<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. 50
AND
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY
ACT OF 1940
AMENDMENT NO. 52
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 March 30, 1998 pursuant to paragraph (a) 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 FEBRUARY --, 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 __, 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
<CAPTION>
FORM N-1A LOCATION IN STATEMENT
ITEM NUMBER OF ADDITIONAL INFORMATION
<C> <S> <C>
Item 10. Cover Page.................................... Cover Page
Item 11. Table of Contents............................. Cover Page
Item 12. General Information and History............... Not Applicable
Item 13. Investment Objectives and Policies............ Investment Objectives and Policies;
Investment Limitations
Item 14. Management of the Registrant.................. Management of the Trust
Item 15. Control Persons and Principal Holders of
Securities.................................... Not Applicable
Item 16. Investment Advisory and Other Services........ Management of the Trust
Item 17. Brokerage Allocation and Other Services....... Portfolio Transactions
Item 18. Capital Stock and Other Securities............ Description of Shares and Voting
Rights
Item 19. Purchase, Redemption and Pricing of Securities
Being Offered................................. Purchase of Shares; Redemption of
Shares
Item 20. Tax Status.................................... Not Applicable
Item 21. Underwriters.................................. Management of the Trust
Item 22. Calculation Performance Data.................. Yield and Total Return; Performance
Measures
Item 23. Financial Statements.......................... Financial Statements
</TABLE>
<PAGE> 3
VANGUARD INDEX TRUST
PROSPECTUS SUPPLEMENT
MARCH 30, 1998
On March 30, 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 12, 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 13, 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
March 30, 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.
[PHOTO]
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 VANGUARDS INVESTOR INFORMATION DEPARTMENT AT
1-800-662-7447.
[THE VANGUARD GROUP LOGO]
<PAGE> 5
VANGUARD INDEX TRUST
CONTENTS
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 25
Redeeming Shares 27
Portfolio and
Account Updates 29
Prospectus Postscript 31
Risk Quiz 32
Glossary Inside Back Cover
A Stock Index Mutual Fund
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 March 30, 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 March 30, 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.
<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 describes 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 a separate
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 dividends 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) Vanguard Index Trust
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(sm)
- - Vanguard Automatic Exchange Service(sm)
- - Vanguard Fund Express(R)
- - Vanguard Dividend Express(sm)
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS--PERIODS ENDED DECEMBER 31, 1997
1 YEAR 5 YEARS 10 YEARS
----------------------------------------
<S> <C> <C> <C>
Total Stock Market - - -*
Wilshire 5000 Index - - -*
500 - - -
S&P 500 Index - - -
Extended Market** - - -
Wilshire 4500 Index - - -
SmallCap Stock** - - -
Russell 2000 Index - - -
Value - - --
S&P/BARRA Value Index - - --
Growth - -* --
S&P/BARRA Growth Index - -* --
--------------------------------------------------------------------
</TABLE>
Note: The Mid Capitalization Stock, Small Capitalization Value Stock, and Small
Capitalization Growth Stock Portfolios did not begin operations until March 30,
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
- --------------------------------------------------------------------------------------------
INCEPTION DATE: 4/27/92 8/31/76 12/21/87
<S> <C> <C> <C>
NET ASSETS AS OF 12/31/97: $- billion $- billion $- billion
PORTFOLIO EXPENSE RATIO FOR THE
PERIOD ENDED 12/31/97: - - -
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 Exten
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
- --------------------------------------------------------------------------------------------
INCEPTION DATE: 3/30/98 10/3/60 11/2/92
<S> <C> <C> <C>
NET ASSETS AS OF 12/31/97: None $- billion $- billion
PORTFOLIO EXPENSE RATIO FOR THE
PERIOD ENDED 12/31/97: N/A - -
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: - 922908702 922908405
QUOTRON SYMBOL: N/A NAESX.Q VIVAX.Q
- --------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
SMALLCAP SMALLCAP
VALUE GROWTH GROWTH
- --------------------------------------------------------------------------------------------
INCEPTION DATE: 3/30/98 11/2/92 3/30/98
<S> <C> <C> <C>
NET ASSETS AS OF 12/31/97: None $- billion None
PORTFOLIO EXPENSE RATIO FOR THE
PERIOD ENDED 12/31/97: N/A - 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: - 922908504 -
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>
<CAPTION>
Sales Load Imposed on Purchases: None
<S> <C>
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: - - -
Investment Advisory Expenses: None None None
12b-1 Marketing Fees: None None None
Other Expenses
Marketing and Distribution
Expenses: - - -
Miscellaneous Expenses
(e.g., Taxes, Auditing): - - -
------------ ----------
Total Other Expenses: - - -
----- ----- -----
TOTAL OPERATING EXPENSES
(EXPENSE RATIO): - - -
=====================================
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
MIDCAP SMALLCAP
STOCK STOCK VALUE
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Management and
Administrative Expenses: - - -
Investment Advisory Expenses: None None None
12b-1 Marketing Fees: None None None
Other Expenses
Marketing and Distribution
Expenses: - - -
Miscellaneous Expenses
(e.g., Taxes, Auditing): - - -
------------ ----------
Total Other Expenses: - - -
----- ----- -----
TOTAL OPERATING EXPENSES
(EXPENSE RATIO): - - -
=====================================
</TABLE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
SMALLCAP SMALLCAP
VALUE GROWTH GROWTH
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Management and
Administrative Expenses: - - -
Investment Advisory Expenses: None None None
12b-1 Marketing Fees: None None None
Other Expenses
Marketing and Distribution
Expenses: - - -
Miscellaneous Expenses
(e.g., Taxes, Auditing): - - -
------------ ----------
Total Other Expenses: - - -
----- ----- -----
TOTAL OPERATING EXPENSES
(EXPENSE RATIO): - - -
=====================================
</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 -%, or $- per $1,000 of average net assets. The average
equity index fund had expenses in 1996 of 0.65%, or $6.50 per $1,000 of average
net assets, according to Lipper Analytical Services, Inc., 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 $- per share from investment income
(interest and dividends) and $- 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 $- per share. Of those earnings, $- per share was
returned to shareholders in distributions ($- in dividends, $- in capital
gains). The earnings ($- per share) less distributions ($- per share) resulted
in a share price of $- at the end of the fiscal year, an increase of $- per
share (from $- at the start of the period to $- 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 -% for the year.
As of December 31, 1997, the Portfolio had $- billion in net assets; an
expense ratio of -% ($- per $1,000 of net assets); and net investment income
amounting to -% of its average net assets. It sold and replaced securities
valued at -% of its total net assets.
The following examples illustrate the hypothetical expenses that you would
incur on a $1,000 investment in each Portfolio over various periods. These
examples assume that each Portfolio provides a return of 5% a year and that 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 $ 7 $12 $28
500 2 6 11 26
Extended Market 8 13 19 37
MidCap Stock 5 11 17 34
SmallCap Stock 8 13 19 37
Value 2 6 11 26
SmallCap Value Stock 10 15 21 39
Growth 2 6 11 26
SmallCap Growth Stock 10 15 21 39
- -------------------------------------------------------------------------------------------------
</TABLE>
THIS EXAMPLE 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 last ten
years 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 March 30,
1998.
6
<PAGE> 12
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
TOTAL STOCK MARKET PORTFOLIO
--------------------------------------------------------------
YEAR ENDED DECEMBER 31,
-------------------------------------------------- 3/16*-
1997 1996 1995 1994 1993 12/31/92
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD - $15.04 $11.37 $11.69 $10.84 $10.00
--------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income - .29 .29 .27 .26 .23
Net Realized and Unrealized Gain (Loss) on Investments - 2.84 3.75 (.29) .88 .84
--------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS - 3.13 4.04 (.02) 1.14 1.07
- -------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income - (.29) (.28) (.27) (.26) (.23)
--------------------------------------------------------------
Distributions from Realized Capital Gains - (.11) (.09) (.03) (.03) --
--------------------------------------------------------------
TOTAL DISTRIBUTIONS - (.40) (.37) (.30) (.29) (.23)
- -------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD - $17.77 $15.04 $11.37 $11.69 $10.84
=========================================================================================================================
TOTAL RETURN** - 20.96% 35.79% -0.17% 10.62% 10.41%
=========================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) - $3,531 $1,571 $786 $512 $275
Ratio of Total Expenses to Average Net Assets - 0.22% 0.25% 0.20% 0.20% 0.21%+
Ratio of Net Investment Income to Average Net Assets - 1.86% 2.14% 2.35% 2.31% 2.42%+
Portfolio Turnover Rate - 3% 3% 2% 1% 3%
Average Commission Rate Paid - $.0216 N/A N/A N/A N/A
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Commencement of operations.
** 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 1989 1988
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING
OF PERIOD - $57.60 $42.97 $43.83 $40.97 $39.32 $31.24 $33.64 $27.18 $24.65
--------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income - 1.28 1.22 1.18 1.13 1.12 1.15 1.17 1.20 1.08
Net Realized and Unrealized
Gain (Loss) on Investments - 11.82 14.76 (.67) 2.89 1.75 8.20 (2.30) 7.21 2.87
--------------------------------------------------------------------------------------------
TOTAL FROM INVESTMENT
OPERATIONS - 13.10 15.98 .51 4.02 2.87 9.35 (1.13) 8.41 3.95
- ----------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net
Investment Income - (1.28) (1.22) (1.17) (1.13) (1.12) (1.15) (1.17) (1.20) (1.10)
Distributions from
Realized Capital Gains - (.25) (.13) (.20) (.03) (.10) (.12) (.10) (.75) (.32)
--------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS - (1.53) (1.35) (1.37) (1.16) (1.22) (1.27) (1.27) (1.95) (1.42)
- ----------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE,
END OF PERIOD - $69.17 $57.60 $42.97 $43.83 $40.97 $39.32 $31.24 $33.64 $27.18
==================================================================================================================================
TOTAL RETURN* - 22.88% 37.45% 1.18% 9.89% 7.42% 30.22% -3.32% 31.36% 16.22%
==================================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of
Period (Millions) - $30,332 $17,372 $9,356 $8,273 $6,547 $4,345 $2,173 $1,804 $1,055
Ratio of Total Expenses to
Average Net Assets - 0.20% 0.20% 0.19% 0.19% 0.19% 0.20% 0.22% 0.21% 0.22%
Ratio of Net Investment
Income to Average
Net Assets - 2.04% 2.38% 2.72% 2.65% 2.81% 3.07% 3.60% 3.62% 4.08%
Portfolio Turnover Rate - 5%+ 4%+ 6%+ 6%+ 4%+ 5%+ 23%+ 8% 10%
Average Commission
Rate Paid - $.0166 N/A N/A N/A N/A N/A N/A N/A N/A
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Total return figures do not reflect the annual account maintenance fee of $10.
+Portfolio turnover rates excluding in-kind redemptions were 3%, 2%, 2%, 4%,
2%, 1%, 1%, and 6%, respectively.
- --------------------------------------------------------------------------------
7
<PAGE> 13
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
EXTENDED MARKET PORTFOLIO
--------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD - $24.07 $18.52 $19.43 $17.35 $15.82 $11.48 $13.92 $11.60 $ 9.99
--------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income - .34 .30 .28 .23 .24 .25 .30 .26 .34
Net Realized and
Unrealized Gain (Loss)
on Investments - 3.85 5.95 (.62) 2.28 1.72 4.54 (2.25) 2.52 1.63
--------------------------------------------------------------------------------------------
TOTAL FROM INVESTMENT
OPERATIONS - 4.19 6.25 (.34) 2.51 1.96 4.79 (1.95) 2.78 1.97
- ----------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net
Investment Income - (.34) (.30) (.28) (.23) (.25) (.25) (.33) (.23) (.20)
Distributions from
Realized Capital Gains - (1.72) (.40) (.29) (.20) (.18) (.20) (.16) (.23) (.16)
--------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS - (2.06) (.70) (.57) (.43) (.43) (.45) (.49) (.46) (.36)
- ----------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE,
END OF PERIOD - $26.20 $24.07 $18.52 $19.43 $17.35 $15.82 $11.48 $13.92 $11.60
==================================================================================================================================
TOTAL RETURN** - 17.65% 33.80% -1.76% 14.49% 12.47% 41.85% -14.05% 24.10% 19.75%
==================================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of
Period (Millions) - $2,099 $1,523 $967 $928 $585 $372 $179 $147 $35
Ratio of Total Expenses to
Average Net Assets - 0.25% 0.25% 0.20% 0.20% 0.20% 0.19% 0.23% 0.23% 0.24%
Ratio of Net Investment
Income to Average
Net Assets - 1.42% 1.51% 1.51% 1.48% 1.73% 2.14% 2.68% 2.92% 2.90%
Portfolio Turnover Rate - 22% 15% 19% 13% 9% 11% 9% 14% 26%
Average Commission Rate Paid - $.0235 N/A N/A N/A N/A N/A N/A 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.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
SMALL CAPITALIZATION
STOCK PORTFOLIO*
--------------------------------------------
YEAR ENDED
DECEMBER 31,
------------------------ 2/1- 10/1/93-
1997 1996 1995 12/31/94 1/31/94
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD - $18.61 $14.99 $16.24 $16.23
--------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income - .26 .24 .20 .05
Net Realized and Unrealized Gain (Loss) on Investments - 3.07 4.06 (.86) .96
--------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS - 3.33 4.30 (.66) 1.01
- --------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income - (.27) (.23) (.22) (.18)
Distributions from Realized Capital Gains - (1.44) (.45) (.37) (.82)
--------------------------------------------
TOTAL DISTRIBUTIONS - (1.71) (.68) (.59) (1.00)
- --------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD - $20.23 $18.61 $14.99 $16.24
==================================================================================================
TOTAL RETURN** - 18.12% 28.74% -4.00% 6.65%
==================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) - $1,713 $971 $605 $533
Ratio of Total Expenses to Average Net Assets - 0.25% 0.25% 0.17%+ 0.18%+
Ratio of Net Investment Income to Average Net Assets - 1.51% 1.58% 1.50%+ 1.16%+
Portfolio Turnover Rate - 28% 28% 25% 5%
Average Commission Rate Paid - $.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 PERIOD $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 PERIOD $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 Period (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,
----------------------------------------- 11/2*-
1997 1996 1995 1994 1993 12/31/92
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD - $14.79 $11.12 $11.74 $10.30 $10.00
-----------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income - .37 .41 .38 .38 .07
Net Realized and Unrealized Gain (Loss) on Investments - 2.81 3.66 (.46) 1.50 .30
-----------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS - 3.18 4.07 (.08) 1.88 .37
- -------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income - (.38) (.40) (.38) (.38) (.07)
Distributions from Realized Capital Gains - (.57) -- (.16) (.06) --
-----------------------------------------------------
TOTAL DISTRIBUTIONS - (.95) (.40) (.54) (.44) (.07)
- -------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD - $17.02 $14.79 $11.12 $11.74 $10.30
=============================================================================================================
TOTAL RETURN** - 21.86% 36.94% -0.73% 18.35% 3.70%
=============================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) - $1,016 $496 $297 $190 $24
Ratio of Total Expenses to Average Net Assets - 0.20% 0.20% 0.20% 0.20% 0%+
Ratio of Net Investment Income to Average Net Assets - 2.54% 3.06% 3.37% 3.26% 3.46%+
Portfolio Turnover Rate - 29% 27% 32% 30% 4%
Average Commission Rate Paid - $.0188 N/A N/A N/A N/A
- -------------------------------------------------------------------------------------------------------------
</TABLE>
* Commencement of operations.
** 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,
---------------------------------------- 11/2*-
1997 1996 1995 1994 1993 12/31/92
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD - $13.97 $10.28 $10.20 $10.26 $10.00
-----------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income - .22 .21 .21 .21 .06
Net Realized and Unrealized Gain (Loss) on Investments - 3.07 3.68 .08 (.06) .26
-----------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS - 3.29 3.89 .29 .15 .32
- -------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income - (.22) (.20) (.21) (.21) (.06)
Distributions from Realized Capital Gains - (.14) -- -- -- --
-----------------------------------------------------
TOTAL DISTRIBUTIONS - (.36) (.20) (.21) (.21) (.06)
- -------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD - $16.90 $13.97 $10.28 $10.20 $10.26
=============================================================================================================
TOTAL RETURN** - 23.74% 38.06% 2.89% 1.53% 3.19%
=============================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) - $787 $271 $86 $51 $21
Ratio of Total Expenses to Average Net Assets - 0.20% 0.20% 0.20% 0.20% 0%
Ratio of Net Investment Income to Average Net Assets - 1.57% 1.71% 2.08% 2.10% 2.85%+
Portfolio Turnover Rate - 29% 24% 28% 36% 2%
Average Commission Rate Paid - $.0183 N/A N/A N/A N/A
- -------------------------------------------------------------------------------------------------------------
</TABLE>
* Commencement of operations.
** 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. 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 will 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, will 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/BARRA 600 Value Index, which includes
those stocks of the S&P SmallCap 600 Index that are often considered out of
favor with investors.
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/BARRA 600 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.
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,
while growth funds 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 non-retirement accounts.
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 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
12
<PAGE> 18
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 Trust's investment adviser pursues the 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, the Trust 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.
<TABLE>
<CAPTION>
- -----------------------------------------------------------
U.S. STOCK MARKET RETURNS (1926-1996)
- -----------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS 20 YEARS
- -----------------------------------------------------------
<S> <C> <C> <C> <C>
Best 53.9% 23.9% 20.1% 16.9%
Worst -43.3 -12.5 -0.9 3.1
Average 12.7 10.4 10.8 10.8
- -----------------------------------------------------------
</TABLE>
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 billion.
Mid-cap funds hold stocks of companies with a median market value between $1
billion and $7 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.
The table covers all of the 1-, 5-, 10-, and 20-year periods from 1926 through
1996. For example, while the average return on stocks for all of the 5-year
periods was 10.4%, 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, the S&P/BARRA 600 Value Index, and the
S&P/BARRA 600 Growth Index (the target indexes for the Value, Growth, Small
Capitalization Value Stock, and Small Capitalization Growth Stock Portfolios,
respectively)--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 S&P/BARRA 600 Value
Index have been less volatile than the stocks found in the broader S&P 500
Index; stocks of the S&P/BARRA Growth Index and the S&P/BARRA 600 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
14
<PAGE> 20
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 7,300 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 March 30, 1998.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------
NUMBER OF NUMBER OF STOCKS
PORTFOLIO STOCKS HELD IN TARGET INDEX
- ----------------------------------------------------------------
<S> <C> <C>
Total Stock Market - -
500 - -
Extended Market - -
MidCap Stock N/A -
SmallCap Stock - -
Value - -
SmallCap Value Stock N/A -
Growth - -
SmallCap Growth Stock N/A -
- ----------------------------------------------------------------
</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
March 30, 1998.
<TABLE>
<CAPTION>
TOTAL STOCK MARKET PORTFOLIO 500 PORTFOLIO
<S> <C>
1. General Electric Co. 1. General Electric Co.
2. The Coca-Cola Co. 2. The Coca-Cola Co.
3. Exxon Corp. 3. Exxon Corp.
4. Microsoft Corp. 4. Microsoft Corp.
5. Merck & Co., Inc. 5. Merck & Co., Inc.
6. Intel Corp. 6. Royal Dutch Petroleum Co.
7. Philip Morris Cos., Inc. 7. Intel Corp.
8. Procter & Gamble Co. 8. Philip Morris Cos., Inc.
9. International Business 9. Procter & Gamble Co.
Machines Corp. 10. International Business
10. Johnson & Johnson Machines Corp.
14% of the Portfolio's total net assets. 19% of the Portfolio's total net assets.
</TABLE>
<TABLE>
<CAPTION>
EXTENDED MARKET PORTFOLIO SMALLCAP STOCK PORTFOLIO
<S> <C>
1. Berkshire Hathaway 1. Keystone Financial, Inc.
2. Electronic Data Systems 2. Stratus Computer, Inc.
3. Rhone-Poulenc Rorer, Inc. 3. Dauphin Deposit Bank
4. Carnival Corp. Class A & Trust
5. Safeway, Inc. 4. Federal-Mogul Corp.
6. Franklin Resources Corp. 5. United Carolina Bancshare
7. RJR Nabisco Holdings Corp. 6. Citrix Systems, Inc.
8. The Coca-Cola Co. 7. Hawaiian Electric
9. Republic Industries, Inc. Industries, Inc.
10. Washington Mutual, Inc. 8. Pier 1 Imports, Inc.
9. AmeriSource Health Corp.
6% of the Portfolio's total net assets. 10. CCB Financial Corp.
2% of the Portfolio's total net assets.
</TABLE>
<TABLE>
<CAPTION>
VALUE PORTFOLIO GROWTH PORTFOLIO
<S> <C>
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. Hewlett-Packard Co. 6. Philip Morris Cos., Inc.
6. Citicorp 7. Procter & Gamble Co.
7. Mobil Corp. 8. Johnson & Johnson
8. The Walt Disney Co. 9. Bristol-Myers Squibb Co.
9. Chevron Corp. 10. Wal-Mart Stores, Inc.
10. NationsBank Corp.
35% of the Portfolio's total net assets.
22% of the Portfolio's total net assets.
</TABLE>
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 150 stocks, has far more of its assets invested in its top ten
holdings (35%) than the Total Stock Market Portfolio (14%), which seeks to
track a much larger universe of more than 7,300 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 27% 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 20%; for all domestic stock funds, the average turnover rate
is 79%.
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.
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--up to 5% if required for deposit and no more than 20% of total
assets--may be committed to such contracts.
The reasons for which a Portfolio may use 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 by buying futures instead of
actual stocks.
- - To add value to the Portfolio by buying futures instead of actual stocks when
futures are cheaper.
INVESTMENT LIMITATIONS
To reduce risk and maintain diversification, the Portfolios have adopted limits
on some of their investment policies. Specifically, a Portfolio will not:
- - Invest more than 25% of its assets in any one industry.
- - Borrow money in an amount that is more than 15% of its assets. If borrowing
exceeds 5%, the Portfolio will not make any additional 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.
The limitations listed in this prospectus and in the Statement of Additional
Information 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 PERIODS ENDED 12/31/97
- ---------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS 20 YEARS
- ---------------------------------------------------------------
<S> <C> <C> <C> <C>
Total Stock Market -% -% -%* --
Wilshire 5000 Index - - -* --
- ---------------------------------------------------------------
500 -% -% -% -%
S&P 500 Index - - - -
- ---------------------------------------------------------------
Extended Market** -% -% -% --
Wilshire 4500 Index - - - --
- ---------------------------------------------------------------
SmallCap Stock** -% -% -% --
Russell 2000 Index - - - --
- ---------------------------------------------------------------
Value -% -% -- --
S&P/BARRA Value Index - - -- --
- ---------------------------------------------------------------
Growth -% -%* -- --
S&P/BARRA Growth Index - -* -- --
- ---------------------------------------------------------------
</TABLE>
Note: The Mid Capitalization Stock, Small Capitalization Value Stock, and Small
Capitalization Growth Stock Portfolios did not begin operations until March 30,
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 March 30,
1998.
SHARE PRICE
Each Portfolio's share price, called its net asset value, is calculated each
business day after the close of trading (generally 4 p.m. Eastern time) on the
New York Stock Exchange. 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, or NAV, is useful to you as a shareholder because
the NAV, multiplied by the number of Portfolio
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 gain 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.
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, EXTEN, 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 gain 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.
Your distributions of income and capital gains are automatically invested in
more shares of the Portfolio unless you elect to receive the distribution in
cash. In either case, 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 process your dividend
distribution and 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. Both dividend and capital gain
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.
- - 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.
20
<PAGE> 26
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 own 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 $310 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 March 30,
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 Core Management 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 $- 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 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. "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] . 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
(SALES AND EXCHANGES) you notify us otherwise.
(Sales for nonretirement accounts only;
exchanges for retirement accounts only.)
VANGUARD DIRECT DEPOSIT Automatic method for depositing your paycheck or
SERVICE U.S. government payment (including Social
[BOOK] Security and government pension checks) into your
account.
VANGUARD AUTOMATIC EXCHANGE SERVICE Automatic method for moving a fixed amount of
[BOOK] money from one Vanguard fund account to another.*
VANGUARD FUND EXPRESS Electronic method for buying or selling shares.
[BOOK] You can transfer money between your Vanguard fund
account and an account at your bank, savings and
loan, or credit union on a systematic schedule.*
VANGUARD DIVIDEND EXPRESS Electronic method for transferring dividend
[BOOK] and/or capital gain distributions 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
(VBS) options on major exchanges, Nasdaq, and other
[BOOK] domestic over-the-counter markets at reduced
rates, and to buy and sell shares of non-Vanguard
mutual funds. Call VBS (1-800-992-8327) for
additional information and the appropriate forms.
</TABLE>
*Can be used to "dollar-cost average"[BOOK] or to contribute to an IRA or other
retirement plan.
Investor Information 1-800-662-7447 - Client Services 1-800-662-2739 -
Tele-Account 1-800-662-6273
23
<PAGE> 29
Investor Information 1-800-662-7447 - Client Services 1-800-662-2739 -
Tele-Account 1-800-662-6273
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
[BOOK] Gifts/Transfers to Minors Act). Age of majority
and other requirements are set by state law.
$1,000 minimum initial investment.
FOR HOLDING TRUST ASSETS To invest assets held in an existing trust.
[BOOK] $3,000 minimum initial investment.
FOR THIRD-PARTY TRUSTEE To open an account as a retirement trust or plan
RETIREMENT INVESTMENTS based on an existing corporate or institutional
(Vanguard is not the custodian plan. These accounts are established by the
or trustee.) custodian or trustee of the existing plan.
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 AN INDIVIDUAL RETIREMENT To open a retirement account in the name of an
ACCOUNT (IRA) individual. IRAs can be established with a
(Vanguard Fiduciary Trust contribution, a direct rollover from an
Company is the custodian.) employer's plan, such as a 401(k), or an asset
transfer or rollover from another financial
institution, such as a bank or mutual fund
company. $1,000 minimum initial investment.
FOR A SIMPLIFIED EMPLOYEE To open a retirement account in the name of an
PENSION PLAN ACCOUNT (SEP-IRA) employee. SEPs allow employers to make deductible
(Vanguard Fiduciary Trust contributions directly to IRAs established by
Company is the custodian.) their employees. A SEP can be established by
1-800-662-2003 people who are self-employed, small-business
Individual Retirement Plans owners, partnerships, or corporations.
</TABLE>
24
<PAGE> 30
TYPES OF ACCOUNTS (continued)
<TABLE>
<S> <C>
FOR A SAVINGS INCENTIVE MATCH To open a retirement account in the name of an
PLAN FOR EMPLOYEES ACCOUNT employee. Created as part of the Small Business
(SIMPLE IRA) Job Protection Act of 1996, SIMPLEs replace
(Vanguard Fiduciary Trust SAR-SEPs. SIMPLEs are exclusively for employers
Company is the custodian.) that had 100 or fewer employees in the most
1-800-662-2003 recent calendar year and that do not maintain
Individual Retirement Plans another employer-sponsored retirement plan. A
SIMPLE can be established by people who are
self-employed, small-business owners,
partnerships, or corporations. Salary reduction
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
PROGRAM ACCOUNT small-business owners or people who are
(Vanguard Fiduciary Trust self-employed to make tax-deductible retirement
Company can be the custodian.) contributions for themselves and their employees
1-800-662-2003 into Profit-Sharing and Money Purchase Pension
Individual Retirement Plans (Keogh) plans.
FOR A 403(b)(7) CUSTODIAL ACCOUNT To open a retirement account that allows
(Vanguard Fiduciary Trust employees of tax-exempt institutions (for
Company is the trustee.) example, schools or hospitals) to make pretax
1-800-662-2003 retirement contributions.
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 Portfolio,
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.
DIVIDENDS AND CAPITAL GAINS Both dividends and capital gains are paid by
IN CASH check and mailed to 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."
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 (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.
Investor Information 1-800-662-7447 - Client Services 1-800-662-2739 -
Tele-Account 1-800-662-6273
25
<PAGE> 31
Investor Information 1-800-662-7447 - Client Services 1-800-662-2739 -
Tele-Account 1-800-662-6273
BUYING SHARES (continued)
<TABLE>
<S> <C> <C>
OPEN A NEW ACCOUNT ADD TO AN EXISTING ACCOUNT
MINIMUM INVESTMENT $3,000 (regular account); $1,000 $100 by mail or exchange; $1,000
(IRAs and custodial accounts for by wire.
minors).
BY MAIL Complete and sign the Mail your check with an
[ENVELOPE] application form. Invest-By-Mail form detached
FIRST-CLASS mail to: from your confirmation statement to
The Vanguard Group the address listed on the form.
P.O. Box 2600
Valley Forge, PA 19482 Make your check payable to: Make your check payable to:
The Vanguard Group--(insert The Vanguard Group--(insert
EXPRESS or REGISTERED mail to: appropriate Portfolio Number, appropriate Portfolio Number,
The Vanguard Group see below) see below)
455 Devon Park Drive Total Stock Market 85 Total Stock Market 85
Wayne, PA 19087 500 40 500 40
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>
<S> <C> <C>
BY TELEPHONE FOR RETIREMENT ACCOUNTS FOR RETIREMENT ACCOUNTS
[TELEPHONE] ONLY: Call Vanguard Tele-Account* ONLY: Call Vanguard Tele-Account*
1-800-662-6273 24 hours a day--or Client 24 hours a day--or Client
Vanguard Tele-Account(R) Services during business Services during business
hours--to exchange from another hours--to exchange from another
1-800-662-2739 Vanguard fund account with the Vanguard fund account with the
Client Services same registration (name, same registration (name,
address, taxpayer I.D., and address, taxpayer I.D., and
account type). account type).
</TABLE>
*You must obtain a Personal Identification
Number through Tele-Account at least seven
days before you request your first
exchange.
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.
26
<PAGE> 32
BUYING SHARES (continued)
<TABLE>
<S> <C> <C>
CALL CLIENT SERVICES TO ARRANGE CALL CLIENT SERVICES TO ARRANGE
BY WIRE your wire transaction. your wire transaction.
[WIRE]
Wire to:
CoreStates Bank, N.A. Wire transactions are not Wire transactions are not
ABA 031000011 available for retirement available for retirement
CoreStates No 01019897 accounts. accounts.
[Temporary Account Number]
Vanguard Index Trust
[Portfolio Name]
[Account Registration]
Attention: Vanguard
AUTOMATICALLY -- Vanguard offers a variety of
[AUTOMATIC] ways 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 a 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:
[X] Portfolio name.
[X] 10-digit account number.
[X] Name and address exactly as registered on that account.
[X] 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.
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.
Investor Information 1-800-662-7447 - Client Services 1-800-662-2739 -
Tele-Account 1-800-662-6273
27
<PAGE> 33
Investor Information 1-800-662-7447 - Client Services 1-800-662-2739 -
Tele-Account 1-800-662-6273
REDEEMING SHARES (continued)
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:
[X] Portfolio name and account number.
[X] Amount of the transaction (in dollars or shares).
[X] Signatures of all owners exactly as registered on the account.
[X] Signature guarantees (if required).
[X] Any supporting legal documentation that may be required.
[X] Any certificates you are holding for the account.
Sales or exchange requests received after the close of trading on the New York
Stock Exchange (generally 4 p.m. Eastern time) are processed at the next
business day's net asset value.
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 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 large enough to have a negative impact on the Portfolio or a series of
movements between Vanguard funds.
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.
<TABLE>
<S> <C>
SELLING OR EXCHANGING SHARES ACCOUNT TYPE
BY TELEPHONE ALL TYPES EXCEPT RETIREMENT:
[TELEPHONE] Call Vanguard Tele-Account* 24 hours a day--or
1-800-662-6273 Client Services during business hours--to sell
Vanguard Tele-Account shares. You cannot exchange 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.
</TABLE>
28
<PAGE> 34
REDEEMING SHARES (continued)
<TABLE>
<S> <C>
SELLING OR EXCHANGING SHARES ACCOUNT TYPE
BY MAIL ALL TYPES EXCEPT RETIREMENT:
[ENVELOPE] Send a letter of instruction signed by all
FIRST-CLASS mail to: registered account holders. Include the portfolio
The Vanguard Group name and account number and (if you are selling)
Vanguard Index Trust a dollar amount or number of shares OR (if you
P.O. Box 1120 are exchanging) the name of the fund you want to
Valley Forge, PA 19482 exchange into and a dollar amount or number of
shares.
RETIREMENT:
EXPRESS or REGISTERED mail to: For information on how to request distributions
The Vanguard Group from:
Vanguard Index Trust - IRAs--call Client Services.
455 Devon Park Drive - SEP-IRAs, SIMPLE IRAs, 403(b)(7) custodial
Wayne, PA 19087 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.
AUTOMATICALLY ALL TYPES EXCEPT RETIREMENT:
[AUTOMATIC] 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>
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 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, without 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.
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.
Investor Information 1-800-662-7447 - Client Services 1-800-662-2739 -
Tele-Account 1-800-662-6273
29
<PAGE> 35
Investor Information 1-800-662-7447 - Client Services 1-800-662-2739 -
Tele-Account 1-800-662-6273
PORTFOLIO AND ACCOUNT UPDATES (continued)
<TABLE>
<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 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 taxable accounts
[BOOK] (accompanies your 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
VANGUARD TELE-ACCOUNT Toll-free access to Vanguard fund and account
1-800-662-6273 information--as well as some
Any time, seven days a week, transactions--through any Touch-Tone(TM)
from anywhere in the continental United States telephone. TeleAccount provides total return,
and Canada. share price, price change, and yield quotations
[BOOK] for all Vanguard funds; gives your account
balances and history (e.g., last transaction,
latest dividend distribution); and allows you to
sell Portfolio shares.
COMPUTER ACCESS
VANGUARD ON THE Use your personal computer to visit Vanguard's
WORLD WIDE WEB education-oriented website, which provides timely
www.vanguard.com news and information about Vanguard 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>
30
<PAGE> 36
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 25-27)
[ ] How to sell or exchange shares? (pages 27-29)
[ ] How often you'll receive statements and financial reports?
(pages 29 and 30)
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> 37
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
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.
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.
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
[PHOTO]
[THE VANGUARD GROUP LOGO]
Post Office Box 2600
Valley Forge, PA 19482
INVESTOR INFORMATION
DEPARTMENT
1-800-662-7447 (SHIP)
TEXT TELEPHONE:
1-800-952-3335
For information on our funds,
fund services, and retirement
accounts; requests for
literature
CLIENT SERVICES DEPARTMENT
1-800-662-2739 (CREW)
TEXT TELEPHONE:
1-800-662-2738
For information on your
account, account transactions,
account statements
VANGUARD BROKERAGE
SERVICES
1-800-992-8327
For information on trading
stocks, bonds, and options
at reduced commissions
VANGUARD TELE-ACCOUNT(R)
1-800-662-6273 (ON-BOARD)
For 24-hour automated access
to price and yield, information
on your account, certain
transactions
ELECTRONIC ACCESS TO THE
VANGUARD MUTUAL FUND
EDUCATION AND INFORMATION
CENTER
World Wide Web
www.vanguard.com
E-mail
[email protected]
(C) 1998 Vanguard Marketing
Corporation, Distributor
P040N
<PAGE> 40
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS
DATED JANUARY 9, 1998
VANGUARD
INDEX TRUST
Institutional Prospectus
March 30, 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.
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.
[GRAPHIC OF SHIP]
[VANGUARD LOGO]
<PAGE> 41
VANGUARD INDEX TRUST
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
A Stock Index Mutual Fund
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 March 30, 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 March 30, 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 by 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 describes 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 a separate
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 10-14)
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 dividends 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--
PERIODS ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
1 YEAR 5 YEARS 10 YEARS
-----------------------------
<S> <C> <C> <C>
Total Stock Market - - -*
Wilshire 5000 Index - - -*
500 - - -
S&P 500 Index - - -
Extended Market** - - -
Wilshire 4500 Index - - -
SmallCap Stock** - - -
Russell 2000 Index - - -
Value - - --
S&P/BARRA Value Index - - --
Growth - -* --
S&P/BARRA Growth Index - -* --
- ----------------------------------------------------------------
</TABLE>
Note: The Mid Capitalization Stock, Small Capitalization Value Stock, and Small
Capitalization Growth Stock Portfolios did not begin operations until March 30,
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: 4/27/92 8/31/76 12/21/87
NET ASSETS AS OF 12/31/97: $- billion $- billion $- billion
PORTFOLIO EXPENSE RATIO FOR THE
PERIOD ENDED 12/31/97: - - -
TRANSACTION FEE ON PURCHASES: None None 0.25%
NEWSPAPER ABBREVIATION: TotSt 500 Exten
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: 3/30/98 10/3/60 11/2/92
NET ASSETS AS OF 12/31/97: None $- billion $- billion
PORTFOLIO EXPENSE RATIO FOR THE
PERIOD ENDED 12/31/97: N/A - -
TRANSACTION FEE ON PURCHASES: 0.25% 0.5% None
NEWSPAPER ABBREVIATION: MidCap SmCap Value
VANGUARD FUND NUMBER: 859 048 006
CUSIP NUMBER: - 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: 3/30/98 11/2/92 3/30/98
NET ASSETS AS OF 12/31/97: None $- billion None
PORTFOLIO EXPENSE RATIO FOR THE
PERIOD ENDED 12/31/97: N/A - N/A
TRANSACTION FEE ON PURCHASES: 1.00% None 1.00%
NEWSPAPER ABBREVIATION: SmValue Growth SmGrowth
VANGUARD FUND NUMBER: 860 009 861
CUSIP NUMBER: - 922908504 -
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.
PORTFOLIO EXPENSES
The examples below are designed to help you understand the costs you would bear
as an investor in one of the Portfolios.
<TABLE>
<CAPTION>
SHAREHOLDER TRANSACTION EXPENSES AND FEES
<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.
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 -%, or $- per $1,000 of average net assets. The average
equity index fund had expenses in 1996 of 0.65%, or $6.50 per $1,000 of average
net assets, according to Lipper Analytical Services, Inc., which reports on the
mutual fund industry.
PORTFOLIO OPERATING EXPENSES
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
TOTAL STOCK EXTENDED
MARKET 500 MARKET
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Management and
Administrative Expenses: - - -
Investment Advisory Expenses: None None None
12b-1 Marketing Fees: None None None
Other Expenses
Marketing and Distribution
Expenses: - - -
Miscellaneous Expenses
(e.g., Taxes, Auditing): - - -
---- ---- ----
Total Other Expenses: - - -
---- ---- ----
TOTAL OPERATING EXPENSES
(EXPENSE RATIO): - - -
===== ==== ====
</TABLE>
4
<PAGE> 46
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
MIDCAP SMALLCAP
STOCK STOCK VALUE
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Management and
Administrative Expenses: - - -
Investment Advisory Expenses: None None None
12b-1 Marketing Fees: None None None
Other Expenses
Marketing and Distribution
Expenses: - - -
Miscellaneous Expenses
(e.g., Taxes, Auditing): - - -
---- ---- ----
Total Other Expenses: - - -
---- ---- ----
TOTAL OPERATING EXPENSES
(EXPENSE RATIO): - - -
===== ==== ====
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
SMALLCAP SMALLCAP
VALUE GROWTH GROWTH
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Management and
Administrative Expenses: - - -
Investment Advisory Expenses: None None None
12b-1 Marketing Fees: None None None
Other Expenses
Marketing and Distribution
Expenses: - - -
Miscellaneous Expenses
(e.g., Taxes, Auditing): - - -
---- ---- ----
Total Other Expenses: - - -
---- ---- ----
TOTAL OPERATING EXPENSES
(EXPENSE RATIO): - - -
===== ==== ====
</TABLE>
The following examples illustrate the hypothetical expenses that you would
incur on a $1,000 investment in each Portfolio over various periods. These
examples assume that each Portfolio provides a return of 5% a year and that 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 $ 7 $12 $28
500 2 6 11 26
Extended Market 8 13 19 37
MidCap Stock 5 11 17 34
SmallCap Stock 8 13 19 37
Value 2 6 11 26
SmallCap Value Stock 10 15 21 39
Growth 2 6 11 26
SmallCap Growth Stock 10 15 21 39
- ---------------------------------------------------------------------------------------
</TABLE>
THIS EXAMPLE 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.
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 $- per share from investment income
(interest and dividends) and $- 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 $- per share. Of those earnings, $- per share was
returned to shareholders in distributions ($- in dividends, $- in capital
gains). The earnings ($- per share) less distributions ($- per share) resulted
in a share price of $- at the end of the fiscal year, an increase of $- per
share (from $- at the start of the period to $- 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 -% for the year.
As of December 31, 1997, the Portfolio had $- billion in net assets; an
annualized expense ratio of -% ($- per $1,000 of net assets); and net investment
income amounting to -% of its average net assets. It sold and replaced
securities valued at -% of its total net assets.
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 last ten
years 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).
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL STOCK MARKET PORTFOLIO
- ----------------------------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
----------------------------------------------------- 3/16*-
1997 1996 1995 1994 1993 12/31/92
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD - $15.04 $11.37 $11.69 $10.84 $10.00
-------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income - .29 .29 .27 .26 .23
Net Realized and Unrealized Gain (Loss) on Investments - 2.84 3.75 (.29) .88 .84
-------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS - 3.13 4.04 (.02) 1.14 1.07
- ----------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income - (.29) (.28) (.27) (.26) (.23)
Distributions from Realized Capital Gains - (.11) (.09) (.03) (.03) --
-------------------------------------------------------------------
TOTAL DISTRIBUTIONS - (.40) (.37) (.30) (.29) (.23)
- ----------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD - $17.77 $15.04 $11.37 $11.69 $10.84
==================================================================================================================================
TOTAL RETURN** - 20.96% 35.79% -0.17% 10.62% 10.41%
==================================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) - $3,531 $1,571 $786 $512 $275
Ratio of Total Expenses to Average Net Assets - 0.22% 0.25% 0.20% 0.20% 0.21%+
Ratio of Net Investment Income to Average Net Assets - 1.86% 2.14% 2.35% 2.31% 2.42%+
Portfolio Turnover Rate - 3% 3% 2% 1% 3%
Average Commission Rate Paid - $.0216 N/A N/A N/A N/A
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Commencement of operations.
**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.
*The Mid Capitalization Stock, Small Capitalization Value Stock, and Small
Capitalization Growth Stock Portfolios did not begin operations until March
30, 1998.
6
<PAGE> 48
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
500 PORTFOLIO
--------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING
OF PERIOD - $57.60 $42.97 $43.83 $40.97 $39.32 $31.24 $33.64 $27.18 $24.65
--------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income - 1.28 1.22 1.18 1.13 1.12 1.15 1.17 1.20 1.08
Net Realized and Unrealized
Gain (Loss) on Investments - 11.82 14.76 (.67) 2.89 1.75 8.20 (2.30) 7.21 2.87
--------------------------------------------------------------------------------------------
TOTAL FROM INVESTMENT
OPERATIONS - 13.10 15.98 .51 4.02 2.87 9.35 (1.13) 8.41 3.95
--------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net
Investment Income - (1.28) (1.22) (1.17) (1.13) (1.12) (1.15) (1.17) (1.20) (1.10)
Distributions from
Realized Capital Gains - (.25) (.13) (.20) (.03) (.10) (.12) (.10) (.75) (.32)
--------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS - (1.53) (1.35) (1.37) (1.16) (1.22) (1.27) (1.27) (1.95) (1.42)
--------------------------------------------------------------------------------------------
NET ASSET VALUE,
END OF PERIOD - $69.17 $57.60 $42.97 $43.83 $40.97 $39.32 $31.24 $33.64 $27.18
====================================================================================================================================
Total Return - 22.88% 37.45% 1.18% 9.89% 7.42% 30.22% -3.32% 31.36% 16.22%
====================================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of
Period (Millions) - $30,332 $17,372 $9,356 $8,273 $6,547 $4,345 $2,173 $1,804 $1,055
Ratio of Total Expenses to
Average Net Assets - 0.20% 0.20% 0.19% 0.19% 0.19% 0.20% 0.22% 0.21% 0.22%
Ratio of Net Investment
Income to Average
Net Assets - 2.04% 2.38% 2.72% 2.65% 2.81% 3.07% 3.60% 3.62% 4.08%
Portfolio Turnover Rate -+ 5%+ 4%+ 6%+ 6%+ 4%+ 5%+ 23%+ 8% 10%
Average Commission
Rate Paid - $.0166 N/A N/A N/A N/A N/A 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 1990 1989 1988
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD - $24.07 $18.52 $19.43 $17.35 $15.82 $11.48 $13.92 $11.60 $ 9.99
--------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income - .34 .30 .28 .23 .24 .25 .30 .26 .34
Net Realized and
Unrealized Gain (Loss)
on Investments - 3.85 5.95 (.62) 2.28 1.72 4.54 (2.25) 2.52 1.63
--------------------------------------------------------------------------------------------
TOTAL FROM INVESTMENT
OPERATIONS - 4.19 6.25 (.34) 2.51 1.96 4.79 (1.95) 2.78 1.97
- ------------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net
Investment Income - (.34) (.30) (.28) (.23) (.25) (.25) (.33) (.23) (.20)
Distributions from
Realized Capital Gains - (1.72) (.40) (.29) (.20) (.18) (.20) (.16) (.23) (.16)
--------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS - (2.06) (.70) (.57) (.43) (.43) (.45) (.49) (.46) (.36)
- ------------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE,
END OF PERIOD - $26.20 $24.07 $18.52 $19.43 $17.35 $15.82 $11.48 $13.92 $11.60
====================================================================================================================================
TOTAL RETURN** - 17.65% 33.80% -1.76% 14.49% 12.47% 41.85% -14.05% 24.10% 19.75%
====================================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of
Period (Millions) - $2,099 $1,523 $967 $928 $585 $372 $179 $147 $35
Ratio of Total Expenses to
Average Net Assets - 0.25% 0.25% 0.20% 0.20% 0.20% 0.19% 0.23% 0.23% 0.24%
Ratio of Net Investment
Income to Average
Net Assets - 1.42% 1.51% 1.51% 1.48% 1.73% 2.14% 2.68% 2.92% 2.90%
Portfolio Turnover Rate - 22% 15% 19% 13% 9% 11% 9% 14% 26%
Average Commission Rate Paid - $.0235 N/A N/A N/A N/A N/A N/A 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). (Note: The
transaction fee on purchases was reduced to 0.25% as of November 3, 1997.)
7
<PAGE> 49
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
SMALL CAPITALIZATION
STOCK PORTFOLIO*
------------------------------------------------------
YEAR ENDED
DECEMBER 31,
----------------------------- 2/1- 10/1/93-
1997 1996 1995 12/31/94 1/31/94
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD - $18.61 $14.99 $16.24 $16.23
------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income - .26 .24 .20 .05
Net Realized and Unrealized Gain (Loss) on Investments - 3.07 4.06 (.86) .96
------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS - 3.33 4.30 (.66) 1.01
- ---------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income - (.27) (.23) (.22) (.18)
Distributions from Realized Capital Gains - (1.44) (.45) (.37) (.82)
------------------------------------------------------
TOTAL DISTRIBUTIONS - (1.71) (.68) (.59) (1.00)
- ---------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD - $20.23 $18.61 $14.99 $16.24
=====================================================================================================================
TOTAL RETURN** - 18.12% 28.74% -4.00% 6.65%
=====================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) - $1,713 $971 $605 $533
Ratio of Total Expenses to Average Net Assets - 0.25% 0.25% 0.17%+ 0.18%+
Ratio of Net Investment Income to Average Net Assets - 1.51% 1.58% 1.50%+ 1.16%+
Portfolio Turnover Rate - 28% 28% 25% 5%
Average Commission Rate Paid - $.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 PERIOD $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 PERIOD $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 Period (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% 0.65% 0.24%
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,
----------------------------------------------------- 11/2*-
1997 1996 1995 1994 1993 12/31/92
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD - $14.79 $11.12 $11.74 $10.30 $10.00
-------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income - .37 .41 .38 .38 .07
Net Realized and Unrealized Gain (Loss) on Investments - 2.81 3.66 (.46) 1.50 .30
-------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS - 3.18 4.07 (.08) 1.88 .37
- ----------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income - (.38) (.40) (.38) (.38) (.07)
Distributions from Realized Capital Gains - (.57) -- (.16) (.06) --
-------------------------------------------------------------------
TOTAL DISTRIBUTIONS - (.95) (.40) (.54) (.44) (.07)
- ----------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD - $17.02 $14.79 $11.12 $11.74 $10.30
==================================================================================================================================
TOTAL RETURN - 21.86% 36.94% -0.73% 18.35% 3.70%
==================================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) - $1,016 $496 $297 $190 $24
Ratio of Total Expenses to Average Net Assets - 0.20% 0.20% 0.20% 0.20% 0%**
Ratio of Net Investment Income to Average Net Assets - 2.54% 3.06% 3.37% 3.26% 3.46%**
Portfolio Turnover Rate - 29% 27% 32% 30% 4%
Average Commission Rate Paid - $.0188 N/A N/A N/A N/A
</TABLE>
* Commencement of operations.
**Annualized.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
GROWTH PORTFOLIO
-------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
----------------------------------------------------- 11/2*-
1997 1996 1995 1994 1993 12/31/92
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD - $13.97 $10.28 $10.20 $10.26 $10.00
-------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income - .22 .21 .21 .21 .06
Net Realized and Unrealized Gain (Loss) on Investments - 3.07 3.68 .08 (.06) .26
-------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS - 3.29 3.89 .29 .15 .32
- ----------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income - (.22) (.20) (.21) (.21) (.06)
Distributions from Realized Capital Gains - (.14) -- -- -- --
-------------------------------------------------------------------
TOTAL DISTRIBUTIONS - (.36) (.20) (.21) (.21) (.06)
- ----------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD - $16.90 $13.97 $10.28 $10.20 $10.26
==================================================================================================================================
TOTAL RETURN - 23.74% 38.06% 2.89% 1.53% 3.19%
==================================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) - $787 $271 $86 $51 $21
Ratio of Total Expenses to Average Net Assets - 0.20% 0.20% 0.20% 0.20% 0%**
Ratio of Net Investment Income to Average Net Assets - 1.57% 1.71% 2.08% 2.10% 2.85%**
Portfolio Turnover Rate - 29% 24% 28% 36% 2%
Average Commission Rate Paid - $.0183 N/A N/A N/A N/A
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Commencement of operations.
**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. 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 will 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, will 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
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/BARRA 600 Value Index, which includes those
stocks of the S&P SmallCap 600 Index that are often considered out of favor with
investors.
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/BARRA 600 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:
- - You are seeking exposure to the stocks of small companies that are often
considered out of favor in the market.
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,
while growth funds 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.
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.
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 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 Trust's investment adviser pursues the 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, the Trust 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 (1926-1996)
- ------------------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS 20 YEARS
- ------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Best 53.9% 23.9% 20.1% 16.9%
Worst -43.3 -12.5 -0.9 3.1
Average 12.7 10.4 10.8 10.8
- ------------------------------------------------------------------------------------
</TABLE>
The table covers all of the 1-, 5-, 10-, and 20-year periods from 1926
through 1996. For example, while the average return on stocks for all of the
5-year periods was 10.4%, 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, the S&P/BARRA 600 Value Index, and the
S&P/BARRA 600 Growth Index (the target indexes for the Value, Growth, Small
Capitalization Value Stock, and Small Capitalization Growth Stock Portfolios,
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 billion.
Mid-cap funds hold stocks of companies with a median market value between $1
billion and $7 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).
respectively)--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 S&P/BARRA 600 Value
Index have been less volatile than the stocks found in the broader S&P 500
Index; stocks of the S&P/BARRA Growth Index and the S&P/BARRA 600 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 7,300
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 March 30, 1998.
14
<PAGE> 56
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
NUMBER OF NUMBER OF STOCKS
PORTFOLIO STOCKS HELD IN TARGET INDEX
- --------------------------------------------------------------------------------------
<S> <C> <C>
Total Stock Market - -
500 - -
Extended Market - -
MidCap Stock N/A -
SmallCap Stock - -
Value - -
SmallCap Value Stock N/A -
Growth - -
SmallCap Growth Stock N/A -
- --------------------------------------------------------------------------------------
</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
March 30, 1998.
<TABLE>
<CAPTION>
TOTAL STOCK MARKET PORTFOLIO 500 PORTFOLIO
<S> <C>
1. General Electric Co. 1. General Electric Co.
2. The Coca-Cola Co. 2. The Coca-Cola Co.
3. Exxon Corp. 3. Exxon Corp.
4. Microsoft Corp. 4. Microsoft Corp.
5. Merck & Co., Inc. 5. Merck & Co., Inc.
6. Intel Corp. 6. Royal Dutch Petroleum Co.
7. Philip Morris Cos., Inc. 7. Intel Corp.
8. Procter & Gamble Co. 8. Philip Morris Cos., Inc.
9. International Business 9. Procter & Gamble Co.
Machines Corp. 10. International Business
10. Johnson & Johnson Machines Corp.
14% of the Portfolio's total net assets. 19% of the Portfolio's total net assets.
</TABLE>
<TABLE>
<CAPTION>
EXTENDED MARKET PORTFOLIO SMALLCAP STOCK PORTFOLIO
<S> <C>
1. Berkshire Hathaway 1. Keystone Financial, Inc.
2. Electronic Data Systems 2. Stratus Computer, Inc.
3. Rhone-Poulenc Rorer, Inc. 3. Dauphin Deposit Bank
4. Carnival Corp. Class A & Trust
5. Safeway, Inc. 4. Federal-Mogul Corp.
6. Franklin Resources Corp. 5. United Carolina Bancshare
7. RJR Nabisco Holdings Corp. 6. Citrix Systems, Inc.
8. The Coca-Cola Co. 7. Hawaiian Electric
9. Republic Industries, Inc. Industries, Inc.
10. Washington Mutual, Inc. 8. Pier 1 Imports, Inc.
6% of the Portfolio's total net assets. 9. AmeriSource Health Corp.
10. CCB Financial Corp.
2% of the Portfolio's total net assets.
</TABLE>
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 20%; for all domestic
stock funds, the average turnover rate is 79%.
<TABLE>
<CAPTION>
VALUE PORTFOLIO GROWTH PORTFOLIO
<S> <C>
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. Hewlett-Packard Co. 6. Philip Morris Cos., Inc.
6. Citicorp 7. Procter & Gamble Co.
7. Mobil Corp. 8. Johnson & Johnson
8. The Walt Disney Co. 9. Bristol-Myers Squibb Co.
9. Chevron Corp. 10. Wal-Mart Stores, Inc.
10. NationsBank Corp. 35% of the Portfolio's total net assets.
22% of the Portfolio's total net assets.
</TABLE>
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 150 stocks, has far more of its assets invested in its top ten holdings
(35%) than the Total Stock Market Portfolio (14%), which seeks to track a much
larger universe of more than 7,300 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 27% 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.
16
<PAGE> 58
[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 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--up to 5% if required for deposit
and no more than 20% of total assets--may be committed to such contracts.
The reasons for which a Portfolio may use 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 by buying futures instead of
actual stocks.
- - To add value to the Portfolio by buying futures instead of actual stocks
when futures are cheaper.
INVESTMENT LIMITATIONS
To reduce risk and maintain diversification, the Portfolios have adopted limits
on some of their investment policies. Specifically, a Portfolio will not:
- - Invest more than 25% of its assets in any one industry.
- - Borrow money in an amount that is more than 15% of its assets. If borrowing
exceeds 5%, the Portfolio will not make any additional 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.
The limitations listed in this prospectus and in the Statement of Additional
Information are fundamental and may be changed only by approval of a majority of
the Portfolio's shareholders.
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.
17
<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.
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 PERIODS ENDED 12/31/97
- ---------------------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS 20 YEARS
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total Stock Market -% -% -%* --
Wilshire 5000 Index - - -* --
- ---------------------------------------------------------------------------------------
500 -% -% -% -%
S&P 500 Index - - - -
- ---------------------------------------------------------------------------------------
Extended Market** -% -% -% --
Wilshire 4500 Index - - - --
- ---------------------------------------------------------------------------------------
SmallCap Stock** -% -% -% --
Russell 2000 Index - - - --
- ---------------------------------------------------------------------------------------
Value -% -% -- --
S&P/BARRA Value Index - - -- --
- ---------------------------------------------------------------------------------------
Growth -% -%* -- --
S&P/BARRA Growth Index - -* -- --
- ---------------------------------------------------------------------------------------
</TABLE>
Note: The Mid Capitalization Stock, Small Capitalization Value Stock, and Small
Capitalization Growth Stock Portfolios did not begin operations until March 30,
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 March 30, 1998.
18
<PAGE> 60
SHARE PRICE
Each Portfolio's share price, called its net asset value, is calculated each
business day after the close of trading (generally 4 p.m. Eastern time) on the
New York Stock Exchange. 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, or NAV, 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, EXTEN, 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 gain distributions at some
other time during the year. Keep in mind that index portfolios tend to provide
less in capital gain 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
gain 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 own 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 gain 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.
19
<PAGE> 61
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 $- 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 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 own 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 $310 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 March 30,
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 Core Management 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.
20
<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 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. "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.
21
<PAGE> 63
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 the 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 large enough to have a
negative impact on the Portfolio, or a series of movements between Vanguard
funds. 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 Participant Services, 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.
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
22
<PAGE> 64
INVESTING WITH VANGUARD (continued)
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 ON THE WORLD WIDE WEB
www.vanguard.com
Use your personal computer to visit Vanguard's education-oriented website, which
provides timely news and information about Vanguard 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.
23
<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 11)
/ / 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)
24
<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
[THE VANGUARD GROUP 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: 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
(C) 1998 Vanguard Marketing
Corporation, Distributor
</TABLE>
I040N
<PAGE> 68
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS
DATED JANUARY 9, 1998
PROSPECTUS
MARCH 30, 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.
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.
INSTITUTIONAL SHARES OF THE MID CAPITALIZATION STOCK PORTFOLIO, THE VALUE
PORTFOLIO, THE SMALL CAPITALIZATION VALUE STOCK PORTFOLIO, THE GROWTH PORTFOLIO
AND THE SMALL CAPITALIZATION GROWTH STOCK 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 VANGUARD INSTITUTIONAL INDEX FUND,
AS WELL AS THE EXISTING PORTFOLIOS OF VANGUARD INDEX TRUST, PLEASE CONTACT
VANGUARD'S INSTITUTIONAL INVESTOR GROUP AT 1-800-523-1036.
[GRAPHIC OF SHIP]
[VANGUARD LOGO]
<PAGE> 69
Vanguard Institutional Index Fund
Vanguard Index Trust
Stock Index Mutual Funds
Contents
Fund Profiles -
Fund Expenses -
Financial Highlights -
A Word About Risk -
The Funds' Objectives -
Who Should Invest -
Investment Strategy -
Investment Policies -
Investment Limitations -
Investment
Performance -
Share Price -
Dividends, Capital
Gains, and Taxes -
The Funds and
Vanguard -
Investment Adviser -
General Information -
Investing
with Vanguard
Accessing Fund Information by
Computer -
Prospectus Postscript -
Glossary Inside Back Cover
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 March 30,
1998; the Value and Growth Portfolios did not begin issuing Institutional Shares
until March 30, 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.
*The 500 Portfolio of Vanguard Index Trust is not included in this prospectus
since it does not offer Institutional Shares.
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 may require special
employee benefit plan services. The Institutional Plus Shares are designed for
investors who meet the investment minimum of $200 million and 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. 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.
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 March 30, 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 by
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> 70
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.
Funds Profile
Vanguard Institutional Index Fund
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 Funds (pages 10 - 14)
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 the Funds --
is provided beginning on page 10.
Dividends and Capital Gains (page 19)
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 20)
Vanguard Core Management Group, Valley Forge, Pa., manages the Funds.
Average Annual Total Returns -- Institutional Shares
Periods Ended December 31, 1997
<PAGE> 71
<TABLE>
<CAPTION>
1 Year 5 Years 10 Years
- ------------------------------------------------------------------------------
<S> <C> <C> <C>
Institutional Index Fund --
Institutional Shares - % - % - %*
- ------------------------------------------------------------------------------
Institutional Index Fund --
Institutional Plus Shares - * -- --
- ------------------------------------------------------------------------------
Total Stock Market - * -- --
Wilshire 5000 Index - * -- --
- ------------------------------------------------------------------------------
Extended Market** - * -- --
Wilshire 4500 Index - * -- --
- ------------------------------------------------------------------------------
SmallCap Stock** - * -- --
Russell 2000 Index - * -- --
- ------------------------------------------------------------------------------
</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 March 30, 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 -% -% -%*
Wilshire 5000 Index - - -*
- ---------------------------------------------------------
Extended Market** - - -
Wilshire 4500 Index - - -
- ---------------------------------------------------------
SmallCap Stock** - - -
Russell 2000 Index - - -
- ---------------------------------------------------------
Value - - -*
S&P/BARRA Value Index - - -*
- ---------------------------------------------------------
Growth - - -*
S&P/BARRA Growth Index - - -*
- ---------------------------------------------------------
</TABLE>
Note: The Mid Capitalization Stock, Small Capitalization Value Stock, and Small
Capitalization Growth Stock Portfolios did not begin operations until March 30,
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 dividends 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 Shares Institutional Plus Shares
- ----------------------------------------------------------------------------------------
<S> <C> <C>
Inception Date: 7/31/90 7/7/97
Net Assets as of 12/31/97: $- $-
Portfolio Expense Ratio for the
</TABLE>
<PAGE> 72
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
Institutional Shares Institutional Plus Shares
- ----------------------------------------------------------------------------------------
<S> <C> <C>
Period Ended 12/31/97: -% -%
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.
Index Trust -- Institutional Shares
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
Total Stock Extended MidCap
Market Market Stock
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Inception Date: 7/7/97 7/7/97 3/30/98
Net Assets as of 12/31/97: - - None
Portfolio Expense Ratio for the
Period Ended 12/31/97: -% -% N/A
Transaction Fee on Purchases: None* 0.25% 0.25%
Newspaper Abbreviation: TotStIst ExtenIst MidCapIst
Vanguard Fund Number: 855 856 864
CUSIP Number: 922908801 922908884 -
Quotron Symbol: VITSX.Q VIEIX.Q -
</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: 7/7/97 3/30/98 3/30/98
Net Assets as of 12/31/97: - None None
Portfolio Expense Ratio for the
Period Ended 12/31/97: - 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 - -
Quotron Symbol: VSCIX.Q - -
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
SmallCap
Growth Growth
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Inception Date: 3/30/98 3/30/98
Net Assets as of 12/31/97: None None
Portfolio Expense Ratio for the
Period Ended 12/31/97: N/A N/A
Transaction Fee on Purchases: None 1.00%
Newspaper Abbreviation: GroIst SmGroIst
Vanguard Fund Number: 868 866
</TABLE>
<PAGE> 73
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
SmallCap
Growth Growth
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
CUSIP Number: - -
Quotron Symbol: - -
</TABLE>
Index Trust -- Investor Shares
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
Total Stock Extended MidCap
Market Market Stock
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Inception Date: 4/27/92 12/21/87 3/30/98
Net Assets as of 12/31/97: $- billion $- billion None
Portfolio Expense Ratio for the
Period Ended 12/31/97: -% -% N/A
Transaction Fee on Purchases: None 0.25% 0.25%
Newspaper Abbreviation: TotSt Exten MidCap
Vanguard Fund Number: 085 098 859
CUSIP Number: 922908306 922908207 -
Quotron Symbol: VTSMX.Q VEXMX.Q -
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
SmallCap SmallCap
Stock Value Value
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Inception Date: 10/3/60 11/2/92 3/30/98
Net Assets as of 12/31/97: $- billion $- billion None
Portfolio Expense Ratio for the
Period Ended 12/31/97: - - 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 -
Quotron Symbol: NAESX.Q VIVAX.Q -
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
SmallCap
Growth Growth
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Inception Date: 11/2/92 3/30/98
Net Assets as of 12/31/97: $- billion None
Portfolio Expense Ratio for the
Period Ended 12/31/97: - N/A
Transaction Fee on Purchases: None 1.00%
Newspaper Abbreviation: Growth SmGrowth
Vanguard Fund Number: 009 861
CUSIP Number: 922908504 -
Quotron Symbol: VIGRX.Q -
</TABLE>
Fund Expenses
The examples below are designed to help you understand the costs you would bear
as an investor in the Funds.
<PAGE> 74
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**: None
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
the 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.
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.
<PAGE> 75
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.
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 -%, or $- 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, Inc.,
which reports on the mutual fund industry.
Fund Operating Expenses
Institutional Index Fund
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
Institutional Shares Institutional Plus Shares
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Management and
Administrative Expenses: - -
Investment Advisory Expenses: None None
12b-1 Marketing Fees: None None
Other Expenses
Marketing and Distribution
Expenses: - -
Miscellaneous Expenses
(e.g., Taxes, Auditing): - -
- --------------------------------------------------------------------------------------------
Total Other Expenses: - -
- --------------------------------------------------------------------------------------------
Total Operating Expenses
(Expense Ratio): - -
============================================================================================
</TABLE>
Index Trust -- Institutional Shares
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
Total Stock Extended MidCap
Market Market Stock
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Management and
Administrative Expenses: - - -
Investment Advisory Expenses: None None None
12b-1 Marketing Fees: None None None
Other Expenses
</TABLE>
<PAGE> 76
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
Total Stock Extended MidCap
Market Market Stock
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Marketing and Distribution
Expenses: - - -
Miscellaneous Expenses
(e.g., Taxes, Auditing): - - -
- --------------------------------------------------------------------------------------------
Total Other Expenses: - - -
- --------------------------------------------------------------------------------------------
Total Operating Expenses
(Expense Ratio): - - -
============================================================================================
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
SmallCap SmallCap
Stock Value Value
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Management and
Administrative Expenses: - - -
Investment Advisory Expenses: None None None
12b-1 Marketing Fees: None None None
Other Expenses
Marketing and Distribution
Expenses: - - -
Miscellaneous Expenses
(e.g., Taxes, Auditing): - - -
- --------------------------------------------------------------------------------------------
Total Other Expenses: - - -
- --------------------------------------------------------------------------------------------
Total Operating Expenses
(Expense Ratio): - - -
============================================================================================
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
SmallCap
Growth Growth
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Management and
Administrative Expenses: - -
Investment Advisory Expenses: None None
12b-1 Marketing Fees: None None
Other Expenses
Marketing and Distribution
Expenses: - -
Miscellaneous Expenses
(e.g., Taxes, Auditing): - -
- --------------------------------------------------------------------------------------------
Total Other Expenses: - -
- --------------------------------------------------------------------------------------------
Total Operating Expenses
(Expense Ratio): - -
============================================================================================
</TABLE>
Index Trust -- Investor Shares
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
Total Stock Extended MidCap
Market Market Stock
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Management and
Administrative Expenses: - - -
Investment Advisory Expenses: None None None
12b-1 Marketing Fees: None None None
Other Expenses
</TABLE>
<PAGE> 77
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
Total Stock Extended MidCap
Market Market Stock
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Marketing and Distribution
Expenses: - - -
Miscellaneous Expenses
(e.g., Taxes, Auditing): - - -
- --------------------------------------------------------------------------------------------
Total Other Expenses: - - -
- --------------------------------------------------------------------------------------------
Total Operating Expenses
(Expense Ratio): - - -
============================================================================================
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
SmallCap SmallCap
Stock Value Value
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Management and
Administrative Expenses: - - -
Investment Advisory Expenses: None None None
12b-1 Marketing Fees: None None None
Other Expenses
Marketing and Distribution
Expenses: - - -
Miscellaneous Expenses
(e.g., Taxes, Auditing): - - -
- --------------------------------------------------------------------------------------------
Total Other Expenses: - - -
- --------------------------------------------------------------------------------------------
Total Operating Expenses
(Expense Ratio): - - -
============================================================================================
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
SmallCap
Growth Growth
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Management and
Administrative Expenses: - -
Investment Advisory Expenses: None None
12b-1 Marketing Fees: None None
Other Expenses
Marketing and Distribution
Expenses: - -
Miscellaneous Expenses
(e.g., Taxes, Auditing): - -
- --------------------------------------------------------------------------------------------
Total Other Expenses: - -
- --------------------------------------------------------------------------------------------
Total Operating Expenses
(Expense Ratio): - -
- --------------------------------------------------------------------------------------------
</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 the
Funds over various periods. These examples assume that (1) the Funds provide a
return of 5% a year, and (2) you redeem your investment at the end of each
period.
<PAGE> 78
Institutional Index Fund
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
1 Year 3 Years 5 Years 10 Years
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Institutional Shares $ - $ - $ - $ -
Institutional Plus Shares $ - $ - $ - $ -
- ----------------------------------------------------------------------------------
</TABLE>
Index Trust -- Institutional Shares
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
Portfolio 1 Year 3 Years 5 Years 10 Years
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total Stock Market $ - $ - $ - $ -
Extended Market - - - -
MidCap Stock - - - -
SmallCap Stock - - - -
Value - - - -
SmallCap Value Stock - - - -
Growth - - - -
SmallCap Growth Stock - - - -
- ----------------------------------------------------------------------------------
</TABLE>
Index Trust -- Investor Shares
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
Portfolio 1 Year 3 Years 5 Years 10 Years
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total Stock Market $ 2 $ 7 $12 $28
Extended Market 8 13 19 37
MidCap Stock 5 11 17 34
SmallCap Stock 8 13 19 37
Value 2 6 11 26
SmallCap Value Stock 10 15 21 39
Growth 2 6 11 26
SmallCap Growth Stock 10 15 21 39
- ----------------------------------------------------------------------------------
</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 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
<PAGE> 79
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).
*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 issuing Institutional Shares
until March 30, 1998.
**The Mid Capitalization Stock, Small Capitalization Value Stock, and Small
Capitalization Growth Stock Portfolios did not begin operations until March 30,
1998.
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 $- per share from investment income
(interest and dividends) and $- 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 $- per share. Of those earnings, $- per share was
returned to shareholders in distributions ($- in dividends, $- in capital
gains). The earnings ($- per share) less distributions ($- per share) resulted
in a share price of $- at the end of the fiscal year, an increase of $- per
share (from $- at the start of the period to $- 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 -% for the year.
As of December 31, 1997, the Fund had $- billion in net assets; an annualized
expense ratio of -% ($- per $1,000 of net assets); and net investment income
amounting to -% of its average net assets. It sold and replaced securities
valued at -% of its total net assets.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
INSTITUTIONAL INDEX FUND - INSTITUTIONAL SHARES
- ------------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
- ---------------------------------------------------------------------------------------------------------- 7/31/90*-
1997 1996 1995 1994 1993 1992 1991 12/31/90
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period - $ 57.93 $43.22 $44.20 $41.45 $39.91 $31.62 $34.10
- ------------------------------------------------------------------------------------------------------------------------
Investment Operations
Net Investment Income - 1.38 1.28 1.23 1.20 1.17 1.16 .52
Net Realized and Unrealized Gain (Loss)
on Investments - 11.90 14.86 (.66) 2.92 1.79 8.35 (2.48)
- ------------------------------------------------------------------------------------------------------------------------
Total from Investment Operations - 13.28 16.14 .57 4.12 2.96 9.51 (1.96)
- ------------------------------------------------------------------------------------------------------------------------
Distributions
Dividends from Net Investment Income - (1.36) (1.27) (1.21) (1.19) (1.17) (1.16) (.52)
Distributions from Realized Capital Gains - (.99) (.16) (.34) (.18) (.25) (.06) --
- ------------------------------------------------------------------------------------------------------------------------
Total Distributions - (2.35) (1.43) (1.55) (1.37) (1.42) (1.22) (.52)
- ------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period - $ 68.86 $57.93 $43.22 $44.20 $41.45 $39.91 $31.62
========================================================================================================================
Total Return - 23.06% 37.60% 1.31% 10.02% 7.54% 30.34% (5.74)%
========================================================================================================================
Ratios/Supplemental Data
Net Assets, End of Period (Millions) - $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% 0.07% 0.07% 0.07% 0.08% 0.09%**
Ratio of Net Investment Income to
Average Net Assets - 2.18% 2.49% 2.80% 2.72% 2.94% 3.15% 3.98%**
Portfolio Turnover Rate - 9% 4%+ 23%+ 4%+ 9%+ 4% 2%
Average Commission Rate Paid - $ .0167 N/A N/A N/A N/A N/A N/A
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Inception date.
<PAGE> 80
**Annualized.
+ Portfolio turnover rates excluding in-kind redemptions were 4%,
19%, 3%, and 6%, respectively.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
INSTITUTIONAL INDEX FUND - INSTITUTIONAL PLUS SHARES
- --------------------------------------------------------------------------------
7/7/97* -
12/31/97
- --------------------------------------------------------------------------------
<S> <C>
Net Asset Value, Beginning of Period -
- --------------------------------------------------------------------------------
Investment Operations
Net Investment Income -
Net Realized and Unrealized Gain (Loss)
on Investments -
- --------------------------------------------------------------------------------
Total from Investment Operations -
- --------------------------------------------------------------------------------
Distributions
Dividends from Net Investment Income -
Distributions from Realized Capital Gains -
- --------------------------------------------------------------------------------
Total Distributions -
- --------------------------------------------------------------------------------
Net Asset Value, End of Period -
================================================================================
Total Return -
================================================================================
Ratios/Supplemental Data
Net Assets, End of Period (Millions) -
Ratio of Total Expenses to Average Net Assets -
Ratio of Net Investment Income to
Average Net Assets -
Portfolio Turnover Rate -
Average Commission Rate Paid -
- --------------------------------------------------------------------------------
</TABLE>
*Inception date.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
TOTAL STOCK MARKET PORTFOLIO - INSTITUTIONAL SHARES
- --------------------------------------------------------------------------------
7/7/97* -
12/31/97
- --------------------------------------------------------------------------------
<S> <C>
Net Asset Value, Beginning of Period -
- --------------------------------------------------------------------------------
Investment Operations
Net Investment Income -
Net Realized and Unrealized Gain (Loss)
on Investments -
- --------------------------------------------------------------------------------
Total from Investment Operations -
- --------------------------------------------------------------------------------
Distributions
Dividends from Net Investment Income -
Distributions from Realized Capital Gains -
- --------------------------------------------------------------------------------
Total Distributions -
- --------------------------------------------------------------------------------
Net Asset Value, End of Period -
================================================================================
Total Return -
================================================================================
Ratios/Supplemental Data
Net Assets, End of Period (Millions) -
Ratio of Total Expenses to Average Net Assets -
Ratio of Net Investment Income to
Average Net Assets -
Portfolio Turnover Rate -
Average Commission Rate Paid -
- --------------------------------------------------------------------------------
</TABLE>
*Inception date.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
EXTENDED MARKET PORTFOLIO - INSTITUTIONAL SHARES
- --------------------------------------------------------------------------------
7/7/97* -
12/31/97
- --------------------------------------------------------------------------------
<S> <C>
Net Asset Value, Beginning of Period -
- --------------------------------------------------------------------------------
Investment Operations
Net Investment Income -
Net Realized and Unrealized Gain (Loss)
on Investments -
- --------------------------------------------------------------------------------
Total from Investment Operations -
- --------------------------------------------------------------------------------
Distributions
</TABLE>
<PAGE> 81
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
EXTENDED MARKET PORTFOLIO - INSTITUTIONAL SHARES
- --------------------------------------------------------------------------------
7/7/97* -
12/31/97
- --------------------------------------------------------------------------------
<S> <C>
Dividends from Net Investment Income -
Distributions from Realized Capital Gains -
- --------------------------------------------------------------------------------
Total Distributions -
- --------------------------------------------------------------------------------
Net Asset Value, End of Period -
================================================================================
Total Return** -
================================================================================
Ratios/Supplemental Data
Net Assets, End of Period (Millions) -
Ratio of Total Expenses to Average Net Assets -
Ratio of Net Investment Income to
Average Net Assets -
Portfolio Turnover Rate -
Average Commission Rate Paid -
- --------------------------------------------------------------------------------
</TABLE>
*Inception date.
**Total return figures do not reflect transaction fees on purchases (0.5% until
November 3, 1997; 0.25% thereafter).
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
SMALL CAPITALIZATION STOCK PORTFOLIO - INSTITUTIONAL SHARES
- ---------------------------------------------------------------------------------------------------
7/7/97* -
12/31/97
- ---------------------------------------------------------------------------------------------------
<S> <C>
Net Asset Value, Beginning of Period -
- ---------------------------------------------------------------------------------------------------
Investment Operations
Net Investment Income -
Net Realized and Unrealized Gain (Loss)
on Investments -
- ---------------------------------------------------------------------------------------------------
Total from Investment Operations -
- ---------------------------------------------------------------------------------------------------
Distributions
Dividends from Net Investment Income -
Distributions from Realized Capital Gains -
- ---------------------------------------------------------------------------------------------------
Total Distributions -
- ---------------------------------------------------------------------------------------------------
Net Asset Value, End of Period -
===================================================================================================
Total Return** -
===================================================================================================
Ratios/Supplemental Data
Net Assets, End of Period (Millions) -
Ratio of Total Expenses to Average Net Assets -
Ratio of Net Investment Income to
Average Net Assets -
Portfolio Turnover Rate -
Average Commission Rate Paid -
- ---------------------------------------------------------------------------------------------------
</TABLE>
*Inception date.
**Total return figures do not reflect the 0.5% transaction fee on purchases.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL STOCK MARKET PORTFOLIO - INVESTOR SHARES
- ---------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 3/16/92* -
- ---------------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993 12/31/92
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period - $15.04 $11.37 $11.69 $10.84 $10.00
- ---------------------------------------------------------------------------------------------------------------------------
Investment Operations
Net Investment Income - .29 .29 .27 .26 .23
Net Realized and Unrealized Gain (Loss) on Investments - 2.84 3.75 (.29) .88 .84
- ---------------------------------------------------------------------------------------------------------------------------
Total from Investment Operations - 3.13 4.04 (.02) 1.14 1.07
- ---------------------------------------------------------------------------------------------------------------------------
Distributions
Dividends from Net Investment Income - (.29) (.28) (.27) (.26) (.23)
Distributions from Realized Capital Gains - (.11) (.09) (.03) (.03) --
- ---------------------------------------------------------------------------------------------------------------------------
Total Distributions - (.40) (.37) (.30) (.29) (.23)
- ---------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period - $17.77 $15.04 $11.37 $11.69 $10.84
===========================================================================================================================
Total Return** - 20.96% 35.79% -0.17% 10.62% 10.41%
===========================================================================================================================
Ratios/Supplemental Data
Net Assets, End of Period (Millions) - $3,531 $1,571 $786 $512 $275
Ratio of Total Expenses to Average Net Assets - 0.22% 0.25% 0.20% 0.20% 0.21%+
Ratio of Net Investment Income to Average Net Assets - 1.86% 2.14% 2.35% 2.31% 2.42%+
Portfolio Turnover Rate - 3% 3% 2% 1% 3%
Average Commission Rate Paid - $.0216 N/A N/A N/A N/A
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 82
* Inception date.
** Total return figures do not reflect the 0.25% transaction fee on purchases
through 1995. 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 1989 1988
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period - $24.07 $18.52 $19.43 $17.35 $15.82 $11.48 $13.92 $11.60 $ 9.99
- ------------------------------------------------------------------------------------------------------------------------------
Investment Operations
Net Investment Income - .34 .30 .28 .23 .24 .25 .30 .26 .34
Net Realized and
Unrealized Gain (Loss)
on Investments - 3.85 5.95 (.62) 2.28 1.72 4.54 (2.25) 2.52 1.63
- ------------------------------------------------------------------------------------------------------------------------------
Total from Investment
Operations - 4.19 6.25 (.34) 2.51 1.96 4.79 (1.95) 2.78 1.97
- ------------------------------------------------------------------------------------------------------------------------------
Distributions
Dividends from Net
Investment Income - (.34) (.30) (.28) (.23) (.25) (.25) (.33) (.23) (.20)
Distributions from
Realized Capital Gains - (1.72) (.40) (.29) (.20) (.18) (.20) (.16) (.23) (.16)
- ------------------------------------------------------------------------------------------------------------------------------
Total Distributions - (2.06) (.70) (.57) (.43) (.43) (.45) (.49) (.46) (.36)
- ------------------------------------------------------------------------------------------------------------------------------
Net Asset Value,
End of Period - $26.20 $24.07 $18.52 $19.43 $17.35 $15.82 $11.48 $13.92 $11.60
==============================================================================================================================
Total Return* - 17.65% 33.80% -1.76% 14.49% 12.47% 41.85% -14.05% 24.10% 19.75%
==============================================================================================================================
Ratios/Supplemental Data
Net Assets, End of
Period (Millions) - $2,099 $1,523 $ 967 $ 928 $ 585 $ 372 $ 179 $ 147 $ 35
Ratio of Total Expenses to
Average Net Assets - 0.25% 0.25% 0.20% 0.20% 0.20% 0.19% 0.23% 0.23% 0.24%
Ratio of Net Investment
Income to Average
Net Assets - 1.42% 1.51% 1.51% 1.48% 1.73% 2.14% 2.68% 2.92% 2.90%
Portfolio Turnover Rate - 22% 15% 19% 13% 9% 11% 9% 14% 26%
Average Commission Rate Paid - $.0235 N/A N/A N/A N/A N/A N/A 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). (Note: The
transaction fee on purchases was reduced to 0.25% as of November 3, 1997.)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
SMALL CAPITALIZATION STOCK PORTFOLIO - INVESTOR SHARES*
- ---------------------------------------------------------------------------------------------------------------
Year Ended
December 31,
- ------------------------------------------------------------------------------------- 2/1/94- 10/1/93-
1997 1996 1995 12/31/94 1/31/94
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period - $18.61 $14.99 $16.24 $16.23
- ---------------------------------------------------------------------------------------------------------------
Investment Operations
Net Investment Income - .26 .24 .20 .05
Net Realized and Unrealized Gain (Loss) on Investments - 3.07 4.06 (.86) .96
- ---------------------------------------------------------------------------------------------------------------
Total from Investment Operations - 3.33 4.30 (.66) 1.01
- ---------------------------------------------------------------------------------------------------------------
Distributions
Dividends from Net Investment Income - (.27) (.23) (.22) (.18)
Distributions from Realized Capital Gains - (1.44) (.45) (.37) (.82)
- ---------------------------------------------------------------------------------------------------------------
Total Distributions - (1.71) (.68) (.59) (1.00)
- ---------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period - $20.23 $18.61 $14.99 $16.24
===============================================================================================================
Total Return** - 18.12% 28.74% -4.00% 6.65%
===============================================================================================================
Ratios/Supplemental Data
Net Assets, End of Period (Millions) - $1,713 $ 971 $ 605 $ 533
Ratio of Total Expenses to Average Net Assets - 0.25% 0.25% 0.17%+ 0.18%+
Ratio of Net Investment Income to Average Net Assets - 1.51% 1.58% 1.50%+ 1.16%+
Portfolio Turnover Rate - 28% 28% 25%+ 5%+
Average Commission Rate Paid - $.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).
<PAGE> 83
+Annualized.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
SMALL CAPITALIZATION STOCK PORTFOLIO - INVESTOR SHARES*
(continued)
- -------------------------------------------------------------------------------------------------------------------------
Year Ended September 30,
- -------------------------------------------------------------------------------------------------------------------------
1993 1992 1991 1990++ 1989 1988
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $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 Period $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 Period (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% 0.65% 0.24%
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.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
VALUE PORTFOLIO - INVESTOR SHARES
- -------------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
- --------------------------------------------------------------------------------------------------------- 11/2/92*-
1997 1996 1995 1994 1993 12/31/92
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period - $14.79 $11.12 $11.74 $10.30 $10.00
- -------------------------------------------------------------------------------------------------------------------------
Investment Operations
Net Investment Income - .37 .41 .38 .38 .07
Net Realized and Unrealized Gain (Loss) on Investments - 2.81 3.66 (.46) 1.50 .30
- -------------------------------------------------------------------------------------------------------------------------
Total from Investment Operations - 3.18 4.07 (.08) 1.88 .37
- -------------------------------------------------------------------------------------------------------------------------
Distributions
Dividends from Net Investment Income - (.38) (.40) (.38) (.38) (.07)
Distributions from Realized Capital Gains - (.57) -- (.16) (.06) --
- -------------------------------------------------------------------------------------------------------------------------
Total Distributions - (.95) (.40) (.54) (.44) (.07)
- -------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period - $17.02 $14.79 $11.12 $11.74 $10.30
=========================================================================================================================
Total Return - 21.86% 36.94% -0.73% 18.35% 3.70%
=========================================================================================================================
Ratios/Supplemental Data
Net Assets, End of Period (Millions) - $1,016 $ 496 $ 297 $ 190 $ 24
Ratio of Total Expenses to Average Net Assets - 0.20% 0.20% 0.20% 0.20% 0%**
Ratio of Net Investment Income to Average Net Assets - 2.54% 3.06% 3.37% 3.26% 3.46%**
Portfolio Turnover Rate - 29% 27% 32% 30% 4%
Average Commission Rate Paid - $.0188 N/A N/A N/A N/A
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Inception date.
** Annualized.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
GROWTH PORTFOLIO - INVESTOR SHARES
- -------------------------------------------------------------------------------------------------------------------------
Year Ended December 31,
- --------------------------------------------------------------------------------------------------------- 11/2/92*-
1997 1996 1995 1994 1993 12/31/92
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of Period - $13.97 $10.28 $10.20 $10.26 $10.00
- -------------------------------------------------------------------------------------------------------------------------
Investment Operations
Net Investment Income - .22 .21 .21 .21 .06
Net Realized and Unrealized Gain (Loss) on Investments - 3.07 3.68 .08 (.06) .26
- -------------------------------------------------------------------------------------------------------------------------
Total from Investment Operations - 3.29 3.89 .29 .15 .32
- -------------------------------------------------------------------------------------------------------------------------
Distributions
Dividends from Net Investment Income - (.22) (.20) (.21) (.21) (.06)
Distributions from Realized Capital Gains - (.14) -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 84
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Total Distributions - (.36) (.20) (.21) (.21) (.06)
- -------------------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period - $16.90 $13.97 $10.28 $10.20 $10.26
=========================================================================================================================
Total Return - 23.74% 38.06% 2.89% 1.53% 3.19%
=========================================================================================================================
Ratios/Supplemental Data
Net Assets, End of Period (Millions) - $ 787 $ 271 $ 86 $ 51 $ 21
Ratio of Total Expenses to Average Net Assets - 0.20% 0.20% 0.20% 0.20% 0%**
Ratio of Net Investment Income to Average Net Assets - 1.57% 1.71% 2.08% 2.10% 2.85%**
Portfolio Turnover Rate - 29% 24% 28% 36% 2%
Average Commission Rate Paid - $.0183 N/A N/A N/A N/A
- -------------------------------------------------------------------------------------------------------------------------
</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. 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 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 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.
The Funds' Objective
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.
Indexes
An index is a group of securities whose overall performance is used as a
standard to measure investment performance.
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.
<PAGE> 85
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.
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/BARRA 600 Value Index, which includes those
stocks of the S&P SmallCap 600 Index that are often considered out of favor with
investors.
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/BARRA 600 Growth Index, which includes
those stocks of the S&P SmallCap 600 Index with higher-than-average
price/earnings and price/book ratios.
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,
while growth funds 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.
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.
<PAGE> 86
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.
- - 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.
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.
- - 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.
Neither 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.
<PAGE> 87
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.
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 to the Funds pursues the
objective of matching the performance of specific stock 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.
Market Exposure
To track their target indexes as closely as possible, the Funds attempt to
remain fully invested in stocks.
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.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
U.S. Stock Market Returns (1926 - 1996)
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1 Year 5 Years 10 Years 20 Years
- --------------------------------------------------------------------------------
Best 53.9% 23.9% 20.1% 16.9%
</TABLE>
<PAGE> 88
<TABLE>
<S> <C> <C> <C> <C>
Worst -43.3 -12.5 -0.9 3.1
Average 12.7 10.4 10.8 10.8
- --------------------------------------------------------------------------------
</TABLE>
The table covers all of the 1-, 5-, 10-, and 20-year periods from 1926
through 1996. For example, while the average return on stocks for all of the
5-year periods was 10.4%, 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 -- 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, the S&P/BARRA 600 Value Index, and the
S&P/BARRA 600 Growth Index (the target indexes for the Value, Growth, Small
Capitalization Value Stock, and Small Capitalization Growth Stock Portfolios,
respectively) -- 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 S&P/BARRA 600 Value
Index have been less volatile than the stocks found in the broader S&P 500
Index; stocks of the S&P/BARRA Growth Index and the S&P/BARRA 600 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.
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 billion. Mid-cap funds
hold stocks of companies with a median market value between $1 billion and $7
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.
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.
Active Versus Passive Management
<PAGE> 89
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 7,300 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.
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 March 30,
1998. (Note: Numbers for the Fund apply to both Institutional and Institutional
Plus Shares; numbers for the 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 March 30, 1998.)
Institutional Index Fund
Number of Number of Stocks
Stocks Held in Target Index
- -
Index Trust
<PAGE> 90
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Number of Number of Stocks
Portfolio Stocks Held in Target Index
- --------------------------------------------------------------------------------
<S> <C> <C>
Total Stock Market - -
Extended Market - -
MidCap Stock N/A -
SmallCap Stock - -
Value - -
SmallCap Value Stock N/A -
Growth - -
SmallCap Growth Stock N/A -
- --------------------------------------------------------------------------------
</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 March 30, 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 March 30, 1998.)
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.
Institutional Index Fund Total Stock Market Portfolio
1. - 1. General Electric Co.
2. - 2. The Coca-Cola Co.
3. - 3. Exxon Corp.
4. - 4. Microsoft Corp.
5. - 5. Merck & Co., Inc.
6. - 6. Intel Corp.
7. - 7. Philip Morris Cos., Inc.
8. - 8. Procter & Gamble Co.
9. - 9. International Business
10. - Machines Corp.
-% of the Portfolio's total net assets. 10. Johnson & Johnson
14% of the Portfolio's total
net assets.
Extended Market Portfolio SmallCap Stock Portfolio
1. Berkshire Hathaway 1. Keystone Financial, Inc.
2. Electronic Data Systems 2. Stratus Computer, Inc.
3. Rhone-Poulenc Rorer, Inc. 3. Dauphin Deposit Bank
4. Carnival Corp. Class A & Trust
5. Safeway, Inc. 4. Federal-Mogul Corp.
6. Franklin Resources Corp. 5. United Carolina Bancshare
<PAGE> 91
7. RJR Nabisco Holdings Corp. 6. Citrix Systems, Inc.
8. The Coca-Cola Co. 7. Hawaiian Electric
9. Republic Industries, Inc. Industries, Inc.
10. Washington Mutual, Inc. 8. Pier 1 Imports, Inc.
6% of the Portfolio's total net assets. 9. AmeriSource Health Corp.
10. CCB Financial Corp.
2% 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. Hewlett-Packard Co. 6. Philip Morris Cos., Inc.
6. Citicorp 7. Procter & Gamble Co.
7. Mobil Corp. 8. Johnson & Johnson
8. The Walt Disney Co. 9. Bristol-Myers Squibb Co.
9. Chevron Corp. 10. Wal-Mart Stores, Inc.
10. NationsBank Corp. 35% of the Portfolio's total
22% of the Portfolio's total net assets. net assets.
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 150 stocks, has far more of its assets invested in its top ten holdings
(35%) than the Total Stock Market Portfolio (14%), which seeks to track a much
larger universe of more than 7,300 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 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 1% to 3% 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.)
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
<PAGE> 92
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 20%; for all domestic stock funds, the
average turnover rate is 79%.
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.
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.
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.
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 the Funds. 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
required on such contracts, and the value of all such contracts in which either
of the Funds acquires an interest cannot exceed 20% of the Fund's total assets.
The reasons for which the Funds may use 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 by buying futures instead of actual
stocks when futures are cheaper.
<PAGE> 93
- - To add value to the Funds by buying futures instead of actual stocks when
futures are cheaper.
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.
Investment Limitations
To reduce risk and maintain diversification, the Funds have adopted limits on
some of their investment policies. Specifically, none of the Funds will:
- - Invest more than 25% of its assets in any one industry.
- - Borrow money in an amount that is more than 15% of its assets. If borrowing
exceeds 5%, the Funds will not make any additional investments.
With respect to 75% of its assets, none of the Funds will:
- - Invest more than 5% in the outstanding securities of any one company.
- - Buy more than 10% of the outstanding voting securities of any company.
The limitations listed in this prospectus and in the Statements of Additional
Information are fundamental and may be changed only by approval of a majority of
the Funds' shareholders.
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.
Average Annual Total Returns -- Institutional Shares
Periods Ended December 31, 1997
1 Year 5 Years 10 Years
- -------------------------------------------------------------------------------
Institutional Index Fund --
Institutional Shares -% -% -%*
- -------------------------------------------------------------------------------
Institutional Index Fund --
Institutional Plus Shares -* -- --
- -------------------------------------------------------------------------------
Total Stock Market -* -- --
Wilshire 5000 Index -* -- --
- -------------------------------------------------------------------------------
Extended Market** -* -- --
Wilshire 4500 Index -* -- --
- -------------------------------------------------------------------------------
SmallCap Stock** -* -- --
Russell 2000 Index -* -- --
- -------------------------------------------------------------------------------
<PAGE> 94
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 March 30, 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
1 Year 5 Years 10 Years
- -------------------------------------------------------------------------------
Total Stock Market -% -% -%*
Wilshire 5000 Index - - -*
- -------------------------------------------------------------------------------
Extended Market** - - -
Wilshire 4500 Index - - -
- -------------------------------------------------------------------------------
SmallCap Stock** - - -
Russell 2000 Index - - -
- -------------------------------------------------------------------------------
Value - - -*
S&P/BARRA Value Index - - -*
- -------------------------------------------------------------------------------
Growth - - -*
S&P/BARRA Growth Index - - -*
- -------------------------------------------------------------------------------
Note: The Mid Capitalization Stock, Small Capitalization Value Stock, and Small
Capitalization Growth Stock Portfolios did not begin operations until March 30,
1998.
* Since inception; see pages 2 and 3.
** Does not include transaction fee; see pages 2 and 3.
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.
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 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 for 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 March 30, 1998; the Value and Growth Portfolios did not begin
offering Institutional Shares until March 30, 1998.
Share Price
The share price of the Funds, called the net asset value, is calculated each
business day after the close of trading (generally 4 p.m. Eastern time)
<PAGE> 95
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:
Net Asset Value = Total Assets - Liabilities
----------------------------
Number of Shares Outstanding
The daily net asset value, or NAV, 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, ExtenIst, MidCapIst, SmCapIst, ValIst, SmValIst,
GroIst, and SmGroIst (for Institutional Shares); and TotSt, Exten, MidCap,
SmCap, Value, SmValue, Growth, and SmGrowth (for Investor Shares).
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 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 gain distributions at some other time
during the year. Keep in mind that index portfolios tend to provide less in
capital gain distributions than actively managed funds generally do.
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 gain 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.
You can receive distributions of income or capital gains in cash, or you may
have them automatically reinvested in more shares of the Funds. If you choose to
receive distributions in cash, and the postal or other delivery service is
unable to deliver checks to your address of record, we will change the
distribution option so that all distributions are automatically reinvested in
additional shares. We will not pay interest on uncashed distribution checks.
Both dividend and capital gain distributions -- whether received in cash or
reinvested in additional shares -- are subject to federal (and possibly state
and local) income taxes, no
<PAGE> 96
matter how long you have held the shares in the Funds. You should consult your
own tax adviser about other tax consequences of an investment in the Funds.
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 $310 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.
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.
Investment Adviser
Vanguard Core Management Group, P.O. Box 2600, Valley Forge, PA 19482, provides
advisory services to the Funds.
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 $ in
investment advisory expenses. (The Total Stock Market Portfolio paid $-, the
Extended Market Portfolio paid $-, and the Small Capitalization Stock Portfolio
paid $-.) For the fiscal year ended December 31, 1997, the Investor Shares of
the Portfolios paid a total of $ in investment advisory expenses.
(The Stock Market Portfolio paid $-, the Extended Market Portfolio paid $-, the
Small Capitalization Stock Portfolio paid $-, the Value Portfolio paid $-, and
the Growth Portfolio paid $-.) (Note: the Mid Capitalization Stock, Small
Capitalization Value Stock, and Small Capitalization Growth Stock Portfolios did
not begin operations until March 30, 1998; the
<PAGE> 97
Value and Growth Portfolios did not begin offering Institutional Shares until
March 30, 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.
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 $__ 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.
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.
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 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 the Funds shares 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 the 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. "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.
<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 large enough to have a
negative impact on the Funds, or a series of movements between Vanguard funds.
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 Participant Services, 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.
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. There will be no portfolio transaction fee
imposed on share class conversions.
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 the 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
--
<PAGE> 99
INVESTING WITH VANGUARD (continued)
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.
ACCESSING FUND INFORMATION BY COMPUTER
VANGUARD ON THE WORLD WIDE WEB
www.vanguard.com
Use your personal computer to visit Vanguard's education-oriented website, which
provides timely news and information about Vanguard 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.
--
<PAGE> 100
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 Gain 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> 101
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: 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
(C) 1998 Vanguard Marketing
Corporation, Distributor
</TABLE>
I040N
<PAGE> 102
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
MARCH 30, 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 March 30, 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-5
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-11
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
<PAGE> 103
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
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exchange minimums. Futures contracts are customarily purchased and sold on
deposits which may range upward from less than 5% of the value of the contract
being traded.
After a futures contract position is opened, the value of the contract is
marked to market daily. If the futures contract price changes to the extent that
the margin on deposit does not satisfy margin requirements, payment of
additional "variation" margin will be required. Conversely, change in the
contract value may reduce the required margin, resulting in a repayment of
excess margin to the contract holder. Variation margin payments are made to and
from the futures broker for as long as the contract remains open. A Portfolio of
the Trust expects to earn interest income on its margin deposits.
Traders in futures contracts may be broadly classified as either "hedgers"
or "speculators." Hedgers use the futures markets primarily to offset
unfavorable changes in the value of securities otherwise held for investment
purposes or expected to be acquired by them. Speculators are less inclined to
own the securities underlying the futures contracts which they trade, and use
futures contracts with the expectation of realizing profits from fluctuations in
the prices of underlying securities. The Trust's Portfolios intend to use
futures contracts only for bona fide hedging purposes.
Regulations of the CFTC applicable to the Trust require that all of its
futures transactions constitute bona fide hedging transactions 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 against a
decrease in the price of securities it intends to sell or purchase contracts to
protect against an increase in the price of securities it intends to purchase.
As evidence of this hedging interest, the Portfolio expects that approximately
75% of its futures contract purchases will be "completed;" that is, equivalent
amounts of related securities will have been purchased or are being purchased by
the Portfolio upon sale of open futures contracts.
Although techniques other than the sale and purchase of futures contracts
could be used to control the Portfolio's exposure to market fluctuations, the
use of futures contracts may be a more effective means of hedging this exposure.
While a Portfolio will incur commission expenses in both opening and closing out
futures positions, these costs are lower than transaction costs incurred in the
purchase and sale of the underlying securities.
RESTRICTIONS ON THE USE OF FUTURES CONTRACTS. A Portfolio will not enter
into futures contract transactions to the extent that, immediately thereafter,
the sum of its initial margin deposits on open contracts exceeds 5% of the
market value of the Portfolio's total assets. In addition, a Portfolio will not
enter into futures contracts to the extent that its outstanding obligations to
purchase securities under these contracts would exceed 20% of the Portfolio's
total assets.
RISK FACTORS IN FUTURES TRANSACTIONS. Positions in futures contracts may
be closed out only on an Exchange which provides a secondary market for such
futures. However, there can be no assurance that a liquid secondary market will
exist for any particular futures contract at any specific time. Thus, it may not
be possible to close a futures position. In the event of adverse price
movements, the Portfolio would continue to be required to make daily cash
payments to maintain its required margin. In such situations, if the Portfolio
has insufficient cash, it may have to sell portfolio securities to meet daily
margin requirements at a time when it may be disadvantageous to do so. In
addition, the Portfolio may be required to make delivery of the instruments
underlying futures contracts it holds. The inability to close options and
futures positions also could have an adverse impact on the ability to
effectively hedge.
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. In addition, gains realized on
the sale or other disposition of securities held for less than three months must
be limited to less than 30% of the Portfolio's annual gross income. Net gain
realized from the closing out of futures contracts will be considered gain from
the sale of securities and therefore be qualifying income for purposes of the
90% requirement. In order to avoid realizing excessive gains on securities held
less than three months, the Portfolio may be required to defer the closing out
of futures contracts beyond the time when it would otherwise be advantageous to
do so. It is anticipated that unrealized gains on futures contracts, which have
been open for less than three months as of the end of the Portfolio's fiscal
year and which are recognized for tax purposes, will not be considered gains on
sales of securities held less than three months for the purpose of the 30% test.
Each Portfolio will distribute to shareholders annually any net capital
gains which have been recognized for federal income tax purposes (including
unrealized gains at the end of the Portfolio's fiscal year) on futures
transactions. Such distributions will be combined with distributions of capital
gains realized on the Portfolio's other investments and shareholders will be
advised on the nature of the distributions.
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INVESTMENT LIMITATIONS
The following restrictions and fundamental policies cannot be changed
without approval of the holders of a majority of the outstanding shares of each
Portfolio (as defined in the Investment Company Act of 1940). Each Portfolio may
not under any circumstances:
1) change its investment objective, which is to provide investment results
that correspond to the performance of a particular stock index as set
forth in (2) below;
2) change its investment policy, which, 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;
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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 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.
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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.
YIELD AND TOTAL RETURN
The annualized yield of the 500 Portfolio for the 30-day period ended
December 31, 1997 was +--%. The annualized yield of the Extended Market
Portfolio's Investor Shares for the 30-day period ended December 31, 1997 was
+--%. The annualized yield of the Total Stock Market Portfolio's Investor Shares
for the 30-day period ended December 31, 1997 was +--%. The annualized yield of
the Value Portfolio for the 30-day period ended December 31, 1997 was +--%. The
annualized yield of the Growth Portfolio for the 30-day period ended December
31, 1997 was +--%. The annualized yield of the Small Capitalization Stock
Portfolio's Investor Shares for the 30-day period ended December 31, 1997 was
+--%.
The average annual total return of the 500 Portfolio* for the one-, five-,
and ten-year periods ended December 31, 1997 was +--%, +--% and +--%,
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 +--%, +--%, and +--%, 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 +--%, +--%, and +--%(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
+--%, +--%, and +--%(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 +--%, +--%, and +--%(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 +--%, +--%, and +--%, 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 March 30, 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
March 30, 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, Chairman and Trustee*
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, President, Chief Executive
Officer & Trustee*
President, 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, 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, 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, Trustee
President Emeritus of The Brookings Institution; Director of American
Express Bank, Ltd., The St. Paul Companies, Inc., and National Steel
Corporation.
BURTON G. MALKIEL, Trustee
Chemical Bank Chairman's Professor of Economics, Princeton University;
Director of Prudential Insurance Co. of America, Amdahl Corporation, Baker
Fentress & Co., The Jeffrey Co., and Southern New England
Telecommunications Company.
ALFRED M. RANKIN, JR., 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, 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., 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, 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, Secretary*
Managing Director and Secretary of The Vanguard Group, Inc.; Secretary of
each of the investment companies in The Vanguard Group.
RICHARD F. HYLAND, Treasurer*
Treasurer of The Vanguard Group, Inc. and of each of the investment
companies in The Vanguard Group.
KAREN E. WEST, Controller*
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 $-- to Vanguard,
representing --% 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 $--.
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 $ -- 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-9
<PAGE> 111
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 Insured Tax-Free Fund, Ohio Tax-Free Fund, Pennsylvania
Tax-Free Fund, a portion of the assets of Vanguard/Windsor II, a portion of
Vanguard/Morgan Growth Fund and several indexed separate accounts. These
services are provided on an at-cost basis from money management staff employed
directly by Vanguard. The compensation and other expenses of this staff are paid
by the Funds utilizing these services. During the fiscal year ended December 31,
1995, 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 $ --
Extended Market Portfolio.................................... $ 47,000 $ 27,000 --
Total Stock Market Portfolio................................. $ 47,000 $ 27,000 --
Small Capitalization Stock Portfolio......................... $ 47,000 $ 29,000 --
Value Portfolio.............................................. $ 24,000 $ 12,000 --
Growth Portfolio............................................. $ 24,000 $ 12,000 --
</TABLE>
REMUNERATION OF TRUSTEES AND OFFICERS. The Trust pays each Trustee, who is
not also an Officer, an annual fee plus travel and other expenses incurred in
attending Board meetings. The Trust's Officers and employees are paid by
Vanguard which, in turn, is reimbursed by the Trust and each other Fund in the
Group, for its proportionate share of Officers' and employees' salaries and
retirement benefits. For the fiscal year ended December 31, 1997, the Fund's
proportionate share of remuneration for all Officers as a group was
approximately $--, and its proportionate share of the amounts contributed to the
retirement plans of all Officers as a group was approximately $--.
During the fiscal year ended December 31, 1997, the Trust paid
approximately $-- in Trustees' fees and expenses.
Upon retirement, Trustees who are not Officers receive an annual fee of
$1,000 for each year of service on the Board up to a maximum of $15,000. Under
its retirement plan, Vanguard contributes annually an amount equal to 10% of
each Officer's annual compensation plus 7% of that part of the Officer's
compensation during the year, if any, that exceeds the Social Security Taxable
Wage Base then in effect.
B-10
<PAGE> 112
The following table provides detailed information with respect to the
amounts paid or accrued for the Trustees and Officers of the Trust for whom the
Trust's proportionate share of remuneration exceeded $60,000 for the fiscal year
ended December 31, 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) $ -- $-- -- --
John J. Brennan(1) $ -- $-- -- --
Barbara Barnes Hauptfuhrer $ -- $-- $-- $--
Robert E. Cawthorn $ -- $-- $-- $--
Bruce K. MacLaury $ -- $-- $-- $--
Burton G. Malkiel $ -- $-- $-- $--
Alfred M. Rankin, Jr. $ -- $-- $-- $--
John C. Sawhill $ -- $-- $-- $--
James O. Welch, Jr. $ -- $-- $-- $--
J. Lawrence Wilson $ -- $-- $-- $--
NAMES OF OTHER OFFICERS
- ---------------------
Raymond J. Klapinsky,
Secretary $ -- $-- -- --
</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.
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 $--, 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.
B-11
<PAGE> 113
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 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-12
<PAGE> 114
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/BARRA 600 VALUE INDEX -- contains stocks of the S&P SmallCap
600 Index which have a lower than average price-to-book ratio.
STANDARD & POOR'S/BARRA 600 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-13
<PAGE> 115
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 MUTUAL FUND LONG (10+) GOVERNMENT/CORPORATE INDEX -- is a
market-weighted index that contains individually priced U.S. Treasury, agency,
and corporate securities rated BBB- or better with maturities greater than 10
years. The index has a market value of over $900 billion.
LEHMAN CORPORATE (BAA) BOND INDEX -- all publicly offered fixed-rate,
nonconvertible domestic corporate bonds rated Baa by Moody's, with a maturity
longer than 1 year and with more than $25 million outstanding. This index
includes over 1,000 issues.
LEHMAN BROTHERS LONG-TERM CORPORATE BOND INDEX -- is a subset of the Lehman
Corporate Bond Index covering all corporate, publicly issued, fixed-rate
nonconvertible U.S. debt issues rated at least Baa, with at least $50 million
principal outstanding and maturity greater than 10 years.
FINANCIAL STATEMENTS
The Trust's Financial Statements for the year ended December 31, 1997,
including the financial highlights for each of the respective periods presented,
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 March 30, 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 March 30, 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-14
<PAGE> 116
PART C
VANGUARD INDEX TRUST
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(a) FINANCIAL STATEMENTS
The Registrant's Financial Statements for the year ended December 31, 1997,
including the financial highlights for each of the respective periods presented,
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.
+ To be filed by amendment.
<PAGE> 117
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.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES
As of December 31, 1997 there were -- shareholders of the 500 Portfolio, --
shareholders of the Extended Market Portfolio, -- shareholders of the Total
Stock Market Portfolio, -- shareholders of the Value Portfolio, -- shareholders
of the Growth Portfolio and -- 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> 118
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 (a) 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 9th day of January,
1998.
VANGUARD INDEX TRUST
By:
-----------------------------------
John J. Brennan, President &
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, Chairman of the Board and Trustee
January 9, 1998
BY: (Raymond J. Klapinsky)*
John J. Brennan, President, Trustee and Chief Executive Officer
January 9, 1998
BY: (Raymond J. Klapinsky)*
Robert E. Cawthorn, Trustee
January 9, 1998
BY: (Raymond J. Klapinsky)*
Barbara B. Hauptfuhrer, Trustee
January 9, 1998
BY: (Raymond J. Klapinsky)*
Bruce K. MacLaury, Trustee
January 9, 1998
BY: (Raymond J. Klapinsky)*
Burton G. Malkiel, Trustee
January 9, 1998
BY: (Raymond J. Klapinsky)*
Alfred M. Rankin, Jr., Trustee
January 9, 1998
BY: (Raymond J. Klapinsky)*
John C. Sawhill, Trustee
January 9, 1998
BY: (Raymond J. Klapinsky)*
James O. Welch, Jr., Trustee
January 9, 1998
BY: (Raymond J. Klapinsky)*
J. Lawrence Wilson, Trustee
January 9, 1998
BY: (Raymond J. Klapinsky)*
Richard F. Hyland, Treasurer and Principal
Financial Officer and Accounting Officer
January 9, 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> 119
INDEX TO EXHIBITS
<TABLE>
<S> <C>
Schedule for Computation of Performance Quotations................................... EX-99.B16
Amended and Restated Multiple Class Plan Pursuant to Rule 18f-3 Under the Investment
Company Act of 1940................................................................ EX-99.B18
Financial Data Schedules............................................................. EX-27
</TABLE>
<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)
n
P (1 + T) = 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 = +--%
N = 1
ERV = $--*
Five Year
P = $1,000
T = +--%
N = 5
ERV = $--*
Ten Year
P = $1,000
T = +--%
N = 10
ERV = $--*
</TABLE>
*Not adjusted for $10 account maintenance fee.
2. YIELD (30 Days Ended December 31, 1997)
6
Yield = 2[(a - b +1) -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 = $--
b = $--
c = --
d = $--
Yield = --%
</TABLE>
<PAGE> 2
VANGUARD INDEX TRUST -- EXTENDED MARKET PORTFOLIO
1. Average Annual Total Return (As of December 31, 1997)
n
P (1 + T) = 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 = +--%
N = 1
ERV = $--*
Five Year
-------
P = $1,000
T = +--%
N = 5
ERV = $--*
Ten Year
-------
P = $1,000
T = +--%
N = 10
ERV = $--*
</TABLE>
*Not adjusted for $10 account maintenance fee and .25% portfolio transaction
fee.
2. YIELD (30 Days Ended December 31, 1997)
6
Yield = 2[(a - b +1) -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 = $--
b = $--
c = --
d = $--
Yield = --%
</TABLE>
<PAGE> 3
VANGUARD INDEX TRUST -- TOTAL STOCK MARKET PORTFOLIO
1. Average Annual Total Return (As of December 31, 1997)
n
P (1 + T) = 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 = +--%
N = 1
ERV = $--**
Five Year
-------
P = $1,000
T = +--%
N = 5
ERV = $--**
Ten Year
-------
P = $1,000
T = +--%
N = *
ERV = $--**
</TABLE>
* Since inception March 16, 1992.
** Not adjusted for $10 account maintenance fee.
2. YIELD (30 Days Ended December 31, 1997)
6
Yield = 2[(a - b +1) -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 = $--
b = $--
c = --
d = $--
Yield = --%
</TABLE>
<PAGE> 4
VANGUARD INDEX TRUST -- VALUE PORTFOLIO
1. Average Annual Total Return (As of December 31, 1997)
n
P (1 + T) = 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 = +--%
N = 1
ERV = $--**
Five Year
-------
P = $1,000
T = +--%
N = 5
ERV = $--**
Ten Year
-------
P = $1,000
T = +--%
N = *
ERV = $--**
</TABLE>
* Since inception November 2, 1992.
** Not adjusted for $10 account maintenance fee.
2. YIELD (30 Days Ended December 31, 1997)
6
Yield = 2[(a - b +1) -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 = $--
b = $--
c = --
d = $--
Yield = --%
</TABLE>
<PAGE> 5
VANGUARD INDEX TRUST -- GROWTH PORTFOLIO
1. Average Annual Total Return (As of December 31, 1997)
n
P (1 + T) = 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 = +--%
N = 1
ERV = $--**
Five Year
-------
P = $1,000
T = +--%
N = 5
ERV = $--**
Ten Year
-------
P = $1,000
T = +--%
N = *
ERV = $--**
</TABLE>
* Since inception November 2, 1992.
** Not adjusted for $10 account maintenance fee.
2. YIELD (30 Days Ended December 31, 1997)
6
Yield = 2[(a - b +1) -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 = $--
b = $--
c = --
d = $--
Yield = --%
</TABLE>
<PAGE> 6
SMALL CAPITALIZATION STOCK PORTFOLIO
(FORMERLY VANGUARD SMALL CAPITALIZATION STOCK FUND, INC.)
1. Average Annual Total Return (As of December 31, 1997)
n
P (1 + T) = 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 = +--%
N = 1
ERV = $--*
Five Year
-------
P = $1,000
T = +--%
N = 5
ERV = $--*
Ten Year
-------
P = $1,000
T = +--%
N = 10
ERV = $--*
</TABLE>
*Not adjusted for $10 account maintenance fee and .5% portfolio transaction
fee.
2. YIELD (30 Days Ended December 31, 1997)
6
Yield = 2[(a - b +1) -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 = $--
b = $--
c = --
d = $--
Yield = --%
</TABLE>
<PAGE> 1
EX-99.B18
VANGUARD INDEX TRUST
AMENDED AND RESTATED MULTIPLE CLASS PLAN PURSUANT TO RULE 18f-3
UNDER THE INVESTMENT COMPANY ACT OF 1940
This Amended and Restated Multiple Class Plan ("Plan") has been adopted
by a majority of the Board of Trustees of Vanguard Index Trust (the "Fund"),
including a majority of the Trustees who are not interested persons of the Fund.
This Plan replaces the Multiple Class Plan previously adopted by the Fund's
Board of Trustees on May 16, 1997. Provisions of this Plan relating to the
Fund's Mid Capitalization Stock, Small Capitalization Value Stock and Small
Capitalization Growth Stock Portfolios will take effect upon the effectiveness
of these new Portfolios.
I. SHARE CLASSES
Each Multiple Class Portfolio of the Fund will offer two classes of
shares as follows:
A. TOTAL STOCK MARKET PORTFOLIO
1. Total Stock Market Portfolio Investor Shares
(referred to herein as "Class A Shares"); and
2. Total Stock Market Portfolio Institutional Shares
(referred to herein as "Class C Shares").
B. EXTENDED MARKET PORTFOLIO
1. Extended Market Portfolio Investor Shares
(referred to herein as "Class A Shares"); and
2. Extended Market Portfolio Institutional Shares
(referred to herein as "Class C Shares").
C. SMALL CAPITALIZATION STOCK PORTFOLIO
1. Small Capitalization Stock Portfolio Investor Shares
(referred to herein as "Class A Shares"); and
2. Small Capitalization Stock Portfolio Institutional
Shares (referred to herein as "Class C Shares").
D. VALUE PORTFOLIO
1. Value Portfolio Investor Shares (referred to herein
as "Class A Shares"); and
2. Value Portfolio Institutional Shares (referred to
herein as "Class C Shares").
E. GROWTH PORTFOLIO
1. Growth Portfolio Investor Shares (referred to herein
as "Class A Shares"); and
2. Growth Portfolio Institutional Shares (referred to
herein as "Class C Shares").
F. MID CAPITALIZATION STOCK PORTFOLIO
1. Mid Capitalization Stock Portfolio Investor Shares
(referred to herein as "Class A Shares"); and
2. Mid Capitalization Stock Portfolio Institutional
Shares (referred to herein as "Class C Shares").
G. SMALL CAPITALIZATION VALUE STOCK PORTFOLIO
1. Small Capitalization Value Stock Portfolio Investor
Shares (referred to herein as "Class A Shares"); and
2. Small Capitalization Value Stock Portfolio
Institutional Shares (referred to herein as "Class C
Shares").
H. SMALL CAPITALIZATION GROWTH STOCK PORTFOLIO
1. Small Capitalization Growth Stock Portfolio Investor
Shares (referred to herein as "Class A Shares"); and
2. Small Capitalization Growth Stock Portfolio
Institutional Shares (referred to herein as "Class C
Shares").
II. DISTRIBUTION ARRANGEMENTS
For each Multiple Class Portfolio, the distribution arrangements will
differ between Class A Shares and Class C Shares as follows:
A. CLASS A SHARES
Class A Shares will be available to all investors, but will be
marketed primarily to individual investors and smaller institutional investors.
Class A Shares also will be marketed to
<PAGE> 2
employee benefit plans that require participant recordkeeping services provided
by The Vanguard Group, Inc. ("Vanguard"). At present, the minimum initial
investment requirement for Class A Shares is expected to be $3,000 for
non-retirement accounts and $1,000 for most retirement accounts and Uniform
Gifts/Transfers to Minors Act accounts.
B. CLASS C SHARES
Class C Shares will be available only to investors who, due to
the substantial size of their investments, are expected to afford the Fund
certain economies of scale with respect to the servicing of their accounts. It
is expected that most investors eligible for Class C Shares will be
institutional entities, such as employee benefit plans, foundations, endowments,
trusts, bank nominees and corporations. At present, the minimum initial
investment requirement for Class C Shares is expected to be at least $10
million.
III. SERVICE ARRANGEMENTS
Service arrangements will differ between Class A Shares and Class C
Shares of each Multiple Class Portfolio as follows:
A. CLASS A SHARES
Class A Shares will be serviced primarily through Vanguard's
Individual Investor Services Group. Employee benefit plan investors utilizing
Vanguard's participant recordkeeping system (VISTA) will be serviced through
Vanguard's Institutional Investor Services Group. Due to the lower minimum
initial investment requirement, it is expected that Class A Shares will be held
by more investors than Class C Shares. It is anticipated that the aggregate
amount of account-based services(1) that are provided to Class A Shares will
materially exceed the amount of such services for Class C Shares.
B. CLASS C SHARES
Class C Shares will be serviced primarily through Vanguard's
Institutional Investor Services Group. Due to the higher minimum initial
investment requirement, it is expected that Class C Shares will be held by fewer
investors than Class A Shares. It is anticipated that the aggregate amount of
account-based services that are provided to Class C Shares will be materially
less than the amount of such services provided to Class A Shares.
IV. EXCHANGES AND CONVERSIONS
A. EXCHANGES
1. CLASS A SHARES
Class A Shares may be exchanged for Class C Shares of
the same Multiple Class Portfolio provided that all
purchase
- --------
(1) "Account-based services" for purposes of the Fund's Multiple Class
Plan are defined as services provided by Vanguard on a per account basis to the
Fund. Such services include transaction processing, shareholder recordkeeping
and the mailing of shareholder reports, proxy materials and other items.
-2-
<PAGE> 3
eligibility requirements for Class C Shares are
satisfied by the holder of Class A Shares. Class A
Shares of each Multiple Class Portfolio may be
exchanged into a class of shares of one or more of
the other investment companies for which Vanguard
provides administrative services (including any other
Multiple Class Portfolio)("Vanguard Fund"); provided
that (a) exchanges into the class of shares of the
Vanguard Fund are permitted by such Vanguard Fund;
(b) all purchase eligibility requirements for such
class of shares of the Vanguard Fund are satisfied by
the investor; and (c) any such exchanges are
permitted by the Investment Company Act of 1940, as
amended ("1940 Act") and the rules, regulations and
interpretations thereunder.
2. CLASS C SHARES
Class C Shares of one Multiple Class Portfolio may be
exchanged for Class A Shares of the same Multiple
Class Portfolio provided that all purchase
eligibility requirements for Class A Shares are
satisfied by the holder of Class C Shares. Class C
Shares of each Multiple Class Portfolio may be
exchanged into a class of shares of a Vanguard Fund;
provided that (a) exchanges into the class of shares
of the Vanguard Fund are permitted by such Vanguard
Fund; (b) all purchase eligibility requirements
(including the then-applicable minimum initial
investment amount) for such class of shares of the
Vanguard Fund are satisfied by the investor; and (c)
any such exchanges are permitted by the 1940 Act and
the rules, regulations and interpretations
thereunder.
B. CONVERSIONS OF CLASS C SHARES INTO CLASS A SHARES
The Fund may convert an investor's Class C Shares into Class A
Shares of the same Multiple Class Portfolio of the Fund if such investor's
account falls below the then-applicable minimum initial investment amount for
Class C Shares. Any such conversion will be preceded by written notice to the
investor and will be effected on the basis of the relative net asset values of
Class A Shares and Class C Shares of the applicable Multiple Class Portfolio
without the imposition of any sales load, fee or other charge.
V. EXPENSE ALLOCATION BETWEEN CLASSES
A. BACKGROUND
The Fund is a member of The Vanguard Group of Investment
Companies (the "Group"). Through their jointly-owned subsidiary, Vanguard, the
Fund 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 the Fund. Vanguard
was established and operates pursuant to a Funds' Service Agreement
("Agreement") between itself and the Vanguard funds, and pursuant to an
exemptive order granted by the U.S. Securities and Exchange Commission.
Vanguard's direct and indirect expenses of providing corporate management,
administrative and distribution services to the Vanguard funds are allocated
among the funds in the Group in accordance with methods specified in the
Agreement.
-3-
<PAGE> 4
B. CLASS SPECIFIC EXPENSES
1. MARKETING AND DISTRIBUTION EXPENSES
Expenses associated with Vanguard's marketing and
distribution activities will be allocated to the
share class of the Multiple Class Portfolio on behalf
of which the expenses were incurred by making such
allocations to Class A Shares and Class C Shares as
if each such share class were a separate Vanguard
fund under the Agreement.
2. EXPENSES FOR ACCOUNT-BASED SERVICES
Expenses associated with Vanguard's provision of
account-based services to the Multiple Class
Portfolios will be allocated between Class A Shares
and Class C Shares of each Multiple Class Portfolio
on the basis of the amount incurred by each such
share class as follows:
(a) ACCOUNT MAINTENANCE EXPENSES
For each Multiple Class Portfolio, expenses
associated with the maintenance of investor
accounts will be proportionately allocated
between Class A Shares and Class C Shares
based upon a monthly determination of (i)
the percentage of total shareholder accounts
represented by each class, and (ii) the
percentage of total account transactions
performed by Vanguard for each class. In
allocating account maintenance expenses
between the classes, (i) above will be given
a 75% weighting and (ii) above will be given
a 25% weighting.
(b) LITERATURE PRODUCTION AND MAILING EXPENSES
For each Multiple Class Portfolio, expenses
associated with shareholder reports, proxy
materials and other literature will be
allocated between Class A Shares and Class C
Shares based upon the number of such items
produced and mailed for each class of
shares.
3. OTHER CLASS SPECIFIC EXPENSES
Expenses for the primary benefit of a particular
share class will be allocated to that share class.
Such expenses include the following: each class'
share of Vanguard's operating expenses (not including
expenses related to management of the Fund's assets
allocated under subparagraph (C) below); blue sky
fees; and legal fees attributable to a particular
class.
-4-
<PAGE> 5
C. FUND EXPENSES
1. ASSET MANAGEMENT EXPENSES
For each Multiple Class Portfolio, expenses
associated with management of a Multiple Class
Portfolio's assets (including all advisory, tax
preparation and custody fees) will be allocated
between Class A Shares and Class C Shares on the
basis of their relative net assets.
2. OTHER FUND EXPENSES
For each Multiple Class Portfolio, any other expenses
not described above will be allocated between Class A
Shares and Class C Shares on the basis of their
relative net assets.
VI. ALLOCATION OF INCOME, GAINS AND LOSSES
For each Multiple Class Portfolio, income, gains and losses will be
allocated between Class A Shares and Class C Shares on the basis of their
relative net assets. As a result of differences in allocated expenses, it is
expected that the net income of, and dividends payable to, each class of shares
will vary. For each Multiple Class Portfolio, dividends and distributions paid
to each class of shares will be calculated in the same manner, on the same day
and at the same time.
VII. VOTING AND OTHER RIGHTS
For each Multiple Class Portfolio, Class A Shares and Class C Shares
will each have: (i) exclusive voting rights on any matter submitted to
shareholders that relates solely to its service or distribution arrangements;
and (ii) separate voting rights on any matter submitted to shareholders in which
the interests of one class differ from the interests of the other class; and
(iii) in all other respects the same rights, obligations and privileges as each
other, except as described in this Multiple Class Plan.
VIII. AMENDMENTS
All material amendments to this Multiple Class Plan must be approved by
a majority of the Board of Trustees of the Fund, including a majority of the
Trustees who are not interested persons of the Fund.
-5-
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000036405
<NAME> VANGUARD INDEX TRUST
<SERIES>
<NUMBER> 01
<NAME> 500 PORTFOLIO
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 27,315,600
<INVESTMENTS-AT-VALUE> 41,581,723
<RECEIVABLES> 287,195
<ASSETS-OTHER> 3,001
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 41,871,919
<PAYABLE-FOR-SECURITIES> 138,974
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 179,524
<TOTAL-LIABILITIES> 318,498
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 26,965,253
<SHARES-COMMON-STOCK> 502,258
<SHARES-COMMON-PRIOR> 438,518
<ACCUMULATED-NII-CURRENT> 80,014
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 217,858
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 14,290,296
<NET-ASSETS> 41,553,421
<DIVIDEND-INCOME> 325,646
<INTEREST-INCOME> 16,194
<OTHER-INCOME> 0
<EXPENSES-NET> 35,355
<NET-INVESTMENT-INCOME> 306,485
<REALIZED-GAINS-CURRENT> 569,832
<APPREC-INCREASE-CURRENT> 5,834,860
<NET-CHANGE-FROM-OPS> 6,711,177
<EQUALIZATION> 12,722
<DISTRIBUTIONS-OF-INCOME> 263,058
<DISTRIBUTIONS-OF-GAINS> 19,002
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 107,951
<NUMBER-OF-SHARES-REDEEMED> 47,527
<SHARES-REINVESTED> 3,316
<NET-CHANGE-IN-ASSETS> 11,221,569
<ACCUMULATED-NII-PRIOR> 23,865
<ACCUMULATED-GAINS-PRIOR> 43,958
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 35
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 35,355
<AVERAGE-NET-ASSETS> 35,548,474
<PER-SHARE-NAV-BEGIN> 69.17
<PER-SHARE-NII> 0.65
<PER-SHARE-GAIN-APPREC> 13.49
<PER-SHARE-DIVIDEND> 0.54
<PER-SHARE-DISTRIBUTIONS> 0.04
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 82.73
<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> 02
<NAME> EXTENDED MARKET PORTFOLIO
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 1,833,157
<INVESTMENTS-AT-VALUE> 2,548,386
<RECEIVABLES> 178,916
<ASSETS-OTHER> 934
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 2,738,236
<PAYABLE-FOR-SECURITIES> 11,562
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 169,008
<TOTAL-LIABILITIES> 180,570
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1,750,639
<SHARES-COMMON-STOCK> 88,349
<SHARES-COMMON-PRIOR> 80,119
<ACCUMULATED-NII-CURRENT> 14,412
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 65,070
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 717,545
<NET-ASSETS> 2,547,666
<DIVIDEND-INCOME> 14,289
<INTEREST-INCOME> 3,304
<OTHER-INCOME> 0
<EXPENSES-NET> 2,603
<NET-INVESTMENT-INCOME> 14,990
<REALIZED-GAINS-CURRENT> 65,831
<APPREC-INCREASE-CURRENT> 182,136
<NET-CHANGE-FROM-OPS> 262,957
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 841
<DISTRIBUTIONS-OF-GAINS> 31,006
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 13,699
<NUMBER-OF-SHARES-REDEEMED> 6,623
<SHARES-REINVESTED> 1,154
<NET-CHANGE-IN-ASSETS> 448,828
<ACCUMULATED-NII-PRIOR> 263
<ACCUMULATED-GAINS-PRIOR> 30,245
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 29
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2,603
<AVERAGE-NET-ASSETS> 2,250,222
<PER-SHARE-NAV-BEGIN> 26.20
<PER-SHARE-NII> 0.17
<PER-SHARE-GAIN-APPREC> 2.85
<PER-SHARE-DIVIDEND> 0.01
<PER-SHARE-DISTRIBUTIONS> 0.37
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 28.84
<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> 03
<NAME> TOTAL STOCK MARKET PORTFOLIO
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 3,522,911
<INVESTMENTS-AT-VALUE> 4,876,092
<RECEIVABLES> 104,637
<ASSETS-OTHER> 962
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 4,981,691
<PAYABLE-FOR-SECURITIES> 27,121
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 91,596
<TOTAL-LIABILITIES> 118,717
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 3,466,348
<SHARES-COMMON-STOCK> 234,688
<SHARES-COMMON-PRIOR> 198,663
<ACCUMULATED-NII-CURRENT> 8,049
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 30,689
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1,357,888
<NET-ASSETS> 4,862,974
<DIVIDEND-INCOME> 32,930
<INTEREST-INCOME> 5,977
<OTHER-INCOME> 0
<EXPENSES-NET> 4,119
<NET-INVESTMENT-INCOME> 34,788
<REALIZED-GAINS-CURRENT> 30,515
<APPREC-INCREASE-CURRENT> 612,779
<NET-CHANGE-FROM-OPS> 678,082
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 26,831
<DISTRIBUTIONS-OF-GAINS> 8,575
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 46,618
<NUMBER-OF-SHARES-REDEEMED> 12,283
<SHARES-REINVESTED> 1,690
<NET-CHANGE-IN-ASSETS> 1,332,118
<ACCUMULATED-NII-PRIOR> 92
<ACCUMULATED-GAINS-PRIOR> 8,749
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 29
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 4,119
<AVERAGE-NET-ASSETS> 4,095,511
<PER-SHARE-NAV-BEGIN> 17.77
<PER-SHARE-NII> 0.15
<PER-SHARE-GAIN-APPREC> 2.96
<PER-SHARE-DIVIDEND> 0.12
<PER-SHARE-DISTRIBUTIONS> 0.04
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 20.72
<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> 04
<NAME> VALUE PORTFOLIO
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 1,101,253
<INVESTMENTS-AT-VALUE> 1,422,410
<RECEIVABLES> 171,598
<ASSETS-OTHER> 103
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1,594,111
<PAYABLE-FOR-SECURITIES> 166,398
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 11,265
<TOTAL-LIABILITIES> 177,663
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1,063,571
<SHARES-COMMON-STOCK> 73,365
<SHARES-COMMON-PRIOR> 59,666
<ACCUMULATED-NII-CURRENT> 3,259
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 28,435
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 321,183
<NET-ASSETS> 1,416,448
<DIVIDEND-INCOME> 14,541
<INTEREST-INCOME> 222
<OTHER-INCOME> 0
<EXPENSES-NET> 1,200
<NET-INVESTMENT-INCOME> 13,563
<REALIZED-GAINS-CURRENT> 28,263
<APPREC-INCREASE-CURRENT> 145,174
<NET-CHANGE-FROM-OPS> 187,000
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 9,773
<DISTRIBUTIONS-OF-GAINS> 21,325
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 19,501
<NUMBER-OF-SHARES-REDEEMED> 7,408
<SHARES-REINVESTED> 1,606
<NET-CHANGE-IN-ASSETS> 400,721
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 21,497
<OVERDISTRIB-NII-PRIOR> 531
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 11
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,200
<AVERAGE-NET-ASSETS> 1,208,120
<PER-SHARE-NAV-BEGIN> 17.02
<PER-SHARE-NII> 0.19
<PER-SHARE-GAIN-APPREC> 2.56
<PER-SHARE-DIVIDEND> 0.14
<PER-SHARE-DISTRIBUTIONS> 0.32
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 19.31
<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> 05
<NAME> GROWTH PORTFOLIO
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 1,319,717
<INVESTMENTS-AT-VALUE> 1,694,238
<RECEIVABLES> 196,067
<ASSETS-OTHER> 130
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1,890,435
<PAYABLE-FOR-SECURITIES> 190,401
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 6,942
<TOTAL-LIABILITIES> 197,343
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1,295,482
<SHARES-COMMON-STOCK> 80,897
<SHARES-COMMON-PRIOR> 46,552
<ACCUMULATED-NII-CURRENT> 55
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 22,970
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 374,585
<NET-ASSETS> 1,693,092
<DIVIDEND-INCOME> 7,909
<INTEREST-INCOME> 325
<OTHER-INCOME> 0
<EXPENSES-NET> 1,170
<NET-INVESTMENT-INCOME> 7,064
<REALIZED-GAINS-CURRENT> 25,022
<APPREC-INCREASE-CURRENT> 230,646
<NET-CHANGE-FROM-OPS> 262,732
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 7,057
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 40,935
<NUMBER-OF-SHARES-REDEEMED> 6,917
<SHARES-REINVESTED> 327
<NET-CHANGE-IN-ASSETS> 906,188
<ACCUMULATED-NII-PRIOR> 48
<ACCUMULATED-GAINS-PRIOR> (2,052)
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 12
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 1,170
<AVERAGE-NET-ASSETS> 1,188,874
<PER-SHARE-NAV-BEGIN> 16.90
<PER-SHARE-NII> 0.10
<PER-SHARE-GAIN-APPREC> 4.03
<PER-SHARE-DIVIDEND> 0.10
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 20.93
<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> 06
<NAME> SMALL CAPITALIZATION STOCK PORTFOLIO
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLAR
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 1,723,323
<INVESTMENTS-AT-VALUE> 2,157,092
<RECEIVABLES> 176,912
<ASSETS-OTHER> 153
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 2,334,157
<PAYABLE-FOR-SECURITIES> 65,472
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 117,971
<TOTAL-LIABILITIES> 183,443
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 1,671,049
<SHARES-COMMON-STOCK> 95,685
<SHARES-COMMON-PRIOR> 84,695
<ACCUMULATED-NII-CURRENT> 12,057
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 32,792
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 434,816
<NET-ASSETS> 2,150,714
<DIVIDEND-INCOME> 12,661
<INTEREST-INCOME> 2,014
<OTHER-INCOME> 0
<EXPENSES-NET> 2,124
<NET-INVESTMENT-INCOME> 12,551
<REALIZED-GAINS-CURRENT> 32,613
<APPREC-INCREASE-CURRENT> 167,768
<NET-CHANGE-FROM-OPS> 212,932
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 5,787
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 20,977
<NUMBER-OF-SHARES-REDEEMED> 10,267
<SHARES-REINVESTED> 280
<NET-CHANGE-IN-ASSETS> 437,360
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 5,966
<OVERDISTRIB-NII-PRIOR> 494
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 35
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 2,124
<AVERAGE-NET-ASSETS> 1,844,998
<PER-SHARE-NAV-BEGIN> 20.23
<PER-SHARE-NII> 0.140
<PER-SHARE-GAIN-APPREC> 2.175
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0.065
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 22.48
<EXPENSE-RATIO> 0.23
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
