOWN.
8
<PAGE> 78
FINANCIAL HIGHLIGHTS
The following financial highlights tables show the results for a share
outstanding of Vanguard Institutional Index Fund (Institutional Shares and
Institutional Plus Shares), as well as an Institutional Share outstanding of the
Total Stock Market, Extended Market, and Small Capitalization Stock Market
Portfolios* for each of the last ten years ended December 31, 1997 (or each year
since the Fund's or Portfolio's inception date). The tables also show the
results for an Investor Share outstanding of the Total Stock Market, Extended
Market, Small Capitalization Stock, Value, and Growth Portfolios** for each of
the last ten years ended December 31, 1997 (or each year since the Portfolio's
inception date). The financial statements that include these financial
highlights were audited by Price Waterhouse LLP, independent accountants. You
should read this information in conjunction with the financial statements and
accompanying notes of the Funds, which appear, along with the audit reports from
Price Waterhouse, in the Funds' most recent annual reports to shareholders. The
annual reports are incorporated by reference in the Statements of Additional
Information and in this prospectus, and contain a more complete discussion of
the Funds' performance. You may have the reports sent to you without charge by
contacting Vanguard (see back cover).
PLAIN TALK ABOUT
HOW TO READ THE FINANCIAL HIGHLIGHTS TABLE
This explanation uses the Institutional Index Fund - Institutional Shares as an
example. The Fund began fiscal 1997 with a net asset value (price) of $68.86 per
share. During the year, the Fund earned $1.391 per share from investment income
(interest and dividends) and $21.415 per share from investments that had
appreciated in value or were sold for a price higher than the Fund paid for
them. This resulted in total earnings of $22.806 per share. Of those earnings,
$2.106 per share was returned to shareholders in distributions ($1.391 in
dividends, $.715 in capital gains). The earnings ($22.806 per share) less
distributions ($2.106 per share) resulted in a share price of $89.56 at the end
of the fiscal year, an increase of $20.70 per share (from $68.86 at the start of
the period to $89.56 at the end of the period). Assuming the shareholder had
reinvested the distributions in the purchase of more shares, total return from
the Fund was 33.36% for the year.
As of December 31, 1997, the Fund had $15.3 billion in net assets; an expense
ratio of 0.06% ($0.60 per $1,000 of net assets); and net investment income
amounting to 1.77% of its average net assets. It sold and replaced securities
valued at 7% of its total net assets.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
INSTITUTIONAL INDEX FUND - - INSTITUTIONAL SHARES
-----------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------- 7/31/1990* -
1997 1996 1995 1994 1993 1992 1991 12/31/1990
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 68.86 $ 57.93 $ 43.22 $ 44.20 $ 41.45 $ 39.91 $ 31.62 $ 34.10
-----------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income 1.391 1.38 1.28 1.23 1.20 1.17 1.16 .52
Net Realized and Unrealized
Gain (Loss) on Investments 21.415 11.90 14.86 (.66) 2.92 1.79 8.35 (2.48)
-----------------------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 22.80 613.28 16.14 .57 4.12 2.96 9.51 (1.96)
- ------------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (1.391) (1.36) (1.27) (1.21) (1.19) (1.17) (1.16) (.52)
Distributions from Realized Capital Gains (.715) (.99) (.16) (.34) (.18) (.25) (.06) --
-----------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (2.106) (2.35) (1.43) (1.55) (1.37) (1.42) (1.22) (.52)
- ------------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 89.56 $ 68.86 $ 57.93 $ 43.22 $ 44.20 $ 41.45 $ 39.91 $ 31.62
====================================================================================================================================
TOTAL RETURN 33.36% 23.06% 37.60% 1.31% 10.02% 7.54% 30.34% (5.74)%
====================================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $ 15,348 $ 11,426 $ 6,674 $ 3,265 $ 3,103 $ 1,525 $ 1,069 $ 512
Ratio of Total Expenses to Average Net Assets 0.06% 0.06% 0.06% 0.07% 0.07% 0.07% 0.08% 0.09%**
Ratio of Net Investment Income to
Average Net Assets 1.77% 2.18% 2.49% 2.80% 2.72% 2.94% 3.15% 3.98%**
Portfolio Turnover Rate 7%+ 9%+ 4%+ 23%+ 4%+ 9%+ 4% 2%
Average Commission Rate Paid $ .0166 $ .0167 N/A N/A N/A N/A N/A N/A
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Inception date.
** Annualized.
+ Portfolio turnover rates excluding in-kind redemptions were 6%, 9%, 4%, 19%,
3%, and 6%, respectively.
- --------------------------------------------------------------------------------
* The Mid Capitalization Stock, Small Capitalization Value Stock, and Small
Capitalization Growth Stock Portfolios did not begin operations until April
20, 1998; the Value and Growth Portfolios did not begin issuing Institutional
Shares until April 20, 1998.
**The Mid Capitalization Stock, Small Capitalization Value Stock, and Small
Capitalization Growth Stock Portfolios did not begin operations until April
20, 1998.
9
<PAGE> 79
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
INSTITUTIONAL INDEX FUND -- INSTITUTIONAL PLUS SHARES
-----------------------------------------------------
7/7/1997* -
12/31/1997
- --------------------------------------------------------------------------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 84.91
-----------
INVESTMENT OPERATIONS
Net Investment Income .681
Net Realized and Unrealized Gain (Loss) on Investments 5.455
-----------
TOTAL FROM INVESTMENT OPERATIONS 6.136
- --------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.866)
Distributions from Realized Capital Gains (.620)
-----------
TOTAL DISTRIBUTIONS (1.486)
- --------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 89.56
================================================================================
TOTAL RETURN 7.29%
================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $ 3,488
Ratio of Total Expenses to Average Net Assets 0.025%**
Ratio of Net Investment Income to Average Net Assets 1.72%**
Portfolio Turnover Rate 7%+
Average Commission Rate Paid $ .0166
- --------------------------------------------------------------------------------
</TABLE>
* Inception Date.
** Annualized.
+ Portfolio turnover rate excluding in-kind redemptions was 6%.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
TOTAL STOCK MARKET PORTFOLIO -- INSTITUTIONAL SHARES
----------------------------------------------------
7/7/1997* -
12/31/1997
- --------------------------------------------------------------------------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 21.27
-----------
INVESTMENT OPERATIONS
Net Investment Income .172
Net Realized and Unrealized Gain (Loss) on Investments 1.642
-----------
TOTAL FROM INVESTMENT OPERATIONS 1.814
- --------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.214)
Distributions from Realized Capital Gains (.230)
-----------
TOTAL DISTRIBUTIONS (.444)
- --------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 22.64
================================================================================
TOTAL RETURN 8.60%
================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $ 1,504
Ratio of Total Expenses to Average Net Assets 0.10%**
Ratio of Net Investment Income to Average Net Assets 1.70%**
Portfolio Turnover Rate 2%
Average Commission Rate Paid $ .0
- --------------------------------------------------------------------------------
</TABLE>
* Inception Date.
** Annualized.
- --------------------------------------------------------------------------------
10
<PAGE> 80
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
EXTENDED MARKET PORTFOLIO -- INSTITUTIONAL SHARES
-------------------------------------------------
7/7/1997* -
12/31/1997
- --------------------------------------------------------------------------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 29.28
-----------
INVESTMENT OPERATIONS
Net Investment Income .200
Net Realized and Unrealized Gain (Loss) on Investments 3.191
-----------
TOTAL FROM INVESTMENT OPERATIONS 3.391
- --------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.371)
Distributions from Realized Capital Gains (1.540)
-----------
TOTAL DISTRIBUTIONS (1.911)
- --------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 30.76
================================================================================
TOTAL RETURN** 11.82%
================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $ 415
Ratio of Total Expenses to Average Net Assets 0.10%+
Ratio of Net Investment Income to Average Net Assets 1.43%+
Portfolio Turnover Rate 15%++
Average Commission Rate Paid $ .0228
- --------------------------------------------------------------------------------
</TABLE>
* Inception date.
** Total return figures do not reflect transaction fees on purchases (0.5% until
November 3, 1997; 0.25% thereafter).
+ Annualized.
++ Portfolio turnover rate excluding in-kind redemptions was 14%.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
SMALL CAPITALIZATION STOCK PORTFOLIO -- INSTITUTIONAL SHARES
------------------------------------------------------------
7/7/1997* -
12/31/1997
- --------------------------------------------------------------------------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 22.56
-----------
INVESTMENT OPERATIONS
Net Investment Income .158
Net Realized and Unrealized Gain (Loss) on Investments 2.370
-----------
TOTAL FROM INVESTMENT OPERATIONS 2.528
- --------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.288)
Distributions from Realized Capital Gains (1.050)
-----------
TOTAL DISTRIBUTIONS (1.338)
- --------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 23.75
================================================================================
TOTAL RETURN** 11.42%
================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $ 137
Ratio of Total Expenses to Average Net Assets 0.12%+
Ratio of Net Investment Income to Average Net Assets 1.52%+
Portfolio Turnover Rate 29%
Average Commission Rate Paid $ .0226
- --------------------------------------------------------------------------------
</TABLE>
* Inception date.
** Total return figures do not reflect the 0.5% transaction fee on purchases.
+ Annualized.
- --------------------------------------------------------------------------------
11
<PAGE> 81
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL STOCK MARKET PORTFOLIO -- INVESTOR SHARES
----------------------------------------------------------------
YEAR ENDED DECEMBER 31,
--------------------------------------------------- 3/16/1992*-
1997 1996 1995 1994 1993 12/31/1992
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 17.77 $ 15.04 $ 11.37 $ 11.69 $ 10.84 $ 10.00
----------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .319 .29 .29 .27 .26 .23
Net Realized and Unrealized Gain (Loss) on Investments 5.143 2.84 3.75 (.29) .88 .84
----------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 5.462 3.13 4.04 (.02) 1.14 1.07
- ---------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.322) (.29) (.28) (.27) (.26) (.23)
Distributions from Realized Capital Gains (.270) (.11) (.09) (.03) (.03) --
----------------------------------------------------------------
TOTAL DISTRIBUTIONS (.592) (.40) (.37) (.30) (.29) (.23)
- ---------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 22.64 $ 17.77 $ 15.04 $ 11.37 $ 11.69 $ 10.84
===========================================================================================================================
TOTAL RETURN** 30.99% 20.96% 35.79% -0.17% 10.62% 10.41%
===========================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $ 5,092 $ 3,531 $ 1,571 $ 786 $ 512 $ 275
Ratio of Total Expenses to Average
Net Assets 0.20% 0.22% 0.25% 0.20% 0.20% 0.21%+
Ratio of Net Investment Income to
Average Net Assets 1.65% 1.86% 2.14% 2.35% 2.31% 2.42%+
Portfolio Turnover Rate 2% 3% 3% 2% 1% 3%
Average Commission Rate Paid $ .0177 $ .0216 N/A N/A N/A N/A
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Inception date.
** Total return figures do not reflect the 0.25% transaction fee on purchases
through 1995 or the annual account maintenance fee of $10. Subscription
period for the Portfolio was March 16 to April 26, 1992, during which time
all assets were held in money market instruments. Performance measurement
began April 27, 1992.
+ Annualized.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
EXTENDED MARKET PORTFOLIO -- INVESTOR SHARES
----------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
1997 1996 1995 1994 1993 1992 1991 1990
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $ 26.20 $ 24.07 $ 18.52 $ 19.43 $ 17.35 $ 15.82 $ 11.48 $ 13.92
----------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .351 .34 .30 .28 .23 .24 .25 .30
----------------------------------------------------------------------------------
Net Realized and Unrealized Gain (Loss)
on Investments 6.479 3.85 5.95 (.62) 2.28 1.72 4.54 (2.25)
----------------------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 6.830 4.19 6.25 (.34) 2.51 1.96 4.79 (1.95)
- ----------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.360) (.34) (.30) (.28) (.23) (.25) (.25) (.33)
Distributions from Realized
Capital Gains (1.910) (1.72) (.40) (.29) (.20) (.18) (.20) (.16)
----------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (2.270) (2.06) (.70) (.57) (.43) (.43) (.45) (.49)
- ----------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 30.76 $ 26.20 $ 24.07 $ 18.52 $ 19.43 $ 17.35 $ 15.82 $ 11.48
============================================================================================================================
TOTAL RETURN* 26.73% 17.65% 33.80% -1.76% 14.49% 12.47% 41.85% -14.05%
============================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $ 2,723 $ 2,099 $ 1,523 $ 967 $ 928 $ 585 $ 372 $ 179
Ratio of Total Expenses to
Average Net Assets 0.23% 0.25% 0.25% 0.20% 0.20% 0.20% 0.19% 0.23%
Ratio of Net Investment Income to
Average Net Assets 1.30% 1.42% 1.51% 1.51% 1.48% 1.73% 2.14% 2.68%
Portfolio Turnover Rate 15%** 22% 15% 19% 13% 9% 11% 9%
Average Commission Rate Paid $ .0228 $ .0235 N/A N/A N/A N/A N/A N/A
- ----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
EXTENDED MARKET PORTFOLIO -- INVESTOR SHARES
---------------------
YEAR ENDED DECEMBER 31,
---------------------
1989 1988
---------------------
<S> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $ 11.60 $ 9.99
---------------------
INVESTMENT OPERATIONS
Net Investment Income .26 .34
---------------------
Net Realized and Unrealized Gain (Loss)
on Investments 2.52 1.63
---------------------
TOTAL FROM INVESTMENT OPERATIONS 2.78 1.97
- --------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.23) (.20)
Distributions from Realized
Capital Gains (.23) (.16)
---------------------
TOTAL DISTRIBUTIONS (.46) (.36)
- --------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 13.92 $ 11.60
================================================================================
TOTAL RETURN* 24.10% 19.75%
================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $ 147 $ 35
Ratio of Total Expenses to
Average Net Assets 0.23% 0.24%
Ratio of Net Investment Income to
Average Net Assets 2.92% 2.90%
Portfolio Turnover Rate 14% 26%
Average Commission Rate Paid N/A N/A
- --------------------------------------------------------------------------------
</TABLE>
* Total return figures do not reflect transaction fees on purchases (0.5% in
1995, 1996, and the 1997 period; 1% in 1992 through 1994) or the annual
account maintenance fee of $10. (Note: The transaction fee on purchases was
reduced to 0.25% as of November 3, 1997.)
** Portfolio turnover rate excluding in-kind redemptions was 14%.
- --------------------------------------------------------------------------------
12
<PAGE> 82
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
SMALL CAPITALIZATION STOCK PORTFOLIO -- INVESTOR SHARES*
---------------------------------------------------------------------------------------------
YEAR ENDED
DECEMBER 31, YEAR ENDED SEPTEMBER 30,
---------------------------- 2/1/1994- 10/1/1993- ---------------------------------------
1997 1996 1995 12/31/1994 1/31/1994 1993 1992 1991 1990++
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $ 20.23 $ 18.61 $ 14.99 $ 16.24 $ 16.23 $ 12.63 $ 12.03 $ 8.55 $ 11.88
---------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .277 .26 .24 .20 .05 20 .19 .20 .17
Net Realized and Unrealized
Gain (Loss) on Investments 4.632 3.07 4.06 (.86) .96 3.73 .88 3.60 (3.46)
---------------------------------------------------------------------------------------------
TOTAL FROM INVESTMENT
OPERATIONS 4.909 3.33 4.30 (.66) 1.01 3.93 1.07 3.80 (3.29)
- -----------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net
Investment Income (.274) (.27) (.23) (.22) (.18) (.18) (.18) (.18) (.04)
Distributions from
Realized Capital Gains (1.115) (1.44) (.45) (.37) (.82) (.15) (.29) (.14) --
---------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (1.389) (1.71) (.68) (.59) (1.00) (.33) (.47) (.32) (.04)
- -----------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 23.75 $ 20.23 $ 18.61 $ 14.99 $ 16.24 $ 16.23 $ 12.63 $ 12.03 $ 8.55
=============================================================================================================================
TOTAL RETURN* 24.59% 18.12% 28.74% -4.00% 6.65% 31.60% 9.34% 45.91% -27.73%
=============================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period
(Millions) $ 2,652 $ 1,713 $ 971 $ 605 $ 533 $ 432 $ 202 $ 111 $ 40
Ratio of Total Expenses to
Average Net Assets 0.23% 0.25% 0.25% 0.17%+ 0.18%+ 0.18% 0.18% 0.21% 0.31%
Ratio of Net Investment Income
to Average Net Assets 1.38% 1.51% 1.58% 1.50%+ 1.16%+ 1.47% 1.65% 2.11% 1.91%
Portfolio Turnover Rate 29% 28% 28% 25%+ 5%+ 26% 26% 33% 40%
Average Commission Rate Paid $ .0226 $ .0245 N/A N/A N/A N/A N/A N/A N/A
- -----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
SMALL CAPITALIZATION STOCK PORTFOLIO -- INVESTOR SHARES*
------------------------
YEAR ENDED SEPTEMBER 30,
------------------------
1989 1988
- --------------------------------------------------------------------------------
<S> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $ 11.96 $ 15.73
------------------------
INVESTMENT OPERATIONS
Net Investment Income .10 .03
Net Realized and Unrealized
Gain (Loss) on Investments 2.13 (2.59)
------------------------
TOTAL FROM INVESTMENT
OPERATIONS 2.23 (2.56)
- --------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net
Investment Income (.14) --
Distributions from
Realized Capital Gains (2.17) (1.21)
------------------------
TOTAL DISTRIBUTIONS (2.31) (1.21)
- --------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 11.88 $ 11.96
================================================================================
TOTAL RETURN* 18.83% -14.30%
================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period
(Millions) $ 20 $ 27
Ratio of Total Expenses to
Average Net Assets 1.00% 0.95%
Ratio of Net Investment Income
to Average Net Assets 0.65% 0.24%
Portfolio Turnover Rate 160% 68%
Average Commission Rate Paid N/A N/A
- --------------------------------------------------------------------------------
</TABLE>
* Returns prior to January 31, 1994, are for the former Vanguard Small
Capitalization Stock Fund.
** Total return figures do not reflect transaction fees on purchases (0.5% in
1997, 1.0% in 1994 through 1996) or the annual account maintenance fee of
$10.
+ Annualized.
++ Adjusted to reflect a 3-for-1 stock split as of February 3, 1990.
- --------------------------------------------------------------------------------
13
<PAGE> 83
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
VALUE PORTFOLIO -- INVESTOR SHARES
-----------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
-------------------------------------------------------- 11/2/1992*-
1997 1996 1995 1994 1993 12/31/1992
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 17.02 $ 14.79 $ 11.12 $ 11.74 $ 10.30 $ 10.00
-----------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .38 .37 .41 .38 .38 .07
Net Realized and Unrealized Gain (Loss) on Investments 4.57 2.81 3.66 (.46) 1.50 .30
-----------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 4.95 3.18 4.07 (.08) 1.88 .37
- ------------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.37) (.38) (.40) (.38) (.38) (.07)
Distributions from Realized Capital Gains (.75) (.57) -- (.16) (.06) --
-----------------------------------------------------------------------
TOTAL DISTRIBUTIONS (1.12) (.95) (.40) (.54) (.44) (.07)
- ------------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 20.85 $ 17.02 $ 14.79 $ 11.12 $ 11.74 $ 10.30
====================================================================================================================================
TOTAL RETURN+ 29.77% 21.86% 36.94% -0.73% 18.35% 3.70%
====================================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $ 1,796 $ 1,016 $ 496 $ 297 $ 190 $ 24
Ratio of Total Expenses to Average Net Assets 0.20% 0.20% 0.20% 0.20% 0.20% 0%**
Ratio of Net Investment Income to Average Net Assets 2.05% 2.54% 3.06% 3.37% 3.26% 3.46%**
Portfolio Turnover Rate 25% 29% 27% 32% 30% 4%
Average Commission Rate Paid $ .0149 $ .0188 N/A N/A N/A N/A
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
** Inception date.
** Annualized.
+ Total return figures do not reflect the annual maintenance fee of $10.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
GROWTH PORTFOLIO -- INVESTOR SHARES
-----------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
-------------------------------------------------------- 11/2/1992*-
1997 1996 1995 1994 1993 12/31/1992
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 16.90 $ 13.97 $ 10.28 $ 10.20 $ 10.26 $ 10.00
-----------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .23 .22 .21 .21 .21 .06
Net Realized and Unrealized Gain (Loss) on Investments 5.88 3.07 3.68 .08 (.06) .26
-----------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 6.11 3.29 3.89 .29 .15 .32
- ------------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.23) (.22) (.20) (.21) (.21) (.06)
Distributions from Realized Capital Gains (.25) (.14) -- -- -- --
-----------------------------------------------------------------------
TOTAL DISTRIBUTIONS (.48) (.36) (.20) (.21) (.21) (.06)
- ------------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 22.53 $ 16.90 $ 13.97 $ 10.28 $ 10.20 $ 10.26
====================================================================================================================================
TOTAL RETURN+ 36.34% 23.74% 38.06% 2.89% 1.53% 3.19%
====================================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $ 2,365 $ 787 $ 271 $ 86 $ 51 $ 21
Ratio of Total Expenses to Average Net Assets 0.20% 0.20% 0.20% 0.20% 0.20% 0%**
Ratio of Net Investment Income to Average Net Assets 1.19% 1.57% 1.71% 2.08% 2.10% 2.85%**
Portfolio Turnover Rate 26% 29% 24% 28% 36% 2%
Average Commission Rate Paid $ 0.134 $ .0183 N/A N/A N/A N/A
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
** Inception date.
** Annualized.
+ Total return figures do not reflect the annual account maintenance fee of
$10.
- --------------------------------------------------------------------------------
From time to time, the Vanguard funds advertise yield and total return
figures. Yield is a historical measure of dividend income, and total return is a
measure of past dividend income (assuming that it has been reinvested) plus
realized and unrealized capital appreciation (depreciation). Neither yield nor
total return should be used to predict the future performance of a fund.
14
<PAGE> 84
A WORD ABOUT RISK
This prospectus describes the risks you would face as an investor in Vanguard
Institutional Index Fund or the Portfolios of Vanguard Index Trust. It is
important to keep in mind one of the main axioms of investing: The higher the
risk of losing money, the higher the potential reward. The reverse, also, is
generally true: The lower the risk, the lower the potential reward. As you
consider an investment in the Funds, you should take into account your personal
tolerance for the daily fluctuations of the stock market. Remember, too, that
each Fund seeks to match a different stock market index; therefore, investment
risk will vary from one investment to another.
Look for this "warning flag" symbol [FLAG] throughout the prospectus. It is
used to mark detailed information about each type of risk that you, as a
shareholder of the Funds, would confront.
PLAIN TALK ABOUT
INDEXES
An index is a group of securities whose overall performance is used as a
standard to measure investment performance.
THE FUNDS' OBJECTIVES
Each of the Funds seeks to match, as closely as possible, the performance of a
specific stock market index. This objective is fundamental, which means that it
cannot be changed unless a majority of Fund shareholders vote to do so.
[FLAG] BECAUSE OF THE SEVERAL TYPES OF RISK DESCRIBED ON THE FOLLOWING
PAGES, YOUR INVESTMENT IN THE FUNDS, AS WITH ANY INVESTMENT IN COMMON STOCKS,
COULD LOSE MONEY.
The Institutional Index Fund seeks to track the performance of the Standard
& Poor's 500 Composite Stock Price Index, which emphasizes stocks of large U.S.
companies.
The Total Stock Market Portfolio seeks to parallel the performance of the
Wilshire 5000 Equity Index, which consists of all of the U.S. stocks regularly
traded on the New York and American Stock Exchanges and in the Nasdaq
over-the-counter market.
The Extended Market Portfolio seeks to track the performance of the Wilshire
4500 Equity Index, a broadly diversified index of stocks of medium-size and
small U.S. companies (none of which is included in the S&P 500 Index).
The Mid Capitalization Stock Portfolio seeks to parallel the performance of
the Standard & Poor's MidCap 400 Index, which comprises a market-weighted group
of medium-sized U.S. companies.
The Small Capitalization Stock Portfolio seeks to match the performance of
the Russell 2000 Index, which is made up of stocks of small, generally
unseasoned U.S. companies.
15
<PAGE> 85
PLAIN TALK ABOUT
VALUE FUNDS
AND GROWTH FUNDS
Value investing and growth investing are two styles employed by stock fund
managers. Value funds generally emphasize companies that, considering their
assets and earnings history, are attractively priced; these companies often pay
regular dividend income to shareholders. Growth funds generally focus on
companies that, due to their strong earnings and revenue potential, offer
above-average prospects for capital growth, with less emphasis on dividend
income. Value and growth stocks have, in the past, produced similar long-term
returns, though each has periods when it outperforms the other. In general,
value funds are appropriate for investors who want some dividend income and the
potential for capital gains but are less tolerant of share-price fluctuations.
Growth funds, by contrast, appeal to investors who will accept more volatility
in hopes of a greater increase in share price or who prefer a higher portion of
the fund's returns as capital gains, which may be taxed at lower rates than
dividend income.
The Value Portfolio seeks to replicate the performance of the Standard &
Poor's/BARRA Value Index, which includes those stocks of the S&P 500 Index that
offer higher-than-average dividend yields and are often considered out of favor
with investors.
The Small Capitalization Value Stock Portfolio seeks to replicate the
performance of the Standard & Poor's SmallCap 600/BARRA Value Index, which
includes those stocks of the S&P SmallCap 600 Index, with lower-than-average
price/earnings and price/book ratios.
The Growth Portfolio seeks to parallel the performance of the Standard &
Poor's/BARRA Growth Index, which is made up of those stocks of the S&P 500 Index
with lower-than-average dividend yields and higher-than-average price/earnings
and price/book ratios.
The Small Capitalization Growth Stock Portfolio seeks to track the
performance of the Standard & Poor's SmallCap 600/BARRA Growth Index, which
includes those stocks of the S&P SmallCap 600 Index with higher-than-average
price/earnings and price/book ratios.
[FLAG] AN INDEX FUND HAS OPERATING EXPENSES; A MARKET INDEX DOES NOT.
THEREFORE, AN INDEX FUND -- WHILE EXPECTED TO TRACK ITS TARGET INDEX AS CLOSELY
AS POSSIBLE -- WILL NOT BE ABLE TO MATCH THE PERFORMANCE OF THE INDEX EXACTLY.
Neither Vanguard Institutional Index Fund nor any of the Portfolios of
Vanguard Index Trust are sponsored, sold, promoted, or endorsed by Standard &
Poor's Corporation, BARRA Associates, Wilshire Associates, or the Frank Russell
Company.
PLAIN TALK ABOUT
INVESTING FOR THE LONG TERM
The Funds are intended to be long-term investment vehicles; none are designed to
provide investors with a means of speculating on short-term fluctuations in the
stock market.
WHO SHOULD INVEST
Vanguard Institutional Index Fund, or any of the Portfolios of Vanguard Index
Trust, may be a suitable investment for you if you are looking for a U.S. stock
portfolio that follows a simple, cost-effective index-matching strategy and, in
doing so, provides the potential for growth in the value of your investment over
the long term. However, one investment may more closely meet your investment
objectives than the others.
For instance, the Total Stock Market Portfolio may be suitable for you if:
- - You are looking for an investment that reflects the performance of the
entire U.S. stock market.
- - You are seeking some dividend income.
The Institutional Index Fund and the Value Portfolio may be suitable for
you if:
- - You want to invest in large companies.
- - You are seeking some dividend income.
The Extended Market, Mid Capitalization Stock, and Small Capitalization
Stock Portfolios may be suitable for you if:
- - You want to focus on the stocks of medium-sized and/or small companies.
16
<PAGE> 86
- - You can accept greater share-price volatility than Vanguard Institutional
Index Fund and the other Trust Portfolios tend to experience.
The Small Capitalization Value Stock Portfolio may be suitable for you if:
- - You are seeking exposure to the stocks of small companies that are often
considered out of favor in the market.
- - You are comfortable with a higher level of share-price volatility than that
experienced by Vanguard Institutional Index Fund and the other Trust
Portfolios.
- - You are willing to forgo dividend income.
The Growth Portfolio may be suitable for you if:
- - You want to invest in large companies, but you are not seeking dividend
income.
- - You are looking for more growth potential than the Institutional Index Fund
and the Value Portfolio offer -- and are willing to accept greater
fluctuations in share price.
The Small Capitalization Growth Stock Portfolio may be suitable for you if:
- - You want to focus on small-company stocks.
- - You are seeking a portfolio of stocks considered to have
higher-than-average price/earnings and price/book ratios.
- - You are willing to accept a high level of share-price fluctuation.
None of the Funds would be an appropriate investment if you are a
market-timer. Investors who engage in excessive in-and-out trading activity
generate additional costs that are borne by all of the shareholders in a
portfolio. To minimize such costs, which reduce the ultimate returns achieved by
you and other shareholders, the Funds have adopted the following policies:
- - The Funds reserve the right to reject any purchase request into the Funds
-- including exchanges from other Vanguard funds -- that they regard as
disruptive to the efficient management of the Funds.
The Funds may exercise this right because of the timing of the investment or
because of a history of excessive trading by the investor.
- - Five of Vanguard Index Trust's Portfolios (Extended Market, Mid
Capitalization Stock, Small Capitalization Stock, Small Capitalization
Value Stock, and Small Capitalization Growth Stock) charge a transaction
fee on purchases.
- - There is a limit on the number of times you can exchange into or out of the
Funds (see "Exchanges" in the INVESTING WITH VANGUARD section).
- - The Funds reserve the right to stop offering shares at any time.
PLAIN TALK ABOUT
COSTS AND MARKET-TIMING
Some investors try to profit from a strategy called "market-timing" -- switching
money into investments when they expect prices to rise, and taking money out
when they expect the market to fall. As money is shifted in and out, a fund
incurs expenses for buying and selling securities. These costs are borne by all
fund shareholders, including the long-term investors who do not generate the
costs. Therefore, the Funds discourage short-term trading by, among other
things, closely monitoring daily transactions.
INVESTMENT STRATEGY
This section explains how the investment adviser pursues the Funds' objective of
matching the performance of specific stock
17
<PAGE> 87
indexes. It also explains the market and objective risks faced by the Funds'
shareholders. Unlike the investment objective of the Funds, the adviser's
investment strategy is not fundamental and can be changed by the Funds' Board of
Trustees without shareholder approval. However, before making any important
change in their strategy, the Funds will give shareholders 30 days' notice, in
writing.
PLAIN TALK ABOUT
LARGE-CAP, MID-CAP, AND SMALL-CAP STOCKS
Stocks of publicly traded companies -- and mutual funds that hold these stocks
- -- can be classified by the companies' market value, or capitalization. Vanguard
defines large-capitalization, or large-cap, funds as those holding stocks of
companies with a median total market value exceeding $7.5 billion. Mid-cap funds
hold stocks of companies with a median market value between $1 billion and $7.5
billion. Small-cap funds hold stocks of companies with a median market value of
less than $1 billion. Historically, large-cap funds have exhibited lower
volatility than mid-cap and small-cap funds. Note that a fund's capitalization
parameters (that is, what constitutes a large-, mid-, or small-cap stock) may
vary from the parameters set by a particular index.
MARKET EXPOSURE
To track their target indexes as closely as possible, the Funds attempt to
remain fully invested in stocks.
[FLAG] THE FUNDS ARE SUBJECT TO MARKET RISK, WHICH IS THE POSSIBILITY THAT
STOCK PRICES OVERALL WILL DECLINE OVER SHORT OR EVEN EXTENDED PERIODS. STOCK
MARKETS TEND TO MOVE IN CYCLES, WITH PERIODS OF RISING STOCK PRICES AND PERIODS
OF FALLING STOCK PRICES.
To illustrate the volatility of stock prices, the following table shows the
best, worst, and average total returns (dividend income plus change in market
value) for the U.S. stock market over various periods as measured by the S&P 500
Index, which -- in addition to being the target index for the Institutional
Index Fund -- is a widely used barometer of stock market activity. Note that the
returns shown do not include the costs of buying and selling stocks or other
expenses that a real-world investment portfolio would incur. Note, also, that
the gap between the best and worst tends to narrow over the long term.
U.S. STOCK MARKET RETURNS (1926 - 1997)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS 20 YEARS
<S> <C> <C> <C> <C>
Best 53.9% 23.9% 20.1% 16.9%
Worst -43.3 -12.5 -0.9 3.1
Average 13.0 10.5 10.9 10.9
- ----------------------------------------------------------------------
</TABLE>
The table covers all of the 1-, 5-, 10-, and 20-year periods from 1926
through 1997. For example, while the average return on stocks for all of the
5-year periods was 10.5%, returns for these 5-year periods ranged from a -12.5%
average (from 1928 through 1932) to 23.9% (from 1950 through 1954). These
average returns reflect past performance on common stocks and should not be
regarded as an indication of future returns from either the stock market as a
whole or the Funds in particular.
Keep in mind that the S&P 500 Index tracks mainly large-cap stocks.
Historically, the mid- and small-cap stocks of the Wilshire 4500, S&P MidCap
400, and Russell 2000 Indexes (the target indexes for the Extended Market, Mid
Capitalization Stock, and Small Capitalization Stock Portfolios, respectively)
have been more volatile than -- and at times have performed quite differently
from --
18
<PAGE> 88
the large-cap stocks of the S&P 500 Index. This is due to several factors,
including less-certain growth and dividend prospects for smaller companies.
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, will not perform in the same way as
the broader S&P 500 Index. Historically, stocks of the S&P/BARRA Value Index has
been less volatile than the stocks found in the broader S&P 500 Index; stocks of
the S&P/BARRA Growth Index and the S&P SmallCap 600/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.
[FLAG] THE FUNDS ARE SUBJECT, IN VARYING DEGREES, TO OBJECTIVE RISK, WHICH
IS THE POSSIBILITY THAT RETURNS FROM A SPECIFIC TYPE OF STOCK (FOR INSTANCE,
SMALL-CAP OR VALUE) WILL TRAIL RETURNS FROM THE OVERALL STOCK MARKET. EACH TYPE
OF STOCK TENDS TO GO THROUGH CYCLES OF OUTPERFORMANCE AND UNDERPERFORMANCE IN
COMPARISON TO THE STOCK MARKET IN GENERAL. THESE PERIODS HAVE, IN THE PAST,
LASTED FOR AS LONG AS SEVERAL YEARS.
PLAIN TALK ABOUT
ACTIVE VERSUS PASSIVE MANAGEMENT
Vanguard index portfolios are not actively managed by investment advisers who
buy and sell securities based on research and analysis. Instead, each "passively
managed" portfolio tries to match, as closely as possible, the performance of a
target index by either holding all the securities in the index or by holding a
representative sample. Indexing appeals to many investors because of its
simplicity (indexing is a straightforward market-matching strategy);
diversification (indexes generally cover a wide variety of companies and
industries); relative performance predictability (an index portfolio is expected
to move in the same direction -- up or down -- as its target index); and low
cost (index funds do not have many of the expenses of an actively managed fund
- -- such as research -- and their relatively low turnover of securities helps
keep brokerage commissions to a minimum).
SECURITY SELECTION
The Funds employ a "passively managed" investment approach to implement their
indexing strategies. Vanguard Core Management Group, adviser to the Funds,
creates a mix of securities that will match the performance of a benchmark
index.
Vanguard Institutional Index Fund and the Mid Capitalization Stock, Value,
Small Capitalization Value Stock, Growth, and Small Capitalization Growth Stock
Portfolios hold each stock found in their respective indexes in roughly the same
proportions as represented in the indexes themselves. For example, if a
particular company made up 5% of the assets in the S&P 500 Index, the Fund would
try to invest the same percentage of its assets in that company.
The Total Stock Market, Extended Market, and Small Capitalization Stock
Portfolios use a different selection process. Because it would be very expensive
to hold all of the stocks in each Portfolio's target index (the Total Stock
Market Portfolio's target index, for example, includes more than 7,400 stocks),
these three Portfolios employ a "sampling" technique. Using a sophisticated
computer program, each Portfolio selects stocks that will recreate its target
index in terms of industry, size, and other characteristics (such as projected
earnings, financial strength, and debt). For instance, if 10% of the Wilshire
4500 Index were made up of utility stocks, the Extended Market Portfolio would
invest 10% of its assets in utility stocks with similar characteristics to the
Wilshire group.
19
<PAGE> 89
PLAIN TALK ABOUT
PORTFOLIO DIVERSIFICATION
In general, the more diversified a fund's portfolio of stocks, the less likely
that a specific stock's poor performance will hurt the fund. One measure of a
fund's level of diversification is the percentage of total net assets
represented by its ten largest holdings. The average U.S. equity mutual fund has
about 30% of its assets invested in its ten largest holdings, while some
less-diversified mutual funds have more than 50% of their assets invested in the
stocks of just ten companies.
The following tables show the number of stocks generally held by Vanguard
Institutional Index Fund and the Total Stock Market, Extended Market, Small
Capitalization Stock, Value, and Growth Portfolios as of December 31, 1997. The
Mid Capitalization Stock, Small Capitalization Value Stock, and Small
Capitalization Growth Stock Portfolios did not begin operations until April 20,
1998. (Note: Numbers for Vanguard Institutional Index Fund apply to both
Institutional and Institutional Plus Shares; numbers for Vanguard Index Trust's
Portfolios apply to both Institutional and Investor Shares, except for the Value
and Growth Portfolios, which did not begin issuing Institutional Shares until
April 20, 1998.)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
NUMBER OF NUMBER OF STOCKS
PORTFOLIO STOCKS HELD IN TARGET INDEX
- ----------------------------------------------------------------------
<S> <C> <C>
Vanguard Institutional
Index Fund [bullet] [bullet]
- ----------------------------------------------------------------------
NUMBER OF NUMBER OF STOCKS
PORTFOLIO STOCKS HELD IN TARGET INDEX
- ----------------------------------------------------------------------
Total Stock Market 2,800 7,400
Extended Market 2,150 6,900
MidCap Stock N/A 400
SmallCap Stock 1,700 1,900
Value 360 360
SmallCap Value Stock N/A 380
Growth 140 140
SmallCap Growth Stock N/A 220
- ----------------------------------------------------------------------
</TABLE>
The top ten holdings for Vanguard Institutional Index Fund and the Total
Stock Market, Extended Market, Small Capitalization Stock, Value, and Growth
Portfolios as of December 31, 1997, follow. The Mid Capitalization Stock, Small
Capitalization Value Stock, and Small Capitalization Growth Stock Portfolios did
not begin operations until April 20, 1998. (Note: Holdings for Vanguard
Institutional Index Fund apply to both Institutional and Institutional Plus
Shares; holdings for Vanguard Index Trust's Portfolios apply to both
Institutional and Investor Shares, except for the Value and Growth Portfolios,
which did not begin issuing Institutional Shares until April 20, 1998.)
20
<PAGE> 90
<TABLE>
<CAPTION>
INSTITUTIONAL INDEX FUND TOTAL STOCK MARKET PORTFOLIO
<S> <C>
1. General Electric Co. 1. General Electric Co.
2. The Coca-Cola Co. 2. The Coca-Cola Co.
3. Microsoft Corp. 3. Microsoft Corp.
4. Exxon Corp. 4. Exxon Corp.
5. Merck & Co., Inc. 5. Merck & Co., Inc.
6. Royal Dutch Petroleum 6. Intel Corp.
7. Intel Corp. 7. Philip Morris Cos., Inc.
8. Philip Morris Cos., Inc. 8. Procter & Gamble Co.
9. Procter & Gamble Co. 9. International Business
10. International Business Machines Corp.
Machines Corp. 10. AT&T Corp.
18% of the Portfolio's total net assets. 13% of the Portfolio's total net assets.
EXTENDED MARKET PORTFOLIO SMALLCAP STOCK PORTFOLIO
1. Berkshire Hathaway 1. Associated Banc-Corp.
2. Electronic Data Systems 2. U.S. Office Products Co.
3. Carnival Corp. Class A 3. Jacor Comm. Warrants
4. Safeway, Inc. 4. Allied Waste Industries
5. The Coca-Cola Co. 5. Brooks Fiber Properties
6. RJR Nabisco Holdings 6. Keystone Financial, Inc.
Corp. 7. Mack-Cali Realty Corp.
7. Franklin Resources Corp. 8. Arterial Vascular
8. Republic Industries, Inc. Engineering, Inc.
9. Cox Communications 9. Citrix Systems, Inc..
Class A 10. Sovereign Bancorp, Inc.
10. The Equitable Cos. 2% of the Portfolio's total net assets.
6% of the Portfolio's total net assets.
VALUE PORTFOLIO GROWTH PORTFOLIO
1. Exxon Corp. 1. General Electric Co.
2. Royal Dutch Petroleum Co. 2. The Coca-Cola Co.
3. International Business 3. Microsoft Corp.
Machines Corp. 4. Merck & Co., Inc.
4. AT&T Corp. 5. Intel Corp.
5. The Walt Disney Co. 6. Philip Morris Cos., Inc.
6. Travelers Group Inc. 7. Procter & Gamble Co.
7. Ford Motor Co. 8. Pfizer, Inc.
8. Citicorp 9. Bristol-Myers Squibb Co.
9. Mobil Corp. 10. Wal-Mart Stores, Inc.
10. Bellsouth Corp. 34% of the Portfolio's total net assets.
22% of the Portfolio's total net assets.
</TABLE>
Keep in mind that, because the makeup of the Funds changes daily, these
listings are only "snapshots" at one point in time. Note, too, that portfolios
that track indexes comprising a relatively small number of securities tend to be
less diversified than portfolios whose target indexes contain thousands of
securities. For instance, the Growth Portfolio, which seeks to parallel an index
of about
21
<PAGE> 91
140 stocks, has far more of its assets invested in its top ten holdings
(34%) than the Total Stock Market Portfolio (13%), which seeks to track a much
larger universe of more than 7,400 stocks. This means that the Growth Portfolio
stands a greater chance than the Total Stock Market Portfolio of being hurt by
the poor performance of a single stock.
PLAIN TALK ABOUT
PORTFOLIO TURNOVER
Before investing in a mutual fund, you should review its portfolio turnover
rate for an indication of the potential effect of transaction costs on the
fund's future returns. In general, the greater the volume of buying and selling
by the fund, the greater the impact that brokerage commissions and other
transaction costs will have on its return. Also, funds with high portfolio
turnover rates may be more likely than low-turnover funds to generate capital
gains that must be distributed to shareholders as taxable income. The average
turnover rate for passively managed domestic index funds investing in common
stocks is roughly 10%; for all domestic stock funds, the average turnover rate
is approximately 80%.
PORTFOLIO TURNOVER
Although the Funds seek to invest for the long term, they retain the right to
sell any security at any time. Generally, a passively managed fund sells
securities only to respond to redemption requests or to adjust the number of
shares held to reflect a change in the portfolio's target index. Because of
this, the turnover rates for the Funds are expected to remain extremely low.
Averages for Vanguard Institutional Index Fund (Institutional Shares), for
example, have ranged from 4% to 23% over the past five years. (A turnover rate
of 100% would occur if a portfolio sold and replaced securities valued at 100%
of its total net assets within a one-year period.)
PLAIN TALK ABOUT
DERIVATIVES
A derivative is a financial contract whose value is based on (or "derived" from)
a traditional security (such as a stock or a bond), an asset (such as a
commodity like gold), or a market index (such as the S&P 500 Index). For
instance, futures and options are derivatives that have been trading on
regulated exchanges for more than two decades. These "traditional" derivatives
are standardized contracts that can be easily bought and sold, and whose market
values are determined and published daily. It is these characteristics that
differentiate futures and options from the relatively new types of derivatives
- -- some of which can carry considerable risks.
INVESTMENT POLICIES
Besides investing in the stocks found in their respective target indexes, the
Funds may follow a number of other investment policies to achieve their
objectives.
[FLAG] THE FUNDS RESERVE THE RIGHT TO INVEST, TO A LIMITED EXTENT, IN STOCK
FUTURES AND OPTIONS CONTRACTS, WARRANTS, CONVERTIBLE SECURITIES, AND SWAP
AGREEMENTS, WHICH ARE TYPES OF DERIVATIVES.
Losses (or gains) involving futures contracts can sometimes be substantial
- -- in part because a relatively small price movement in a futures contract may
result in an immediate and substantial loss (or gain) for a Fund. Similar risks
exist for warrants (securities that permit their owners to purchase a specific
number of shares of stock at a predetermined price), convertible securities
(securities that may be exchanged for another asset), and swap agreements
(contracts between two parties in which each agrees to make payments to the
other based on the return of a specified index or asset).
For this reason, the Funds will not use futures, options, warrants,
convertible securities, or swap agreements for speculative purposes or as
leveraged investments that magnify the gains or losses of an investment. Rather,
the Funds will keep separate cash reserves or other liquid portfolio securities
in the amount of the obligation underlying the contract. Only a limited
percentage of the Funds' assets -- 5% -- may be applied toward the deposits
22
<PAGE> 92
PLAIN TALK ABOUT
CASH RESERVES
With mutual funds, holding cash reserves -- or "cash" -- does not mean literally
that the fund holds a stack of currency. Rather, cash reserves refer to
short-term, interest-bearing securities that can easily and quickly be converted
to cash. Most mutual funds keep at least a small percentage of assets in cash
reserves to accommodate shareholder redemptions. While some funds, like index
funds, strive to keep cash reserve levels at a minimum and to always remain
fully invested in stocks, others allow investment advisers to hold up to 20% of
a fund's assets in cash reserves.
required on such contracts, and the value of all such contracts in which any of
the Funds acquires an interest cannot exceed 20% of the Fund's total assets.
The reasons for which the Funds will invest in futures, options, warrants,
convertible securities, and swap agreements are:
- - To keep cash on hand to meet shareholder redemptions or other needs while
simulating full investment in stocks.
- - To reduce the Funds' transaction costs and add incremental value by buying
futures instead of actual stocks.
- - To add value to the Funds by buying assets that mimic the performance of
particular stocks, but trade at a discount because of a short term market
inefficiency.
INVESTMENT LIMITATIONS
The Funds have adopted limitations on some of their investment policies. Some of
these limitations are that a Fund will not:
- - Invest more than 25% of its assets in any one industry.
- - Borrow money, except for temporary or emergency purposes in an amount not
exceeding 15% of its assets. Whenever the Fund's outstanding borrowing is
more than 5% of its assets, it will stop making investments. With respect
to 75% of its assets, a Fund will not:
- - Invest more than 5% in the outstanding securities of any one company.
- - Buy more than 10% of the outstanding voting securities of any company.
A complete list of the Funds' investment limitations can be found in the
Statements of Additional Information. These limitations are fundamental and may
be changed only by approval of a majority of a Fund's shareholders.
PLAIN TALK ABOUT
PAST PERFORMANCE
Whenever you see information on a fund's performance, do not consider the
figures to be an indication of the performance you could expect by making an
investment in the fund today. The past is an imperfect guide to the future;
history does not repeat itself in neat, predictable patterns.
INVESTMENT PERFORMANCE
The performance of the Funds is expected to mirror the performance of a specific
U.S. stock market segment (or, in the case of the Total Stock Market Portfolio,
the entire stock market). Historically, stock market performance has been
characterized by sharp up-and-down swings in the short term and by more stable
growth over the long term.
23
<PAGE> 93
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS -- INSTITUTIONAL SHARES
PERIODS ENDED DECEMBER 31, 1997
- -----------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS
<S> <C> <C> <C>
Institutional Index Fund --
Institutional Shares 33.4% 20.3% 17.6%
S&P 500 Index [BULLET] [BULLET] [BULLET]
Institutional Index Fund --
Institutional Plus Shares 7.3* -- --
S&P 500 Index [BULLET] [BULLET] [BULLET]
- -----------------------------------------------------------------------------
Total Stock Market 8.6* -- --
Wilshire 5000 Index 8.9* -- --
- -----------------------------------------------------------------------------
Extended Market** 11.8* -- --
Wilshire 4500 Index 12.1* -- --
- -----------------------------------------------------------------------------
SmallCap Stock** 11.4* -- --
Russell 2000 Index 11.1* -- --
- -----------------------------------------------------------------------------
</TABLE>
Note: The Mid Capitalization Stock, Small Capitalization Value Stock, and Small
Capitalization Growth Stock Portfolios did not begin operations until March 30,
1998; the Value and Growth Portfolios did not begin offering Institutional
Shares until April 20, 1998.
*Since inception; see pages 2 and 3.
**Does not include transaction fee; see pages 2 and 3.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS -- INVESTOR SHARES
PERIODS ENDED DECEMBER 31, 1997
- -----------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Total Stock Market 31.0% 18.9% 18.5%*
Wilshire 5000 Index 31.4 19.3 18.9*
- -----------------------------------------------------------------------------
Extended Market** 26.7% 17.5% 16.4%
Wilshire 4500 Index 25.7 17.0 16.3
- -----------------------------------------------------------------------------
SmallCap Stock** 24.6% 17.5% 15.8%
Russell 2000 Index 22.4 16.4 15.8
- -----------------------------------------------------------------------------
Value 29.8% 20.5% 20.7%*
S&P/BARRA Value Index 30.0 20.7 20.9*
- -----------------------------------------------------------------------------
Growth 36.3% 19.5% 19.5%*
S&P/BARRA Growth Index 36.5 19.6 19.8*
- -----------------------------------------------------------------------------
</TABLE>
Note: The Mid Capitalization Stock, Small Capitalization Value Stock, and Small
Capitalization Growth Stock Portfolios did not begin operations until April 20,
1998.
*Since inception; see pages 2 and 3.
**Does not include transaction fee; see pages 2 and 3.
The results shown represent the "average annual total return" performance of
Vanguard Institutional Index Fund (Institutional and Institutional Plus Shares)
and of each Portfolio of Vanguard Index Trust (Institutional and Investor
Shares), which assumes that any distributions of capital gains and dividends
were rein-
24
<PAGE> 94
vested for the indicated periods. Also included is comparative information on
the appropriate unmanaged benchmark index. The Portfolios' returns are not
adjusted for the purchase fee for the Extended Market and Small Capitalization
Stock Portfolios, or for the purchase fee for the Total Stock Market Portfolio
that was eliminated at year-end 1995, nor has an allowance been made for
federal, state, or local income taxes that shareholders must pay on a current
basis. Note also that the Mid Capitalization Stock, Small Capitalization Value
Stock, and Small Capitalization Growth Stock Portfolios did not begin operations
until April 20, 1998; the Value and Growth Portfolios did not begin offering
Institutional Shares until April 20, 1998.
SHARE PRICE
The share price of the Funds, called the net asset value, or NAV, is calculated
each business day after the close of trading (generally 4 p.m. Eastern time) on
the New York Stock Exchange. Net asset value per share for each of the Funds is
calculated by adding up the total assets of the Funds, subtracting all of its
liabilities, or debts, and then dividing by the total number of Fund shares
outstanding:
TOTAL ASSETS - LIABILITIES
NET ASSET VALUE = ------------------------------------------------
NUMBER OF SHARES OUTSTANDING
The daily net asset value is useful to you as a shareholder because the NAV,
multiplied by the number of each of the Funds shares you own, gives you the
dollar amount you would have received had you sold your shares back to the Fund
that day.
The share price of the Funds can be found daily in the mutual fund listings
of most major newspapers under the heading Vanguard Index Funds. Different
newspapers use different abbreviations for the Funds, but the most common are:
InstIdx, InstPlus, TotStIst, ExtndIst, MidCapIst, SmCapIst, ValIst, SmValIst,
GroIst, and SmGroIst (for Institutional Shares); and TotSt, Extnd, MidCap,
SmCap, Value, SmValue, Growth, and SmGrowth (for Investor Shares).
PLAIN TALK ABOUT
DISTRIBUTIONS
As a shareholder, you are entitled to your share of the fund's income from
interest and dividends, and gains from the sale of investments. You receive such
earnings as either an income dividend or capital gains distribution. Income
dividends come from the dividends that the fund earns from its holdings as well
as interest it receives from its money market and bond investments. Capital
gains are realized whenever the fund sells securities for higher prices than it
paid for them. These capital gains are either short-term or long-term, depending
on whether the fund held the securities for less than or more than one year.
DIVIDENDS, CAPITAL GAINS, AND TAXES
Each March, June, September, and December, Vanguard Institutional Index Fund and
the Total Stock Market, Value, and Growth Portfolios of Vanguard Index Trust
distribute virtually all of their income from interest and dividends to their
shareholders; the Extended Market, Mid Capitalization Stock, Small
Capitalization Stock, Small Capitalization Value Stock, and Small Capitalization
Growth Stock Portfolios of Vanguard Index Trust
25
<PAGE> 95
distribute their income in December. The Funds distribute any capital gains
realized from the sale of securities in December. In addition, the Funds may
occasionally be required to make supplemental dividend or capital gains
distributions at some other time during the year. Keep in mind that index
portfolios tend to provide less in capital gains distributions than actively
managed funds generally do.
If you own shares of a Fund as an investment option in an employer-sponsored
retirement or savings plan, these dividend and capital gains distributions will
be reinvested in additional Fund shares and accumulate on a tax-deferred basis.
You will not owe taxes on these distributions until you begin withdrawals. You
should consult your plan administrator, your plan's Summary Plan Document, or
your tax adviser about the tax consequences of an investment in the Fund and of
any plan withdrawals.
If your Fund investment is not part of an employer-sponsored plan, you can
receive distributions of income or capital gains in cash, or you may have them
automatically reinvested in more shares of the Fund. Both dividend and capital
gains distributions -- whether received in cash or reinvested in additional
shares -- are subject to federal (and possibly state and local) income taxes, no
matter how long you have held the shares in the Fund. You should consult your
tax adviser about other tax consequences of an investment in any of the Funds.
PLAIN TALK ABOUT
VANGUARD'S UNIQUE
CORPORATE STRUCTURE
The Vanguard Group, Inc. is the only MUTUAL mutual fund company. It is owned
jointly by the funds it oversees and by the shareholders in those funds. Other
mutual funds are operated by for-profit management companies that may be owned
by one person, by a group of individuals, or by investors who bought the
management company's publicly traded stock. Because of its structure, Vanguard
operates its funds at cost. Instead of distributing profits from operations to a
separate management company, Vanguard returns profits to fund shareholders in
the form of lower operating expenses.
THE FUNDS AND VANGUARD
Vanguard Institutional Index Fund and Vanguard Index Trust are members of The
Vanguard Group, a family of more than 30 investment companies with more than 95
distinct investment portfolios and total net assets of more than $350 billion.
All of the Vanguard funds share in the expenses associated with business
operations, such as personnel, office space, equipment, and advertising.
Vanguard also provides marketing services to the funds. Although
shareholders do not pay sales commissions or 12b-1 marketing fees, each fund
pays its allocated share of The Vanguard Group's costs.
A list of the Trustees and officers of the Funds, and their present
positions and principal occupations during the past five years, can be found in
the Statements of Additional Information.
INVESTMENT ADVISER
Vanguard Core Management Group, P.O. Box 2600, Valley Forge, PA 19482, provides
advisory services to the Funds.
26
<PAGE> 96
PLAIN TALK ABOUT
THE FUNDS' ADVISER
Vanguard Core Management Group provides investment advisory services to many
Vanguard funds; as of December 31, 1997, the Group managed more than $99 billion
in total assets. The individual primarily responsible for overseeing the Funds'
investments is:
GEORGE U. SAUTER, Managing Director of Vanguard; has worked in investment
management since 1985; with Vanguard since 1987, including primary
responsibility for Vanguard Core Management Group since 1987; A.B., Dartmouth
College; M.B.A., University of Chicago.
Under the terms of an advisory agreement, Vanguard pays for all of Vanguard
Institutional Index Fund's expenses (except taxes and brokerage commissions). In
exchange, the Fund pays Vanguard a quarterly advisory fee of 0.02% that is based
on average daily net assets of the Fund for the quarter. In addition, the Fund
pays Vanguard a fee of 0.04% for shareholder services related to the
Institutional Shares, and a fee of 0.005% for shareholder services related to
the Institutional Plus Shares. (The Institutional Shares and Institutional Plus
Shares each bear their own expenses for shareholder services.)
Each of Vanguard Index Trust's Portfolios receives advisory services from
Vanguard on an at-cost basis. For the fiscal year ended December 31, 1997, the
Institutional Shares of the Portfolios paid a total of $[BULLET] in investment
advisory expenses. (The Total Stock Market Portfolio paid $[BULLET], the
Extended Market Portfolio paid $[BULLET], and the Small Capitalization Stock
Portfolio paid $[BULLET].) For the fiscal year ended December 31, 1997, the
Investor Shares of the Portfolios paid a total of $[BULLET] in investment
advisory expenses. (The Total Stock Market Portfolio paid $[BULLET], the
Extended Market Portfolio paid $[BULLET], the Small Capitalization Stock
Portfolio paid $[BULLET], the Value Portfolio paid $[BULLET], and the Growth
Portfolio paid $[BULLET].) (Note: the Mid Capitalization Stock, Small
Capitalization Value Stock, and Small Capitalization Growth Stock Portfolios did
not begin operations until April 20, 1998; the Value and Growth Portfolios did
not begin offering Institutional Shares until April 20, 1998.)
The Group is authorized to choose brokers or dealers to handle the purchase
and sale of the Funds' securities, and is directed to get the best available
price and most favorable execution from these brokers with respect to all
transactions. However, the Group will not pay higher commissions specifically
for the purpose of obtaining research services. The Funds may direct the Group
to use a particular broker for certain transactions in exchange for commission
rebates or research services provided to the Funds.
GENERAL INFORMATION
Vanguard Institutional Index Fund is organized as a Pennsylvania business trust.
The Fund offers two separate classes of shares: Institutional Shares and
Institutional Plus Shares. The Institutional Shares are available to investors
who meet the $10 million investment minimum and may require special employee
benefit plan services. The Institutional Plus Shares are available to investors
who meet the $200 million investment minimum and do not require special employee
benefit plan services.
27
<PAGE> 97
Vanguard Index Trust is organized as a Pennsylvania business trust. The Trust
offers two separate classes of shares: Institutional Shares and Investor Shares.
The Institutional Shares are available to investors who meet the $10 million
investment minimum. The Investor Shares are available to investors who meet the
$3,000 investment minimum (these shares are offered by a separate prospectus).
Shareholders of the Funds have rights and privileges similar to those
enjoyed by other corporate and trust shareholders. For example, shareholders
will not be responsible for any liabilities of the Funds. If any matters are to
be voted on by shareholders (such as a change in a fundamental investment
objective or the election of Trustees), each of Funds share outstanding at that
point would be entitled to one vote. Annual meetings will not be held by the
Funds except as required by the Investment Company Act of 1940. A meeting will
be scheduled to vote on the removal of a Trustee if the holders of at least 10%
of a Fund's shares request a meeting in writing.
The Funds are not sponsored, endorsed, sold or promoted by Standard & Poor's
Corporation ("S&P"). S&P makes no representation or warranty, implied or
express, to the purchasers of the Funds or any member of the public regarding
the advisability of investing in index funds or the ability of the S&P 500 Index
to track general stock market performance. S&P does not guarantee the accuracy
and/or the completeness of the S&P 500 Index or any data included therein. S&P
MAKES NO WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS TO BE OBTAINED BY THE
FUNDS, OWNERS OF THE FUNDS, OR ANY PERSON OR ANY ENTITY FROM THE USE OF THE S&P
500 INDEX OR ANY DATA INCLUDED THEREIN. 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 INDEX OR ANY DATA INCLUDED THEREIN. S&P's only relationship to the Funds
is the licensing of the S&P marks and S&P 500, which is determined, composed,
and calculated by S&P without regard to the Funds. "Standard & Poor's 500," "S&P
500(R)," "Standard & Poor's(R)," "S&P(R)," and "500" are trademarks of The
McGraw-Hill Companies, Inc. "Wilshire 4500" and "Wilshire 5000" are registered
trademarks of Wilshire Associates. Frank Russell Company is the owner of the
trademarks and copyrights relating to the Russell Indexes.
28
<PAGE> 98
INVESTING WITH VANGUARD
FOR PLAN PARTICIPANTS
The Funds described in this prospectus are investment options in your retirement
or savings plan. Your plan administrator or your employee benefits office can
provide you with detailed information on how to participate in your plan and how
to elect any of the Funds as an investment option.
- - If you have any questions about the Funds, or Vanguard, including the
Funds' investment objective, strategy, or risks, contact Vanguard's
Participant Services Center, toll-free, at 1-800-523-1188.
- - If you have questions about your account, contact your plan administrator
or the organization that provides recordkeeping services for your plan.
INVESTMENT OPTIONS AND ALLOCATIONS
Your plan's specific provisions may allow you to change your investment
selections, the amount of your contributions, or how your contributions are
allocated among the investment choices available to you. Contact your plan
administrator or employee benefits office for more details.
TRANSACTIONS
Contributions, exchanges, or redemptions of the Funds' shares are processed as
soon as they have been received by Vanguard in good order. Good order means that
your request includes complete information on your contribution, exchange, or
redemption, and that Vanguard has received the appropriate assets.
EXCHANGES
The exchange privilege (your ability to redeem shares from one fund to purchase
shares of another fund) may be available to you through your plan. Although we
make every effort to maintain the exchange privilege, Vanguard reserves the
right to revise or terminate the exchange privilege, limit the amount of an
exchange, or reject any exchange, at any time, without notice. Because excessive
exchanges can potentially disrupt the management of the Funds and increase its
transaction costs, Vanguard limits exchange activity to TWO SUBSTANTIVE EXCHANGE
REDEMPTIONS (at least 30 days apart) from any of the Funds during any 12-month
period. "Substantive" means either a dollar amount or a series of movements
between Vanguard funds that Vanguard determines, in its sole discretion, could
have an adverse impact on the management of a Fund. In addition, certain
investment options, particularly funds made up of company stock or investment
contracts, may be subject to unique restrictions. Contact your plan
administrator for details on the exchange policies that apply to your plan.
Before making an exchange, you should consider the following:
- - Before you exchange to another Vanguard fund available in your plan, you
should read that fund's prospectus. Contact Vanguard's Participant Services
Center, toll-free, at 1-800-523-1188 for a copy.
- - Vanguard can accept exchanges only as permitted by your plan. Your plan
administrator can explain how frequently exchanges are allowed.
29
<PAGE> 99
INVESTING WITH VANGUARD (continued)
FOR OTHER INSTITUTIONAL INVESTORS
If you have questions about the Funds, including how to establish an account,
call Vanguard, toll-free, at 1-800-523-1036.
If you have questions about an existing account, contact your Vanguard
account administrator.
TRANSACTIONS
Purchases, exchanges, or redemptions of a Fund's shares are processed as
soon as they have been received by Vanguard in good order. Good order means that
your request includes complete information on your purchase, exchange, or
redemption, and that Vanguard has received the appropriate assets. The price of
shares bought, exchanged, or sold will be the Funds' next-determined net asset
value after Vanguard has processed your request, provided your request has been
received before the close of trading on the New York Stock Exchange (generally 4
p.m. Eastern time).
Vanguard must consider the interests of all of the Funds' shareholders and
so reserves the right to:
- - Delay or reject any purchase or exchange request that may disrupt the
Funds' operation or performance.
- - Revise or terminate the exchange privilege or limit the amount of an
exchange, at any time, without notice.
- - Take up to seven days to deliver your redemption proceeds.
- - Pay redemption proceeds -- in whole or in part -- through a distribution in
kind of readily marketable securities.
MANDATORY CONVERSION TO INSTITUTIONAL SHARES OR INVESTOR SHARES
Vanguard Institutional Index Fund reserves the right to convert an investor's
Institutional Plus Shares into the Institutional Shares of the Fund if the
investor's account balance falls below $200 million. The Total Stock Market,
Extended Market, Mid Capitalization Stock, Small Capitalization Stock, Value,
Small Capitalization Value Stock, Growth, and Small Capitalization Growth Stock
Portfolios each reserves the right to convert an investor's Institutional Shares
into the Investor Shares of the same Portfolio if the investor's account balance
falls below $10 million. Any such conversion will be preceded by written notice
to the investor. No portfolio transaction fee will be imposed on share-class
conversions.
ACCESSING FUND INFORMATION BY COMPUTER
VANGUARD ONLINE(R)
www.vanguard.com
Use your personal computer to learn more about Vanguard's funds and services;
keep in touch with your Vanguard accounts; map out a long-term investment
strategy; initiate certain transactions; and ask questions, make suggestions,
and send messages to Vanguard.
Our education-oriented website provides timely news and information about
Vanguard's funds and services; an online "university" that offers a variety of
mutual fund classes; and easy-to-use, interactive tools to help you create your
own investment and retirement strategies.
30
<PAGE> 100
PROSPECTUS POSTSCRIPT
This prospectus is designed to provide you with pertinent information about
Fund/Portfolio Name, including its investment objective, risks, strategy, and
expenses, as well as services available to you as a shareholder.
It is important that you understand these facts so that you can decide
whether an investment in this Fund/Portfolio is right for you. The following
questions offer a quick review of some of the subjects covered by this
prospectus.
IN READING THE PROSPECTUS, DID YOU LEARN . . .
- The Fund's/Portfolio's objective? (page 00)
- The Fund's/Portfolio's investment strategy? (page 00)
- Who should invest in the Fund/Portfolio? (page 00)
- The risks associated with the Fund/Portfolio? (pages 00 - 0)
- Whether the Fund/Portfolio is federally insured?
(inside front cover)
- The Fund's/Portfolio's expenses? (page 00)
- The background of the Fund's/Portfolio's investment
managers? (pages 00 - 00)
- How to open an account? (page 00)
- How to sell or exchange shares? (page 00)
- How often you'll receive statements and financial reports?
(page 00)
PLAIN TALK ABOUT
KEEPING YOUR PROSPECTUS
Reading this prospectus will help you to decide whether one or more of the
Portfolios is suitable for your investment goals. If you decide to invest, don't
throw the prospectus out; you will no doubt need it for future reference.
31
<PAGE> 101
ABOUT THE QUIZ
Knowing your risk tolerance is important when you are making an investment
decision. To give you a general idea of your comfort level with investing,
circle the response that most closely matches your personal situation. Keep in
mind, though, that there is no "foolproof" way to gauge your risk tolerance.
Scoring for the quiz is below.
A SIMPLE RISK QUIZ
A. I HAVE BEEN INVESTING IN STOCK AND BOND MUTUAL FUNDS (OR IN INDIVIDUAL
STOCKS OR BONDS) FOR...
1. Less than a year
2. 1 - 2 years
3. 3 - 4 years
4. 5 - 9 years
5. 10 years or more
B. WHEN IT COMES TO INVESTING IN STOCK OR BOND MUTUAL FUNDS (OR INDIVIDUAL
STOCKS OR BONDS), I WOULD SAY I'M...
1. A very inexperienced investor
2. A somewhat inexperienced investor
3. A somewhat experienced investor
4. An experienced investor
5. A very experienced investor
C. I AM COMFORTABLE WITH INVESTMENTS THAT MAY LOSE MONEY FROM TIME TO TIME IF
THEY OFFER THE POTENTIAL FOR HIGHER RETURNS.
1. I strongly disagree
2. I disagree
3. I somewhat agree
4. I agree
5. I strongly agree
D. I WILL KEEP AN INVESTMENT EVEN IF IT LOSES 10% OF ITS VALUE OVER THE COURSE
OF A YEAR.
1. I strongly disagree
2. I disagree
3. I somewhat agree
4. I agree
5. I strongly agree
E. IN ADDITION TO MY LONG-TERM INVESTMENTS, I HAVE EMERGENCY SAVINGS EQUAL TO
____ MONTHS OF MY TAKE-HOME PAY.
1. Zero
2. One
3. Two
4. Three
5. Four or more
F. I FIND IT EASY TO PAY MY MONTHLY BILLS FROM MY CURRENT PAY.
1. I strongly disagree
2. I disagree
3. I somewhat agree
4. I agree
5. I strongly agree
G. OVERALL, MY PERSONAL FINANCIAL SITUATION IS SECURE.
1. I strongly disagree
2. I disagree
3. I somewhat agree
4. I agree
5. I strongly agree
HOW TO SCORE THE QUIZ
Use the number of your answer as the number of points scored. For instance, if
you chose answer #3 to a question, that's worth three points. Add up your points
and check below for the type of investor you are. (Note: If you chose answer #1
or #2 to Question C, subtract five points from your total score.)
- - If you scored between 0 and 25 points, you are considered a conservative
investor.
- - If you scored between 26 and 32 points, you are considered a moderate
investor.
- - If you scored between 33 and 35 points, you are considered an aggressive
investor.
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<PAGE> 102
GLOSSARY OF INVESTMENT TERMS
ACTIVE MANAGEMENT
An investment approach that seeks to exceed the average returns of the financial
markets. Active managers rely on research, market forecasts, and their own
judgment and experience in selecting securities to buy and sell.
CAPITAL GAINS DISTRIBUTION
Payment to mutual fund shareholders of gains realized during the year on
securities that the fund has sold at a profit, minus any realized losses.
CASH RESERVES
Cash deposits as well as short-term bank deposits, money market instruments,
U.S. Treasury bills, bank certificates of deposit (CDs), repurchase agreements,
commercial paper, and banker's acceptances.
COMMON STOCK
A security representing ownership rights in a corporation. A stockholder is
entitled to share in the company's profits, some of which may be paid out as
dividends.
DIVIDEND INCOME
Payment to shareholders of income from interest or dividends generated by a
fund's investments.
DOLLAR-COST AVERAGING
Investing equal amounts of money at regular intervals on an ongoing basis. This
technique ensures that an investor buys fewer shares when prices are high and
more shares when prices are low.
EXPENSE RATIO
The percentage of a fund's average net assets used to pay its expenses. The
expense ratio includes account management fees, administrative fees, and any
12b-1 marketing fees.
INDEX
An unmanaged group of securities whose overall performance is used as a standard
to measure investment performance.
INVESTMENT ADVISER
An organization that makes the day-to-day decisions regarding a portfolio's
investments.
MUTUAL FUND
An investment company that pools the money of many people and invests it in a
variety of securities in an effort to achieve a specific objective over time.
NET ASSET VALUE (NAV)
The market value of a mutual fund's total assets, minus liabilities, divided by
the number of shares outstanding. The value of a single share is called its
share value or share price.
PASSIVE MANAGEMENT
A low-cost investment strategy in which a mutual fund attempts to match --
rather than outperform -- a particular stock or bond market index. Also known as
indexing.
PORTFOLIO DIVERSIFICATION
Holding a variety of securities so that a portfolio's return is not hurt by the
poor performance of a single security or industry.
PRICE/EARNINGS (P/E) RATIO
The current price of a stock, divided by its per-share earnings (profits) from
the past year. A stock selling for $20, with earnings of $2 per share, has a
price/earnings ratio of 10.
PRINCIPAL
The amount of your own money you put into an investment.
SECURITIES
Stocks, bonds, and other investment vehicles.
TOTAL RETURN
A percentage change, over a specified time period, in a mutual fund's net asset
value, with the ending net asset value adjusted to account for the reinvestment
of all distributions of dividends and capital gains.
VOLATILITY
The fluctuations in value of a mutual fund or other security. The greater a
fund's volatility, the wider the fluctuations between its high and low prices.
YIELD
Current income (interest or dividends) earned by an investment, expressed as a
percentage of the investment's price.
<PAGE> 103
[THE VANGUARD GROUP LOGO]
Institutional Division
Post Office Box 2900
Valley Forge, PA 19482
<TABLE>
<CAPTION>
<S> <C> <C>
FOR PARTICIPANTS IN FOR OTHER INSTITUTIONAL ELECTRONIC ACCESS TO THE
EMPLOYER-SPONSORED PLANS INVESTORS VANGUARD MUTUAL FUND
1-800-523-1036 EDUCATION AND INFORMATION
PARTICIPANT SERVICES CENTER For information on Vanguard CENTER
1-800-523-1188 funds and services World Wide Web
TEXT TELEPHONE: www.vanguard.com
1-800-523-8004
For information on the E-mail
Vanguard funds in your plan, [email protected]
Monday through Friday
8:30 a.m. to 9 p.m.,
Eastern time
</TABLE>
(C) 1998 Vanguard Marketing
Corporation, Distributor
1854N
<PAGE> 104
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THE INVESTOR AND INSTITUTIONAL SHARES
OF THE MID CAPITALIZATION STOCK PORTFOLIO, THE SMALL CAPITALIZATION VALUE
STOCK PORTFOLIO, AND THE SMALL CAPITALIZATION GROWTH STOCK PORTFOLIO, AS
WELL AS THE INSTITUTIONAL SHARES OF THE VALUE PORTFOLIO AND THE GROWTH
PORTFOLIO MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE
TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS STATEMENT OF
ADDITIONAL INFORMATION DOES NOT CONSTITUTE A PROSPECTUS. TO OBTAIN A
CURRENTLY EFFECTIVE PROSPECTUS FOR VANGUARD INDEX TRUST PLEASE CONTACT
VANGUARD'S INVESTOR INFORMATION DEPARTMENT AT 1-800-662-7447.
SUBJECT TO COMPLETION
PRELIMINARY STATEMENT OF ADDITIONAL INFORMATION
DATED JANUARY 9, 1998
PART B
VANGUARD INDEX TRUST
STATEMENT OF ADDITIONAL INFORMATION
APRIL 20, 1998
This Statement is not a prospectus but should be read in conjunction with the
Trust's current Prospectuses, as they may be amended from time to time. The
Trust's current prospectuses are dated April 20, 1998. To obtain a Prospectus
please call:
VANGUARD INVESTOR INFORMATION CENTER
1-800-662-7447
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Objectives and Policies.......................... B-1
Investment Limitations...................................... B-4
Purchase of Shares.......................................... B-6
Redemption of Shares........................................ B-7
Yield and Total Return...................................... B-7
Management of the Trust..................................... B-8
Portfolio Transactions...................................... B-10
Description of Shares and Voting Rights..................... B-11
Performance Measures........................................ B-13
Financial Statements........................................ B-14
</TABLE>
INVESTMENT OBJECTIVES AND POLICIES
REPURCHASE AGREEMENTS. Each Portfolio of the Trust may invest in
repurchase agreements with commercial banks, brokers or dealers either for
defensive purposes due to market conditions or to generate income from its
excess cash balances. A repurchase agreement is an agreement under which the
Portfolio acquires a money market instrument (generally a security issued by the
U.S. Government or an agency thereof, a banker's acceptance or a certificate of
deposit) from a commercial bank, broker or dealer, subject to resale to the
seller at an agreed upon price and date (normally, the next business day). A
repurchase agreement may be considered a loan collateralized by securities. The
resale price reflects an agreed upon interest rate effective for the period the
instrument is held by the Portfolio and is unrelated to the interest rate on the
underlying instrument. In these transactions, the securities acquired by the
Portfolio (including accrued interest earned thereon) must have a total value in
excess of the value of the repurchase agreement and are held by a custodian bank
until repurchased. In addition, the Board of Trustees will monitor the Trust's
repurchase agreement transactions generally and will establish guidelines and
standards for review of the creditworthiness of any bank, broker or dealer party
to a repurchase agreement with the Trust. No more than an aggregate of 15% of a
Portfolio's assets at the time of investment will be invested in repurchase
agreements having maturities longer than seven days and securities subject to
legal or contractual restrictions on resale, for which there are no readily
available market quotations. From time to time, the Fund's Board of Trustees may
determine that certain restricted securities known as Rule 144A securities are
liquid and not subject to the 15% limitation described above.
The use of repurchase agreements involves certain risks. For example, if
the other party to the agreement defaults on its obligation to repurchase the
underlying security at a time when the value of the security has declined, the
Portfolio may incur a loss upon disposition of the security. If the other party
to the agreement becomes insolvent and subject to liquidation or reorganization
under the Bankruptcy Code or other laws, a court may determine that the
underlying security is collateral for a loan by the Portfolio not within the
control of the Portfolio and therefore the Portfolio may not be able to
substantiate its interest in the underlying security and
B-1
<PAGE> 105
may be deemed an unsecured creditor of the other party to the agreement. While
the Trust's management acknowledges these risks, it is expected that they can be
controlled through careful monitoring procedures.
LENDING OF SECURITIES. Each Portfolio of the Trust may lend its securities
on a short-term or long-term basis to qualified institutional investors who need
to borrow securities in order to complete certain transactions, such as covering
short sales, avoiding failures to deliver securities or completing arbitrage
operations. By lending its portfolio securities, a Portfolio attempts to
increase its net investment income through the receipt of interest on the loan.
Any gain or loss in the market price of the securities loaned that might occur
during the term of the loan would be for the account of the Portfolio. The
Portfolio may lend its portfolio securities to qualified brokers, dealers, banks
or other financial institutions, so long as the terms, the structure and the
aggregate amount of such loans are not inconsistent with the Investment Company
Act of 1940, or the Rules and Regulations or interpretations of the Securities
and Exchange Commission (the "Commission") thereunder, which currently require
that (a) the borrower pledge and maintain with the Trust collateral consisting
of cash, a letter of credit issued by a domestic U.S. bank, or securities issued
or guaranteed by the United States Government having at all times not less than
100% of the value of the securities loaned, (b) the borrower add to such
collateral whenever the price of the securities loaned rises (i.e. the borrower
"marks to the market" on a daily basis), (c) the loan be made subject to
termination by the Trust at any time and (d) the Portfolio receive reasonable
interest on the loan (which may include the Portfolio's investing any cash
collateral in interest bearing short-term investments), any distribution on the
loaned securities and any increase in their market value. Loan arrangements made
by the Trust will comply with all other applicable regulatory requirements,
including the rules of the New York Stock Exchange, which rules presently
require the borrower, after notice, to redeliver the securities within the
normal settlement time of three business days. All relevant facts and
circumstances, including the creditworthiness of the broker, dealer or
institution, will be considered in making decisions with respect to the lending
of securities, subject to review by the Board of Trustees.
At the present time, the Staff of the Commission does not object if an
investment company pays reasonable negotiated fees in connection with loaned
securities, so long as such fees are set forth in a written contract and
approved by the investment company's trustees. In addition, voting rights pass
with the loaned securities, but if a material event will occur affecting an
investment on loan, the loan must be called and the securities voted.
FUTURES CONTRACTS. Each Portfolio of the Trust may enter into futures
contracts, options, warrants, options on futures contracts, convertible
securities and swap agreements for the purpose of simulating full investment and
reducing transactions costs. The Trust does not use futures or options for
speculative purposes. Each Portfolio will only use futures and options to
simulate full investment in the underlying index while retaining a cash balance
for fund management purposes. Futures contracts provide for the future sale by
one party and purchase by another party of a specified amount of a specific
security at a specified future time and at a specified price. Futures contracts
which are standardized as to maturity date and underlying financial instrument
are traded on national futures exchanges. Futures exchanges and trading are
regulated under the Commodity Exchange Act by the Commodity Futures Trading
Commission ("CFTC"), a U.S. Government agency. Assets committed to futures
contracts will be segregated at the Trust's custodian bank to the extent
required by law.
Although futures contracts by their terms call for actual delivery or
acceptance of the underlying securities, in most cases the contracts are closed
out before the settlement date without the making or taking of delivery. Closing
out an open futures position is done by taking an opposite position ("buying" a
contract which has previously been "sold," or "selling" a contract previously
purchased) in an identical contract to terminate the position. Brokerage
commissions are incurred when a futures contract is bought or sold.
Futures traders are required to make a good faith margin deposit in cash or
government securities with a broker or custodian to initiate and maintain open
positions in futures contracts. A margin deposit is intended to assure
completion of the contract (delivery or acceptance of the underlying security)
if it is not terminated prior to the specified delivery date. Minimal initial
margin requirements are established by the futures exchange and may be changed.
Brokers may establish deposit requirements which are higher than the
B-2
<PAGE> 106
exchange minimums. Futures contracts are customarily purchased and sold on
deposits which may range upward from less than 5% of the value of the contract
being traded.
After a futures contract position is opened, the value of the contract is
marked to market daily. If the futures contract price changes to the extent that
the margin on deposit does not satisfy margin requirements, payment of
additional "variation" margin will be required. Conversely, change in the
contract value may reduce the required margin, resulting in a repayment of
excess margin to the contract holder. Variation margin payments are made to and
from the futures broker for as long as the contract remains open. A Portfolio of
the Trust expects to earn interest income on its margin deposits.
Traders in futures contracts may be broadly classified as either "hedgers"
or "speculators." Hedgers use the futures markets primarily to offset
unfavorable changes in the value of securities either held for investment
purposes or expected to be acquired by them. Speculators are less inclined to
own, or intend to purchase, the securities underlying the futures contracts
which they trade, and use futures contracts with the expectation of realizing
profits from fluctuations in the prices of underlying securities. The Trust's
Portfolios intend to use futures contracts only for bona fide hedging purposes.
Regulations of the CFTC applicable to the Trust require that all of its
futures transactions constitute bona fide hedging transactions except to the
extent that the aggregate initial margins and premiums required to establish any
non-hedging positions do not exceed five percent of the value of the Fund's
portfolio. A Portfolio will only sell futures contracts to protect the Portfolio
against declines in the prices of the securities underlying the futures
contracts or purchase contracts to protect against an increase in the price of
securities it intends to purchase. As evidence of this hedging interest, the
Portfolio expects that the majority of its futures contract purchases will be
"completed;" that is, equivalent amounts of related securities will have been
purchased or are being purchased by the Portfolio upon sale of open futures
contracts.
Although techniques other than the sale and purchase of futures contracts
could be used to control the Portfolio's exposure to market fluctuations, the
use of futures contracts may be a more effective means of hedging this exposure.
While a Portfolio will incur commission expenses in both opening and closing out
futures positions, these costs are lower than transaction costs incurred in the
purchase and sale of the underlying securities.
RESTRICTIONS ON THE USE OF FUTURES CONTRACTS. A Portfolio will not enter
into futures contract transactions to the extent that, immediately thereafter,
the sum of its initial margin deposits on open contracts exceeds 5% of the
market value of the Portfolio's total assets. In addition, a Portfolio will not
enter into futures contracts to the extent that its outstanding obligations to
purchase securities under these contracts would exceed 20% of the Portfolio's
total assets.
RISK FACTORS IN FUTURES TRANSACTIONS. Positions in futures contracts may
be closed out only on an Exchange which provides a secondary market for such
futures. However, there can be no assurance that a liquid secondary market will
exist for any particular futures contract at any specific time. Thus, it may not
be possible to close a futures position. In the event of adverse price
movements, the Portfolio would continue to be required to make daily cash
payments to maintain its required margin. In such situations, if the Portfolio
has insufficient cash, it may have to sell portfolio securities to meet daily
margin requirements at a time when it may be disadvantageous to do so. In
addition, the Portfolio may be required to make delivery of the instruments
underlying futures contracts it holds. The inability to close options and
futures positions also could have an adverse impact on the ability to
effectively hedge.
Each Portfolio will minimize the risk that it will be unable to close out a
futures contract by only entering into futures which are traded on national
futures exchanges and for which there appears to be a liquid secondary market.
The risk of loss in trading futures contracts in some strategies can be
substantial, due both to the low margin deposits required, and the extremely
high degree of leverage involved in futures pricing. As a result, a relatively
small price movement in a futures contract may result in immediate and
substantial loss (as well as gain) to the investor. For example, if at the time
of purchase, 10% of the value of the futures contract is deposited as margin, a
subsequent 10% decrease in the value of the futures contract would result in a
total
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loss of the margin deposit, before any deduction for the transaction costs, if
the account were then closed out. A 15% decrease would result in a loss equal to
150% of the original margin deposit if the contract were closed out. Thus, a
purchase or sale of a futures contract may result in losses in excess of the
amount invested in the contract. The Trust also bears the risk that the adviser
will incorrectly predict future stock market trends. However, because the
futures strategies of the Trust are engaged in only for hedging purposes, the
Trust's Officers do not believe that the Portfolios are subject to the risks of
loss frequently associated with futures transactions. A Portfolio would
presumably have sustained comparable losses if, instead of the futures contract,
it had invested in the underlying financial instrument and sold it after the
decline.
Utilization of futures transactions by the Trust does involve the risk of
imperfect or no correlation where the securities underlying futures contracts
have different maturities than the portfolio securities being hedged.
It is also possible that the Portfolio could both lose money on futures
contracts and also experience a decline in value of its portfolio securities.
There is also the risk of loss by the Portfolio of margin deposits in the event
of bankruptcy of a broker with whom the Portfolio has an open position in a
futures contract or related option.
Most futures exchanges limit the amount of fluctuation permitted in futures
contract prices during a single trading day. The daily limit establishes the
maximum amount that the price of a futures contract may vary either up or down
from the previous day's settlement price at the end of a trading session. Once
the daily limit has been reached in a particular type of contract, no trades may
be made on that day at a price beyond that limit. The daily limit governs only
price movement during a particular trading day and therefore does not limit
potential losses, because the limit may prevent the liquidation of unfavorable
positions. Futures contract prices have occasionally moved to the daily limit
for several consecutive trading days with little or no trading, thereby
preventing prompt liquidation of future positions and subjecting some futures
traders to substantial losses.
FEDERAL TAX TREATMENT OF FUTURES CONTRACTS. Each Portfolio of the Trust is
required for federal income tax purposes to recognize as income for each taxable
year its net unrealized gains and losses on certain futures contracts as of the
end of the year as well as those actually realized during the year. In most
cases, any gain or loss recognized with respect to a futures contract is
considered to be 60% long-term capital gain or loss and 40% short-term capital
gain or loss, without regard to the holding period of the contract. Furthermore,
sales of futures contracts which are intended to hedge against a change in the
value of securities held by the Portfolio may affect the holding period of such
securities and, consequently, the nature of the gain or loss on such securities
upon disposition. A Portfolio may be required to defer the recognition of losses
on futures contracts to the extent of any unrecognized gains on related
positions held by the Portfolio.
In order for each Portfolio to continue to qualify for Federal income tax
treatment as a regulated investment company, at least 90% of its gross income
for a taxable year must be derived from qualifying income; i.e., dividends,
interest, income derived from loans of securities, gains from the sale of
securities or of foreign currencies or other income derived with respect to the
Portfolio's business of investing in securities. Net gain realized from the
closing out of futures contracts will be considered gain from the sale of
securities and therefore be qualifying income for purposes of the 90%
requirement.
Each Portfolio will distribute to shareholders annually any net capital
gains which have been recognized for federal income tax purposes (including
unrealized gains at the end of the Portfolio's fiscal year) on futures
transactions. Such distributions will be combined with distributions of capital
gains realized on the Portfolio's other investments and shareholders will be
advised on the nature of the distributions.
INVESTMENT LIMITATIONS
The following restrictions and fundamental policies cannot be changed
without approval of the holders of a majority of the outstanding shares of each
Portfolio (as defined in the Investment Company Act of 1940). Each Portfolio may
not under any circumstances:
1) change its investment objective, which is to provide investment results
that correspond to the performance of a particular stock index as set
forth in (2) below;
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2) change its investment policy, which, in the case of the 500 Portfolio,
is to attempt to duplicate the performance of Standard & Poor's 500
Composite Stock Price Index by owning as many of the 500 stocks
contained in the index as is feasible; in the case of the Extended
Market Portfolio, is to attempt to duplicate the performance of common
stocks traded on the New York Stock Exchange, American Stock Exchange
and NASDAQ not included in the S&P 500 Index as represented by the
Wilshire 4500 Index; in the case of the Total Stock Market Portfolio is
to match the investment performance of the Wilshire 5000 Index, an
index consisting of all regularly traded U.S. stocks; in the case of
the Value Portfolio, is to attempt to duplicate the performance of the
Standard & Poor's/BARRA Value Index by owning as many of the stocks
contained in the index as is feasible; in the case of the Growth
Portfolio, is to attempt to duplicate the performance of the Standard &
Poor's/BARRA Growth Index by owning as many of the stocks contained in
the index as is feasible; in the case of the Small Capitalization Stock
Portfolio is to duplicate the investment performance of the Russell
2000 Small Stock Index; in the case of the Mid Capitalization Stock
Portfolio, is to attempt to duplicate the performance of the S&P MidCap
400 Index by owning as many of the stocks contained in the index as is
feasible; in the case of the Small Capitalization Value Stock
Portfolio, is to attempt to duplicate the performance of the S&P/BARRA
600 Value Index by owning as many of the stocks contained in the index
as is feasible; and, in the case of the Small Capitalization Growth
Stock Portfolio, is to attempt to duplicate the performance of the
S&P/BARRA 600 Growth Index by owning as many of the stocks contained in
the index as is feasible.
3) invest in commodities or purchase real estate, although it may purchase
securities of companies which deal in real estate or interests therein,
and that each Portfolio may invest in stock index futures contracts,
stock options and options on stock index futures contracts to the
extent that not more than 5% of the Portfolio's assets are required as
margin deposit for futures contracts and not more than 20% of a
Portfolio's assets are invested in futures and options at any time;
4) lend money to any person except (i) by purchasing a portion of an issue
of short-term debt securities or similar obligations (including
repurchase agreements) which are publicly distributed or customarily
purchased by institutional investors, (ii) as provided under "Lending
of Securities", and (iii) the Mid Capitalization Stock Portfolio, the
Small Capitalization Value Stock Portfolio, and the Small
Capitalization Growth Stock Portfolio may make loans to any existing
and future investment company member of The Vanguard Group of
Investment Companies, or its predecessors, through its interfund
lending facility;
5) purchase securities on margin or sell securities short, except as set
forth in paragraph 3 above;
6) with respect to 75% of total assets, (i) purchase more than 10% of the
outstanding voting securities of any company, or (ii) purchase
securities of any issuer (except obligations of the United States
Government and its instrumentalities), if, as a result, more than 5% of
the value of the Portfolio's total assets would be invested in the
securities of such issuer;
7) borrow money, except from banks (or through reverse repurchase
agreements) for temporary or emergency (not leveraging) purposes,
including the meeting of redemption requests which might otherwise
require the untimely disposition of securities, in an amount not
exceeding 15% of its net assets (including the amount borrowed and the
value of any outstanding reverse repurchase agreements) at the time the
borrowing is made. The Mid Capitalization Stock Portfolio, the Small
Capitalization Value Stock Portfolio, and the Small Capitalization
Growth Stock Portfolio may borrow from any existing and future
investment company member of The Vanguard Group of Investment
Companies, or its predecessors, through its interfund lending facility.
Whenever a borrowing exceeds 5% of a Portfolio's net assets, the
Portfolio will not make any additional investments;
8) pledge, mortgage, or hypothecate any of its assets to an extent greater
than 5% of the value of its total assets;
9) engage in the business of underwriting securities issued by other
persons except to the extent that a Portfolio may technically be deemed
an underwriter under the Securities Act of 1933, as amended, in
disposing of portfolio securities;
10) purchase or otherwise acquire any security if, as a result, more than
15% of its net assets would be invested in securities that are illiquid
(including the Trust's investment in The Vanguard Group, Inc.);
11) invest for the purpose of controlling management of any company;
12) invest in securities of other investment companies, except as may be
acquired as a part of a merger, consolidation or acquisition of assets
approved by the Portfolio's shareholders, or otherwise to the extent
permitted by Section 12 of the Investment Company Act of 1940. The
Portfolio will invest only
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in investment companies which have investment objectives and investment
policies consistent with those of the Portfolio;
13) invest more than 25% of the value of its total assets in any one
industry; or
14) invest in put, call, straddle or spread options or in interests in oil,
gas or other mineral exploration or development programs, except as set
forth in limitation number "3", above.
The above-mentioned investment limitations are considered at the time
investment securities are purchased. Notwithstanding these limitations, the
Trust may own all or any portion of the securities of, or make loans to, or
contribute to the costs or other financial requirements of any company which
will be wholly owned by the Trust and one or more other investment companies and
is primarily engaged in the business of providing, at-cost, management,
administrative, distribution or related services to the Trust and other
investment companies. See "The Vanguard Group". Each Portfolio of the Trust may
not invest more than 5% of its total assets in securities of companies which
have (with predecessors) a record of less than three years' of continuous
operation. Additionally, each Portfolio of the Trust will not purchase or retain
securities of an issuer if those Officers and Trustees of the Trust owning more
than 1/2 of 1% of such securities together own more than 5% of such securities.
These are non-fundamental policies which may be changed by the vote of a
majority of the Trustees.
PURCHASE OF SHARES
The Trust reserves the right in its sole discretion (i) to suspend the
offerings of its shares, (ii) to reject purchase or exchange purchase orders
when in the judgment of management such rejection is in the best interest of the
Trust, and (iii) to reduce or waive the minimum investment for or any other
restrictions on initial and subsequent investments as well as redemption fees
for certain fiduciary accounts or under circumstances where certain economies
can be achieved in sales of the Trust's shares.
EXCHANGE OF SECURITIES FOR SHARES OF THE TRUST. In certain circumstances,
shares of the Trust's Portfolios may be purchased in exchange for a minimum
value of $1 million in common stocks. Such common stocks must be included in the
appropriate Index and each position must have a market value in excess of
$10,000. Additionally, such securities will be acquired by a Portfolio of the
Trust for investment purpose and not for resale and must be liquid securities
which are not restricted as to transfer and have a value which is readily
ascertainable as evidenced by a listing on the American Stock Exchange, the New
York Stock Exchange or NASDAQ. Securities accepted by the Portfolio will be
valued as set forth under "The Share Price of Each Portfolio" in the Trust's
prospectus as of the time of the next determination of net asset value after
such acceptance. Shares of each Portfolio of the Trust are issued at net asset
value determined as of the same time. "IN-KIND" PURCHASES OF THE SMALL
CAPITALIZATION STOCK, EXTENDED MARKET, MID CAPITALIZATION STOCK, SMALL
CAPITALIZATION VALUE STOCK AND SMALL CAPITALIZATION GROWTH STOCK PORTFOLIOS WILL
NOT BE SUBJECT TO THEIR NORMAL TRANSACTION FEES, 0.5%, 0.25%, 0.25%, 1.00% AND
1.00%, RESPECTIVELY. All dividends, subscription, or other rights which are
reflected in the market price of accepted securities at the time of valuation
become the property of the Portfolio and must be delivered to the Portfolio by
the investor upon receipt from the issuer. A gain or loss for Federal income tax
purposes would be realized by the investor upon the exchange depending upon the
cost of the securities tendered.
The Portfolio will not accept securities in exchange unless: (1) such
securities are, at the time of the exchange, included in the Portfolio; (2) such
an exchange will not cause the Portfolio's weightings to become imbalanced with
respect to the weightings of the stocks included in the Index; (3) the investor
represents and agrees that all securities offered to the Portfolio are not
subject to any restrictions upon their sale by the Portfolio under the
Securities Act of 1933, or otherwise; (4) such securities are traded in an
unrelated transaction with a quoted sales price on the same day the exchange
valuation is made; (5) the quoted sales price used as a basis of valuation is
representative (i.e., one that does not involve a trade of substantial size
which artificially influences the price of the security); and (6) the value of
any such security being exchanged will not exceed 5% of the Portfolio's net
assets immediately prior to the transaction.
Investors interested in such purchases should contact the Trust.
SHARE PRICE
The share price, or "net asset value" per share for the 500 Portfolio is
calculated by dividing the total assets of the Portfolio, less all liabilities,
by the total number of shares outstanding. The net asset value for each share
class of the Value, Growth, Extended Market, Small Capitalization Stock and the
Total Stock Market
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Portfolios are calculated by dividing the net assets attributed to each share
class, by the total number of shares outstanding for that share class. 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 the exchange is open for trading.
Portfolio securities for which market quotations are readily available
(includes those securities listed on national securities exchanges, as well as
those quoted on the NASDAQ Stock Market) will be valued at the last quoted sales
price on the day the valuation is made. Such securities which are not traded on
the valuation date are valued at the mean of the bid and ask prices. Price
information on exchange-listed securities is taken from the exchange where the
security is primarily traded. 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.
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 value.
Bonds and other fixed income 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. The prices provided by a pricing
service may be determined without regard to bid or last sale prices of each
security, but take into account institutional-size transactions in similar
groups of securities as well as any developments related to specific securities.
Foreign securities are valued at the last quoted sales price, according to
the broadest and most representative market, available at the time the Portfolio
is valued. If events which materially affect the value of a Portfolio's
investments occur after the close of the securities markets on which such
securities are primarily traded, those investments may be valued by such methods
as the Board of Trustees deems in good faith to reflect fair value.
In determining the Portfolio's net asset value per share, all assets and
liabilities initially expressed in foreign currencies will be converted into
U.S. dollars using the officially quoted daily exchange rates used by Morgan
Stanley Capital International in calculating various benchmarking indices. This
officially quoted exchange rate may be determined prior to or after the close of
a particular securities market. If such quotations are not available, the rate
of exchange will be determined in accordance with policies established in good
faith by the Board of Trustees.
Other assets and securities for which no quotations are readily available
or which are restricted as to sale (or resale) are valued by such methods as the
Board of Trustees deems in good faith to reflect fair value.
The share price for each Portfolio can be found daily in the mutual fund
listings of most major newspapers under the heading of Vanguard Funds.
REDEMPTION OF SHARES
Each Portfolio may suspend redemption privileges or postpone the date of
payment (i) during any period that the New York Stock Exchange is closed, or
trading on the Exchange is restricted as determined by the Securities and
Exchange Commission (the "Commission"), (ii) during any period when an emergency
exists as defined by the rules of the Commission as a result of which it is not
reasonably practicable for the Trust to dispose of securities owned by it, or
fairly to determine the value of its assets, and (iii) for such other periods as
the Commission may permit.
No charge is made by the Trust for redemptions. Any redemption may be more
or less than the shareholder's cost depending on the market value of the
securities held by each Portfolio.
The Trust has made an election with the Commission to pay in cash all
redemptions requested by any shareholder of record limited in amount during any
90-day period to the lesser of $250,000 or 1% of the net assets of a Portfolio
at the beginning of such period. Such commitment is irrevocable without the
prior approval of the Commission. Redemptions in excess of the above limits may
be paid in whole or in part, in investment securities or in cash, as the
Trustees may deem advisable; however, payment will be made wholly in cash unless
the Trustees believe that economic or market conditions exist which would make
such a practice detrimental to the best interests of the Trust. If redemptions
are paid in investment securities, such securities will be valued as set forth
in the Prospectus, and a redeeming shareholder would normally incur brokerage
expenses if he converted these securities to cash.
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The Fund has authorized Charles Schwab & Co., Inc. ("Schwab") to accept on
its behalf purchase and redemption orders under certain terms and conditions.
Schwab is also authorized to designate other intermediaries to accept purchase
and redemption orders on the Fund's behalf subject to those terms and
conditions. Under this arrangement, the Fund will be deemed to have received a
purchase or redemption order when Schwab or, if applicable, Schwab's authorized
designee, accepts the order in accordance with the Fund's instructions. Customer
orders that are properly transmitted to the Fund by Schwab, or if applicable,
Schwab's authorized designee, will be priced as follows:
If you place your order through Schwab and it is received before 3 p.m.
Eastern time on any business day, your order will be sent to Vanguard that day
and your share price will be based on the Fund's net asset value calculated at
the close of trading that day. If your order is received after 3 p.m. Eastern
time, it will be sent to Vanguard on the following business day and your share
price will be based on the Fund's net asset value calculated at the close of
trading that day.
YIELD AND TOTAL RETURN
The annualized yield of the 500 Portfolio for the 30-day period ended
December 31, 1997 was +1.50%. The annualized yield of the Extended Market
Portfolio's Investor Shares for the 30-day period ended December 31, 1997 was
+1.17%. The annualized yield of the Total Stock Market Portfolio's Investor
Shares for the 30-day period ended December 31, 1997 was +1.52%. The annualized
yield of the Value Portfolio for the 30-day period ended December 31, 1997 was
+1.83%. The annualized yield of the Growth Portfolio for the 30-day period ended
December 31, 1997 was +1.06%. The annualized yield of the Small Capitalization
Stock Portfolio's Investor Shares for the 30-day period ended December 31, 1997
was +1.31%.
The average annual total return of the 500 Portfolio* for the one-, five-,
and ten-year periods ended December 31, 1997 was +33.19%, +20.12% and +17.84%,
respectively. The average annual total return for the Investor Shares of the
Extended Market Portfolio** for the one-, five- and 10-year periods ended
December 31, 1997 was +26.73%, +17.54%, and +16.41%, respectively. The average
annual total return of the Investor Shares of the Total Stock Market Portfolio*
for the one- and five-year periods ended December 31, 1997, and since the
Portfolio's inception on March 16, 1992, was +30.99%, +18.90%, and +18.52%(1),
respectively. The average annual total return of the Value Portfolio* for the
one- and five-year periods ended December 31, 1997 and since inception on
November 2, 1992 was +29.77%, +20.53%, and +20.68%(1), respectively. The average
annual total return of the Growth Portfolio* for the one- and five-year periods
ended December 31, 1997 and since inception on November 2, 1992, was +36.34%,
+19.46%, and +19.53%(1), respectively. The average annual total return of the
Investor Shares of the Small Capitalization Stock Portfolio*** for the one-
five- and ten-year periods ended December 31, 1997 was +24.59%, +17.48%, and
+15.79%, respectively. Total return is computed by finding the average
compounded rates of return over the one- five-and ten-year periods set forth
above that would equate an initial amount invested at the beginning of the
periods to the ending redeemable value of the investment.
The Institutional Shares of the Extended Market Portfolio, Total Stock
Market Portfolio and Small Capitalization Stock Portfolio were not offered prior
to July 7, 1997. The Institutional Shares of the Value Portfolio and the Growth
Portfolio were not offered prior to April 20, 1998. The Investor Shares and
Institutional Shares of the Mid Capitalization Stock, Small Capitalization Value
Stock and Small Capitalization Growth Stock Portfolios were not offered prior to
April 20, 1998.
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* Total return figures are not adjusted to reflect the $10 annual account
maintenance fee.
** Total return figures for the Extended Market Portfolio are not adjusted to
reflect the 0.25% portfolio transaction fee and the $10 annual account
maintenance fee.
*** Total return figures for the Small Capitalization Stock Portfolio are not
adjusted to reflect the 0.5% portfolio transaction fee and the $10 annual
account maintenance fee.
(1) Annualized.
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MANAGEMENT OF THE TRUST
TRUSTEES AND OFFICERS
The Officers of the Trust manage its day-to-day operations and are
responsible to the Trust's Board of Trustees. The Trustees set broad policies
for the Trust and choose its Officers. The following is a list of the Trustees
and Officers of the Trust and a statement of their present positions and
principal occupations during the past five years. The mailing address of the
Trustees and Officers of the Trust is Post Office Box 876, Valley Forge, PA
19482.
JOHN C. BOGLE, (DOB: 5/8/1929)
Senior Chairman and Trustee*
Senior Chairman, Director and former Chief Executive Officer of The
Vanguard Group, Inc., and of each of the investment companies in The
Vanguard Group; Director of The Mead Corporation, General Accident
Insurance, and Chris-Craft Industries, Inc.
JOHN J. BRENNAN, (DOB: 7/29/1954) Chairman, Chief Executive Officer & Trustee*
Chairman, Chief Executive Officer and Direc-
tor of The Vanguard Group, Inc. and of each
of the investment companies in The Vanguard Group.
ROBERT E. CAWTHORN, (DOB: 9/28/1935)
Trustee
Chairman Emeritus and Director of Rhone-Poulenc Rorer, Inc.; Managing
Director of Global Health Care Partners/DLJ Merchant Banking Partners;
Director of Sun Company, Inc., and Westinghouse Electric Corp.
BARBARA BARNES HAUPTFUHRER,
(DOB: 10/11/1928) Trustee
Director of The Great Atlantic and Pacific Tea Company, IKON Office
Solutions, Inc., Raytheon Company, Knight-Ridder Inc., Massachusetts Mutual
Life Insurance Co., and Ladies Professional Golf Association; and Trustee
Emerita of Wellesley College.
BRUCE K. MACLAURY, (DOB: 5/7/1931) Trustee
President Emeritus of The Brookings Institu-
tion; Director of American Express Bank, Ltd.,
The St. Paul Companies, Inc., and National Steel Corporation.
BURTON G. MALKIEL, (DOB: 8/28/1932) Trustee
Chemical Bank Chairman's Professor of Economics, Princeton University;
Director of Prudential Insurance Co. of America, Amdahl Corporation, Baker
Fentress & Co., The Jeffrey Co., and Southern New England
Telecommunications Company.
ALFRED M. RANKIN, JR., (DOB: 10/8/1941)
Trustee
Chairman, President, Chief Executive Officer, and Director of NACCO
Industries, Inc.; Director of The BFGoodrich Company, and The Standard
Products Company.
JOHN C. SAWHILL, (DOB: 6/12/1936) Trustee
President and Chief Executive Officer of The Nature Conservancy; formerly,
Director and Senior Partner of McKinsey & Co., and President of New York
University; Director of Pacific Gas and Electric Company, Procter & Gamble
Company, and NACCO Industries.
JAMES O. WELCH, JR., (DOB: 5/13/1931) Trustee
Retired Chairman of Nabisco Brands, Inc.; retired Vice Chairman and
Director of RJR Nabisco; Director of TECO Energy, Inc., and Kmart
Corporation.
J. LAWRENCE WILSON, (DOB: 3/2/1936) Trustee
Chairman and Chief Executive Officer of Rohm & Haas Company; Director of
Cummins Engine Company, and The Mead Corporation; Trustee of Vanderbilt
University.
RAYMOND J. KLAPINSKY, (DOB: 12/7/1938)
Secretary*
Managing Director and Secretary of The Vanguard Group, Inc.; Secretary of
each of the investment companies in The Vanguard Group.
RICHARD F. HYLAND, (DOB: 3/22/1937)
Treasurer*
Treasurer of The Vanguard Group, Inc. and of each of the investment
companies in The Vanguard Group.
KAREN E. WEST, (DOB: 9/13/1946) Controller*
Principal of The Vanguard Group, Inc.; Controller of each of the investment
companies in The Vanguard Group.
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*Mr. Bogle and the Officers of the Trust are "interested persons" as defined in
the Investment Company Act of 1940.
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THE VANGUARD GROUP, INC.
Vanguard Index Trust is a member of the Vanguard Group of Investment
Companies which consists of more than 30 investment companies. Through their
jointly-owned subsidiary, The Vanguard Group, Inc. ("Vanguard"), the Trust and
the other Funds in the Group obtain at cost virtually all of their corporate
management, administrative and distribution services. Vanguard also provides
investment advisory services on an at-cost basis to several of the Vanguard
Funds.
Vanguard employs a supporting staff of management and administrative
personnel needed to provide the requisite services to the Funds and also
furnishes the Funds with necessary office space, furnishings and equipment. Each
Fund pays its share of Vanguard's total expenses which are allocated among the
Funds under methods approved by the Board of Trustees (Directors) of each Fund.
In addition, each Fund bears its own direct expenses such as legal, auditing and
custodian fees.
The Fund's Officers are Officers of Vanguard. No Officer or employee owns,
or is permitted to own, any securities of any external adviser for the Funds.
The Vanguard Group adheres to a Code of Ethics established pursuant to Rule
17j-1 under the Investment Company Act of 1940. The Code is designed to prevent
unlawful practices in connection with the purchase or sale of securities by
persons associated with Vanguard. Under Vanguard's Code of Ethics certain
Officers and employees of Vanguard who are considered access persons are
permitted to engage in personal securities transactions. However, such
transactions are subject to procedures and guidelines substantially similar to
those recommended by the mutual fund industry and approved by the U.S.
Securities and Exchange Commission.
The Vanguard Group was established and operates under a Funds' Service
Agreement which was approved by the shareholders of each of the Funds. The
Funds' Service Agreement provides as follows: (a) each aggregate Vanguard Fund
may invest up to .40% of its current assets in Vanguard, and (b) there is no
limitation on the amount that the Vanguard Funds may contribute to Vanguard's
capitalization. The amounts which each of the Funds has invested are adjusted
from time to time in order to maintain the proportionate relationship between
each Fund's relative net assets and its contribution to Vanguard's capital. At
December 31, 1997, the Trust had contributed capital of $4,283,000 to Vanguard,
representing 21.4% of Vanguard's capitalization.
MANAGEMENT. Corporate management and administrative services include: (1)
executive staff; (2) accounting and financial; (3) legal and regulatory; (4)
shareholder account maintenance; (5) monitoring and control of custodian
relationships; (6) shareholder reporting; and (7) review and evaluation of
advisory and other services provided to the Funds by third parties. During the
fiscal year ended December 31, 1997, the Trust's share of Vanguard's actual net
costs of operation relating to management and administrative services (including
transfer agency) totaled approximately $80,039,000.
DISTRIBUTION. Vanguard provides all distribution and marketing activities
for the Funds in the Group. Vanguard Marketing Corporation, a wholly-owned
subsidiary of The Vanguard Group, Inc., acts as Sales Agent for the shares of
the Funds in connection with any sales made directly to investors in the states
of Florida, Missouri, New York, Ohio, Texas and such other states as it may be
required.
The principal distribution expenses are for advertising, promotional
materials and marketing personnel. Distribution services may also include
organizing and offering to the public, from time to time, one or more new
investment companies which will become members of the Group. The Directors and
Officers of Vanguard determine the amount to be spent annually on distribution
activities, the manner and amount to be spent on each Fund, and whether to
organize new investment companies.
One half of the distribution expenses of a marketing and promotional nature
is allocated among the Funds based upon relative net assets. The remaining one
half of those expenses is allocated among the Funds based upon each Fund's sales
for the preceding 24 months relative to the total sales of the Funds as a Group,
provided, however, that no Fund's aggregate quarterly rate of contribution for
distribution expenses of a marketing and promotional nature shall exceed 125% of
the average distribution expense rate for the Group, and that no Fund shall
incur annual distribution expenses in excess of 20/100 of 1% of its average
month-end net assets. During the fiscal year ended December 31, 1997, the Trust
paid approximately $13,553,000 of the Group's distribution and marketing
expenses. With respect to the Extended Market, Total Stock Market and Small
Capitalization Portfolios, expenses paid to Vanguard that are associated with
marketing and distribu-
B-10
<PAGE> 114
tion activities will be allocated to the class of shares of the Portfolio on
behalf of which the expenses were incurred by making such allocations to each
share class as if each such class were a separate Vanguard Fund. With respect to
the Extended Market, Total Stock Market and Small Capitalization Stock
Portfolios' expenses associated with Vanguard's provision of shareholder account
services will be allocated to each share class on the basis of the amount
incurred by each share class.
INVESTMENT ADVISORY SERVICES. Vanguard also provides investment advisory
services to Vanguard Municipal Bond Fund, Vanguard Admiral Funds, Vanguard
Balanced Index Fund, several Portfolios of Vanguard Variable Insurance Fund,
Vanguard Bond Index Fund, Vanguard International Equity Index Fund, Vanguard
Institutional Index Fund, Vanguard Money Market Reserves, several Portfolios of
Vanguard Fixed Income Securities Fund, Vanguard Tax-Managed Fund, the Aggressive
Growth Portfolio of Vanguard Horizon Fund, the Total International Portfolio of
Vanguard STAR Fund, the REIT Index Portfolio of Vanguard Specialized Portfolios,
Vanguard California Tax-Free Fund, Florida Insured Tax-Free Fund, New Jersey
Tax-Free Fund, New York Tax-Free Fund, Ohio Tax-Free Fund, Pennsylvania Tax-Free
Fund, a portion of the assets of Vanguard/Windsor II, a portion of
Vanguard/Morgan Growth Fund, a portion of Vanguard Explorer Fund, and several
indexed separate accounts. These services are provided on an at-cost basis from
money management staff employed directly by Vanguard. The compensation and other
expenses of this staff are paid by the Funds utilizing these services. During
the fiscal year ended December 31, 1995, 1996 and 1997, the Trust paid the
following amount of Vanguard's expenses relating to investment advisory
services:
<TABLE>
<CAPTION>
PORTFOLIO 1995 1996 1997
--------- ------- ------- -------
<S> <C> <C> <C>
500 Portfolio............................................... $24,000 $20,000 $67,000
Extended Market Portfolio................................... $47,000 $27,000 $53,000
Total Stock Market Portfolio................................ $47,000 $27,000 $56,000
Small Capitalization Stock Portfolio........................ $47,000 $29,000 $67,000
Value Portfolio............................................. $24,000 $12,000 $22,000
Growth Portfolio............................................ $24,000 $12,000 $22,000
</TABLE>
B-11
<PAGE> 115
DIRECTOR/TRUSTEE COMPENSATION
The individuals in the table in this section serve as Directors/Trustees of
all Vanguard Funds, and each Fund pays a proportionate share of the
Directors'/Trustees' compensation. The Funds employ their officers on a shared
basis, as well. However, officers are compensated by The Vanguard Group, Inc.,
not the Funds.
INDEPENDENT DIRECTORS/TRUSTEES. The Funds compensate their independent
Directors/Trustees -- that is, the ones who are not also officers of the
Fund -- in three ways:
- - The independent Directors/Trustees receive an annual fee for their service to
the Funds, which is subject to reduction based on absences from scheduled
Board meetings.
- - The independent Directors/Trustees are reimbursed for the travel and other
expenses that they incur in attending Board meetings.
- - Upon retirement, the independent Directors/Trustees receive an aggregate
annual fee of $1,000 for each year served on the Board, up to fifteen years of
service. This annual fee is paid for ten years following retirement, or until
the Directors'/Trustees' death.
"INTERESTED" DIRECTORS/TRUSTEES. The Funds' interested
Directors/Trustees -- Messrs. Bogle and Brennan -- receive no compensation for
their service in that capacity. However, they are paid in their role as officers
of The Vanguard Group, Inc.
COMPENSATION TABLE. The following table provides compensation details for each
of the Trustees. For the Fund, we list the amounts paid as compensation and
accrued as retirement benefits by the Fund for each Trustee. In addition, the
table shows the total amount of benefits that we expect each Director/Trustee to
receive from all Vanguard Funds upon retirement, and the total amount of
compensation paid to each Director/Trustee by all Vanguard Funds. All
information shown is for the fiscal year ended December 31, 1997.
VANGUARD INDEX TRUST
COMPENSATION TABLE
<TABLE>
<CAPTION>
AGGREGATE PENSION OR RETIREMENT ESTIMATED TOTAL COMPENSATION
COMPENSATION BENEFITS ACCRUED AS ANNUAL BENEFITS FROM ALL VANGUARD FUNDS
NAMES OF TRUSTEES FROM TRUST PART OF TRUST EXPENSES UPON RETIREMENT PAID TO TRUSTEES(2)
----------------- ------------ ---------------------- --------------- -----------------------
<S> <C> <C> <C> <C>
John C. Bogle(1) None None None None
John J. Brennan(1) None None None None
Barbara Barnes Hauptfuhrer $12,781 $1,843 $15,000 $70,000
Robert E. Cawthorn $12,781 $1,536 $13,000 $70,000
Bruce K. MacLaury $13,603 $1,761 $12,000 $65,000
Burton G. Malkiel $12,862 $1,237 $15,000 $70,000
Alfred M. Rankin, Jr. $12,781 $ 970 $15,000 $70,000
John C. Sawhill $12,781 $1,152 $15,000 $70,000
James O. Welch, Jr. $12,781 $1,418 $15,000 $70,000
J. Lawrence Wilson $12,781 $1,024 $15,000 $70,000
</TABLE>
(1) As "Interested Trustees," Messrs. Bogle and Brennan receive no compensation
for their service as Trustees.
(2) The amounts reported in this column reflect the total compensation paid to
each Trustee for their service as Director or Trustee of 34 Vanguard Funds
(33 in the case of Mr. Malkiel; 27 in the case of Mr. MacLaury).
PORTFOLIO TRANSACTIONS
In placing portfolio transactions, the Trust uses its best judgment to
choose the broker most capable of providing the brokerage services necessary to
obtain best available price and most favorable execution. The full range and
quality of brokerage services available are considered in making these
determinations. In those instances where it is reasonably determined that more
than one broker can offer the brokerage services needed to obtain the best
available price and most favorable execution, consideration will be given to
those brokers which supply statistical information and provide other services in
addition to execution services to the Trust.
B-12
<PAGE> 116
Since the Trust does not market its shares through intermediary brokers or
dealers, it is not the Trust's practice to allocate brokerage or principal
business on the basis of sales of its shares which may be made through such
firms. However, the Trust may place portfolio orders with qualified
broker-dealers who recommend the Trust to clients, and may, when a number of
brokers and dealers can provide best price and execution on a particular
transaction, consider the sale of Trust shares by a broker or dealer in
selecting among broker-dealers.
During the years ended December 31, 1995, 1996 and 1997, the Trust paid
brokerage commissions of $3,421,567, $5,809,682 and $6,577,424, respectively.
DESCRIPTION OF SHARES AND VOTING RIGHTS
The Declaration of Trust permits the Trustees to issue an unlimited number
of shares of beneficial interest, without par value, from an unlimited number of
series ("Portfolios") or classes of shares. Currently the Trust is offering
shares of nine Portfolios. The Extended Market Portfolio, the Total Stock Market
Portfolio, the Small Capitalization Stock Portfolio, the Mid Capitalization
Stock Portfolio, the Value Portfolio, the Small Capitalization Value Stock
Portfolio, the Growth Portfolio, and the Small Capitalization Growth Stock
Portfolio of the Trust each offers two classes of shares, Investor Shares and
Institutional Shares.
The shares of the Trust are fully paid and nonassessable, except as set
forth under "Shareholder and Trustee Liability," and have no preference as to
conversion, exchange, dividends, retirement or other features. The shares of the
Trust have no pre-emptive rights. The shares of the Trust have non-cumulative
voting rights, which means that the holders of more than 50% of the shares
voting for the election of Trustees can elect 100% of the Trustees if they
choose to do so. A shareholder is entitled to one vote for each full share held
(and a fractional vote for each fractional share held), then standing in his
name on the books of the Trust. On any matter submitted to a vote of
shareholders, all shares of the Trust then issued and outstanding and entitled
to vote, irrespective of the Portfolio or class, shall be voted in the aggregate
and not by Portfolio except (i) when required by the Investment Company Act of
1940, shares shall be voted by individual Portfolio or class; and (ii) when the
matter does not affect any interest of a particular Portfolio or class, then
only shareholders of the affected Portfolio(s) or class(es) shall be entitled to
vote thereon.
The Trust will continue without limitation of time, provided, however,
that:
1) Subject to the majority vote of the holders of shares of any Portfolio
of the Trust outstanding, the Trustees may sell or convert the assets of
such Portfolio to another investment company in exchange for shares of
such investment company and distribute such shares ratably among the
shareholders of such Portfolio and any classes thereof;
2) Subject to the majority vote of shares of any Portfolio of the Trust
outstanding, the Trustees may sell and convert into money the assets of
such Portfolio and distribute such assets ratably among the shareholders
of such Portfolio or its classes; and
3) Without the approval of the shareholders of any Portfolio, unless
otherwise required by law, the Trustees may combine the assets of any
two or more Portfolios or classes into a single Portfolio or class so
long as such combination will not have a material adverse effect upon
the shareholders of such Portfolio.
Upon completion of the distribution of the remaining proceeds or the
remaining assets of any Portfolio as provided in paragraphs 1), 2), and 3)
above, the Trust shall terminate as to that Portfolio and the Trustees shall be
discharged of any and all further liabilities and duties hereunder and the
right, title and interest of all parties shall be cancelled and discharged.
SHAREHOLDER AND TRUSTEE LIABILITY. Under Pennsylvania law, shareholders of
such a Trust may, under certain circumstances, be held personally liable as
partners for the obligations of the Trust. Therefore, the Declaration of Trust
contains an express disclaimer of shareholder liability for acts or obligations
of the Trust and requires that notice of such disclaimer be given in each
agreement, obligation, or instrument entered into or executed by the Trust or
the Trustees. The Declaration of Trust provides for indemnification out of the
Trust property of any shareholder held personally liable for the obligations of
the Trust and not because of such
B-13
<PAGE> 117
shareholder's acts or omissions. The Declaration of Trust also provides that the
Trust shall, upon request, assume the defense of any claim against any
shareholder for any act or obligation of the Trust and satisfy any judgment
thereon. Thus, the risk of a shareholder incurring financial loss on account of
shareholder liability is limited to circumstances in which the Trust itself
would be unable to meet its obligations.
The Declaration of Trust further provides that the Trustees will not be
liable for neglect or wrongdoing, errors of judgment or mistakes of fact or law,
provided the Trustees have exercised reasonable care and have acted under the
reasonable belief that their actions are in the best interests of the Trust.
Nothing in the Declaration of Trust protects a Trustee against any liability to
which he would otherwise be subject by reason of willful misfeasance, bad faith,
gross negligence, or reckless disregard of the duties involved in the conduct of
his office.
B-14
<PAGE> 118
PERFORMANCE MEASURES
Vanguard may use reprinted material discussing The Vanguard Group, Inc. or
any of the member funds of The Vanguard Group of Investment Companies.
Each of the investment company members of the Vanguard Group, including
Vanguard Index Trust, may from time to time, use one or more of the following
unmanaged indices for comparative performance purposes.
STANDARD & POOR'S 500 COMPOSITE STOCK PRICE INDEX -- is a well diversified list
of 500 companies representing the U.S. Stock Market.
STANDARD & POOR'S/BARRA VALUE INDEX -- contains common stocks of the S&P 500
Index which have lower than average price-to-book ratios.
STANDARD & POOR'S MIDCAP 400 INDEX -- is composed of 400 medium sized domestic
stocks.
STANDARD & POOR'S SMALLCAP 600/BARRA VALUE INDEX -- contains stocks of the S&P
SmallCap 600 Index which have a lower than average price-to-book ratio.
STANDARD & POOR'S SMALLCAP 600/BARRA GROWTH INDEX -- contains stocks of the S&P
SmallCap 600 Index which have a higher than average price-to-book ratio.
RUSSELL 1000 VALUE INDEX -- consists of the stocks in the Russell 1000 Index
(comprising the 1,000 largest U.S.-based companies measured by total market
capitalization) with the lowest price-to-book ratios, comprising 50% of the
market capitalization of the Russell 1000.
WILSHIRE 5000 EQUITY INDEX -- consists of more than 7,000 common equity
securities, covering all stocks in the U.S. for which daily pricing is
available.
WILSHIRE 4500 EQUITY INDEX -- consists of all stocks in the Wilshire 5000 except
for the 500 stocks in the Standard & Poor's 500 Index.
RUSSELL 2000 STOCK INDEX -- is composed of approximately 2,000 small
capitalization stocks.
MORGAN STANLEY CAPITAL INTERNATIONAL EAFE INDEX -- is an arithmetic, market
value-weighted average of the performance of over 900 securities listed on the
stock exchanges of countries in Europe, Australasia and the Far East.
GOLDMAN SACHS 100 CONVERTIBLE BOND INDEX -- currently includes 71 bonds and 29
preferred stocks. The original list of names was generated by screening for
convertible issues of $100 million or greater in market capitalization. The
index is priced monthly.
SALOMON BROTHERS GNMA INDEX -- includes pools of mortgages originated by private
lenders and guaranteed by the mortgage pools of the Government National Mortgage
Association.
SALOMON BROTHERS HIGH-GRADE CORPORATE BOND INDEX -- consists of publicly issued,
non-convertible corporate bonds rated Aa or Aaa. It is a value-weighted, total
return index, including approximately 800 issues with maturities of 12 years or
greater.
SALOMON BROTHERS BROAD INVESTMENT-GRADE BOND INDEX -- is a market-weighted index
that contains approximately 4700 individually priced investment-grade corporate
bonds rated BBB or better, U.S. Treasury/agency issues and mortgage pass-through
securities.
LEHMAN LONG-TERM TREASURY BOND INDEX -- is composed of all bonds covered by the
Shearson Lehman Hutton Treasury Bond Index with maturities of 10 years or
greater.
NASDAQ INDUSTRIAL INDEX -- is composed of more than 3,000 industrial issues. It
is a value-weighted index calculated on price change only and does not include
income.
COMPOSITE INDEX -- 70% Standard & Poor's 500 Index and 30% NASDAQ Industrial
Index.
COMPOSITE INDEX -- 65% Standard & Poor's 500 Index and 35% Lehman Long-Term
Corporate AA or Better Bond Index.
COMPOSITE INDEX -- 65% Lehman Long-Term Corporate AA or Better Bond Index and a
35% weighting in a blended equity composite (75% Standard & Poor's/BARRA Value
Index, 12.5% Standard & Poor's Utilities Index and 12.5% Standard & Poor's
Telephone Index).
B-15
<PAGE> 119
LEHMAN LONG-TERM CORPORATE AA OR BETTER BOND INDEX -- consists of all publicly
issued, fixed rate, nonconvertible investment grade, dollar-denominated,
SEC-registered corporate debt rated AA or AAA.
LEHMAN BROTHERS AGGREGATE BOND INDEX -- is a market-weighted index that contains
individually priced U.S. Treasury, agency, corporate, and mortgage pass-through
securities corporate rated Baa- or better. The Index has a market value of over
$4 trillion.
LEHMAN BROTHERS MUTUAL FUND SHORT (1-5) GOVERNMENT/CORPORATE INDEX -- is a
market-weighted index that contains individually priced U.S. Treasury, agency,
and corporate investment grade bonds rated BBB- or better with maturities
between 1 and 5 years. The index has a market value of over $1.6 trillion.
LEHMAN BROTHERS MUTUAL FUND INTERMEDIATE (5-10) GOVERNMENT/CORPORATE INDEX -- is
a market-weighted index that contains individually priced U.S. Treasury, agency,
and corporate securities rated BBB- or better with maturities between 5 and 10
years. The index has a market value of over $700 billion.
LEHMAN BROTHERS LONG (10+) GOVERNMENT/CORPORATE INDEX -- is a market-weighted
index that contains individually priced U.S. Treasury, agency, and corporate
securities rated BBB- or better with maturities greater than 10 years. The index
has a market value of over $900 billion.
LEHMAN CORPORATE (Baa) BOND INDEX -- all publicly offered fixed-rate,
nonconvertible domestic corporate bonds rated Baa by Moody's, with a maturity
longer than 1 year and with more than $25 million outstanding. This index
includes over 1,000 issues.
LEHMAN BROTHERS LONG-TERM CORPORATE BOND INDEX -- is a subset of the Lehman
Corporate Bond Index covering all corporate, publicly issued, fixed-rate
nonconvertible U.S. debt issues rated at least Baa, with at least $50 million
principal outstanding and maturity greater than 10 years.
FINANCIAL STATEMENTS
The Trust's Financial Statements as of and for the year ended December 31,
1997, appearing in the Vanguard Index Trust 1997 Annual Report to Shareholders
and inserts thereto, and the reports thereon of Price Waterhouse LLP,
independent accountants, also appearing therein, are incorporated by reference
in this Statement of Additional Information. The Trust's 1997 Annual Report to
Shareholders does not include information for the Investor Shares or
Institutional Shares of the Mid Capitalization Stock, Small Capitalization Value
Stock or Small Capitalization Growth Stock Portfolios because such Portfolios
did not exist prior to April 20, 1998. Additionally, the Trust's 1997 Annual
Report to Shareholders does not include information for the Institutional shares
of the Value Portfolio or Growth Portfolio because such class of shares was not
offered for these Portfolios until April 20, 1998. For a more complete
discussion of the Trust's performance, please see the Trust's 1997 Annual Report
to Shareholders, which can be obtained without charge.
B-16
<PAGE> 120
PART C
VANGUARD INDEX TRUST
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(a) FINANCIAL STATEMENTS
The Registrant's Financial Statements as of and for the year ended December
31, 1997, appearing in the Vanguard Index Trust 1997 Annual Report to
Shareholders and inserts thereto, and the reports thereon of Price Waterhouse
LLP, independent accountants, are incorporated by reference in this Statement of
Additional Information from the Registrant's 1997 Annual Report to Shareholders
which has been filed with the Commission. The Financial Statements included in
the Annual Report are:
1. Statement of Net Assets as of December 31, 1997.
2. Statement of Operations for the year ended December 31, 1997.
3. Statement of Changes in Net Assets for the years ended December 31, 1996
and 1997.
4. Financial Highlights for the respective periods ended December 31, 1997.
5. Notes to Financial Statements.
6. Reports of Independent Accountants.
(b) EXHIBITS
1. Declaration of Trust.**
2. By-Laws of Registrant.**
3. Not Applicable.
4. Not Applicable.
5. Not Applicable.
6. Not Applicable.
7. Reference is made to the section entitled "Management of the Trust" in
the Registrant's Statement of Additional Information.
8. Form of Custody Agreement.**
9. Form of Vanguard Service Agreement.**
10. Opinion of Counsel.**
11. Consent of Independent Accountants.*
12. Not Applicable.
13. Not Applicable.
14. Not Applicable.
15. Not Applicable.
16. Schedules for Computation of Performance Quotations.*
18. Registrant's Form of Multiple Class Plan Pursuant to Rule 18f-3 under
the Investment Company Act of 1940.*
19. Powers-of-Attorney.**
27. Financial Data Schedules.*
- ---------------
* Filed herewith
** Previously filed.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
Registrant is not controlled by or under common control with any person.
The Officers of the Registrant, the investment companies in The Vanguard Group
of Investment Companies and The Vanguard Group, Inc. are identical. Reference is
made to the caption "Management and Investment Advisory Services" in the
Prospectus constituting Part A and "Management of the Trust" in the Statement of
Additional Information constituting Part B of this Registration Statement.
<PAGE> 121
ITEM 26. NUMBER OF HOLDERS OF SECURITIES
As of December 31, 1997 there were 1,360,141 shareholders of the 500
Portfolio, 86,901 shareholders of the Extended Market Portfolio, 112,174
shareholders of the Total Stock Market Portfolio, 62,120 shareholders of the
Value Portfolio, 100,896 shareholders of the Growth Portfolio and 99,454
shareholders of Vanguard Small Capitalization Stock Portfolio.
ITEM 27. INDEMNIFICATION
Reference is made to Article X of Registrant's Declaration of Trust.
Insofar as indemnification for liability arising under the Securities Act
of 1933 may be permitted to Trustees, Officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a Director, Officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
Trustee, Officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
Investment advisory services are provided to the Registrant on an at-cost
basis by The Vanguard Group, Inc., a jointly-owned subsidiary of the Registrant
and the other Funds in the Vanguard Group of Investment Companies. See the
information concerning The Vanguard Group, Inc. set forth in Parts A and B. For
information as to any other business, vocation or employment of a substantial
nature in which each director or officer of the Registrant's investment advisor
is or has been engaged for his own account or in the capacity of trustee,
officer, employee, partner or trustee, reference is made to Form ADV (File
#801-11953) filed by it under the Investment Advisers Act of 1940.
ITEM 29. PRINCIPAL UNDERWRITERS
(a) None
(b) Not Applicable.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
The books, accounts and other documents required by Section 31(a) under the
Investment Company Act and the rules promulgated thereunder will be maintained
in the physical possession of Registrant; Registrant's Transfer Agent, The
Vanguard Group, Inc., c/o The Vanguard Financial Center, Valley Forge,
Pennsylvania 19482; and the Registrant's Custodians, State Street Bank and Trust
Company, 225 Franklin Street, Boston, MA 02105, and CoreStates Bank, N.A., Broad
and Market Sts., Philadelphia, PA 19103.
ITEM 31. MANAGEMENT SERVICES
Other than the Amended and Restated Funds' Service Agreement with The
Vanguard Group, Inc. which was previously filed as an Exhibit and described in
Part B under "Management of the Trust," Registrant is not a party to any
management-related service contract.
ITEM 32. UNDERTAKINGS
Registrant hereby undertakes to provide an Annual Report to Shareholders or
prospective investors, free of charge, upon request.
<PAGE> 122
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant hereby certifies that it meets
the requirements for effectiveness pursuant to paragraph (b) of Rule 485 and has
duly caused this Post-Effective Amendment to this Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the Town
of Valley Forge and the Commonwealth of Pennsylvania, on the 26th day of March,
1998.
VANGUARD INDEX TRUST
By:
- ---------------------------------------
John J. Brennan, Chairman &
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment to the Registration Statement has been signed below by
the following persons in the capacities and on the date indicated:
BY: (Raymond J. Klapinsky)*
John C. Bogle, Senior Chairman of the Board and Trustee
March 26, 1998
BY: (Raymond J. Klapinsky)*
John J. Brennan, Chairman, Trustee and Chief Executive Officer
March 26, 1998
BY: (Raymond J. Klapinsky)*
Robert E. Cawthorn, Trustee
March 26, 1998
BY: (Raymond J. Klapinsky)*
Barbara B. Hauptfuhrer, Trustee
March 26, 1998
BY: (Raymond J. Klapinsky)*
Bruce K. MacLaury, Trustee
March 26, 1998
BY: (Raymond J. Klapinsky)*
Burton G. Malkiel, Trustee
March 26, 1998
BY: (Raymond J. Klapinsky)*
Alfred M. Rankin, Jr., Trustee
March 26, 1998
BY: (Raymond J. Klapinsky)*
John C. Sawhill, Trustee
March 26, 1998
BY: (Raymond J. Klapinsky)*
James O. Welch, Jr., Trustee
March 26, 1998
BY: (Raymond J. Klapinsky)*
J. Lawrence Wilson, Trustee
March 26, 1998
BY: (Raymond J. Klapinsky)*
Richard F. Hyland, Treasurer and Principal
Financial Officer and Accounting Officer
March 26, 1998
* As Attorney-in-Fact, pursuant to Power-of-Attorney. See Form SE filed for the
Windsor Funds, Inc. (File Number 2-14336), as filed with the Commission on or
about January 23, 1990. Incorporated by reference.
<PAGE> 123
INDEX TO EXHIBITS
<TABLE>
<S> <C>
Consent of Independent Accountants.......................... EX-99.B11
Schedule for Computation of Performance Quotations.......... EX-99.B16
Financial Data Schedules.................................... EX-27
</TABLE>
<PAGE> 1
EX-99.B11
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus and
Statement of Additional Information constituting parts of this Post-Effective
Amendment No. 51 to the registration statement on Form N-1A (the "Registration
Statement") of our report dated February 6, 1998, relating to the financial
statements and financial highlights appearing in the December 31, 1997 Annual
Report to Shareholders of Vanguard Index Trust, which are incorporated by
reference into the Registration Statement. We also consent to the references to
us under the heading "Financial Highlights" in the Prospectuses and "Financial
Statements" in the Statement of Additional Information.
PRICE WATERHOUSE LLP
Philadelphia, PA
March 24, 1998
<PAGE> 1
EX-99.B16
SCHEDULE FOR COMPUTATION OF PERFORMANCE QUOTATIONS
VANGUARD INDEX TRUST -- 500 PORTFOLIO
1. Average Annual Total Return (As of December 31, 1997)
P (1 + T)n = ERV
<TABLE>
<S> <C> <C>
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
N = number of years
ERV = ending redeemable value at the end of the period
EXAMPLE:
One Year
P = $1,000
T = +33.19%
N = 1
ERV = $1,331.91*
Five Year
P = $1,000
T = +20.12%
N = 5
ERV = $2,501.04*
Ten Year
P = $1,000
T = +17.84%
N = 10
ERV = $5,163.89*
</TABLE>
*Not adjusted for $10 account maintenance fee.
2. YIELD (30 Days Ended December 31, 1997)
Yield = 2[(a - b +1)6-1]
---------------------------
c x d
<TABLE>
<C> <S>
Where: a = dividends and interest paid during the period
b = expense dollars during the period (net of
reimbursements)
c = the average daily number of shares outstanding during
the period
d = the maximum offering price per share on the last day of
the period
Example a = $68,539,630.04
b = $7,182,708.37
c = 545,847,921.91
d = $90.07
Yield = 1.50%
</TABLE>
<PAGE> 2
VANGUARD INDEX TRUST -- EXTENDED MARKET PORTFOLIO -- INVESTOR SHARES
1. Average Annual Total Return (As of December 31, 1997)
P (1 + T)n = ERV
<TABLE>
<S> <C> <C>
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
N = number of years
ERV = ending redeemable value at the end of the period
EXAMPLE:
One Year
-------
P = $1,000
T = +26.73%
N = 1
ERV = $1,267.29*
Five Year
-------
P = $1,000
T = +17.54%
N = 5
ERV = $2,243.57*
Ten Year
-------
P = $1,000
T = +16.41%
N = 10
ERV = $4,571.75*
</TABLE>
*Not adjusted for $10 account maintenance fee and .25% portfolio transaction
fee.
2. YIELD (30 Days Ended December 31, 1997)
Yield = 2[(a - b +1)6-1]
---------------------------
c x d
<TABLE>
<C> <S>
Where: a = dividends and interest paid during the period
b = expense dollars during the period (net of
reimbursements)
c = the average daily number of shares outstanding during
the period
d = the maximum offering price per share on the last day of
the period
Example a = $3,211,541.42
b = $514,196.40
c = 90,340,769.91
d = $30.75
Yield = 1.16%
</TABLE>
<PAGE> 3
VANGUARD INDEX TRUST -- EXTENDED MARKET PORTFOLIO -- INSTITUTIONAL SHARES
1. Average Annual Total Return (As of December 31, 1997)
P (1 + T)n = ERV
<TABLE>
<S> <C> <C>
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
N = number of years
ERV = ending redeemable value at the end of the period
EXAMPLE:
One Year
-------
P = $1,000
T = +11.82%
N = 1*
ERV = $1,118.21
</TABLE>
*Since inception July 7, 1997.
2. YIELD (30 Days Ended December 31, 1997)
Yield = 2[(a - b +1)6-1]
---------------------------
c x d
<TABLE>
<C> <S>
Where: a = dividends and interest paid during the period
b = expense dollars during the period (net of
reimbursements)
c = the average daily number of shares outstanding during
the period
d = the maximum offering price per share on the last day of
the period
Example a = $411,254.08
b = $28,012.86
c = 11,396,556.98
d = $30.75
Yield = 1.31%
</TABLE>
<PAGE> 4
VANGUARD INDEX TRUST -- TOTAL STOCK MARKET PORTFOLIO -- INVESTOR SHARES
1. Average Annual Total Return (As of December 31, 1997)
P (1 + T)n = ERV
<TABLE>
<S> <C> <C>
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
N = number of years
ERV = ending redeemable value at the end of the period
EXAMPLE:
---------
One Year
-------
P = $1,000
T = +30.99%
N = 1
ERV = $1,309.95**
Five Year
-------
P = $1,000
T = +18.90%
N = 5
ERV = $2,376.15**
Ten Year
-------
P = $1,000
T = +18.52%
N = *
ERV = $2,623.46**
</TABLE>
* Since inception March 16, 1992.
** Not adjusted for $10 account maintenance fee.
2. YIELD (30 Days Ended December 31, 1997)
Yield = 2[(a - b +1)6-1]
---------------------------
c x d
<TABLE>
<C> <S>
Where: a = dividends and interest paid during the period
b = expense dollars during the period (net of
reimbursements)
c = the average daily number of shares outstanding during
the period
d = the maximum offering price per share on the last day of
the period
Example a = $7,143,097.46
b = $812,173.36
c = 221,560,312.42
d = $22.64
Yield = 1.51%
</TABLE>
<PAGE> 5
VANGUARD INDEX TRUST -- TOTAL STOCK MARKET PORTFOLIO -- INSTITUTIONAL SHARES
1. Average Annual Total Return (As of December 31, 1997)
P (1 + T)n = ERV
<TABLE>
<S> <C> <C>
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
N = number of years
ERV = ending redeemable value at the end of the period
EXAMPLE:
---------
One Year
-------
P = $1,000
T = +8.60%
N = 1*
ERV = $1,085.96
</TABLE>
* Since inception July 7, 1997
2. YIELD (30 Days Ended December 31, 1997)
Yield = 2[(a - b +1)6-1]
---------------------------
c x d
<TABLE>
<C> <S>
Where: a = dividends and interest paid during the period
b = expense dollars during the period (net of
reimbursements)
c = the average daily number of shares outstanding during
the period
d = the maximum offering price per share on the last day of
the period
Example a = $2,149,951.06
b = $121,647.80
c = 66,311,440.35
d = $22.64
Yield = 1.62%
</TABLE>
<PAGE> 6
VANGUARD INDEX TRUST -- VALUE PORTFOLIO
1. Average Annual Total Return (As of December 31, 1997)
P (1 + T)n = ERV
<TABLE>
<S> <C> <C>
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
N = number of years
ERV = ending redeemable value at the end of the period
EXAMPLE:
---------
One Year
-------
P = $1,000
T = +29.77%
N = 1
ERV = $1,297.67**
Five Year
-------
P = $1,000
T = +20.53%
N = 5
ERV = $2,544.10**
Ten Year
-------
P = $1,000
T = +20.68%
N = *
ERV = $2,638.21**
</TABLE>
* Since inception November 2, 1992.
** Not adjusted for $10 account maintenance fee.
2. YIELD (30 Days Ended December 31, 1997)
Yield = 2[(a - b +1)6-1]
---------------------------
c x d
<TABLE>
<C> <S>
Where: a = dividends and interest paid during the period
b = expense dollars during the period (net of
reimbursements)
c = the average daily number of shares outstanding during
the period
d = the maximum offering price per share on the last day of
the period
Example a = $3,006,357.60
b = $289,369.60
c = 85,567,156.14
d = $20.85
Yield = 1.83%
</TABLE>
<PAGE> 7
VANGUARD INDEX TRUST -- GROWTH PORTFOLIO
1. Average Annual Total Return (As of December 31, 1997)
P (1 + T)n = ERV
<TABLE>
<S> <C> <C>
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
N = number of years
ERV = ending redeemable value at the end of the period
EXAMPLE:
---------
One Year
-------
P = $1,000
T = +36.34%
N = 1
ERV = $1,363.42**
Five Year
-------
P = $1,000
T = +19.46%
N = 5
ERV = $2,433.17**
Ten Year
-------
P = $1,000
T = +19.53%
N = *
ERV = $2,510.90**
</TABLE>
* Since inception November 2, 1992.
** Not adjusted for $10 account maintenance fee.
2. YIELD (30 Days Ended December 31, 1997)
Yield = 2[(a - b +1)6-1]
---------------------------
c x d
<TABLE>
<C> <S>
Where: a = dividends and interest paid during the period
b = expense dollars during the period (net of
reimbursements)
c = the average daily number of shares outstanding during
the period
d = the maximum offering price per share on the last day of
the period
Example a = $2,440,727.99
b = $379,035.07
c = 103,687,812.63
d = $22.53
Yield = 1.06%
</TABLE>
<PAGE> 8
SMALL CAPITALIZATION STOCK PORTFOLIO -- INVESTOR SHARES
(FORMERLY VANGUARD SMALL CAPITALIZATION STOCK FUND, INC.)
1. Average Annual Total Return (As of December 31, 1997)
P (1 + T)n = ERV
<TABLE>
<S> <C> <C>
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
N = number of years
ERV = ending redeemable value at the end of the period
EXAMPLE:
---------
One Year
-------
P = $1,000
T = +24.59%
N = 1
ERV = $1,245.90*
Five Year
-------
P = $1,000
T = +17.48%
N = 5
ERV = $2,237.52*
Ten Year
-------
P = $1,000
T = +15.79%
N = 10
ERV = $4,333.50*
</TABLE>
*Not adjusted for $10 account maintenance fee and .5% portfolio transaction
fee.
2. YIELD (30 Days Ended December 31, 1997)
Yield = 2[(a - b +1)6-1]
---------------------------
c x d
<TABLE>
<C> <S>
Where: a = dividends and interest paid during the period
b = expense dollars during the period (net of
reimbursements)
c = the average daily number of shares outstanding during
the period
d = the maximum offering price per share on the last day of
the period
Example a = $3,395,718.33
b = $492,082.98
c = 112,095,267.92
d = $23.75
Yield = 1.31%
</TABLE>
<PAGE> 9
SMALL CAPITALIZATION STOCK PORTFOLIO -- INSTITUTIONAL SHARES
(FORMERLY VANGUARD SMALL CAPITALIZATION STOCK FUND, INC.)
1. Average Annual Total Return (As of December 31, 1997)
P (1 + T)n = ERV
<TABLE>
<S> <C> <C>
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
N = number of years
ERV = ending redeemable value at the end of the period
EXAMPLE:
---------
One Year
-------
P = $1,000
T = +11.42%
N = *
ERV = $1,114.18
</TABLE>
*Since inception July 7, 1997.
2. YIELD (30 Days Ended December 31, 1997)
Yield = 2[(a - b +1)6-1]
---------------------------
c x d
<TABLE>
<C> <S>
Where: a = dividends and interest paid during the period
b = expense dollars during the period (net of
reimbursements)
c = the average daily number of shares outstanding during
the period
d = the maximum offering price per share on the last day of
the period
Example a = $175,671.20
b = $13,456.08
c = 5,845,259.27
d = $23.75
Yield = 1.40%
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000036405
<NAME> VANGUARD INDEX TRUST
<SERIES>
<NUMBER> 001
<NAME> 500 PORTFOLIO
<MULTIPLIER> 1,000
<CURRENCY> US
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 31,523,432
<INVESTMENTS-AT-VALUE> 49,786,973
<RECEIVABLES> 385,656
<ASSETS-OTHER> 4,141
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 49,876,770
<PAYABLE-FOR-SECURITIES> 182,640
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 336,507
<TOTAL-LIABILITIES> 519,147
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 31,354,591
<SHARES-COMMON-STOCK> 547,990
<SHARES-COMMON-PRIOR> 438,518
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 5,129
<ACCUMULATED-NET-GAINS> 44,740
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 17,963,421
<NET-ASSETS> 49,357,623
<DIVIDEND-INCOME> 713,189
<INTEREST-INCOME> 39,381
<OTHER-INCOME> 0
<EXPENSES-NET> 77,878
<NET-INVESTMENT-INCOME> 674,692
<REALIZED-GAINS-CURRENT> 1,041,603
<APPREC-INCREASE-CURRENT> 9,507,985
<NET-CHANGE-FROM-OPS> 11,224,280
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 679,820
<DISTRIBUTIONS-OF-GAINS> 315,842
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 193,975
<NUMBER-OF-SHARES-REDEEMED> 95,387
<SHARES-REINVESTED> 10,883
<NET-CHANGE-IN-ASSETS> 19,025,771
<ACCUMULATED-NII-PRIOR> 23,865
<ACCUMULATED-GAINS-PRIOR> 43,958
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 67
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 77,878
<AVERAGE-NET-ASSETS> 40,681,611
<PER-SHARE-NAV-BEGIN> 69.17
<PER-SHARE-NII> 1.31
<PER-SHARE-GAIN-APPREC> 21.50
<PER-SHARE-DIVIDEND> 1.32
<PER-SHARE-DISTRIBUTIONS> 0.59
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 90.07
<EXPENSE-RATIO> 0.19
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000036405
<NAME> VANGUARD INDEX TRUST
<SERIES>
<NUMBER> 004
<NAME> VALUE PORTFOLIO
<MULTIPLIER> 1,000
<CURRENCY> US
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 1,360,346
<INVESTMENTS-AT-VALUE> 1,795,210
<RECEIVABLES> 134,042
<ASSETS-OTHER> 115
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1,929,367
<PAYABLE-FOR-SECURITIES> 128,779
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 5,047
<TOTAL-LIABILITIES> 133,826
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1,326,090
<SHARES-COMMON-STOCK> 86,130
<SHARES-COMMON-PRIOR> 59,666
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 186
<ACCUMULATED-NET-GAINS> 34,787
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 434,850
<NET-ASSETS> 1,795,541
<DIVIDEND-INCOME> 31,413
<INTEREST-INCOME> 398
<OTHER-INCOME> 0
<EXPENSES-NET> 2,843
<NET-INVESTMENT-INCOME> 28,968
<REALIZED-GAINS-CURRENT> 70,507
<APPREC-INCREASE-CURRENT> 258,841
<NET-CHANGE-FROM-OPS> 358,316
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 28,623
<DISTRIBUTIONS-OF-GAINS> 57,217
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 36,479
<NUMBER-OF-SHARES-REDEEMED> 14,119
<SHARES-REINVESTED> 4,104
<NET-CHANGE-IN-ASSETS> 779,814
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 21,498
<OVERDISTRIB-NII-PRIOR> 531
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 22
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2,843
<AVERAGE-NET-ASSETS> 1,414,611
<PER-SHARE-NAV-BEGIN> 17.02
<PER-SHARE-NII> 0.38
<PER-SHARE-GAIN-APPREC> 4.57
<PER-SHARE-DIVIDEND> 0.37
<PER-SHARE-DISTRIBUTIONS> 0.75
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 20.85
<EXPENSE-RATIO> 0.20
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000036405
<NAME> VANGUARD INDEX TRUST
<SERIES>
<NUMBER> 005
<NAME> GROWTH PORTFOLIO
<MULTIPLIER> 1,000
<CURRENCY> US
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 1,825,486
<INVESTMENTS-AT-VALUE> 2,372,845
<RECEIVABLES> 170,598
<ASSETS-OTHER> 152
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 2,543,595
<PAYABLE-FOR-SECURITIES> 173,998
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 4,264
<TOTAL-LIABILITIES> 178,262
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1,827,471
<SHARES-COMMON-STOCK> 104,984
<SHARES-COMMON-PRIOR> 46,552
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 521
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 8,937
<ACCUM-APPREC-OR-DEPREC> 547,320
<NET-ASSETS> 2,365,333
<DIVIDEND-INCOME> 21,992
<INTEREST-INCOME> 783
<OTHER-INCOME> 0
<EXPENSES-NET> 3,295
<NET-INVESTMENT-INCOME> 19,480
<REALIZED-GAINS-CURRENT> 18,793
<APPREC-INCREASE-CURRENT> 403,381
<NET-CHANGE-FROM-OPS> 441,654
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 20,049
<DISTRIBUTIONS-OF-GAINS> 25,678
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 77,631
<NUMBER-OF-SHARES-REDEEMED> 21,190
<SHARES-REINVESTED> 1,992
<NET-CHANGE-IN-ASSETS> 1,578,429
<ACCUMULATED-NII-PRIOR> 48
<ACCUMULATED-GAINS-PRIOR> (2,052)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 22
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 3,295
<AVERAGE-NET-ASSETS> 1,632,856
<PER-SHARE-NAV-BEGIN> 16.90
<PER-SHARE-NII> 0.23
<PER-SHARE-GAIN-APPREC> 5.88
<PER-SHARE-DIVIDEND> 0.23
<PER-SHARE-DISTRIBUTIONS> 0.25
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 22.53
<EXPENSE-RATIO> 0.20
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000036405
<NAME> VANGUARD INDEX TRUST
<SERIES>
<NUMBER> 021
<NAME> EXTENDED MARKET PORTFOLIO-INVESTOR SHARES
<MULTIPLIER> 1,000
<CURRENCY> US
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 2,359,293
<INVESTMENTS-AT-VALUE> 3,274,068
<RECEIVABLES> 90,555
<ASSETS-OTHER> 317
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 3,364,940
<PAYABLE-FOR-SECURITIES> 13,829
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 213,632
<TOTAL-LIABILITIES> 227,461
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 2,187,730
<SHARES-COMMON-STOCK> 88,529
<SHARES-COMMON-PRIOR> 80,119
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 578
<ACCUMULATED-NET-GAINS> 34,973
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 915,354
<NET-ASSETS> 2,722,844
<DIVIDEND-INCOME> 31,436
<INTEREST-INCOME> 8,215
<OTHER-INCOME> 0
<EXPENSES-NET> 5,833
<NET-INVESTMENT-INCOME> 33,818
<REALIZED-GAINS-CURRENT> 194,324
<APPREC-INCREASE-CURRENT> 379,945
<NET-CHANGE-FROM-OPS> 608,087
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 30,699
<DISTRIBUTIONS-OF-GAINS> 162,387
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 26,118
<NUMBER-OF-SHARES-REDEEMED> 23,876
<SHARES-REINVESTED> 6,168
<NET-CHANGE-IN-ASSETS> 1,038,641
<ACCUMULATED-NII-PRIOR> 263
<ACCUMULATED-GAINS-PRIOR> 30,245
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 53
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 5,833
<AVERAGE-NET-ASSETS> 2,441,709
<PER-SHARE-NAV-BEGIN> 26.20
<PER-SHARE-NII> 0.351
<PER-SHARE-GAIN-APPREC> 6.476
<PER-SHARE-DIVIDEND> 0.360
<PER-SHARE-DISTRIBUTIONS> 1.910
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 26.73
<EXPENSE-RATIO> 0.23
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000036405
<NAME> VANGUARD INDEX TRUST
<SERIES>
<NUMBER> 022
<NAME> EXTENDED MARKET PORTFOLIO-INSTITUTIONAL SHARES
<MULTIPLIER> 1,000
<CURRENCY> US
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JUL-07-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 2,359,293
<INVESTMENTS-AT-VALUE> 3,274,068
<RECEIVABLES> 90,555
<ASSETS-OTHER> 317
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 3,364,940
<PAYABLE-FOR-SECURITIES> 13,829
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 213,632
<TOTAL-LIABILITIES> 227,461
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 2,187,730
<SHARES-COMMON-STOCK> 13,482
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 578
<ACCUMULATED-NET-GAINS> 34,973
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 915,354
<NET-ASSETS> 414,635
<DIVIDEND-INCOME> 31,436
<INTEREST-INCOME> 8,215
<OTHER-INCOME> 0
<EXPENSES-NET> 5,833
<NET-INVESTMENT-INCOME> 33,818
<REALIZED-GAINS-CURRENT> 194,324
<APPREC-INCREASE-CURRENT> 379,945
<NET-CHANGE-FROM-OPS> 608,087
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 3,960
<DISTRIBUTIONS-OF-GAINS> 16,436
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 13,413
<NUMBER-OF-SHARES-REDEEMED> 494
<SHARES-REINVESTED> 563
<NET-CHANGE-IN-ASSETS> 1,038,641
<ACCUMULATED-NII-PRIOR> 263
<ACCUMULATED-GAINS-PRIOR> 30,245
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 53
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 5,833
<AVERAGE-NET-ASSETS> 265,042
<PER-SHARE-NAV-BEGIN> 29.28
<PER-SHARE-NII> 0.200
<PER-SHARE-GAIN-APPREC> 3.191
<PER-SHARE-DIVIDEND> 0.371
<PER-SHARE-DISTRIBUTIONS> 1.540
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 30.76
<EXPENSE-RATIO> 0.10
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000036405
<NAME> VANGUARD INDEX TRUST
<SERIES>
<NUMBER> 031
<NAME> TOTAL STOCK MARKET PORTFOLIO-INVESTOR SHARES
<MULTIPLIER> 1,000
<CURRENCY> US
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 4,833,650
<INVESTMENTS-AT-VALUE> 6,693,399
<RECEIVABLES> 34,164
<ASSETS-OTHER> 618
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 6,728,181
<PAYABLE-FOR-SECURITIES> 39,146
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 92,578
<TOTAL-LIABILITIES> 131,724
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 4,724,429
<SHARES-COMMON-STOCK> 224,899
<SHARES-COMMON-PRIOR> 198,663
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 956
<ACCUMULATED-NET-GAINS> 12,235
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1,860,749
<NET-ASSETS> 5,092,666
<DIVIDEND-INCOME> 75,622
<INTEREST-INCOME> 16,359
<OTHER-INCOME> 0
<EXPENSES-NET> 9,505
<NET-INVESTMENT-INCOME> 82,476
<REALIZED-GAINS-CURRENT> 77,515
<APPREC-INCREASE-CURRENT> 1,115,640
<NET-CHANGE-FROM-OPS> 1,275,631
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 69,622
<DISTRIBUTIONS-OF-GAINS> 58,866
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 104,873
<NUMBER-OF-SHARES-REDEEMED> 84,266
<SHARES-REINVESTED> 5,629
<NET-CHANGE-IN-ASSETS> 3,065,601
<ACCUMULATED-NII-PRIOR> 92
<ACCUMULATED-GAINS-PRIOR> 8,749
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 56
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 9505
<AVERAGE-NET-ASSETS> 4,458,733
<PER-SHARE-NAV-BEGIN> 17.77
<PER-SHARE-NII> 0.319
<PER-SHARE-GAIN-APPREC> 5.143
<PER-SHARE-DIVIDEND> 0.322
<PER-SHARE-DISTRIBUTIONS> 0.270
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 22.64
<EXPENSE-RATIO> 0.20
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000036405
<NAME> VANGUARD INDEX TRUST
<SERIES>
<NUMBER> 032
<NAME> TOTAL STOCK MARKET PORTFOLIO-INSTITUTIONAL SHARES
<MULTIPLIER> 1,000
<CURRENCY> US
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JUL-07-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 4,833,650
<INVESTMENTS-AT-VALUE> 6,693,399
<RECEIVABLES> 34,164
<ASSETS-OTHER> 618
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 6,728,181
<PAYABLE-FOR-SECURITIES> 39,146
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 92,578
<TOTAL-LIABILITIES> 131,724
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 4,724,429
<SHARES-COMMON-STOCK> 66,413
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 956
<ACCUMULATED-NET-GAINS> 12,235
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1,860,749
<NET-ASSETS> 1,503,791
<DIVIDEND-INCOME> 75,622
<INTEREST-INCOME> 16,359
<OTHER-INCOME> 0
<EXPENSES-NET> 9,505
<NET-INVESTMENT-INCOME> 82,476
<REALIZED-GAINS-CURRENT> 77,515
<APPREC-INCREASE-CURRENT> 1,115,640
<NET-CHANGE-FROM-OPS> 1,275,631
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 13,602
<DISTRIBUTIONS-OF-GAINS> 15,029
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 67,190
<NUMBER-OF-SHARES-REDEEMED> 2,045
<SHARES-REINVESTED> 1,268
<NET-CHANGE-IN-ASSETS> 3,065,601
<ACCUMULATED-NII-PRIOR> 92
<ACCUMULATED-GAINS-PRIOR> 8,749
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 56
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 9,505
<AVERAGE-NET-ASSETS> 929,190
<PER-SHARE-NAV-BEGIN> 21.27
<PER-SHARE-NII> 0.172
<PER-SHARE-GAIN-APPREC> 1.642
<PER-SHARE-DIVIDEND> 0.214
<PER-SHARE-DISTRIBUTIONS> 0.230
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 22.64
<EXPENSE-RATIO> 0.10
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000036405
<NAME> VANGUARD INDEX TRUST
<SERIES>
<NUMBER> 061
<NAME> SMALL CAPITALIZATION STOCK PORTFOLIO-INVESTOR SHARES
<MULTIPLIER> 1,000
<CURRENCY> US
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 2,373,346
<INVESTMENTS-AT-VALUE> 2,940,541
<RECEIVABLES> 17,108
<ASSETS-OTHER> 2,640
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 2,960,289
<PAYABLE-FOR-SECURITIES> 4,611
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 166,384
<TOTAL-LIABILITIES> 170,995
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 2,203,109
<SHARES-COMMON-STOCK> 111,668
<SHARES-COMMON-PRIOR> 84,695
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 381
<ACCUMULATED-NET-GAINS> 18,730
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 567,836
<NET-ASSETS> 2,652,430
<DIVIDEND-INCOME> 29,590
<INTEREST-INCOME> 6,250
<OTHER-INCOME> 0
<EXPENSES-NET> 5,064
<NET-INVESTMENT-INCOME> 30,776
<REALIZED-GAINS-CURRENT> 135,764
<APPREC-INCREASE-CURRENT> 300,788
<NET-CHANGE-FROM-OPS> 467,328
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 29,087
<DISTRIBUTIONS-OF-GAINS> 117,255
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 48,530
<NUMBER-OF-SHARES-REDEEMED> 27,476
<SHARES-REINVESTED> 5,919
<NET-CHANGE-IN-ASSETS> 1,075,940
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 5,966
<OVERDISTRIB-NII-PRIOR> 494
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 67
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 5,064
<AVERAGE-NET-ASSETS> 2,156,119
<PER-SHARE-NAV-BEGIN> 20.23
<PER-SHARE-NII> 0.277
<PER-SHARE-GAIN-APPREC> 4.632
<PER-SHARE-DIVIDEND> 0.274
<PER-SHARE-DISTRIBUTIONS> 1.115
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 23.75
<EXPENSE-RATIO> 0.23
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000036405
<NAME> VANGUARD INDEX TRUST
<SERIES>
<NUMBER> 062
<NAME> SMALL CAPITALIZATION STOCK PORTFOLIO-INSTITUTIONAL SHARES
<MULTIPLIER> 1,000
<CURRENCY> US
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JUL-07-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 2,373,346
<INVESTMENTS-AT-VALUE> 2,940,541
<RECEIVABLES> 17,108
<ASSETS-OTHER> 2,640
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 2,960,289
<PAYABLE-FOR-SECURITIES> 4,611
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 166,384
<TOTAL-LIABILITIES> 170,995
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 2,203,109
<SHARES-COMMON-STOCK> 5,762
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 381
<ACCUMULATED-NET-GAINS> 18,730
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 567,836
<NET-ASSETS> 136,864
<DIVIDEND-INCOME> 29,590
<INTEREST-INCOME> 6,250
<OTHER-INCOME> 0
<EXPENSES-NET> 5,064
<NET-INVESTMENT-INCOME> 30,776
<REALIZED-GAINS-CURRENT> 135,764
<APPREC-INCREASE-CURRENT> 300,788
<NET-CHANGE-FROM-OPS> 467,328
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 1,576
<DISTRIBUTIONS-OF-GAINS> 5,745
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 6,462
<NUMBER-OF-SHARES-REDEEMED> 991
<SHARES-REINVESTED> 291
<NET-CHANGE-IN-ASSETS> 1,075,940
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 5,966
<OVERDISTRIB-NII-PRIOR> 494
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 67
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 5,064
<AVERAGE-NET-ASSETS> 105,400
<PER-SHARE-NAV-BEGIN> 22.56
<PER-SHARE-NII> 0.158
<PER-SHARE-GAIN-APPREC> 2.370
<PER-SHARE-DIVIDEND> 0.288
<PER-SHARE-DISTRIBUTIONS> 1.050
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 23.75
<EXPENSE-RATIO> 0.12
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
