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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT (NO. 2-56846) UNDER
THE SECURITIES ACT OF 1933
PRE-EFFECTIVE AMENDMENT NO.
POST-EFFECTIVE AMENDMENT NO. 55
AND
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY
ACT OF 1940
AMENDMENT NO. 57
VANGUARD INDEX TRUST
(EXACT NAME OF REGISTRANT AS SPECIFIED IN DECLARATION OF TRUST)
P.O. BOX 2600, VALLEY FORGE, PA 19482
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)
REGISTRANT'S TELEPHONE NUMBER (610) 669-1000
R. GREGORY BARTON, ESQUIRE
P.O. BOX 876
VALLEY FORGE, PA 19482
IT IS PROPOSED THAT THIS AMENDMENT BECOME EFFECTIVE
on April 30, 1999 pursuant to paragraph (b) of Rule 485.
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
As soon as practicable after this Registration Statement becomes effective.
WE HAVE ELECTED TO REGISTER AN INDEFINITE NUMBER OF SHARES PURSUANT TO
REGULATION 24f-2 UNDER THE INVESTMENT COMPANY ACT OF 1940. WE FILED OUR RULE
24f-2 NOTICE FOR THE YEAR ENDED DECEMBER 31, 1998 ON MARCH 29, 1999.
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VANGUARD INDEX TRUST
CROSS REFERENCE SHEET
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FORM N-1A
ITEM NUMBER LOCATION IN PROSPECTUS
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Item 1. Front and Back Cover Pages........................... Front and Back Cover Pages
Item 2. Risk/Return Summary: Investments, Risks, and
Performance.......................................... Fund Profile
Item 3. Risk/Return Summary: Fee Table....................... Fee Table
Item 4. Investment Objectives, Principal Investment
Strategies, and Related Risks........................ A Word About Risk; Who Should Invest;
Primary Investment Strategies
Item 5. Management's Discussion of Fund Performance.......... Herein incorporated by reference to
Registrant's Annual Report to
Shareholders dated December 31, 1998
filed with the Securities & Exchange
Commission's EDGAR system on March 1,
1999
Item 6. Management, Organization, and Capital
Structure............................................ The Fund and Vanguard; Investment
Adviser
Item 7. Shareholder Information.............................. Share Price; Dividends, Capital
Gains, and Taxes; Investing with
Vanguard
Item 8. Distribution Arrangements............................ Inside Front Cover Page
Item 9. Financial Highlights Information..................... Financial Highlights
</TABLE>
<TABLE>
<CAPTION>
FORM N-1A LOCATION IN STATEMENT
ITEM NUMBER OF ADDITIONAL INFORMATION
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Item 10. Cover Page and Table of Contents..................... Cover Page; Table of Contents
Item 11. Fund History......................................... Description of the Trust
Item 12. Description of the Fund and its Investments and
Risks................................................ Description of the Trust; Investment
Policies; Fundamental Investment
Limitations
Item 13. Management of the Fund............................... Management of the Trust
Item 14. Control Persons and Principal Holders of
Securities........................................... Management of the Trust
Item 15. Investment Advisory and Other Services............... Investment Advisory Services
Item 16. Brokerage Allocation and Other Services.............. Portfolio Transactions
Item 17. Capital Stock and Other Securities................... Description of the Trust
Item 18. Purchase, Redemption, and Pricing of Shares.......... Purchase of Shares; Redemption of
Shares; Share Price
Item 19. Taxation of the Fund................................. Description of the Trust
Item 20. Underwriters......................................... Not Applicable
Item 21. Calculation of Performance Data...................... Yield and Total Return
Item 22. Financial Statements................................. Financial Statements
</TABLE>
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PART B
VANGUARD INDEX TRUST
(THE TRUST)
STATEMENT OF ADDITIONAL INFORMATION
APRIL 30, 1999; REVISED SEPTEMBER 28, 1999
This Statement is not a prospectus but should be read in conjunction with
the Trust's current Prospectuses, as they may be amended from time to time. The
Trust's current prospectuses are dated April 30, 1999. To obtain a Prospectus or
an additional 1998 Annual Report to Shareholders, which contains the Funds'
Financial Statements as hereby incorporated by reference, please call:
VANGUARD INVESTOR INFORMATION CENTER
1-800-662-7447
TABLE OF CONTENTS
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PAGE
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Description of the Trust.................................... B-1
Investment Policies......................................... B-3
Fundamental Investment Limitations.......................... B-7
Purchase of Shares.......................................... B-9
Share Price................................................. B-9
Redemption of Shares........................................ B-10
Yield and Total Return...................................... B-11
Management of the Trust..................................... B-13
Portfolio Transactions...................................... B-17
Performance Measures........................................ B-18
Financial Statements........................................ B-19
</TABLE>
DESCRIPTION OF THE TRUST
ORGANIZATION
The Trust was organized as a Pennsylvania business trust in 1975, and was
reorganized as a Delaware business trust in July, 1998. The Trust is registered
with the United States Securities and Exchange Commission (the Commission) under
the Investment Company Act of 1940 (the 1940 Act) as an open-end, diversified
management investment company. It currently offers the following funds:
Vanguard 500 Index Fund
Vanguard Total Stock Market Index Fund
Vanguard Extended Market Index Fund
Vanguard Mid-Cap Index Fund
Vanguard Small-Cap Index Fund
Vanguard Value Index Fund
Vanguard Small-Cap Value Index Fund
Vanguard Growth Index Fund
Vanguard Small-Cap Growth Index Fund
(each, a Fund; collectively, the Funds)
Each of the Funds offers two classes of shares, Investor Shares and
Institutional Shares, except the 500 Index Fund, which offers Investor Shares
only. Institutional Shares of a Fund are available only to those investing at
least $10 million in the Fund.
The Trust has the ability to offer additional funds or classes of shares.
There is no limit on the number of full and fractional shares that the Trust may
issue for a particular fund or class of shares.
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SERVICE PROVIDERS
CUSTODIANS. State Street Bank and Trust Company, 225 Franklin Street,
Boston, Massachusetts 02110, and First Union National Bank, PA4943, 530 Walnut
Street, Philadelphia, Pennsylvania 19106, serve as the Trust's custodians. The
custodians are responsible for maintaining the Trust's assets and keeping all
necessary accounts and records.
INDEPENDENT ACCOUNTANTS. PricewaterhouseCoopers LLP, 30 South 17th Street,
Philadelphia, Pennsylvania 19103, serves as the Trust's independent accountants.
The accountants audit the Trust's financial statements and provide other related
services.
TRANSFER AND DIVIDEND-PAYING AGENT. The Trust's transfer agent and
dividend-paying agent is The Vanguard Group, Inc., 100 Vanguard Boulevard,
Malvern, Pennsylvania 19355.
CHARACTERISTICS OF THE TRUST'S SHARES
RESTRICTIONS ON HOLDING OR DISPOSING OF SHARES. There are no restrictions
on the right of shareholders to retain or dispose of the Trust's shares, other
than the possible future termination of the Trust or any of its Funds. The Trust
or any of its Funds may be terminated by reorganization into another mutual fund
or by liquidation and distribution of the assets of the affected Fund. Unless
terminated by reorganization or liquidation, the Trust and its funds will
continue indefinitely.
SHAREHOLDER LIABILITY. The Trust is organized under Delaware law, which
provides that shareholders of a business trust are entitled to the same
limitations of personal liability as shareholders of a corporation organized
under Delaware law. Effectively, this means that a shareholder of the Trust will
not be personally liable for payment of the Trust's debts except by reason of
his or her own conduct or acts. In addition, a shareholder could incur a
financial loss on account of a Trust obligation only if the Trust itself had no
remaining assets with which to meet such obligation. We believe that the
possibility of such a situation arising is extremely remote.
DIVIDEND RIGHTS. The shareholders of a Fund are entitled to receive any
dividends or other distributions declared for such Fund. No shares have priority
or preference over any other shares of the same Fund with respect to
distributions. Distributions will be made from the assets of a Fund, and will be
paid ratably to all shareholders of the Fund (or class) according to the number
of shares of such Fund (or class) held by shareholders on the record date. The
amount of income dividends per share may vary between separate share classes of
the same Fund based upon differences in the way that expenses are allocated
between share classes pursuant to a multiple class plan.
VOTING RIGHTS. Shareholders of the Trust are entitled to vote on a matter
if: (i) a shareholder vote is required under the 1940 Act; (ii) the matter
concerns an amendment to the Declaration of Trust that would adversely affect to
a material degree the rights and preferences of the shares of any class or
series; or (iii) the Trustees determine that it is necessary or desirable to
obtain a shareholder vote. The 1940 Act requires a shareholder vote under
various circumstances, including to elect or remove Trustees upon the written
request of shareholders representing 10% or more of the Trust's net assets, and
to change any fundamental policy of the Trust. Shareholders of the Trust receive
one vote for each dollar of net asset value owned on the record date, and a
fractional vote for each fractional dollar of net asset value owned on the
record date. However, only the shares of the Fund affected by a particular
matter are entitled to vote on that matter. Voting rights are non-cumulative and
cannot be modified without a majority vote.
LIQUIDATION RIGHTS. In the event a Fund is liquidated, Fund shareholders
will be entitled to receive a pro rata share of its net assets.
PREEMPTIVE RIGHTS. There are no preemptive rights associated with shares
of the Trust.
CONVERSION RIGHTS. Shareholders of a Fund may convert their shares into
another class of shares of the same Fund upon the satisfaction of any then
applicable eligibility requirements.
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REDEMPTION PROVISIONS. The Trust's redemption provisions are described in
its current prospectus and elsewhere in this Statement of Additional
Information.
SINKING FUND PROVISIONS. The Trust has no sinking fund provisions.
CALLS OR ASSESSMENT. The Trust's shares, when issued, are fully paid and
non-assessable.
TAX STATUS OF THE TRUST
Each Fund of the Trust qualifies as a "regulated investment company" under
Subchapter M of the Internal Revenue Code. This special tax status means that a
Fund will not be liable for federal tax on income and capital gains distributed
to shareholders. In order to preserve its tax status, each Fund must comply with
certain requirements. If a Fund fails to meet these requirements in any taxable
year, it will be subject to tax on its taxable income at corporate rates, and
all distributions from earnings and profits, including any distributions of net
tax-exempt income and net long-term capital gains, will be taxable to
shareholders as ordinary income. In addition, the Fund could be required to
recognize unrealized gains, pay substantial taxes and interest, and make
substantial distributions before regaining its tax status as a regulated
investment company.
INVESTMENT POLICIES
REPURCHASE AGREEMENTS. Each of the Funds that comprise the Trust may
invest in repurchase agreements with commercial banks, brokers or dealers to
generate income from its excess cash balances. A repurchase agreement is an
agreement under which a Fund acquires a fixed-income security (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 Fund and is
unrelated to the interest rate on the underlying instrument. In these
transactions, the securities acquired by the Fund (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 Funds' 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 a Fund.
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
Fund 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 Fund not within the control
of the Fund and therefore the Fund may not be able to substantiate its interest
in the underlying security and 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 Fund of the Trust may lend its securities on a
short-term or long-term basis to qualified institutional investors (typically
brokers, dealers, banks or other financial institutions) 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 Fund can 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 Fund. The terms, the structure and the
aggregate amount of such loans must be consistent with the 1940 Act, and the
Rules and Regulations or interpretations of the Commission thereunder. These
provisions limit the amount of securities a fund may lend to 33 1/3% of the
Fund's total assets, and require that (a) the borrower pledge and maintain with
the Fund 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
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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 Fund at any time and (d) the Fund receive reasonable interest
on the loan (which may include the Fund'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
Fund 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 occurs that affects the
securities on loan, the Fund must call the loan and vote the securities.
VANGUARD INTERFUND LENDING PROGRAM. The Commission has issued an exemptive
order permitting the Funds to participate in Vanguard's interfund lending
program. This program allows the Vanguard funds to borrow money from and loan
money to each other for temporary or emergency purposes. The program is subject
to a number of conditions, including the requirement that no fund may borrow or
lend money through the program unless it receives a more favorable interest rate
than is available from a typical bank for a comparable transaction. In addition,
a fund may participate in the program only if and to the extent that such
participation is consistent with the fund's investment objective and other
investment policies. The Boards of Trustees of the Vanguard funds are
responsible for ensuring that the interfund lending program operates in
compliance with all conditions of the Commission's exemptive order.
ILLIQUID SECURITIES. Each Fund may invest up to 15% of its net assets in
illiquid securities. Illiquid securities are securities that the Fund may not be
able to sell or dispose of in the ordinary course of business within seven
business days at approximately the value at which they are being carried on the
Fund's books.
FUTURES CONTRACTS. Each Fund 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 Fund 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
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 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.
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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. Each Fund of
the Trust expects to earn interest income on its margin deposits.
Traders in futures contracts may be broadly classified as either "hedgers"
or "speculators." Hedgers use the futures markets primarily to offset
unfavorable changes in the value of securities either held for investment
purposes or expected to be acquired by them. Speculators are less inclined to
own, or intend to purchase, the securities underlying the futures contracts
which they trade, and use futures contracts with the expectation of realizing
profits from fluctuations in the prices of underlying securities. The Trust's
Funds intend to use futures contracts only for bona fide hedging purposes.
Regulations of the CFTC applicable to the Funds require that all of their
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 any Fund's
portfolio. A Fund will only sell futures contracts to protect the Fund against
declines in the prices of the securities underlying the futures contracts or
purchase contracts to protect against an increase in the price of securities it
intends to purchase. As evidence of this hedging interest, the Fund expects that
the majority of its futures contract purchases will be "completed;" that is,
equivalent amounts of related securities will have been purchased or are being
purchased by the Fund upon sale of open futures contracts.
Although techniques other than the sale and purchase of futures contracts
could be used to control a Fund's exposure to market fluctuations, the use of
futures contracts may be a more effective means of hedging this exposure. While
a Fund 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 Fund 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 Fund's total assets. In addition, a Fund will not enter into
futures contracts to the extent that its outstanding obligations to purchase
securities under these contracts would exceed 20% of the Fund'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, a Fund would continue to be required to make daily cash payments to
maintain its required margin. In such situations, if a Fund 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, a Fund 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 Fund will minimize the risk that it will be unable to close out a
futures contract by only entering into futures which are traded on national
futures exchanges and for which there appears to be a liquid secondary market.
The risk of loss in trading futures contracts in some strategies can be
substantial, due both to the low margin deposits required, and the extremely
high degree of leverage involved in futures pricing. As a result, a relatively
small price movement in a futures contract may result in immediate and
substantial loss (as well as gain) to the investor. For example, if at the time
of purchase, 10% of the value of the futures contract is deposited as margin, a
subsequent 10% decrease in the value of the futures contract would result in a
total loss of the margin deposit, before any deduction for the transaction
costs, if the account were then closed out. A 15% decrease would result in a
loss equal to 150% of the original margin deposit if the contract were closed
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out. Thus, a purchase or sale of a futures contract may result in losses in
excess of the amount invested in the contract. The Funds also bear the risk that
the adviser will incorrectly predict future stock market trends. However,
because the futures strategy of the Funds is engaged in only for hedging
purposes, the Funds' Officers do not believe that the Funds are subject to the
risks of loss frequently associated with futures transactions. A Fund 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 a Fund 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 a Fund 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 a Fund of margin deposits in the event of bankruptcy of a broker
with whom the Fund 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 Fund 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 a Fund may affect the holding period of such
securities and, consequently, the nature of the gain or loss on such securities
upon disposition. A Fund 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 Fund.
In order for each Fund 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
Fund's business of investing in securities. Net gain realized from the closing
out of futures contracts will be considered qualifying income for purposes of
the 90% requirement.
Each Fund 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 Fund's fiscal year) on futures transactions. Such
distributions will be combined with distributions of capital gains realized on
the Fund's other investments and shareholders will be advised on the nature of
the distributions.
FOREIGN INVESTMENTS. Each Fund may invest in foreign securities to the
extent necessary to carry out its investment strategy of holding all, or a
representative sample, of the stocks that comprise the index it tracks.
Investors should recognize that investing in foreign companies involves certain
special considerations which are not typically associated with investing in U.S.
companies.
CURRENCY RISK. Since the stocks of foreign companies are frequently
denominated in foreign currencies, and since the Funds may temporarily hold
uninvested reserves in bank deposits in foreign currencies, the Funds will be
affected favorably or unfavorably by changes in currency rates and in exchange
control regulations, and may incur costs in connection with conversions between
various currencies. The investment policies of the Funds permit them to enter
into forward foreign currency exchange contracts in order to hedge a Fund's
holdings and commitments against changes in the level of future currency rates.
Such contracts
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involve an obligation to purchase or sell a specific currency at a future date
at a price set at the time of the contract.
FEDERAL TAX TREATMENT OF NON-U.S. TRANSACTIONS. Special rules govern the
Federal income tax treatment of certain transactions denominated in terms of a
currency other than the U.S. dollar or determined by reference to the value of
one or more currencies other than the U.S. dollar. The types of transactions
covered by the special rules include the following: (1) the acquisition of, or
becoming the obligor under, a bond or other debt instrument (including, to the
extent provided in Treasury regulations, preferred stock); (ii) the accruing of
certain trade receivables and payables; and (iii) the entering into or
acquisition of any forward contract, futures contract, option and similar
financial instrument if such instrument is not marked to market. The disposition
of a currency other than the U.S. dollar by a U.S. taxpayer is also treated as a
transaction subject to the special currency rules. However, foreign
currency-related regulated futures contracts and nonequity options are generally
not subject to the special currency rules if they are or would be treated as
sold for their fair market value at year-end under the marking-to-market rules
applicable to other futures contracts unless an election is made to have such
currency rules apply. With respect to transactions covered by the special rules,
foreign currency gain or loss is calculated separately from any gain or loss on
the underlying transaction and is normally taxable as ordinary gain or loss. A
taxpayer may elect to treat as capital gain or loss foreign currency gain or
loss arising from certain identified forward contracts, futures contracts and
options that are capital assets in the hands of the taxpayer and which are not
part of a straddle. The Treasury Department issued regulations under which
certain transactions subject to the special currency rules that are part of a
"section 988 hedging transaction" (as defined in the Internal Revenue Code of
1986, as amended, and the Treasury regulations) will be integrated and treated
as a single transaction or otherwise treated consistently for purposes of the
Code. Any gain or loss attributable to the foreign currency component of a
transaction engaged in by a Fund which is not subject to the special currency
rules (such as foreign equity investments other than certain preferred stocks)
will be treated as capital gain or loss and will not be segregated from the gain
or loss on the underlying transaction. It is anticipated that some of the
non-U.S. dollar-denominated investments and foreign currency contracts the Fund
may make or enter into will be subject to the special currency rules described
above.
COUNTRY RISK. As foreign companies are not generally subject to uniform
accounting, auditing and financial reporting standards and practices comparable
to those applicable to domestic companies, there may be less publicly available
information about certain foreign companies than about domestic companies.
Securities of some foreign companies are generally less liquid and more volatile
than securities of comparable domestic companies. There is generally less
government supervision and regulation of stock exchanges, brokers and listed
companies than in the U.S. In addition, with respect to certain foreign
countries, there is the possibility of expropriation of confiscatory taxation,
political or social instability, or diplomatic developments which could affect
U.S. investments in those countries.
Although the Funds will endeavor to achieve most favorable execution costs
in their portfolio transactions, fixed commissions on many foreign stock
exchanges are generally higher than negotiated commissions on U.S. exchanges. In
addition, it is expected that the expenses for custodian arrangements of the
Funds' foreign securities will be somewhat greater than the expenses for the
custodian arrangements for handling U.S. securities of equal value.
Certain foreign governments levy withholding taxes against dividend and
interest income. Although in some countries a portion of these taxes is
recoverable, the non-recovered portion of foreign withholding taxes will reduce
the income received from foreign companies held by the Funds. However, these
foreign withholding taxes are not expected to have a significant impact on the
Funds, since each Fund seeks long-term capital appreciation and any income
should be considered incidental.
FUNDAMENTAL INVESTMENT LIMITATIONS
Each Fund of the Trust is subject to the following fundamental investment
limitations, which cannot be changed in any material way without the approval of
the holders of a majority of the Fund's shares. For these purposes, a "majority"
of shares means the lesser of: (i) 67% or more of the votes cast, so long as
shares
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representing more than 50% of a Fund's net asset value are present or
represented by proxy; or (ii) shares representing more than 50% of a Fund's net
asset value.
BORROWING. A Fund may not borrow money, except for temporary or emergency
purposes in an amount not exceeding 15% of the Fund's net assets. A Fund may
borrow money through banks, reverse repurchase agreements, or Vanguard's
interfund lending program only, and must comply with all applicable regulatory
conditions. A Fund may not make any additional investments if its outstanding
borrowings exceed 5% of net assets.
COMMODITIES. A Fund may not invest in commodities, except that it may
invest in stock index futures contracts, stock options and options on stock
index futures contracts. No more than 5% of a Fund's total assets may be used as
initial margin deposit for futures contracts, and no more than 20% of a Fund's
total assets may be invested in futures contracts or options at any time.
DIVERSIFICATION. With respect to 75% of its total assets, a Fund may not:
(i) purchase more than 10% of the outstanding voting securities of any one
issuer; or (ii) purchase securities of any issuer if, as a result, more than 5%
of the Fund's total assets would be invested in that issuer's securities. This
limitation does not apply to obligations of the United States Government, its
agencies, or instrumentalities.
ILLIQUID SECURITIES. A Fund may not acquire any security if, as a result,
more than 15% of its net assets would be invested in securities that are
illiquid. From time to time, the Trust's Board of Trustees may determine that
certain restricted securities known as Rule 144A securities are liquid and not
subject to the 15% limitation.
INDUSTRY CONCENTRATION. A Fund may not invest more than 25% of its total
assets in any one industry.
INVESTING FOR CONTROL. A Fund may not invest in a company for purposes of
controlling its management.
INVESTMENT COMPANIES. A Fund may not invest in any other investment
company, except through a merger, consolidation or acquisition of assets, or to
the extent permitted by Section 12 of the 1940 Act. Investment companies whose
shares a Fund acquires pursuant to Section 12 must have investment objectives
and investment policies consistent with those of the Fund.
LOANS. A Fund may not lend money to any person except by purchasing fixed
income securities that are publicly distributed, lending its portfolio
securities, or through Vanguard's interfund lending program.
MARGIN. A Fund may not purchase securities on margin or sell securities
short, except as permitted by the Fund's investment policies relating to
commodities.
OIL, GAS, MINERALS. A Fund may not invest in interests in oil, gas or
other mineral exploration or development programs.
PLEDGING ASSETS. A Fund may not pledge, mortgage or hypothecate more than
15% of its net assets.
PUTS/CALLS. A Fund may not purchase or sell put, call, straddle or spread
options.
REAL ESTATE. A Fund may not invest directly in real estate, although it
may invest in securities of companies that deal in real estate.
SENIOR SECURITIES. A Fund may not issue senior securities, except in
compliance with the 1940 Act.
UNDERWRITING. A Fund may not engage in the business of underwriting
securities issued by other persons. The Fund will not be considered an
underwriter when disposing of its investment securities.
The above-mentioned investment limitations are considered at the time
investment securities are purchased.
None of these limitations prevents a Fund from participating in The
Vanguard Group (Vanguard). Because the Trust is a member of the Group, the Funds
may own securities issued by Vanguard, make loans to Vanguard, and contribute to
Vanguard's costs or other financial requirement. See "Management of the Trust"
for more information.
B-8
<PAGE> 11
PURCHASE OF SHARES
The Trust reserves the right in its sole discretion (i) to suspend the
offerings of a Fund's shares, (ii) to reject purchase or exchange orders when in
the judgment of management such rejection is in the best interest of a Fund,
(iii) impose a transaction fee on a purchase of a Fund's shares if the purchase,
in the opinion of Vanguard, would disrupt the efficient management of the Fund,
and (iv) 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 a Fund's shares.
EXCHANGE OF SECURITIES FOR SHARES OF A FUND. In certain circumstances,
shares of a Fund may be purchased "in kind," i.e., in exchange for securities,
rather than for cash. The securities tendered as part of an in-kind purchase
must be included in the Index tracked by the Fund and must have a total market
value of $1 million or more. In addition, each position must have a market value
of $10,000 or more. Such securities also must be liquid securities which are not
restricted as to transfer and have a value that is readily ascertainable as
evidenced by a listing on the American Stock Exchange, the New York Stock
Exchange or NASDAQ. Securities accepted by the Fund will be valued as set forth
under "Share Price" in the Trust's prospectus as of the time of the next
determination of net asset value after such acceptance. Shares of each Fund are
issued at net asset value determined as of the same time. "IN-KIND" PURCHASES OF
THE SMALL-CAP INDEX, EXTENDED MARKET INDEX, SMALL-CAP VALUE INDEX, AND SMALL-CAP
GROWTH INDEX FUNDS WILL NOT BE SUBJECT TO THEIR NORMAL TRANSACTION FEES, 0.5%,
0.25%, 0.5% AND 0.5%, RESPECTIVELY. All dividend, subscription, or other rights
that are reflected in the market price of accepted securities at the time of
valuation become the property of the Fund and must be delivered to the Fund 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.
A Fund will not accept securities in exchange for its shares unless: (1)
such securities are, at the time of the exchange, eligible to be held by the
Fund; (2) the transaction will not cause the Fund's weightings to become
imbalanced with respect to the weightings of the stocks included in the
corresponding Index; (3) the investor represents and agrees that all securities
offered to the Fund are not subject to any restrictions upon their sale by the
Fund 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 (e.g., one that does not involve a trade of
substantial size that artificially influences the price of the security); and
(6) the value of any such security being exchanged will not exceed 5% of the
Fund's net assets immediately prior to the transaction.
Investors interested in purchasing Fund shares with securities should
contact Vanguard.
SHARE PRICE
The share price, or "net asset value" per share for the 500 Index Fund is
calculated by dividing the total assets of the Fund, less all liabilities, by
the total number of shares outstanding. The net asset value for each share class
of the other Funds that comprise the Trust are calculated by dividing the net
assets attributable to each share class by the total number of shares
outstanding for that share class. The net asset value is determined as of the
close of the New York Stock Exchange (generally 4:00 p.m. Eastern time) on each
day the Exchange is open for trading.
Portfolio securities for which market quotations are readily available
(includes those securities listed on national securities exchanges, as well as
those quoted on the NASDAQ Stock Market) will be valued at the last quoted sales
price on the day the valuation is made. Such securities which are not traded on
the valuation date are valued at the mean of the bid and ask prices. Price
information on exchange-listed securities is taken from the exchange where the
security is primarily traded. Securities may be valued on the basis of prices
provided by a pricing service when such prices are believed to reflect the fair
market value of such securities.
Short-term instruments (those acquired with remaining maturities of 60 days
or less) may be valued at cost, plus or minus any amortized discount or premium,
which approximates market value.
B-9
<PAGE> 12
Bonds and other fixed income securities may be valued on the basis of
prices provided by a pricing service when such prices are believed to reflect
the fair market value of such securities. The prices provided by a pricing
service may be determined without regard to bid or last sale prices of each
security, but take into account institutional-size transactions in similar
groups of securities as well as any developments related to specific securities.
Foreign securities are valued at the last quoted sales price, or the most
recently determined closing price calculated according to local market
convention, available at the time a Fund is valued. Prices are obtained from the
broadest and most representative market on which the securities trade. If events
which materially affect the value of a Fund's investments occur after the close
of the securities markets on which such securities are primarily traded, those
investments may be valued by such methods as the Board of Trustees deems in good
faith to reflect fair value.
In determining a Fund's net asset value per share, all assets and
liabilities initially expressed in foreign currencies will be converted into
U.S. dollars using the officially quoted daily exchange rates used by Morgan
Stanley Capital International in calculating various benchmarking indices. This
officially quoted exchange rate may be determined prior to or after the close of
a particular securities market. If such quotations are not available, the rate
of exchange will be determined in accordance with policies established in good
faith by the Board of Trustees.
Other assets and securities for which no quotations are readily available
or which are restricted as to sale (or resale) are valued by such methods as the
Board of Trustees deems in good faith to reflect fair value.
The share price for each Fund can be found daily in the mutual fund
listings of most major newspapers under the heading of Vanguard Index Funds.
REDEMPTION OF SHARES
Each Fund 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 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 a Fund for redemptions. The proceeds of a redemption
may be more or less than the shareholder's cost depending on the market value of
the securities held by the Fund.
TRADING SHARES THROUGH CHARLES SCHWAB
The Trust has authorized Charles Schwab & Co., Inc. (Schwab) to accept on
its behalf purchase and redemption orders under certain terms and conditions.
Schwab is also authorized to designate other intermediaries to accept purchase
and redemption orders on the Trust's behalf subject to those terms and
conditions. Under this arrangement, the Trust will be deemed to have received a
purchase or redemption order when Schwab or, if applicable, Schwab's authorized
designee, accepts the order in accordance with the Trust's instructions.
Customer orders that are properly transmitted to the Trust by Schwab, or if
applicable, Schwab's authorized designee, will be priced as follows:
If you place your order through Schwab and it is received before 3 p.m.
Eastern time on any business day, your order will be sent to Vanguard that day
and your share price will be based on the Fund's net asset value calculated at
the close of trading that day. If your order is received after 3 p.m. Eastern
time, it will be sent to Vanguard on the following business day and your share
price will be based on the Fund's net asset value calculated at the close of
trading that day.
B-10
<PAGE> 13
YIELD AND TOTAL RETURN
The annualized yield of each Fund of the Trust for the 30-day period ended
December 31, 1998 is set forth below.
<TABLE>
<CAPTION>
INVESTOR INSTITUTIONAL
SHARES SHARES
-------- -------------
<S> <C> <C>
500 Index Fund.............................................. 1.20% N/A
Total Stock Market Index Fund............................... 1.27 1.36%
Extended Market Index Fund.................................. 1.12 1.26
Mid-Cap Index Fund.......................................... 0.95 1.07
Small-Cap Index Fund........................................ 1.35 1.48
Value Index Fund............................................ 1.64 1.74
Small-Cap Value Index Fund.................................. 1.03 *
Growth Index Fund........................................... 0.77 0.86
Small-Cap Growth Index Fund................................. 0.41 *
</TABLE>
* As of December 31, 1998, there were no Institutional Shares outstanding.
Based on the yield of the Investor Shares, the estimated yield of the
Small-Cap Value and the Small-Cap Growth Index Funds would have been 1.16%
and 0.54%, respectively.
The average annual total return of each Fund of the Trust for the one-,
five-, and ten-year periods ended December 31, 1998 is set forth below.
<TABLE>
<CAPTION>
1 YEAR ENDED 5 YEARS ENDED 10 YEARS ENDED
INVESTOR SHARES 12/31/1998 12/31/1998 12/31/1998
- --------------- ------------ ------------- --------------
<S> <C> <C> <C>
500 Index Fund*....................................... 28.62% 23.96% 19.04%
Total Stock Market Index Fund*........................ 23.26 21.50 19.22(1)+
Extended Market Index Fund**.......................... 8.05 16.19 15.22
Small-Cap Index Fund***............................... -3.10 12.80 12.92
Value Index Fund*..................................... 14.64 19.77 19.68(2)+
Growth Index Fund*.................................... 42.21 27.79 22.95(3)+
</TABLE>
<TABLE>
<CAPTION>
1 YEAR ENDED 5 YEARS ENDED 10 YEARS ENDED
INSTITUTIONAL SHARES 12/31/1998 12/31/1998 12/31/1998
-------------------- ------------ ------------- --------------
<S> <C> <C> <C>
Total Stock Market Index Fund......................... 23.37% 21.77%(4)+ --
Extended Market Index Fund**.......................... 8.18 13.68(4)+ --
Small-Cap Index Fund***............................... -2.99 5.38(4)+ --
</TABLE>
- ---------------
* Total return figures are not adjusted to reflect the $10 annual account
maintenance fee for accounts under $10,000.
** Total return figures for the Extended Market Index Fund are adjusted to
reflect the 0.25% transaction fee but not adjusted for the $10 annual
account maintenance fee for accounts under $10,000 for the Investor Shares.
*** Total return figures for the Small-Cap Index Fund are adjusted to reflect
the 0.5% transaction fee but not adjusted for the $10 annual account
maintenance fee for accounts under $10,000 for the Investor Shares.
+ Annualized.
(1) Since the inception date of the Total Stock Market Index Fund on April 27,
1992.
(2) Since the inception date of the Value Index Fund on November 2, 1992.
(3) Since the inception date of the Growth Index Fund on November 2, 1992.
(4) Since the inception date of the Institutional Shares of the Fund on July 7,
1997.
The Investor Shares and the Institutional Shares of the Mid-Cap Index Fund,
Small-Cap Value Index Fund, and Small-Cap Growth Index Fund were not offered
prior to April 20, 1998. The Institutional Shares of the Value Index Fund and
the Growth Index Fund were not offered prior to April 20, 1998.
B-11
<PAGE> 14
AVERAGE ANNUAL TOTAL RETURN
Average annual total return is the average annual compounded rate of return
for the periods of one year, five years, ten years or the life of the Fund, all
ended on the last day of a recent month. Average annual total return quotations
reflect changes in the price of the Fund's shares and assume that all dividends
and capital gains distributions during the respective periods were reinvested in
Fund shares. Average annual total return is calculated by finding the average
annual compounded rates of return of a hypothetical investment over such periods
according to the following formula (average annual total return is then
expressed as a percentage):
T = (ERV/P)(1/n)-1
<TABLE>
<S> <C> <C>
Where: T = average annual total return
P = a hypothetical initial payment of $1,000
n = number of years
ERV = ending redeemable value: ERV is the value, at the end of the
applicable period, of a hypothetical $1,000 investment made at the
beginning of the applicable period.
</TABLE>
CUMULATIVE TOTAL RETURN
Cumulative total return is the cumulative rate of return on a hypothetical
initial investment of $1,000 for a specified period. Cumulative total return
quotations reflect changes in the price of the Fund's shares and assume that all
dividends and capital gains distributions during the period were reinvested in
Fund shares. Cumulative total return is calculated by finding the cumulative
rates of a return of a hypothetical investment over such periods, according to
the following formula (cumulative total return is then expressed as a
percentage):
C = (ERV/P)-1
<TABLE>
<S> <C> <C>
Where: C = cumulative total return
P = a hypothetical initial payment of $1,000
ERV = ending redeemable value: ERV is the value, at the end of the
applicable period, of a hypothetical $1,000 investment made at the
beginning of the applicable period.
</TABLE>
SEC YIELDS
Yield is the net annualized yield based on the specified 30-day (or one
month) period assuming semiannual compounding of income. Yield is calculated by
dividing the net investment income per share earned during the period by the
maximum offering price per share on the last day of the period, according to the
following formula:
Yield = 2[((a-b)/(cXd)+1)(6)-1]
<TABLE>
<C> <S>
Where: a = dividends and interest earned during the period.
b = expense accrued for the period (net of reimbursements).
c = the average daily number of shares outstanding during
the period that were entitled to receive dividends.
d = the maximum offering price per share on the last day of
the period.
</TABLE>
B-12
<PAGE> 15
MANAGEMENT OF THE TRUST
OFFICERS AND TRUSTEES
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. As a group, the Trust's
Trustees and Officers own less than 1% of the outstanding shares of each Fund of
the Trust. Each Trustee also serves as a Director of The Vanguard Group, Inc.,
and as a Trustee of each of the 36 investment companies administered by Vanguard
(35 in the case of Mr. Malkiel and 28 in the case of Mr. MacLaury). The mailing
address of the Trustees and Officers of the Trust is Post Office Box 876, Valley
Forge, PA 19482.
JOHN C. BOGLE, (DOB: 5/8/1929) Senior Chairman and Trustee*
Senior Chairman and Director of The Vanguard Group, Inc., and Trustee of each of
the investment companies in The Vanguard Group; Director of The Mead Corp.
(Paper Products), General Accident Insurance, and Chris-Craft Industries, Inc.
(Broadcasting & Plastics Manufacturer).
JOHN J. BRENNAN, (DOB: 7/29/1954) Chairman, Chief Executive Officer & Trustee*
Chairman, Chief Executive Officer and Director of The Vanguard Group, Inc., and
Trustee of each of the investment companies in The Vanguard Group.
JOANN HEFFERNAN HEISEN, (DOB: 1/25/1950) Trustee
Vice President, Chief Information Officer, and member of the Executive Committee
of Johnson and Johnson (Pharmaceuticals/Consumer Products), Director of Johnson
& Johnson*MERCK Consumer Pharmaceuticals Co., Women First HealthCare, Inc.
(Research and Education Institution), Recording for the Blind and Dyslexic, The
Medical Center at Princeton, and Women's Research and Education Institute.
BRUCE K. MACLAURY, (DOB: 5/7/1931) Trustee
President Emeritus of The Brookings Institution (Independent Non-Partisan
Research Organization); Director of American Express Bank, Ltd., The St. Paul
Companies, Inc. (Insurance and Financial Services), and National Steel Corp.
BURTON G. MALKIEL, (DOB: 8/28/1932) Trustee
Chemical Bank Chairman's Professor of Economics, Princeton University; Director
of Prudential Insurance Co. of America, Banco Bilbao Gestinova, Baker Fentress &
Co. (Investment Management), The Jeffrey Co. (Holding Company), and Southern New
England Telecommunications Co.
ALFRED M. RANKIN, JR., (DOB: 10/8/1941) Trustee
Chairman, President, Chief Executive Officer, and Director of NACCO Industries
(Machinery/Coal/Appliances); Director of The BFGoodrich Co. (Aircraft
Systems/Manufacturing/Chemicals), and The Standard Products Co. (Rubber Products
Company).
JOHN C. SAWHILL, (DOB: 6/12/1936) Trustee
President and Chief Executive Officer of The Nature Conservancy (Non-Profit
Conservation Group); Director of Pacific Gas and Electric Co., Procter & Gamble
Co., NACCO Industries (Machinery/Coal/Appliances), and Newfield Exploration Co.
(Energy); formerly, Director and Senior Partner of McKinsey & Co., and President
of New York University.
JAMES O. WELCH, JR., (DOB: 5/13/1931) Trustee
Retired Chairman of Nabisco Brands, Inc. (Food Products); retired Vice Chairman
and Director of RJR Nabisco (Food and Tobacco Products); Director of TECO
Energy, Inc., and Kmart Corp.
J. LAWRENCE WILSON, (DOB: 3/2/1936) Trustee
Chairman and Chief Executive Officer of Rohm & Haas Co. (Chemicals); Director of
Cummins Engine Co. (Diesel Engine Company), and The Mead Corp. (Paper Products);
and Trustee of Vanderbilt University.
RAYMOND J. KLAPINSKY, (DOB: 12/7/1938) Secretary*
Managing Director of The Vanguard Group, Inc.; Secretary of The Vanguard Group,
Inc. and of each of the investment companies in The Vanguard Group.
THOMAS J. HIGGINS, (DOB: 5/21/1957) Treasurer*
Principal of The Vanguard Group, Inc.; Treasurer of each of the investment
companies in The Vanguard Group.
B-13
<PAGE> 16
ROBERT D. SNOWDEN, (DOB: 9/4/1961) Controller*
Principal of The Vanguard Group, Inc.; Controller of each of the investment
companies in The Vanguard Group.
- ---------------
*Officers of the Trust are "interested persons" as defined in the 1940 Act.
THE VANGUARD GROUP
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 Trusts in The Vanguard 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 Trusts.
Vanguard employs a supporting staff of management and administrative
personnel needed to provide the requisite services to the Trusts and also
furnishes the Trusts with necessary office space, furnishings and equipment.
Each Trust pays its share of Vanguard's total expenses which are allocated among
the Trusts under methods approved by the Board of Trustees of each Trust. In
addition, each Trust bears its own direct expenses such as legal, auditing and
custodian fees.
The Trust's Officers are Officers of Vanguard. No Officer or employee owns,
or is permitted to own, any securities of any external adviser for the Trusts.
Vanguard adheres to a Code of Ethics established pursuant to Rule 17j-1
under the 1940 Act. 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 similar to, and in many cases more restrictive than, those
recommended by a blue ribbon panel of mutual fund industry executives.
Vanguard was established and operates under an Amended and Restated Funds'
Service Agreement which was approved by the shareholders of each of the Trusts.
The Amended and Restated Funds' Service Agreement provides that each Vanguard
Trust may be called upon to invest up to .40% of its current net assets in
Vanguard as contributions to Vanguard's capitalization, and that there is no
limit on the dollar amount that each Vanguard Trust may contribute to Vanguard's
capitalization. The amounts which each of the Trusts has invested are adjusted
from time to time in order to maintain the proportionate relationship between
each Trust's relative net assets and its contribution to Vanguard's capital. At
December 31, 1998, each Fund of the Trust had contributed capital to Vanguard
representing 0.02% of its net assets. The total amount contributed by the Trust
was $17,029,000, which represented 24.2% 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 Trusts by third parties.
DISTRIBUTION. Vanguard Marketing Corporation, a wholly-owned subsidiary of
Vanguard, provides all distribution and marketing activities for the Trusts in
the Group. 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 Vanguard Group. The
Trustees and Officers of Vanguard determine the amount to be spent annually on
distribution activities, the manner and amount to be spent on each Trust, and
whether to organize new investment companies.
One half of the distribution expenses of a marketing and promotional nature
is allocated among the various Vanguard Trusts based upon relative net assets.
The remaining one half of those expenses is allocated among the Trusts based
upon each Trust's sales for the preceding 24 months relative to the total sales
of the Trusts as a group; provided, however, that no Trust'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 Vanguard,
and that no Trust shall incur annual distribution expenses in excess of 20/100
of 1% of its average month-end net assets. With respect to the Funds which have
two classes of shares, expenses paid to
B-14
<PAGE> 17
Vanguard for marketing and distribution activities will be allocated to the
class of shares of the Fund 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 Trust. With respect to the Funds which have two classes of
shares, 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.
During the fiscal years ended December 31, 1996, 1997, and 1998, the Funds
incurred the following approximate amounts of Vanguard's management (including
transfer agency), distribution, and marketing expenses:
<TABLE>
<CAPTION>
FUND 1996 1997 1998
---- ----------- ----------- ------------
<S> <C> <C> <C>
Vanguard Total Stock Market Index Fund.............. $ 5,284,000 $ 9,113,000 $ 15,330,000
Vanguard 500 Index Fund............................. $44,885,000 $75,851,000 $108,134,000
Vanguard Extended Market Index Fund................. $ 4,248,000 $ 5,518,000 $ 6,534,000
Vanguard Mid-Cap Index Fund......................... N/A N/A $ 174,000*
Vanguard Small-Cap Index Fund....................... $ 3,199,000 $ 4,817,000 $ 6,369,000
Vanguard Value Index Fund........................... $ 1,394,000 $ 2,723,000 $ 4,562,000
Vanguard Small-Cap Value Index Fund................. N/A N/A $ 102,000*
Vanguard Growth Index Fund.......................... $ 947,000 $ 3,147,000 $ 8,785,000
Vanguard Small-Cap Growth Index Fund................ N/A N/A $ 65,000*
</TABLE>
- ---------------
* Since Inception, April 20, 1998.
INVESTMENT ADVISORY SERVICES. The Funds that comprise Vanguard Index Trust
receive all investment advisory services from Vanguard's Core Management Group.
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 Vanguard Funds utilizing these services. During the fiscal years
ended December 31, 1996, 1997 and 1998, the Funds incurred expenses for
investment advisory services in the following amounts:
<TABLE>
<CAPTION>
FUND 1996 1997 1998
---- ------- ------- --------
<S> <C> <C> <C>
Vanguard Total Stock Market Index Fund...................... $27,000 $56,000 $ 82,000
Vanguard 500 Index Fund..................................... $20,000 $67,000 $ 80,000
Vanguard Extended Market Index Fund......................... $27,000 $53,000 $ 73,000
Vanguard Mid-Cap Index Fund................................. N/A N/A $ 20,000*
Vanguard Small-Cap Index Fund............................... $29,000 $67,000 $100,000
Vanguard Value Index Fund................................... $12,000 $22,000 $ 37,000
Vanguard Small-Cap Value Index Fund......................... N/A N/A $ 20,000*
Vanguard Growth Index Fund.................................. $12,000 $22,000 $ 37,000
Vanguard Small-Cap Growth Index Fund........................ N/A N/A $ 20,000*
</TABLE>
- ---------------
* Since Inception, April 20, 1998.
TRUSTEE COMPENSATION
The same individuals serve as Trustees of all Vanguard Trusts (with two
exceptions, which are noted in the table appearing on page B-16), and each Trust
pays a proportionate share of the Trustees' compensation. The Trusts employ
their Officers on a shared basis, as well. However, Officers are compensated by
The Vanguard Group, Inc., not the Trusts.
INDEPENDENT TRUSTEES. The Trusts compensate their independent Trustees -- that
is, the ones who are not also Officers of the Trust -- in three ways:
- -- The independent Trustees receive an annual fee for their service to the
Trusts, which is subject to reduction based on absences from scheduled Board
meetings.
B-15
<PAGE> 18
- -- The independent Trustees are reimbursed for the travel and other expenses
that they incur in attending Board meetings.
- -- Upon retirement, the independent Trustees receive an aggregate annual fee of
$1,000 for each year served on the Board, up to fifteen years of service.
This annual fee is paid for ten years following retirement, or until each
Trustee's death.
"INTERESTED" TRUSTEES. The Trusts' interested Trustees -- Messrs. Bogle and
Brennan -- receive no compensation for their service in that capacity. However,
they are paid in their role as Officers of The Vanguard Group, Inc.
COMPENSATION TABLE. The following table provides compensation details for each
of the Trustees. We list the amounts paid as compensation and accrued as
retirement benefits by the Trust for each Trustee. In addition, the table shows
the total amount of benefits that we expect each Trustee to receive from all
Vanguard Trusts upon retirement, and the total amount of compensation paid to
each Trustee by all Vanguard Trusts. All information shown is for the fiscal
year ended December 31, 1998.
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(1)
----------------- ------------ ---------------------- --------------- -----------------------
<S> <C> <C> <C> <C>
John C. Bogle None None None None
John J. Brennan None None None None
Barbara Barnes Hauptfuhrer(2) $16,262 $2,199 $15,000 $75,000
JoAnn Heffernan Heisen $ 8,131 $ 956 $15,000 $37,500
Robert E. Cawthorn(2) $ 6,776 $1,466 $ 6,000 $31,250
Bruce K. MacLaury $17,016 $1,644 $12,000 $70,000
Burton G. Malkiel $16,374 $1,582 $15,000 $75,000
Alfred M. Rankin, Jr. $16,262 $1,157 $15,000 $75,000
John C. Sawhill $16,262 $1,466 $15,000 $75,000
James O. Welch, Jr. $16,262 $1,692 $15,000 $75,000
J. Lawrence Wilson $16,262 $1,222 $15,000 $75,000
</TABLE>
(1) The amounts reported in this column reflect the total compensation paid to
each Trustee for their service as Trustee of 36 Vanguard Funds (35 in the
case of Mr. Malkiel; 28 in the case of Mr. MacLaury).
(2) Mr. Cawthorn and Mrs. Hauptfuhrer have retired from the Trust's Board,
effective May 31, 1998 and December 31, 1998, respectively.
B-16
<PAGE> 19
PORTFOLIO TRANSACTIONS
In placing portfolio transactions on behalf of a Fund, Vanguard's Core
Management Group 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 is given to those brokers which supply statistical
information and provide other services in addition to execution services to the
Trust.
Since the Funds do not market their shares through intermediary brokers or
dealers, it is not the Funds' practice to allocate brokerage or principal
business on the basis of sales of their shares which may be made through such
firms. However, a Fund may place portfolio orders with qualified broker-dealers
who recommend the Fund 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 Fund shares by a broker or dealer in selecting among broker dealers.
During the fiscal years ended December 31, 1996, 1997 and 1998, the Funds
paid brokerage commissions in the following amounts:
<TABLE>
<CAPTION>
1996 1997 1998
---------- ---------- ----------
<S> <C> <C> <C>
Vanguard Total Stock Market Index Fund $ 592,313 $ 840,641 $1,104,269
Vanguard 500 Index Fund $2,689,619 $2,956,036 $4,181,268
Vanguard Extended Market Index Fund $ 840,353 $ 830,234 $ 966,456
Vanguard Mid-Cap Index Fund $ n/a $ n/a $ 109,539
Vanguard Small-Cap Index Fund $1,344,997 $1,480,436 $1,649,209
Vanguard Value Index Fund $ 229,085 $ 179,361 $ 254,984
Vanguard Small-Cap Value Index Fund $ n/a $ n/a $ 88,369
Vanguard Growth Index Fund $ 140,955 $ 294,025 $ 827,065
Vanguard Small-Cap Growth Index Fund $ n/a $ n/a $ 62,118
</TABLE>
B-17
<PAGE> 20
PERFORMANCE MEASURES
Vanguard may use reprinted material discussing The Vanguard Group, Inc. or
any of the member trusts 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 indexes for comparative performance purposes.
STANDARD & POOR'S 500 COMPOSITE STOCK PRICE INDEX -- includes stocks selected by
Standard & Poor's Index Committee to include leading companies in leading
industries and to reflect the U.S. stock market.
STANDARD & POOR'S 500/BARRA VALUE INDEX -- consists of the stocks in the
Standard & Poor's 500 Composite Stock Price Index (S&P 500) with the lowest
price-to-book ratios, comprising 50% of the market capitalization of the S&P
500.
STANDARD & POOR'S 500/BARRA GROWTH INDEX -- consists of the stocks in the S&P
500 with the highest price-to-book ratios, comprising 50% of the market
capitalization of the S&P 500.
STANDARD & POOR'S MIDCAP 400 INDEX -- is composed of 400 medium sized domestic
stocks.
STANDARD & POOR'S SMALLCAP 600/BARRA VALUE INDEX -- contains stocks of the S&P
SmallCap 600 Index which have a lower than average price-to-book ratio.
STANDARD & POOR'S SMALLCAP 600/BARRA GROWTH INDEX -- contains stocks of the S&P
SmallCap 600 Index which have a higher than average price-to-book ratio.
RUSSELL 1000 VALUE INDEX -- consists of the stocks in the Russell 1000 Index
(comprising the 1,000 largest U.S.-based companies measured by total market
capitalization) with the lowest price-to-book ratios, comprising 50% of the
market capitalization of the Russell 1000.
WILSHIRE 5000 EQUITY INDEX -- consists of more than 7,000 common equity
securities, covering all stocks in the U.S. for which daily pricing is
available.
WILSHIRE 4500 EQUITY INDEX -- consists of all stocks in the Wilshire 5000 except
for the 500 stocks in the Standard & Poor's 500 Index.
BOND BUYER MUNICIPAL BOND INDEX -- is a yield index on current coupon high-grade
general obligation municipal bonds.
RUSSELL 2000 STOCK INDEX -- is composed of approximately 2,000 small
capitalization stocks.
MERRILL LYNCH CORPORATE & GOVERNMENT BOND INDEX -- consists of over 4,500 U.S.
Treasury, Agency and investment grade corporate bonds.
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 a market weighted index that contains
individually priced U.S. Treasury securities 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.
B-18
<PAGE> 21
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).
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
$5 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 $800 billion.
LEHMAN BROTHERS LONG (10+) GOVERNMENT/CORPORATE INDEX -- is a market-weighted
index that contains individually priced U.S. Treasury, agency, and corporate
securities rated BBB- or better with maturities greater than 10 years. The index
has a market value of over $1.1 trillion.
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 $100 million outstanding. This index
includes over 1,500 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 $100 million
principal outstanding and maturity greater than 10 years.
FINANCIAL STATEMENTS
The Trust's Financial Statements as of and for the year ended December 31,
1998, appearing in the Vanguard Index Trust 1998 Annual Report to Shareholders
and inserts thereto, and the reports thereon of PricewaterhouseCoopers LLP,
independent accountants, also appearing therein, are incorporated by reference
in this Statement of Additional Information. For a more complete discussion of
the performance, please see the Trust's Annual Report to Shareholders, which may
be obtained without charge.
B-19
