<PAGE>
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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. 57
AND
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 59
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
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
IT IS PROPOSED THAT THIS FILING BECOME EFFECTIVE:
ON APRIL 21, 2000 PURSUANT TO PARAGRAPH (B) OF RULE 485.
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<PAGE>
VANGUARD(R)
U.S. STOCK INDEX
FUNDS
Prospectus
April 21, 2000
VANGUARD TOTAL STOCK
MARKET INDEX FUND
VANGUARD 500
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
This prospectus contains
financial data for the
Funds through the
fiscal year ended
December 31, 1999.
[MEMBERS OF
THE VANGUARD GROUP(R)]
<PAGE>
VANGUARD U.S. STOCK INDEX FUNDS
Prospectus
April 21, 2000
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CONTENTS
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1 AN INTRODUCTION TO INDEX FUNDS 35 INVESTMENT ADVISER
2 FUND PROFILES 35 DIVIDENDS, CAPITAL GAINS, AND TAXES
2 Vanguard Total Stock Market 37 SHARE PRICE
Index Fund
38 FINANCIAL HIGHLIGHTS
5 Vanguard 500 Index Fund
44 INVESTING WITH VANGUARD
8 Vanguard Extended Market
Index Fund 44 Services and Account Features
11 Vanguard Mid-Cap Index Fund 45 Types of Accounts
14 Vanguard Small-Cap Index Fund 46 Buying Shares
17 Vanguard Value Index Fund 48 Redeeming Shares
20 Vanguard Small-Cap Value 52 Transferring Registration
Index Fund
52 Fund and Account Updates
23 Vanguard Growth Index Fund
GLOSSARY (inside back cover)
26 Vanguard Small-Cap Growth
Index Fund
29 MORE ON THE FUNDS
34 THE FUNDS AND VANGUARD
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WHY READING THIS PROSPECTUS IS IMPORTANT
This prospectus explains the objectives, risks, and strategies of the Vanguard
U.S. Stock Index Funds. To highlight terms and concepts important to mutual fund
investors, we have provided "Plain Talk(R)" explanations along the way. Reading
the prospectus will help you to decide which Funds, if any, are the right
investments for you. We suggest that you keep it for future reference.
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IMPORTANT NOTE
Each of the Vanguard U.S. Stock Index Funds offers two separate classes of
shares: Investor and Institutional (except Vanguard 500 Index Fund, which offers
only Investor Shares). Investor Shares, which have an investment minimum of
$3,000 ($1,000 for IRAs), are offered by two separate prospectuses. This
prospectus is intended for individual investors and institutional clients. There
is also a prospectus for participants in employer-sponsored retirement plans,
which you can obtain by calling Vanguard at 1-800-523-1188.
Institutional Shares have an investment minimum of $10 million and generally do
not require special employee benefit plan services. Institutional Shares are
offered by another prospectus, which you can obtain by calling Vanguard's
Institutional Investor Group at 1-800-523-1036.
Note that the Funds' separate share classes have different expenses; as a
result, their investment performances will vary.
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NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE>
1
AN INTRODUCTION TO INDEX FUNDS
WHAT IS INDEXING?
An index is an unmanaged group of securities whose overall performance is used
as a standard to measure the investment performance of a particular market. An
index (or "passively managed") fund tries to match, as closely as possible, the
performance of an established target index. The fund does this by holding all,
or a representative sample, of the securities that constitute the index.
Stock index funds may seek to track indexes that hold a certain type of
stock--such as growth or value, small-cap or large-cap, or those from just one
industry--or they may seek to track indexes that consist of a broader range of
stocks--for example, the entire U.S. stock market.
Index funds do not have active managers, who buy and sell securities based
on research and analysis in an attempt to outperform a particular benchmark or
the market as a whole. Rather, index funds simply attempt to mirror what the
target index does, for better or worse.
KEEP IN MIND THAT AN INDEX FUND HAS OPERATING EXPENSES AND TRANSACTION
COSTS; A MARKET INDEX DOES NOT. THEREFORE, AN INDEX FUND--WHILE EXPECTED TO
TRACK ITS TARGET INDEX AS CLOSELY AS POSSIBLE--WILL TYPICALLY BE UNABLE TO MATCH
THE PERFORMANCE OF THE INDEX EXACTLY.
WHAT INDEX FUNDS DOES VANGUARD OFFER?
Vanguard offers a variety of stock (both U.S. and international), bond, and
balanced index funds. This prospectus provides information about Vanguard's U.S.
Stock Index Funds. There are nine such funds, each of which seeks to track a
different segment of the U.S. stock market:
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FUND SEEKS TO TRACK
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Vanguard Total Stock Market Index Fund The overall stock market
Vanguard 500 Index Fund Large-cap stocks
Vanguard Extended Market Index Fund Mid- and small-cap stocks
Vanguard Mid-Cap Index Fund Mid-cap stocks
Vanguard Small-Cap Index Fund Small-cap stocks
Vanguard Value Index Fund Large-cap value stocks
Vanguard Small-Cap Value Index Fund Small-cap value stocks
Vanguard Growth Index Fund Large-cap growth stocks
Vanguard Small-Cap Growth Index Fund Small-cap growth stocks
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This prospectus contains profiles that summarize key features of each Fund.
Following the profiles, there is important additional information about the
Funds.
<PAGE>
2
FUND PROFILE--VANGUARD(R) TOTAL STOCK MARKET INDEX FUND
The following profile summarizes key features of Vanguard Total Stock Market
Index Fund.
INVESTMENT OBJECTIVE
The Fund seeks to match the performance of a benchmark index that measures the
investment return of the overall stock market.
INVESTMENT STRATEGIES
The Fund employs a passive management strategy designed to track the performance
of the Wilshire 5000 Total Market Index, which consists of all the U.S. common
stocks regularly traded on the New York and American Stock Exchanges and the
Nasdaq over-the-counter market. The Fund invests all or substantially all of its
assets in a representative sample of the stocks that comprise the Index. For a
description of the Fund's sampling technique, please see "Indexing Methods"
under MORE ON THE FUNDS.
PRIMARY RISK
THE FUND'S TOTAL RETURN, LIKE STOCK PRICES GENERALLY, WILL FLUCTUATE WITHIN A
WIDE RANGE, SO AN INVESTOR COULD LOSE MONEY OVER SHORT OR EVEN LONG PERIODS.
Stock markets tend to move in cycles, with periods of rising prices and periods
of falling prices.
PERFORMANCE/RISK INFORMATION
The bar chart and table below provide an indication of the risk of investing in
the Fund. The bar chart shows the Fund's performance in each calendar year since
the Fund's inception. The table shows how the Fund's average annual total
returns for one and five calendar years and since inception compare with those
of the index that the Fund seeks to track. Keep in mind that the Fund's past
performance does not indicate how it will perform in the future.
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ANNUAL TOTAL RETURNS
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1993 10.62%
1994 -0.17%
1995 35.79%
1996 20.96%
1997 30.99%
1998 23.26%
1999 23.81%
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Return figures do not reflect the account maintenance fee imposed on accounts
with balances of less than $10,000 or the transaction fee on purchases through
1995.
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During the period shown in the bar chart, the highest return for a calendar
quarter was 21.51% (quarter ended December 31, 1998) and the lowest return for a
quarter was -12.07% (quarter ended September 30, 1998).
<PAGE>
3
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AVERAGE ANNUAL TOTAL RETURNS FOR YEARS ENDED DECEMBER 31, 1999
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SINCE
1 YEAR 5 YEARS INCEPTION*
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Vanguard Total Stock Market Index Fund** 23.81% 26.84% 19.80%
Wilshire 5000 Index 23.77 27.11 20.11
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*April 27, 1992.
**Return figures do not reflect the account maintenance fee imposed on accounts
with balances of less than $10,000 or the transaction fee on purchases
through 1995.
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FEES AND EXPENSES
The following table describes the fees and expenses you may pay if you buy and
hold shares of the Fund. The expenses shown under Annual Fund Operating Expenses
are based upon those incurred in the fiscal year ended December 31, 1999.
SHAREHOLDER FEES (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None
Transaction Fee on Purchases: None*
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fee: None
Exchange Fee: None
Account Maintenance Fee (for accounts under $10,000): $2.50/quarter**
ANNUAL FUND OPERATING EXPENSES (expenses deducted from the
Fund's assets)
Management Expenses: 0.18%
12b-1 Distribution Fee: None
Other Expenses: 0.02%
TOTAL ANNUAL FUND OPERATING EXPENSES: 0.20%
*The Fund reserves the right to deduct a transaction fee from future
purchases of shares.
**The account maintenance fee will be deducted from your quarterly
distribution of the Fund's dividends. If your distribution is less
than the fee, fractional shares will be automatically redeemed to
make up the difference.
The following example is intended to help you compare the cost of investing
in the Fund with the cost of investing in other mutual funds. It illustrates the
hypothetical expenses that you would incur over various periods if you invest
$10,000 in the Fund. This example assumes that the Fund provides a return of 5%
a year, and that operating expenses remain the same. The results apply whether
or not you redeem your investment at the end of each period.
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1 YEAR 3 YEARS 5 YEARS 10 YEARS
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$20 $64 $113 $255
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THIS EXAMPLE SHOULD NOT BE CONSIDERED TO REPRESENT ACTUAL EXPENSES OR
PERFORMANCE FROM THE PAST OR FOR THE FUTURE. ACTUAL FUTURE EXPENSES MAY BE
HIGHER OR LOWER THAN THOSE SHOWN.
<PAGE>
4
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ADDITIONAL INFORMATION
DIVIDENDS AND CAPITAL GAINS MINIMUM INITIAL INVESTMENT
Dividends are distributed quarterly in $3,000; $1,000 for IRAs and custodial
March, June, September, and December; accounts for minors
capital gains, if any, are
distributed annually in December NEWSPAPER ABBREVIATION
TotSt
INVESTMENT ADVISER
The Vanguard Group, Valley Forge, Pa., VANGUARD FUND NUMBER
since inception 085
INCEPTION DATE CUSIP NUMBER
April 27, 1992 922908306
NET ASSETS (ALL SHARE CLASSES) AS OF TICKER SYMBOL
DECEMBER 31, 1999 VTSMX
$22.1 billion
SUITABLE FOR IRAS
Yes
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<PAGE>
5
FUND PROFILE--VANGUARD(R) 500 INDEX FUND
The following profile summarizes key features of Vanguard 500 Index Fund.
INVESTMENT OBJECTIVE
The Fund seeks to match the performance of a benchmark index that measures the
investment return of large-capitalization stocks.
INVESTMENT STRATEGIES
The Fund employs a passive management strategy designed to track the performance
of the Standard & Poor's 500 Index, which is dominated by the stocks of large
U.S. companies. The Fund attempts to replicate the target index by investing all
or substantially all of its assets in the stocks that comprise the Index. For a
description of the Fund's replication technique, please see "Indexing Methods"
under MORE ON THE FUNDS.
PRIMARY RISKS
- - THE FUND'S TOTAL RETURN, LIKE STOCK PRICES GENERALLY, WILL FLUCTUATE WITHIN
A WIDE RANGE, SO AN INVESTOR COULD LOSE MONEY OVER SHORT OR EVEN LONG
PERIODS. Stock markets tend to move in cycles, with periods of rising
prices and periods of falling prices.
- - The Fund is also subject to investment style risk, which is the chance that
returns from large-capitalization stocks will trail returns from other
asset classes or the overall stock market. Large-capitalization stocks tend
to go through cycles of doing better--or worse--than the stock market in
general. These periods have, in the past, lasted for as long as several
years.
PERFORMANCE/RISK INFORMATION
The bar chart and table below provide an indication of the risk of investing in
the Fund. The bar chart shows the Fund's performance in each calendar year over
a ten-year period. The table shows how the Fund's average annual total returns
for one, five, and ten calendar years compare with those of the index that the
Fund seeks to track. Keep in mind that the Fund's past performance does not
indicate how it will perform in the future.
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ANNUAL TOTAL RETURNS
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1990 -3.32%
1991 30.22%
1992 7.42%
1993 9.89%
1994 1.18%
1995 37.45%
1996 22.88%
1997 33.19%
1998 28.62%
1999 21.07%
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Return figures do not reflect the account maintenance fee imposed on accounts
with balances of less than $10,000.
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During the period shown in the bar chart, the highest return for a calendar
quarter was 21.39% (quarter ended December 31, 1998) and the lowest return for a
quarter was -13.76% (quarter ended September 30, 1990).
<PAGE>
6
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AVERAGE ANNUAL TOTAL RETURNS FOR YEARS ENDED DECEMBER 31, 1999
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1 YEAR 5 YEARS 10 YEARS
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Vanguard 500 Index Fund* 21.07% 28.49% 18.07%
S&P 500 Index 21.04 28.56 18.21
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*Return figures do not reflect the account maintenance fee imposed on accounts
with balances of less than $10,000.
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FEES AND EXPENSES
The following table describes the fees and expenses you may pay if you buy and
hold shares of the Fund. The expenses shown under Annual Fund Operating Expenses
are based upon those incurred in the fiscal year ended December 31, 1999.
SHAREHOLDER FEES (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None
Transaction Fee on Purchases: None*
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fee: None
Exchange Fee: None
Account Maintenance Fee (for accounts under $10,000): $2.50/quarter**
ANNUAL FUND OPERATING EXPENSES (expenses deducted from the
Fund's assets)
Management Expenses: 0.16%
12b-1 Distribution Fee: None
Other Expenses: 0.02%
TOTAL ANNUAL FUND OPERATING EXPENSES: 0.18%
*The Fund reserves the right to deduct a transaction fee from future
purchases of shares.
**The account maintenance fee will be deducted from your quarterly
distribution of the Fund's dividends. If your distribution is less
than the fee, fractional shares will be automatically redeemed to
make up the difference.
The following example is intended to help you compare the cost of investing
in the Fund with the cost of investing in other mutual funds. It illustrates the
hypothetical expenses that you would incur over various periods if you invest
$10,000 in the Fund. This example assumes that the Fund provides a return of 5%
a year, and that operating expenses remain the same. The results apply whether
or not you redeem your investment at the end of each period.
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1 YEAR 3 YEARS 5 YEARS 10 YEARS
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$18 $58 $101 $230
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THIS EXAMPLE SHOULD NOT BE CONSIDERED TO REPRESENT ACTUAL EXPENSES OR
PERFORMANCE FROM THE PAST OR FOR THE FUTURE. ACTUAL FUTURE EXPENSES MAY BE
HIGHER OR LOWER THAN THOSE SHOWN.
<PAGE>
7
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ADDITIONAL INFORMATION
DIVIDENDS AND CAPITAL GAINS MINIMUM INITIAL INVESTMENT
Dividends are distributed quarterly in $3,000; $1,000 for IRAs and custodial
March, June, September, and December; accounts for minors
capital gains, if any, are
distributed annually in December NEWSPAPER ABBREVIATION
500
INVESTMENT ADVISER
The Vanguard Group, Valley Forge, Pa., VANGUARD FUND NUMBER
since inception 040
INCEPTION DATE CUSIP NUMBER
August 31, 1976 922908108
NET ASSETS AS OF DECEMBER 31, 1999 TICKER SYMBOL
$104.7 billion VFINX
SUITABLE FOR IRAS
Yes
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<PAGE>
8
FUND PROFILE--VANGUARD(R) EXTENDED MARKET INDEX FUND
The following profile summarizes key features of Vanguard Extended Market Index
Fund.
INVESTMENT OBJECTIVE
The Fund seeks to match the performance of a benchmark index that measures the
investment return of mid- and small-capitalization stocks.
INVESTMENT STRATEGIES
The Fund employs a passive management strategy designed to track the performance
of the Wilshire 4500 Completion Index, a broadly diversified index of stocks of
medium-size and small U.S. companies. The Wilshire 4500 Index contains all of
the U.S. common stocks regularly traded on the New York and American Stock
Exchanges and the Nasdaq over-the-counter market, except those stocks included
in the S&P 500 Index. The Fund invests all or substantially all of its assets in
a representative sample of the stocks that comprise the Index. For a description
of the Fund's sampling technique, please see "Indexing Methods" under MORE ON
THE FUNDS.
PRIMARY RISKS
- - THE FUND'S TOTAL RETURN, LIKE STOCK PRICES GENERALLY, WILL FLUCTUATE WITHIN
A WIDE RANGE, SO AN INVESTOR COULD LOSE MONEY OVER SHORT OR EVEN LONG
PERIODS. Stock markets tend to move in cycles, with periods of rising
prices and periods of falling prices.
- - The Fund is also subject to investment style risk, which is the chance that
returns from mid- or small-capitalization stocks will trail returns from
other asset classes or the overall stock market. Small- and mid-cap stocks
historically have been more volatile in price than the large-cap stocks
that dominate the S&P 500 Index, and perform differently than the overall
stock market.
PERFORMANCE/RISK INFORMATION
The bar chart and table below provide an indication of the risk of investing in
the Fund. The bar chart shows the Fund's performance in each calendar year over
a ten-year period. The table shows how the Fund's average annual total returns
for one, five, and ten calendar years compare with those of the index that the
Fund seeks to track. Keep in mind that the Fund's past performance does not
indicate how it will perform in the future.
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ANNUAL TOTAL RETURNS
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1990 -14.05%
1991 41.85%
1992 12.47%
1993 14.49%
1994 -1.76%
1995 33.80%
1996 17.65%
1997 26.73%
1998 8.32%
1999 36.22%
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Return figures do not reflect the account maintenance fee imposed on accounts
with balances of less than $10,000 or the transaction fee on purchases through
March 31, 2000.
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<PAGE>
9
During the period shown in the bar chart, the highest return for a calendar
quarter was 29.54% (quarter ended December 31, 1999) and the lowest return for a
quarter was -18.87% (quarter ended September 30, 1990).
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AVERAGE ANNUAL TOTAL RETURNS FOR YEARS ENDED DECEMBER 31, 1999
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1 YEAR 5 YEARS 10 YEARS
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Vanguard Extended Market Index Fund* 36.22% 24.10% 16.33%
Wilshire 4500 Index 35.37 23.65 16.16
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*Return figures do not reflect the account maintenance fee imposed on accounts
with balances of less than $10,000 or the transaction fee on purchases through
March 31, 2000.
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FEES AND EXPENSES
The following table describes the fees and expenses you may pay if you buy and
hold shares of the Fund. The expenses shown under Annual Fund Operating Expenses
are based upon those incurred in the fiscal year ended December 31, 1999.
SHAREHOLDER FEES (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None
Transaction Fee on Purchases: None*
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fee: None
Exchange Fee: None
Account Maintenance Fee (for accounts under $10,000): $10/year**
ANNUAL FUND OPERATING EXPENSES (expenses deducted from the
Fund's assets)
Management Expenses: 0.22%
12b-1 Distribution Fee: None
Other Expenses: 0.03%
TOTAL ANNUAL FUND OPERATING EXPENSES: 0.25%
*The Fund reserves the right to deduct a transaction fee from future
purchases of shares.
**The account maintenance fee will be deducted from your annual
distribution of the Fund's dividends. If your distribution is less
than the fee, fractional shares will be automatically redeemed to
make up the difference.
The following example is intended to help you compare the cost of investing
in the Fund with the cost of investing in other mutual funds. It illustrates the
hypothetical expenses that you would incur over various periods if you invest
$10,000 in the Fund. This example assumes that the Fund provides a return of 5%
a year, and that operating expenses remain the same. The results apply whether
or not you redeem your investment at the end of each period.
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1 YEAR 3 YEARS 5 YEARS 10 YEARS
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$26 $80 $141 $318
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THIS EXAMPLE SHOULD NOT BE CONSIDERED TO REPRESENT ACTUAL EXPENSES OR
PERFORMANCE FROM THE PAST OR FOR THE FUTURE. ACTUAL FUTURE EXPENSES MAY BE
HIGHER OR LOWER THAN THOSE SHOWN.
<PAGE>
10
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ADDITIONAL INFORMATION
DIVIDENDS AND CAPITAL GAINS MINIMUM INITIAL INVESTMENT
Distributed annually in December $3,000; $1,000 for IRAs and custodial
accounts for minors
INVESTMENT ADVISER
The Vanguard Group, Valley Forge, Pa., NEWSPAPER ABBREVIATION
since inception Extnd
INCEPTION DATE VANGUARD FUND NUMBER
December 21, 1987 098
NET ASSETS (ALL SHARE CLASSES) AS OF CUSIP NUMBER
DECEMBER 31, 1999 922908207
$5.1 billion
TICKER SYMBOL
SUITABLE FOR IRAS VEXMX
Yes
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<PAGE>
11
FUND PROFILE--VANGUARD(R) MID-CAP INDEX FUND
The following profile summarizes key features of Vanguard Mid-Cap Index Fund.
INVESTMENT OBJECTIVE
The Fund seeks to match the performance of a benchmark index that measures the
investment return of mid-capitalization stocks.
INVESTMENT STRATEGIES
The Fund employs a passive management strategy designed to track the performance
of the Standard & Poor's MidCap 400 Index, which is made up of a group of
medium-size U.S. companies. The Fund attempts to replicate the target index by
investing all or substantially all of its assets in the stocks that comprise the
Index. For a description of the Fund's replication technique, please see
"Indexing Methods" under MORE ON THE FUNDS.
PRIMARY RISKS
- - THE FUND'S TOTAL RETURN, LIKE STOCK PRICES GENERALLY, WILL FLUCTUATE WITHIN
A WIDE RANGE, SO AN INVESTOR COULD LOSE MONEY OVER SHORT OR EVEN LONG
PERIODS. Stock markets tend to move in cycles, with periods of rising
prices and periods of falling prices.
- - The Fund is also subject to investment style risk, which is the chance that
returns from mid-capitalization stocks will trail returns from other asset
classes or the overall stock market. Mid-cap stocks historically have been
more volatile in price than the large-cap stocks that dominate the S&P 500
Index and perform differently than the overall stock market.
PERFORMANCE/RISK INFORMATION
The bar chart and table below provide an indication of the risk of investing in
the Fund. The bar chart shows the Fund's performance in the one full calendar
year since its inception. The table shows how the Fund's average annual total
returns for one year and since inception compare with those of the index that
the Fund seeks to track. Keep in mind that the Fund's past performance does not
indicate how it will perform in the future.
- --------------------------------------------------------------------------------
ANNUAL TOTAL RETURN
- --------------------------------------------------------------------------------
1999 15.32%
- --------------------------------------------------------------------------------
The return figure does not reflect the account maintenance fee imposed on
accounts with balances of less than $10,000.
- --------------------------------------------------------------------------------
During the period shown in the bar chart, the highest return for a calendar
quarter was 17.27% (quarter ended December 31, 1999) and the lowest return for a
quarter was -8.20% (quarter ended September 30, 1999).
<PAGE>
12
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AVERAGE ANNUAL TOTAL RETURNS FOR YEARS ENDED DECEMBER 31, 1999
- --------------------------------------------------------------------------------
1 YEAR SINCE INCEPTION*
- --------------------------------------------------------------------------------
Vanguard Mid-Cap Index Fund** 15.32% 14.93%
S&P MidCap 400 Index 14.72 14.12
- --------------------------------------------------------------------------------
*May 21, 1998.
**Return figures do not reflect the account maintenance fee imposed on accounts
with balances of less than $10,000.
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FEES AND EXPENSES
The following table describes the fees and expenses you may pay if you buy and
hold shares of the Fund. The expenses shown under Annual Fund Operating Expenses
are based upon those incurred in the fiscal year ended December 31, 1999.
SHAREHOLDER FEES (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None
Transaction Fee on Purchases: None*
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fee: None
Exchange Fee: None
Account Maintenance Fee (for accounts under $10,000): $10/year**
ANNUAL FUND OPERATING EXPENSES (expenses deducted from the
Fund's assets)
Management Expenses: 0.22%
12b-1 Distribution Fee: None
Other Expenses: 0.03%
TOTAL ANNUAL FUND OPERATING EXPENSES: 0.25%
*The Fund reserves the right to deduct a transaction fee from future
purchases of shares.
**The account maintenance fee will be deducted from your annual
distribution of the Fund's dividends. If your distribution is less
than the fee, fractional shares will be automatically redeemed to
make up the difference.
The following example is intended to help you compare the cost of investing
in the Fund with the cost of investing in other mutual funds. It illustrates the
hypothetical expenses that you would incur over various periods if you invest
$10,000 in the Fund. This example assumes that the Fund provides a return of 5%
a year, and that operating expenses remain the same. The results apply whether
or not you redeem your investment at the end of each period.
- --------------------------------------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------
$26 $80 $141 $318
- --------------------------------------------------------------------------------
THIS EXAMPLE SHOULD NOT BE CONSIDERED TO REPRESENT ACTUAL EXPENSES OR
PERFORMANCE FROM THE PAST OR FOR THE FUTURE. ACTUAL FUTURE EXPENSES MAY BE
HIGHER OR LOWER THAN THOSE SHOWN.
<PAGE>
13
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION
DIVIDENDS AND CAPITAL GAINS MINIMUM INITIAL INVESTMENT
Distributed annually in December $3,000; $1,000 for IRAs and custodial
accounts for minors
INVESTMENT ADVISER
The Vanguard Group, Valley Forge, Pa., NEWSPAPER ABBREVIATION
since inception MidCp
INCEPTION DATE VANGUARD FUND NUMBER
May 21, 1998 859
NET ASSETS (ALL SHARE CLASSES) AS OF CUSIP NUMBER
DECEMBER 31, 1999 922908843
$748 million
TICKER SYMBOL
SUITABLE FOR IRAS VIMSX
Yes
- --------------------------------------------------------------------------------
<PAGE>
14
FUND PROFILE--VANGUARD(R) SMALL-CAP INDEX FUND
The following profile summarizes key features of Vanguard Small-Cap Index Fund.
INVESTMENT OBJECTIVE
The Fund seeks to match the performance of a benchmark index that measures the
investment return of small-capitalization stocks.
INVESTMENT STRATEGIES
The Fund employs a passive management strategy designed to track the performance
of the Russell 2000 Small Stock Index, which is made up of the stocks of smaller
U.S. companies. The Russell 2000 Index is comprised of the 2,000 smallest
companies out of the 3,000 largest U.S. companies. The Fund invests all or
substantially all of its assets in a representative sample of the stocks that
comprise the Index. For a description of the Fund's sampling technique, please
see "Indexing Methods" under MORE ON THE FUNDS.
PRIMARY RISKS
- - THE FUND'S TOTAL RETURN, LIKE STOCK PRICES GENERALLY, WILL FLUCTUATE WITHIN
A WIDE RANGE, SO AN INVESTOR COULD LOSE MONEY OVER SHORT OR EVEN LONG
PERIODS. Stock markets tend to move in cycles, with periods of rising
prices and periods of falling prices.
- - The Fund is also subject to investment style risk, which is the chance that
returns from small-capitalization stocks will trail returns from other
asset classes or the overall stock market. Small-cap stocks historically
have been more volatile in price than the large-cap stocks that dominate
the S&P 500 Index, and perform differently than the overall stock market.
PERFORMANCE/RISK INFORMATION
The bar chart and table below provide an indication of the risk of investing in
the Fund. The bar chart shows the Fund's performance in each calendar year over
a ten-year period. The table shows how the Fund's average annual total returns
for one, five, and ten calendar years compare with those of the index that the
Fund seeks to track. Keep in mind that the Fund's past performance does not
indicate how it will perform in the future.
- --------------------------------------------------------------------------------
ANNUAL TOTAL RETURNS
- --------------------------------------------------------------------------------
1990 -18.13%
1991 45.26%
1992 18.20%
1993 18.70%
1994 -0.51%
1995 28.74%
1996 18.12%
1997 24.59%
1998 -2.61%
1999 23.13%
- --------------------------------------------------------------------------------
Return figures do not reflect the account maintenance fee imposed on accounts
with balances of less than $10,000 or the transaction fee on purchases through
March 31, 2000.
- --------------------------------------------------------------------------------
During the period shown in the bar chart, the highest return for a calendar
quarter was 29.29% (quarter ended March 31, 1991) and the lowest return for a
quarter was -24.00% (quarter ended September 30, 1990).
<PAGE>
15
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS FOR YEARS ENDED DECEMBER 31, 1999
- --------------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------
Vanguard Small-Cap Index Fund* 23.13% 17.84% 14.20%
Russell 2000 Index 21.26 16.69 13.40
- --------------------------------------------------------------------------------
*Return figures do not reflect the account maintenance fee imposed on accounts
with balances of less than $10,000 or the transaction fee on purchases through
March 31, 2000.
- --------------------------------------------------------------------------------
FEES AND EXPENSES
The following table describes the fees and expenses you may pay if you buy and
hold shares of the Fund. The expenses shown under Annual Fund Operating Expenses
are based upon those incurred in the fiscal year ended December 31, 1999.
SHAREHOLDER FEES (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None
Transaction Fee on Purchases: None*
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fee: None
Exchange Fee: None
Account Maintenance Fee (for accounts under $10,000): $10/year**
ANNUAL FUND OPERATING EXPENSES (expenses deducted from the
Fund's assets)
Management Expenses: 0.21%
12b-1 Distribution Fee: None
Other Expenses: 0.04%
TOTAL ANNUAL FUND OPERATING EXPENSES: 0.25%
*The Fund reserves the right to deduct a transaction fee from future
purchases of shares.
**The account maintenance fee will be deducted from your annual
distribution of the Fund's dividends. If your distribution is less
than the fee, fractional shares will be automatically redeemed to
make up the difference.
The following example is intended to help you compare the cost of investing
in the Fund with the cost of investing in other mutual funds. It illustrates the
hypothetical expenses that you would incur over various periods if you invest
$10,000 in the Fund. This example assumes that the Fund provides a return of 5%
a year, and that operating expenses remain the same. The results apply whether
or not you redeem your investment at the end of each period.
- --------------------------------------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------
$26 $80 $141 $318
- --------------------------------------------------------------------------------
THIS EXAMPLE SHOULD NOT BE CONSIDERED TO REPRESENT ACTUAL EXPENSES OR
PERFORMANCE FROM THE PAST OR FOR THE FUTURE. ACTUAL FUTURE EXPENSES MAY BE
HIGHER OR LOWER THAN THOSE SHOWN.
<PAGE>
16
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION
DIVIDENDS AND CAPITAL GAINS MINIMUM INITIAL INVESTMENT
Distributed annually in December $3,000; $1,000 for IRAs and custodial
accounts for minors
INVESTMENT ADVISER
The Vanguard Group, Valley Forge, Pa., NEWSPAPER ABBREVIATION
since inception SmCap
INCEPTION DATE VANGUARD FUND NUMBER
October 3, 1960 048
NET ASSETS (ALL SHARE CLASSES) AS OF CUSIP NUMBER
DECEMBER 31, 1999 922908702
$4.0 billion
TICKER SYMBOL
SUITABLE FOR IRAS NAESX
Yes
- --------------------------------------------------------------------------------
<PAGE>
17
FUND PROFILE--VANGUARD(R) VALUE INDEX FUND
The following profile summarizes key features of Vanguard Value Index Fund.
INVESTMENT OBJECTIVE
The Fund seeks to match the performance of a benchmark index that measures the
investment return of large-capitalization value stocks.
INVESTMENT STRATEGIES
The Fund employs a passive management strategy designed to track the performance
of the Standard & Poor's 500/BARRA Value Index, which includes those stocks of
the S&P 500 Index with lower-than-average price/book ratios. The Fund attempts
to replicate the target index by investing all or substantially all of its
assets in the stocks that comprise the Index. For a description of the Fund's
replication technique, please see "Indexing Methods" under MORE ON THE FUNDS.
PRIMARY RISKS
- - THE FUND'S TOTAL RETURN, LIKE STOCK PRICES GENERALLY, WILL FLUCTUATE WITHIN
A WIDE RANGE, SO AN INVESTOR COULD LOSE MONEY OVER SHORT OR EVEN LONG
PERIODS. Stock markets tend to move in cycles, with periods of rising
prices and periods of falling prices.
- - The Fund is also subject to investment style risk, which is the chance that
returns from large-capitalization value stocks will trail returns from
other asset classes or the overall stock market. Value stocks tend to go
through cycles of doing better--or worse--than the stock market in general.
These periods have, in the past, lasted for as long as several years.
PERFORMANCE/RISK INFORMATION
The bar chart and table below provide an indication of the risk of investing in
the Fund. The bar chart shows the Fund's performance in each calendar year since
the Fund's inception. The table shows how the Fund's average annual total
returns for one and five calendar years and since inception compare with those
of the index that the Fund seeks to track. Keep in mind that the Fund's past
performance does not indicate how it will perform in the future.
- --------------------------------------------------------------------------------
ANNUAL TOTAL RETURNS
- --------------------------------------------------------------------------------
1993 18.35%
1994 -0.73%
1995 36.94%
1996 21.86%
1997 29.77%
1998 14.64%
1999 12.57%
- --------------------------------------------------------------------------------
Return figures do not reflect the account maintenance fee imposed on accounts
with balances of less than $10,000.
- --------------------------------------------------------------------------------
During the period shown in the bar chart, the highest return for a calendar
quarter was 17.50% (quarter ended December 31, 1998) and the lowest return for a
quarter was -12.96% (quarter ended September 30, 1998).
<PAGE>
18
-------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS FOR YEARS ENDED DECEMBER 31, 1999
- --------------------------------------------------------------------------------
SINCE
1 YEAR 5 YEARS INCEPTION*
- --------------------------------------------------------------------------------
Vanguard Value Index Fund** 12.57% 22.82% 18.66%
S&P 500/BARRA Value Index 12.72 22.94 18.81
- --------------------------------------------------------------------------------
*November 2, 1992.
**Return figures do not reflect the account maintenance fee imposed on accounts
with balances of less than $10,000.
- --------------------------------------------------------------------------------
FEES AND EXPENSES
The following table describes the fees and expenses you may pay if you buy and
hold shares of the Fund. The expenses shown under Annual Fund Operating Expenses
are based upon those incurred in the fiscal year ended December 31, 1999.
SHAREHOLDER FEES (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None
Transaction Fee on Purchases: None*
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fee: None
Exchange Fee: None
Account Maintenance Fee (for accounts under $10,000): $2.50/quarter**
ANNUAL FUND OPERATING EXPENSES (expenses deducted from the
Fund's assets)
Management Expenses: 0.19%
12b-1 Distribution Fee: None
Other Expenses: 0.03%
TOTAL ANNUAL FUND OPERATING EXPENSES: 0.22%
*The Fund reserves the right to deduct a transaction fee from future
purchases of shares.
**The account maintenance fee will be deducted from your quarterly
distribution of the Fund's dividends. If your distribution is less
than the fee, fractional shares will be automatically redeemed to
make up the difference.
The following example is intended to help you compare the cost of investing
in the Fund with the cost of investing in other mutual funds. It illustrates the
hypothetical expenses that you would incur over various periods if you invest
$10,000 in the Fund. This example assumes that the Fund provides a return of 5%
a year, and that operating expenses remain the same. The results apply whether
or not you redeem your investment at the end of each period.
- --------------------------------------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------
$23 $71 $124 $280
- --------------------------------------------------------------------------------
THIS EXAMPLE SHOULD NOT BE CONSIDERED TO REPRESENT ACTUAL EXPENSES OR
PERFORMANCE FROM THE PAST OR FOR THE FUTURE. ACTUAL FUTURE EXPENSES MAY BE
HIGHER OR LOWER THAN THOSE SHOWN.
<PAGE>
19
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION
DIVIDENDS AND CAPITAL GAINS MINIMUM INITIAL INVESTMENT
Dividends are distributed quarterly in $3,000; $1,000 for IRAs and custodial
March, June, September, and December; accounts for minors
capital gains, if any, are
distributed annually in December NEWSPAPER ABBREVIATION
Value
INVESTMENT ADVISER
The Vanguard Group, Valley Forge, Pa., VANGUARD FUND NUMBER
since inception 006
INCEPTION DATE CUSIP NUMBER
November 2, 1992 922908405
NET ASSETS (ALL SHARE CLASSES) AS OF TICKER SYMBOL
DECEMBER 31, 1999 VIVAX
$3.8 billion
SUITABLE FOR IRAS
Yes
- --------------------------------------------------------------------------------
<PAGE>
20
FUND PROFILE--VANGUARD(R) SMALL-CAP VALUE INDEX FUND
The following profile summarizes key features of Vanguard Small-Cap Value Index
Fund.
INVESTMENT OBJECTIVE
The Fund seeks to match the performance of a benchmark index that measures the
investment return of small-capitalization value stocks.
INVESTMENT STRATEGIES
The Fund employs a passive management strategy designed to track the performance
of the Standard & Poor's SmallCap 600/BARRA Value Index, which includes those
stocks of the S&P SmallCap 600 Index with lower-than-average price/book ratios.
The Fund attempts to replicate the target index by investing all or
substantially all of its assets in the stocks that comprise the Index. For a
description of the Fund's replication technique, please see "Indexing Methods"
under MORE ON THE FUNDS.
PRIMARY RISKS
- - THE FUND'S TOTAL RETURN, LIKE STOCK PRICES GENERALLY, WILL FLUCTUATE WITHIN
A WIDE RANGE, SO AN INVESTOR COULD LOSE MONEY OVER SHORT OR EVEN LONG
PERIODS. Stock markets tend to move in cycles, with periods of rising
prices and periods of falling prices.
- - The Fund is also subject to investment style risk, which is the chance that
returns from small-capitalization value stocks will trail returns from
other asset classes or the overall stock market. Value stocks tend to go
through cycles of doing better--or worse--than the stock market in general.
In addition, small-cap stocks historically have been more volatile in price
than the large-cap stocks that dominate the S&P 500 Index, and perform
differently than the overall stock market.
PERFORMANCE/RISK INFORMATION
The bar chart and table below provide an indication of the risk of investing in
the Fund. The bar chart shows the Fund's performance in the one full calendar
year since its inception. The table shows how the Fund's average annual total
returns for one year and since inception compare with those of the index that
the Fund seeks to track. Keep in mind that the Fund's past performance does not
indicate how it will perform in the future.
- --------------------------------------------------------------------------------
ANNUAL TOTAL RETURN
- --------------------------------------------------------------------------------
1999 3.35%
- --------------------------------------------------------------------------------
The return figure does not reflect the account maintenance fee imposed on
accounts with balances of less than $10,000 or the transaction fee on purchases.
- --------------------------------------------------------------------------------
<PAGE>
21
During the period shown in the bar chart, the highest return for a calendar
quarter was 20.08% (quarter ended June 30, 1999) and the lowest return for a
quarter was -9.50% (quarter ended March 31, 1999).
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS FOR YEARS ENDED DECEMBER 31, 1999
- --------------------------------------------------------------------------------
1 YEAR SINCE INCEPTION*
- --------------------------------------------------------------------------------
Vanguard Small-Cap Value Index Fund** 2.83% -6.31%
S&P SmallCap 600/BARRA Value Index 3.03 -6.73
- --------------------------------------------------------------------------------
*May 21, 1998.
**Return figures do not reflect the account maintenance fee imposed on accounts
with balances of less than $10,000 but do reflect the transaction fee of
0.50% on purchases.
- --------------------------------------------------------------------------------
FEES AND EXPENSES
The following table describes the fees and expenses you may pay if you buy and
hold shares of the Fund. The expenses shown under Annual Fund Operating Expenses
are based upon those incurred in the fiscal year ended December 31, 1999.
SHAREHOLDER FEES (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None
Transaction Fee on Purchases: 0.50%*
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fee: None
Exchange Fee: None
Account Maintenance Fee (for accounts under $10,000): $10/year**
ANNUAL FUND OPERATING EXPENSES (expenses deducted from the
Fund's assets)
Management Expenses: 0.20%
12b-1 Distribution Fee: None
Other Expenses: 0.05%
TOTAL ANNUAL FUND OPERATING EXPENSES: 0.25%
*The transaction fee is deducted from all purchases (including exchanges
from other Vanguard funds) but not from reinvested dividends or capital
gains.
**The account maintenance fee will be deducted from your annual
distribution of the Fund's dividends. If your distribution is
less than the fee, fractional shares will be automatically redeemed to
make up the difference.
The following example is intended to help you compare the cost of investing
in the Fund with the cost of investing in other mutual funds. It illustrates the
hypothetical expenses that you would incur over various periods if you invest
$10,000 in the Fund. This example assumes that the Fund provides a return of 5%
a year, and that operating expenses remain the same. The results apply whether
or not you redeem your investment at the end of each period.
- --------------------------------------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------
$75 $130 $190 $367
- --------------------------------------------------------------------------------
THIS EXAMPLE SHOULD NOT BE CONSIDERED TO REPRESENT ACTUAL EXPENSES OR
PERFORMANCE FROM THE PAST OR FOR THE FUTURE. ACTUAL FUTURE EXPENSES MAY BE
HIGHER OR LOWER THAN THOSE SHOWN.
<PAGE>
22
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION
DIVIDENDS AND CAPITAL GAINS MINIMUM INITIAL INVESTMENT
Distributed annually in December $3,000; $1,000 for IRAs and custodial
accounts for minors
INVESTMENT ADVISER
The Vanguard Group, Valley Forge, Pa., NEWSPAPER ABBREVIATION
since inception SmVal
INCEPTION DATE VANGUARD FUND NUMBER
May 21, 1998 860
NET ASSETS (ALL SHARE CLASSES) AS OF CUSIP NUMBER
DECEMBER 31, 1999 922908793
$214 million
TICKER SYMBOL
SUITABLE FOR IRAS VISVX
Yes
- --------------------------------------------------------------------------------
<PAGE>
23
FUND PROFILE--VANGUARD(R) GROWTH INDEX FUND
The following profile summarizes key features of Vanguard Growth Index Fund.
INVESTMENT OBJECTIVE
The Fund seeks to match the performance of a benchmark index that measures the
investment return of large-capitalization growth stocks.
INVESTMENT STRATEGIES
The Fund employs a passive management strategy designed to track the performance
of the Standard & Poor's 500/BARRA Growth Index, which includes those stocks of
the S&P 500 Index with higher-than-average price/book ratios. The Fund attempts
to replicate the target index by investing all or substantially all of its
assets in the stocks that comprise the Index. For a description of the Fund's
replication technique, please see "Indexing Methods" under MORE ON THE FUNDS.
PRIMARY RISKS
THE FUND'S TOTAL RETURN, LIKE STOCK PRICES GENERALLY, WILL FLUCTUATE WITHIN A
WIDE RANGE, SO AN INVESTOR COULD LOSE MONEY OVER SHORT OR EVEN LONG PERIODS.
Stock markets tend to move in cycles, with periods of rising prices and periods
of falling prices. The Fund is also subject to:
- - Investment style risk, which is the chance that returns from
large-capitalization growth stocks will trail returns from other asset
classes or the overall stock market. Growth stocks tend to go through
cycles of doing better--or worse--than the stock market in general. These
periods have, in the past, lasted for as long as several years.
- - Nondiversification risk, which is the chance that the Fund's performance
could be hurt disproportionately by a decline in the price of just a few
stocks. This is because the Fund invests a greater percentage of its assets
in the stocks of fewer companies as compared with other mutual funds.
PERFORMANCE/RISK INFORMATION
The bar chart and table below provide an indication of the risk of investing in
the Fund. The bar chart shows the Fund's performance in each calendar year since
the Fund's inception. The table shows how the Fund's average annual total
returns for one and five calendar years and since inception compare with those
of the index that the Fund seeks to track. Keep in mind that the Fund's past
performance does not indicate how it will perform in the future.
- --------------------------------------------------------------------------------
ANNUAL TOTAL RETURNS
- --------------------------------------------------------------------------------
1993 1.53%
1994 2.89%
1995 38.06%
1996 23.74%
1997 36.34%
1998 42.21%
1999 28.76%
- --------------------------------------------------------------------------------
Return figures do not reflect the account maintenance fee imposed on accounts
with balances of less than $10,000.
- --------------------------------------------------------------------------------
<PAGE>
24
During the period shown in the bar chart, the highest return for a calendar
quarter was 24.64% (quarter ended December 31, 1998) and the lowest return for a
quarter was -7.21% (quarter ended September 30, 1998).
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS FOR YEARS ENDED DECEMBER 31, 1999
- --------------------------------------------------------------------------------
SINCE
1 YEAR 5 YEARS INCEPTION*
- --------------------------------------------------------------------------------
Vanguard Growth Index Fund** 28.76% 33.65% 23.74%
S&P 500/BARRA Growth Index 28.25 33.64 23.84
- --------------------------------------------------------------------------------
*November 2, 1992.
**Return figures do not reflect the account maintenance fee imposed on accounts
with balances of less than $10,000.
- --------------------------------------------------------------------------------
FEES AND EXPENSES
The following table describes the fees and expenses you may pay if you buy and
hold shares of the Fund. The expenses shown under Annual Fund Operating Expenses
are based upon those incurred in the fiscal year ended December 31, 1999.
SHAREHOLDER FEES (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None
Transaction Fee on Purchases: None*
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fee: None
Exchange Fee: None
Account Maintenance Fee (for accounts under $10,000): $2.50/quarter**
ANNUAL FUND OPERATING EXPENSES (expenses deducted from the
Fund's assets)
Management Expenses: 0.20%
12b-1 Distribution Fee: None
Other Expenses: 0.02%
TOTAL ANNUAL FUND OPERATING EXPENSES: 0.22%
*The Fund reserves the right to deduct a transaction fee from future
purchases of shares.
**The account maintenance fee will be deducted from your quarterly
distribution of the Fund's dividends. If your distribution is less
than the fee, fractional shares will be automatically redeemed to
make up the difference.
The following example is intended to help you compare the cost of investing
in the Fund with the cost of investing in other mutual funds. It illustrates the
hypothetical expenses that you would incur over various periods if you invest
$10,000 in the Fund. This example assumes that the Fund provides a return of 5%
a year, and that operating expenses remain the same. The results apply whether
or not you redeem your investment at the end of each period.
- --------------------------------------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------
$23 $71 $124 $280
- --------------------------------------------------------------------------------
THIS EXAMPLE SHOULD NOT BE CONSIDERED TO REPRESENT ACTUAL EXPENSES OR
PERFORMANCE FROM THE PAST OR FOR THE FUTURE. ACTUAL FUTURE EXPENSES MAY BE
HIGHER OR LOWER THAN THOSE SHOWN.
<PAGE>
25
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION
DIVIDENDS AND CAPITAL GAINS MINIMUM INITIAL INVESTMENT
Dividends are distributed quarterly in $3,000; $1,000 for IRAs and custodial
March, June, September, and December; accounts for minors
capital gains, if any, are
distributed annually in December NEWSPAPER ABBREVIATION
Growth
INVESTMENT ADVISER
The Vanguard Group, Valley Forge, Pa., VANGUARD FUND NUMBER
since inception 009
INCEPTION DATE CUSIP NUMBER
November 2, 1992 922908504
NET ASSETS (ALL SHARE CLASSES) AS OF TICKER SYMBOL
DECEMBER 31, 1999 VIGRX
$15.7 billion
SUITABLE FOR IRAS
Yes
- --------------------------------------------------------------------------------
<PAGE>
26
FUND PROFILE--VANGUARD(R) SMALL-CAP GROWTH INDEX FUND
The following profile summarizes key features of Vanguard Small-Cap Growth Index
Fund.
INVESTMENT OBJECTIVE
The Fund seeks to match the performance of a benchmark index that measures the
investment return of small-capitalization growth stocks.
INVESTMENT STRATEGIES
The Fund employs a passive management strategy designed to track the performance
of the Standard & Poor's SmallCap 600/BARRA Growth Index, which includes those
stocks of the S&P SmallCap 600 Index with higher-than-average price/book ratios.
The Fund attempts to replicate the target index by investing all or
substantially all of its assets in the stocks that comprise the Index. For a
description of the Fund's replication technique, please see "Indexing Methods"
under MORE ON THE FUNDS.
PRIMARY RISKS
- - THE FUND'S TOTAL RETURN, LIKE STOCK PRICES GENERALLY, WILL FLUCTUATE WITHIN
A WIDE RANGE, SO AN INVESTOR COULD LOSE MONEY OVER SHORT OR EVEN LONG
PERIODS. Stock markets tend to move in cycles, with periods of rising
prices and periods of falling prices.
- - The Fund is also subject to investment style risk, which is the chance that
returns from small-capitalization growth stocks will trail returns from
other asset classes or the overall stock market. Growth stocks tend to go
through cycles of doing better--or worse--than the stock market in general.
In addition, small-cap stocks historically have been more volatile in price
than the large-cap stocks that dominate the S&P 500 Index, and perform
differently than the overall stock market.
PERFORMANCE/RISK INFORMATION
The bar chart and table below provide an indication of the risk of investing in
the Fund. The bar chart shows the Fund's performance in the one full calendar
year since its inception. The table shows how the Fund's average annual total
returns for one year and since inception compare with those of the index that
the Fund seeks to track. Keep in mind that the Fund's past performance does not
indicate how it will perform in the future.
- --------------------------------------------------------------------------------
ANNUAL TOTAL RETURN
- --------------------------------------------------------------------------------
1999 19.80%
- --------------------------------------------------------------------------------
The return figure does not reflect the account maintenance fee imposed on
accounts with balances of less than $10,000 or the transaction fee on purchases.
- --------------------------------------------------------------------------------
<PAGE>
27
During the period shown in the bar chart, the highest return for a calendar
quarter was 20.69% (quarter ended December 31, 1999) and the lowest return for a
quarter was -8.29% (quarter ended March 31, 1999).
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS FOR YEARS ENDED DECEMBER 31, 1999
- --------------------------------------------------------------------------------
1 YEAR SINCE INCEPTION*
- --------------------------------------------------------------------------------
Vanguard Small-Cap Growth Index Fund** 19.20% 8.17%
S&P SmallCap 600/BARRA Growth Index 19.57 8.24
- --------------------------------------------------------------------------------
*May 21, 1998.
**Return figures do not reflect the account maintenance fee imposed on accounts
with balances of less than $10,000 but do reflect the transaction fee of
0.50% on purchases.
- --------------------------------------------------------------------------------
FEES AND EXPENSES
The following table describes the fees and expenses you may pay if you buy and
hold shares of the Fund. The expenses shown under Annual Fund Operating Expenses
are based upon those incurred in the fiscal year ended December 31, 1999.
SHAREHOLDER FEES (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None
Transaction Fee on Purchases: 0.50%*
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fee: None
Exchange Fee: None
Account Maintenance Fee (for accounts under $10,000): $10/year**
ANNUAL FUND OPERATING EXPENSES (expenses deducted from the
Fund's assets)
Management Expenses: 0.20%
12b-1 Distribution Fee: None
Other Expenses: 0.05%
TOTAL ANNUAL FUND OPERATING EXPENSES: 0.25%
*The transaction fee is deducted from all purchases (including exchanges
from other Vanguard funds), but not from reinvested dividends or capital
gains.
**The account maintenance fee will be deducted from your annual
distribution of the Fund's dividends. If your distribution is less
than the fee, fractional shares will be automatically redeemed to
make up the difference.
The following example is intended to help you compare the cost of investing
in the Fund with the cost of investing in other mutual funds. It illustrates the
hypothetical expenses that you would incur over various periods if you invest
$10,000 in the Fund. This example assumes that the Fund provides a return of 5%
a year, and that operating expenses remain the same. The results apply whether
or not you redeem your investment at the end of each period.
- --------------------------------------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------
$75 $130 $190 $367
- --------------------------------------------------------------------------------
THIS EXAMPLE SHOULD NOT BE CONSIDERED TO REPRESENT ACTUAL EXPENSES OR
PERFORMANCE FROM THE PAST OR FOR THE FUTURE. ACTUAL FUTURE EXPENSES MAY BE
HIGHER OR LOWER THAN THOSE SHOWN.
<PAGE>
28
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION
DIVIDENDS AND CAPITAL GAINS MINIMUM INITIAL INVESTMENT
Distributed annually in December $3,000; $1,000 for IRAs and custodial
accounts for minors
INVESTMENT ADVISER
The Vanguard Group, Valley Forge, Pa., NEWSPAPER ABBREVIATION
since inception SmGth
INCEPTION DATE VANGUARD FUND NUMBER
May 21, 1998 861
NET ASSETS AS OF DECEMBER 31, 1999 CUSIP NUMBER
$167 million 922908827
SUITABLE FOR IRAS TICKER SYMBOL
Yes VISGX
- --------------------------------------------------------------------------------
<PAGE>
29
MORE ON THE FUNDS
The following sections discuss other important features of Vanguard U.S. Stock
Index Funds.
WHY INVEST IN INDEX FUNDS?
Index funds appeal to many investors for a number of reasons:
- - Variety of investments. Vanguard index funds generally invest in a wide
variety of companies and industries.
- - Relative consistency. Because they seek to track market benchmarks, index
funds by definition will not perform dramatically better or worse than
their target indexes.
- - Low cost. Index funds do not have many of the expenses of an actively
managed fund, such as research costs; in addition, they keep trading
activity--and thus brokerage commissions--to a minimum.
- - Low realization of capital gains. Because an index fund typically sells
securities only to respond to redemption requests or to adjust its holdings
to reflect a change in its target index, the fund's turnover rate--and thus
its realization of taxable capital gains--is usually very low.
INDEXING METHODS
In seeking to track a particular index, a fund generally uses one of two methods
to select stocks.
Some index funds hold each stock found in their target indexes in about the
same proportions as represented in the indexes themselves. This is called a
"replication" method. For example, if 5% of the S&P 500 Index were made up of
the stock of a specific company, a fund tracking that index (such as Vanguard
500 Index Fund) would invest about 5% of its assets in that company. The 500,
Mid-Cap, Value, Small-Cap Value, Growth, and Small-Cap Growth Index Funds employ
the replication method of indexing.
Because it would be very expensive to buy and sell all of the stocks held
in certain indexes (the Wilshire 5000 Index, for example, included more than
7,000 stocks as of December 31, 1999), many funds tracking these larger indexes
use a "sampling" technique. At Vanguard, we use a sophisticated computer program
to select a representative sample of stocks from a Fund's target index that will
resemble the full index in terms of industry weightings, market capitalization,
price/earnings ratio, dividend yield, and other characteristics. For instance,
if 10% of the Wilshire 5000 Index were made up of utility stocks, the Total
Stock Market Index Fund would invest about 10% of its assets in some--but not
all--of those utility stocks. The particular utility stocks selected by the
Fund, as a group, would have investment characteristics similar to those of the
utility stocks in the Index. Although the Funds' adviser attempts to closely
track the performance of the index, there is no guarantee that securities
selected for a Fund will provide investment performance exactly matching that of
its target index. The Total Stock Market, Extended Market, and Small-Cap Index
Funds employ the sampling method of indexing.
Each Fund seeks to provide investment results that correspond to its target
index. The correlation between the performance of a Fund and its target index is
expected to be at least 95%. (A correlation of 100% would indicate perfect
correlation.)
The following table shows the number of stocks held by each of the Funds,
and the number of stocks in each Fund's target index, as of December 31, 1999.
<PAGE>
30
- --------------------------------------------------------------------------------
NUMBER OF NUMBER OF STOCKS
FUND STOCKS HELD IN TARGET INDEX
- --------------------------------------------------------------------------------
Total Stock Market 3,375 7,093
500 507 500
Extended Market 2,843 6,605
Mid-Cap 402 400
Small-Cap 1,768 1,857
Value 398 394
Small-Cap Value 406 403
Growth 110 106
Small-Cap Growth 198 197
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
GROWTH FUNDS AND VALUE FUNDS
Growth investing and value investing are two styles employed by stock fund
managers. Growth funds generally focus on companies believed to have
above-average potential for growth in revenue and earnings. Reflecting the
market's high expectations for superior growth, such stocks typically have low
dividend yields and above-average prices in relation to such measures as
revenue, earnings, and book value. Value funds generally emphasize stocks of
companies from which the market does not expect strong growth. The prices of
value stocks typically are below-average in comparison with such factors as
earnings and book value, and these stocks typically have above-average dividend
yields. Growth and value stocks have, in the past, produced similar long-term
returns, though each category has periods when it outperforms the other. In
general, growth funds appeal to investors who will accept more volatility in
hopes of a greater increase in share price. Growth funds also may appeal to
investors with taxable accounts who want a higher proportion of returns to come
as capital gains (which may be taxed at lower rates than dividend income). Value
funds, by contrast, are appropriate for investors who want some dividend income
and the potential for capital gains, but are less tolerant of share-price
fluctuations.
- --------------------------------------------------------------------------------
ADDITIONAL RISK INFORMATION
[FLAG] EACH FUND IS SUBJECT TO MARKET RISK, WHICH IS THE CHANCE THAT STOCK
PRICES OVERALL WILL DECLINE OVER SHORT OR EVEN LONG 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 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 Vanguard 500 Index Fund--is a widely used barometer of stock market
activity. (Total returns consist of dividend income plus change in market
price.) 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 best and worst tends to narrow over the
long term.
<PAGE>
31
- --------------------------------------------------------------------------------
U.S. STOCK MARKET RETURNS (1926-1999)
- --------------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS 20 YEARS
- --------------------------------------------------------------------------------
Best 54.2% 28.6% 19.9% 17.9%
Worst -43.1 -12.4 -0.9 3.1
Average 13.2 11.0 11.1 11.1
- --------------------------------------------------------------------------------
The table covers all of the 1-, 5-, 10-, and 20-year periods from 1926
through 1999. You can see, for example, that while the average return on common
stocks for all of the 5-year periods was 11.0%, returns for individual 5-year
periods ranged from a -12.4% average (from 1928 through 1932) to 28.6% (from
1995 through 1999). These average returns reflect past performance on common
stocks; you should not regard them as an indication of future returns from
either the stock market as a whole or any Fund in particular.
Even indexes that are subsets of the S&P 500 Index--such as the S&P
500/BARRA Value Index and the S&P 500/BARRA Growth Index (the target indexes for
the Value and Growth Index Funds)--will not perform in the same way as the
broader S&P 500 Index. Historically, stocks of the S&P 500/BARRA Value Index
have been less volatile than the stocks found in the broader S&P 500 Index;
stocks of the S&P 500/BARRA Growth Index, on the other hand, have displayed
somewhat greater short-term volatility than the S&P 500 Index's stocks. However,
both value and growth stocks have the potential at times to be more volatile
than the broader market.
[FLAG] THE FUNDS ARE ALSO SUBJECT, IN VARYING DEGREES, TO INVESTMENT STYLE RISK,
WHICH IS THE CHANCE THAT RETURNS FROM A SPECIFIC TYPE OF STOCK (FOR
INSTANCE, SMALL-CAP OR VALUE) WILL TRAIL RETURNS FROM OTHER ASSET CLASSES
OR THE OVERALL STOCK MARKET. EACH TYPE OF STOCK TENDS TO GO THROUGH CYCLES
OF DOING BETTER--OR WORSE--THAN COMMON STOCKS IN GENERAL. THESE PERIODS
HAVE, IN THE PAST, LASTED FOR AS LONG AS SEVERAL YEARS.
RISK OF NONDIVERSIFICATION
[FLAG] As index funds, each of the U.S. Stock Index Funds holds the largest
stocks in its target index in approximately the same percentages as those stocks
are represented in its index. When a target index becomes less diversified, a
fund that tracks that index similarly becomes less diversified. This has
happened to the GROWTH INDEX FUND. Due to the rapid appreciation of certain
stocks in its target index, the Fund's top four holdings, as of the date of this
prospectus, represent more than 25% of its total assets. By tracking its target
index, the Fund technically has become "nondiversified" under SEC standards,
although it continues to hold more than 100 stock positions in a variety of
market sectors. As the market values of the Fund's largest holdings rise and
fall, there may be times when the Fund is diversified under SEC standards and
other times when it is not. Shareholders in Vanguard Growth Index Fund are
subject to the risk that the Fund's performance could be hurt disproportionately
by a decline in the price of just a few stocks.
In the unlikely event that the target index of any of the other Vanguard
U.S. Stock Index Funds becomes dominated by just a few companies, shareholders
in that Fund would similarly be subject to the risk of nondiversification.
<PAGE>
32
- --------------------------------------------------------------------------------
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.
Market capitalization changes over time, and there is no "official" definition
of the boundaries of large-, mid-, and small-cap stocks. Vanguard generally
defines large-capitalization (large-cap) funds as those holding stocks of
companies whose outstanding shares have a market value exceeding $12 billion;
mid-cap funds as those holding stocks of companies with a market value between
$1 billion and $12 billion; and small-cap funds as those typically holding
stocks of companies with a market value of less than $1 billion. Vanguard
periodically reassesses these classifications.
- --------------------------------------------------------------------------------
TRANSACTION FEES AND ACCOUNT MAINTENANCE FEES
Some of Vanguard's index funds charge a transaction fee on purchases of fund
shares to offset the higher costs of trading certain securities, particularly
small-company stocks. The transaction fee ensures that these higher costs are
borne by the investors making the transactions--and not by shareholders already
in the fund who do not generate the costs. All transaction fees are paid
directly into the fund itself (unlike a sales charge or load that non-Vanguard
funds may impose to compensate their sales representatives). Without transaction
fees, some index funds would have trouble tracking their target indexes.
In addition, Vanguard assesses an account maintenance fee on index fund
shareholders whose account balances are below $10,000 (for any reason, including
a decline in the value of a Fund's shares) on the date a dividend is
distributed. This fee is intended to allocate the costs of maintaining accounts
more equitably among shareholders. For funds that distribute dividends
quarterly, the account maintenance fee is $2.50 per quarter, deducted from the
quarterly dividend, which usually is distributed during the last two weeks of
each calendar quarter. For funds that distribute dividends annually, the account
maintenance fee is $10 per year, deducted from the annual dividend, which
usually is distributed during the last two weeks of the calendar year. If the
fee is deducted from your dividend distribution, you will still be taxed on the
full amount of your dividend (unless you hold your shares through a nontaxable
account). If you are due a dividend that is less than the fee, fractional shares
will be automatically redeemed to make up the difference. This fee cannot be
prepaid.
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 prices 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 have adopted the following policies, among others, designed
to discourage short-term trading:
- - Each Fund reserves the right to reject any purchase request--including
exchanges from other Vanguard funds--that it regards as disruptive to the
efficient management of the Fund. A purchase request could be rejected
because of the timing of the investment or because of a history of
excessive trading by the investor.
- - Two of the Funds (Small-Cap Value and Small-Cap Growth) charge a
transaction fee on purchases.
<PAGE>
33
- - There is a limit on the number of times you can exchange into and out of a
Fund (see "Redeeming Shares" in the INVESTING WITH VANGUARD section).
- - Telephone and online exchanges are not permitted for non-IRA accounts.
THE VANGUARD FUNDS DO NOT PERMIT MARKET-TIMING. DO NOT INVEST IN THESE
FUNDS IF YOU ARE A MARKET-TIMER.
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
THE COSTS OF INVESTING
Costs are an important consideration in choosing a mutual fund. That's because
you, as a shareholder, pay the costs of operating a fund, plus any transaction
costs associated with the fund's buying and selling of securities. These costs
can erode a substantial portion of the gross income or capital appreciation a
fund achieves. Even seemingly small differences in fund expenses can, over time,
have a dramatic effect on a fund's performance.
- --------------------------------------------------------------------------------
TURNOVER RATE
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 fund's target index. Turnover rates for large-cap stock index funds tend
to be very low because large-cap indexes, such as the S&P 500, typically do not
change much from year to year. Turnover rates for mid-cap and small-cap stock
index funds tend to be higher (although still relatively low, compared to
actively managed stock funds), because the indexes they track are more likely to
change as a result of mergers, acquisitions, business failures, or growth of
companies than a larger-cap index. The turnover rate of each Fund for each of
the last five years (or since inception of the Fund, if shorter) is shown in the
FINANCIAL HIGHLIGHTS section of this prospectus.
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
TURNOVER RATE
Before investing in a mutual fund, you should review its turnover rate. This
gives an indication of how transaction costs could affect 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 turnover rates may be more likely
to generate capital gains that must be distributed to shareholders as income
subject to taxes. As of December 31, 1999, the average turnover rate for
passively managed domestic equity index funds investing in common stocks was
approximately 18%; for all domestic stock funds, the average turnover rate was
approximately 89%, according to Morningstar, Inc. (A turnover rate of 100% would
occur, for example, if a fund sold and replaced securities valued at 100% of its
net assets within a one-year period.)
- --------------------------------------------------------------------------------
INVESTMENT POLICIES
Each Fund reserves the right to substitute a different index for the index it
currently tracks if the current index is discontinued, or for any other reason
determined in good faith by the Fund's Board of Trustees. In every such
instance, the substitute index will measure the same general market (large-,
mid-, or small-cap, growth, or value) as the current index.
<PAGE>
34
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. It is not expected that any Fund will
invest more than 5% of its assets in foreign securities.
Although index funds, by their nature, tend to be tax-efficient investment
vehicles, the Funds generally are managed without regard to tax ramifications.
To track their target indexes as closely as possible, the Funds attempt to
remain fully invested (at least 95% of total assets) in the stocks of the index.
To help stay fully invested, and to reduce transaction costs, the Funds may
invest, to a limited extent, in futures and options contracts, warrants,
convertible securities, and swap agreements, which are types of derivatives.
Losses (or gains) involving futures can sometimes be substantial--in part
because a relatively small price movement in a futures contract may result in an
immediate and substantial loss (or gain) for a fund. Similar risks exist for
warrants (securities that permit their owners to purchase a specific number of
stock shares at a predetermined price), convertible securities (securities that
may be exchanged for another asset), and swap agreements (contracts in which
each party 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. A
Fund's obligation under futures contracts will not exceed 20% of that Fund's
total assets.
The reasons for which a Fund will invest in futures and options are:
- - To keep cash on hand to meet shareholder redemptions or other needs while
simulating full investment in stocks.
- - To reduce the Fund's transaction costs or add value when these instruments
are favorably priced.
THE FUNDS AND VANGUARD
The Funds are members of The Vanguard Group, a family of more than 35 investment
companies with more than 100 funds holding assets worth more than $550 billion.
All of the 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 distribution fees, each fund
pays its allocated share of The Vanguard Group's marketing costs.
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
VANGUARD'S UNIQUE CORPORATE STRUCTURE
The Vanguard Group is truly a MUTUAL mutual fund company. It is owned jointly by
the funds it oversees and thus indirectly by the shareholders in those funds.
Most 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 own the
management company's stock. By contrast, Vanguard provides its services on an
"at-cost" basis, and the funds' expense ratios reflect only these costs. No
separate management company reaps profits or absorbs losses from operating the
funds.
- --------------------------------------------------------------------------------
<PAGE>
35
INVESTMENT ADVISER
The Vanguard Group (Vanguard), P.O. Box 2600, Valley Forge, PA 19482, founded in
1975, serves as the Funds' adviser through its Core Management Group. As of
December 31, 1999, Vanguard served as adviser for about $371.4 billion in
assets. Vanguard manages the Funds on an at-cost basis, subject to the control
of the Trustees and officers of the Funds. For the fiscal year ended December
31, 1999, the investment advisory expenses represented an effective annual rate
of approximately 0.01% of each Fund's average net assets.
The Funds have authorized Vanguard to choose brokers or dealers to handle
the purchase and sale of securities for the Funds, and to get the best available
price and most favorable execution from these brokers with respect to all
transactions. The Funds may direct Vanguard to use a particular broker for
certain transactions in exchange for commission rebates or research services
provided to the Funds.
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
THE FUNDS' ADVISER
The individual responsible for overseeing each Fund's investments is:
GEORGE U. SAUTER, Managing Director of Vanguard and head of Vanguard's Core
Management Group; has worked in investment management since 1985; primary
responsibility for Vanguard's stock indexing policy and strategy since joining
the company in 1987; A.B., Dartmouth College; M.B.A., University of Chicago.
- --------------------------------------------------------------------------------
DIVIDENDS, CAPITAL GAINS, AND TAXES
FUND DISTRIBUTIONS
Each Fund distributes to shareholders virtually all of its net income (interest
and dividends, less expenses), as well as any capital gains realized from the
sale of its holdings. Income dividends for the Total Stock Market, 500, Value,
and Growth Index Funds generally are distributed in March, June, September, and
December; income dividends for the Extended Market, Mid-Cap, Small-Cap,
Small-Cap Value, and Small-Cap Growth Index Funds generally are distributed in
December. Capital gains distributions generally occur in December. In addition,
the Funds may occasionally be required to make supplemental dividend or capital
gains distributions at some other time during the year. You can receive
distributions of income dividends or capital gains in cash, or you can have them
automatically reinvested in more shares of the Fund.
BASIC TAX POINTS
Vanguard will send you a statement each year showing the tax status of all your
distributions. In addition, taxable investors should be aware of the following
basic tax points:
- - Distributions are taxable to you for federal income tax purposes whether or
not you reinvest these amounts in additional Fund shares.
- - Distributions declared in December--if paid to you by the end of
January--are taxable for federal income tax purposes as if received in
December.
- - Any dividends and short-term capital gains that you receive are taxable to
you as ordinary income for federal income tax purposes.
<PAGE>
36
- - Any distributions of net long-term capital gains are taxable to you as
long-term capital gains for federal income tax purposes, no matter how long
you've owned shares in the Fund.
- - Capital gains distributions may vary considerably from year to year as a
result of the Funds' normal investment activities and cash flows.
- - A sale or exchange of Fund shares is a taxable event. This 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.
- - Dividend and capital gains distributions that you receive, as well as your
gains or losses from any sale or exchange of Fund shares, may be subject to
state and local income taxes.
GENERAL INFORMATION
BACKUP WITHHOLDING. By law, Vanguard must withhold 31% of any taxable
distributions or redemptions from your account if you do not:
- - provide us with your correct taxpayer identification number;
- - certify that the taxpayer number is correct; and
- - confirm that you are not subject to backup withholding.
Similarly, Vanguard must withhold from your account if the IRS instructs us to
do so.
FOREIGN INVESTORS. The Vanguard funds generally do not offer their shares for
sale outside of the United States. Foreign investors should be aware that U.S.
withholding and estate taxes may apply to any investments in Vanguard funds.
INVALID ADDRESSES. If a dividend or capital gains distribution check mailed to
your address of record is returned as undeliverable, Vanguard will automatically
reinvest all future distributions until you provide us with a valid mailing
address.
TAX CONSEQUENCES. This prospectus provides general tax information only. If you
are investing through a tax-deferred retirement account, such as an IRA, special
tax rules apply. Please consult your tax adviser for detailed information about
a fund's tax consequences for you.
- --------------------------------------------------------------------------------
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 a capital gains distribution. Income
dividends come from both the dividends that the fund earns from its holdings and
the 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 one year or less, or more than one
year.
- --------------------------------------------------------------------------------
<PAGE>
37
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
"BUYING A DIVIDEND"
Unless you are investing through 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 doing so can cost you money in taxes. 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 still have only $5,000 (250 shares x $19 = $4,750 in share value, plus 250
shares x $1 = $250 in distributions), but you owe tax on the $250 distribution
you received--even if you reinvest it in more shares. To avoid "buying a
dividend," check a fund's distribution schedule before you invest.
- --------------------------------------------------------------------------------
SHARE PRICE
Each Fund's share price, called its net asset value, or NAV, is calculated each
business day after the close of regular trading on the New York Stock Exchange
(the NAV is not calculated on holidays or other days when the Exchange is
closed).
TOTAL ASSETS - LIABILITIES
NET ASSET VALUE = -------------------------------
NUMBER OF SHARES OUTSTANDING
Funds offering more than one class of shares compute a separate net asset
value for each share class. This is done by adding up the total value of the
Fund's investments and other assets attributed to each share class, subtracting
any of its liabilities (debts) attributed to each share class, and then dividing
by the number of Fund shares outstanding for each share class.
The 500 Index Fund, which offers only one class of shares, computes its net
asset value by adding up the total value of its investments and other assets,
subtracting any of its liabilities (debts), and then dividing by the number of
Fund shares outstanding.
Knowing the daily net asset value is useful to you as a shareholder because
it indicates the current value of your investment. The Fund's NAV, multiplied by
the number of shares you own, gives you the dollar amount you would have
received had you sold all of your shares back to the Fund that day.
A NOTE ON PRICING: A Fund's investments will be priced at their market
value when market quotations are readily available. When these quotations are
not readily available, investments will be priced at their fair value,
calculated according to procedures adopted by the Funds' Board of Trustees.
Each Fund'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 Fund, but the most common are:
TOTST, 500, EXTND, MIDCP, SMCAP, VALUE, SMVAL, GROWTH, and SMGTH.
<PAGE>
38
FINANCIAL HIGHLIGHTS
The following financial highlights tables are intended to help you understand
each Fund's financial performance for the past five years or since inception,
and certain information reflects financial results for a single Fund share in
each case. The total returns in each table represent the rate that an investor
would have earned or lost each year on an investment in the Fund (assuming
reinvestment of all dividend and capital gains distributions). This information
has been derived from the financial statements audited by PricewaterhouseCoopers
LLP, independent accountants, whose report--along with each Fund's financial
statements--is included in the Funds' most recent annual report to shareholders.
You may have the annual report sent to you without charge by contacting
Vanguard.
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
HOW TO READ THE FINANCIAL HIGHLIGHTS TABLE
This explanation uses the Total Stock Market Index Fund as an example. The Fund
began fiscal 1999 with a net asset value (price) of $27.42 per share. During the
year, the Fund earned $0.317 per share from investment income (interest and
dividends) and $6.133 per share from investments that had appreciated in value
or that were sold for higher prices than the Fund paid for them.
Shareholders received $0.650 per share in the form of dividend and capital gains
distributions. A portion of each year's distributions may come from the prior
year's income or capital gains.
The earnings ($6.450 per share) minus the distributions ($0.650 per share)
resulted in a share price of $33.22 at the end of the year. This was an increase
of $5.80 per share (from $27.42 at the beginning of the year to $33.22 at the
end of the year). For a shareholder who reinvested the distributions in the
purchase of more shares, the total return from the Fund was 23.81% for the year.
As of December 31, 1999, the Fund (investor shares only) had $18.1 billion in
net assets. For the year, its expense ratio was 0.20% ($2.00 per $1,000 of net
assets); and net investment income amounted to 1.15% of its average net assets.
It sold and replaced securities valued at 3% of its net assets.
- --------------------------------------------------------------------------------
<PAGE>
39
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
VANGUARD TOTAL STOCK MARKET INDEX FUND
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------
1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $27.42 $22.64 $17.77 $15.04 $11.37
- ---------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .317 .336 .319 .29 .29
Net Realized and Unrealized Gain (Loss)
on Investments 6.133 4.898 5.143 2.84 3.75
--------------------------------------------------------------
Total from Investment Operations 6.450 5.234 5.462 3.13 4.04
--------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.330) (.329) (.322) (.29) (.28)
Distributions from Realized Capital Gains (.320) (.125) (.270) (.11) (.09)
--------------------------------------------------------------
Total Distributions (.650) (.454) (.592) (.40) (.37)
- ---------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $33.22 $27.42 $22.64 $17.77 $15.04
=========================================================================================================
TOTAL RETURN* 23.81% 23.26% 30.99% 20.96% 35.79%
=========================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $18,133 $9,308 $5,092 $3,531 $1,571
Ratio of Total Expenses to Average
Net Assets 0.20% 0.20% 0.20% 0.22% 0.25%
Ratio of Net Investment Income to Average
Net Assets 1.15% 1.44% 1.65% 1.86% 2.14%
Turnover Rate 3% 3% 2% 3% 3%
=========================================================================================================
*Total return figures do not reflect the 0.25% transaction fee on purchases through 1995 or the annual
account maintenance fee of $10.
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
VANGUARD 500 INDEX FUND
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $113.95 $ 90.07 $69.17 $57.60 $42.97
- ---------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income 1.370 1.33 1.31 1.28 1.22
Net Realized and Unrealized Gain (Loss)
on Investments 22.415 24.30 21.50 11.82 14.76
--------------------------------------------------------------
Total from Investment Operations 23.785 25.63 22.81 13.10 15.98
--------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (1.410) (1.33) (1.32) (1.28) (1.22)
Distributions from Realized Capital Gains (.995) (.42) (.59) (.25) (.13)
--------------------------------------------------------------
Total Distributions (2.405) (1.75) (1.91) (1.53) (1.35)
- ---------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $135.33 $113.95 $90.07 $69.17 $57.60
=========================================================================================================
TOTAL RETURN* 21.07% 28.62% 33.19% 22.88% 37.45%
=========================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $104,652 $74,229 $49,358 $30,332 $17,372
Ratio of Total Expenses to Average
Net Assets 0.18% 0.18% 0.19% 0.20% 0.20%
Ratio of Net Investment Income to Average
Net Assets 1.13% 1.35% 1.66% 2.04% 2.38%
Turnover Rate** 6% 6% 5% 5% 4%
=========================================================================================================
*Total return figures do not reflect the annual account maintenance fee of $10.
**Turnover rates excluding in-kind redemptions were 3%, 3%, 3%, 2%, and 2%, respectively.
</TABLE>
<PAGE>
40
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
VANGUARD EXTENDED MARKET INDEX FUND
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $30.63 $30.76 $26.20 $24.07 $18.52
- ---------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .297 .388 .351 .34 .30
Net Realized and Unrealized Gain (Loss)
on Investments 10.101 2.025 6.479 3.85 5.95
--------------------------------------------------------------
Total from Investment Operations 10.398 2.413 6.830 4.19 6.25
--------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.318) (.373) (.360) (.34) (.30)
Distributions from Realized Capital Gains (3.640) (2.170) (1.910) (1.72) (.40)
--------------------------------------------------------------
Total Distributions (3.958) (2.543) (2.270) (2.06) (.70)
- ---------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $37.07 $30.63 $30.76 $26.20 $24.07
=========================================================================================================
TOTAL RETURN* 36.22% 8.32% 26.73% 17.65% 33.80%
=========================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $4,221 $2,939 $2,723 $2,099 $1,523
Ratio of Total Expenses to Average
Net Assets 0.25% 0.23% 0.23% 0.25% 0.25%
Ratio of Net Investment Income to Average
Net Assets 1.04% 1.21% 1.30% 1.42% 1.51%
Turnover Rate 26% 27% 15% 22% 15%
=========================================================================================================
*Total return figures do not reflect transaction fees on purchases (0.25% from October 31, 1997 through
March 31, 2000; 0.5% from 1995 through October 31, 1997) or the annual account maintenance fee of $10.
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
VANGUARD MID-CAP INDEX FUND
YEAR ENDED APR.20* TO
DEC. 31, 1999 DEC. 31,1998
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.79 $10.00
- ---------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .073 .053
Net Realized and Unrealized Gain (Loss) on Investments 1.448 .840
-------------------------------
Total from Investment Operations 1.521 .893
-------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.076) (.053)
Distributions from Realized Capital Gains (.935) (.050)
-------------------------------
Total Distributions (1.011) (.103)
- ---------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $11.30 $10.79
=========================================================================================================
TOTAL RETURN** 15.32% 8.55%
=========================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $605 $206
Ratio of Total Expenses to Average Net Assets 0.25% 0.25%+
Ratio of Net Investment Income to Average Net Assets 0.99% 1.19%+
Turnover Rate 38% 44%
=========================================================================================================
*Subscription period for the Fund was April 20, 1998, to May 20, 1998, during which time all assets were
held in money market instruments. Performance measurement begins May 21, 1998.
**Total return figures do not reflect the 0.25% transaction fee on purchases (from inception through
February 28, 1999) or the annual account maintenance fee of $10.
+Annualized.
</TABLE>
<PAGE>
41
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
VANGUARD SMALL-CAP INDEX FUND
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $21.20 $23.75 $20.23 $18.61 $14.99
- ---------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .256 .311 .277 .26 .24
Net Realized and Unrealized Gain (Loss)
on Investments 4.491 (1.007) 4.632 3.07 4.06
--------------------------------------------------------------
Total from Investment Operations 4.747 (.696) 4.909 3.33 4.30
--------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.267) (.304) (.274) (.27) (.23)
Distributions from Realized Capital Gains (2.080) (1.550) (1.115) (1.44) (.45)
--------------------------------------------------------------
Total Distributions (2.347) (1.854) (1.389) (1.71) (.68)
- ---------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $23.60 $21.20 $23.75 $20.23 $18.61
=========================================================================================================
TOTAL RETURN* 23.13% -2.61% 24.59% 18.12% 28.74%
=========================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $3,553 $2,768 $2,652 $1,713 $971
Ratio of Total Expenses to Average
Net Assets 0.25% 0.24% 0.23% 0.25% 0.25%
Ratio of Net Investment Income to Average
Net Assets 1.25% 1.39% 1.38% 1.51% 1.58%
Turnover Rate 42% 35% 29% 28% 28%
=========================================================================================================
*Total return figures do not reflect transaction fees on purchases (0.5% from 1996 through March 31, 2000;
1.0% from 1995 through 1996) or the annual account maintenance fee of $10.
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
VANGUARD VALUE INDEX FUND
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $22.51 $20.85 $17.02 $14.79 $11.12
- ---------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .355 .366 .38 .37 .41
Net Realized and Unrealized Gain (Loss)
on Investments 2.342 2.647 4.57 2.81 3.66
--------------------------------------------------------------
Total from Investment Operations 2.697 3.013 4.95 3.18 4.07
--------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.362) (.363) (.37) (.38) (.40)
Distributions from Realized Capital Gains (1.955) (.990) (.75) (.57) ---
--------------------------------------------------------------
Total Distributions (2.317) (1.353) (1.12) (.95) (.40)
- ---------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $22.89 $22.51 $20.85 $17.02 $14.79
=========================================================================================================
TOTAL RETURN* 12.57% 14.64% 29.77% 21.86% 36.94%
=========================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $3,378 $2,421 $1,796 $1,016 $496
Ratio of Total Expenses to Average
Net Assets 0.22% 0.22% 0.20% 0.20% 0.20%
Ratio of Net Investment Income to Average
Net Assets 1.59% 1.72% 2.05% 2.54% 3.06%
Turnover Rate 41% 33% 25% 29% 27%
=========================================================================================================
*Total return figures do not reflect the annual account maintenance fee of $10.
</TABLE>
<PAGE>
42
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
VANGUARD SMALL-CAP VALUE INDEX FUND
YEAR ENDED APR. 20* TO
DEC. 31, 1999 DEC. 31, 1998
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $8.74 $10.00
- ---------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .065 .045
Net Realized and Unrealized Gain (Loss) on Investments .210 (1.250)
-------------------------------
Total from Investment Operations .275 (1.205)
-------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.070) (.055)
Distributions from Realized Capital Gains (.495) --
-------------------------------
Total Distributions (.565) (.055)
- ---------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $8.45 $ 8.74
=========================================================================================================
TOTAL RETURN** 3.35% -12.47%
=========================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $204 $113
Ratio of Total Expenses to Average Net Assets 0.25% 0.25%+
Ratio of Net Investment Income to Average Net Assets 0.96% 1.13%+
Turnover Rate 80% 53%
=========================================================================================================
*Subscription period for the Fund was April 20, 1998, to May 20, 1998, during which time all assets were
held in money market instruments. Performance measurement begins May 21, 1998.
**Total return figures do not reflect transaction fees on purchases (0.5% after February 28, 1999; 1.0%
from inception through February 28, 1999) or the annual account maintenance fee of $10.
+Annualized.
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
VANGUARD GROWTH INDEX FUND
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $31.67 $22.53 $16.90 $13.97 $10.28
- ---------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .207 .230 .23 .22 .21
Net Realized and Unrealized Gain (Loss)
on Investments 8.821 9.244 5.88 3.07 3.68
--------------------------------------------------------------
Total from Investment Operations 9.028 9.474 6.11 3.29 3.89
--------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.228) (.219) (.23) (.22) (.20)
Distributions from Realized Capital Gains (1.040) (.115) (.25) (.14) ---
--------------------------------------------------------------
Total Distributions (1.268) (.334) (.48) (.36) (.20)
- ---------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $39.43 $31.67 $22.53 $16.90 $13.97
=========================================================================================================
TOTAL RETURN* 28.76% 42.21% 36.34% 23.74% 38.06%
=========================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $15,232 $6,644 $2,365 $787 $271
Ratio of Total Expenses to Average
Net Assets 0.22% 0.22% 0.20% 0.20% 0.20%
Ratio of Net Investment Income to Average
Net Assets 0.64% 0.92% 1.19% 1.57% 1.71%
Turnover Rate 33% 29% 26% 29% 24%
=========================================================================================================
*Total return figures do not reflect the annual account maintenance fee of $10.
</TABLE>
<PAGE>
43
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
VANGUARD SMALL-CAP GROWTH INDEX FUND
YEAR ENDED APR. 20* TO
DEC. 31, 1999 DEC. 31, 1998
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.53 $10.00
- ---------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .025 .03
Net Realized and Unrealized Gain (Loss) on Investments 1.860 (.47)
-------------------------------
Total from Investment Operations 1.885 (.44)
-------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.035) (.03)
Distributions from Realized Capital Gains -- --
-------------------------------
Total Distributions (.035) (.03)
- ---------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $11.38 $ 9.53
=========================================================================================================
TOTAL RETURN** 19.80% -4.77%
=========================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $167 $90
Ratio of Total Expenses to Average Net Assets 0.25% 0.25%+
Ratio of Net Investment Income to Average Net Assets 0.33% 0.63%+
Turnover Rate 82% 77%
=========================================================================================================
*Subscription period for the Fund was April 20, 1998, to May 20, 1998, during which time all assets were
held in money market instruments. Performance measurement begins May 21, 1998.
**Total return figures do not reflect transaction fees on purchases (0.5% after February 28, 1999; 1.0% from
inception through February 28, 1999) or the annual account maintenance fee of $10.
+Annualized.
</TABLE>
"Standard & Poor's(R)," "S&P(R)," "S&P 500(R)," "Standard & Poor's 500," "500,"
"S&P MidCap 400," and "S&P SmallCap 600" are trademarks of The McGraw-Hill
Companies, Inc., and have been licensed for use by Vanguard U.S. Stock Index
Funds and The Vanguard Group. These mutual funds are not sponsored, endorsed,
sold, or promoted by Standard & Poor's, and Standard & Poor's makes no
representation regarding the advisability of investing in 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>
44
- --------------------------------------------------------------------------------
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. Booklets providing detailed information are available on the services
marked with a [BOOKLET]. Please call us to request copies.
- --------------------------------------------------------------------------------
SERVICES AND ACCOUNT FEATURES
Vanguard offers many services that make it convenient to buy, sell, or exchange
shares, or to obtain fund or account information.
- --------------------------------------------------------------------------------
TELEPHONE REDEMPTIONS (SALES AND EXCHANGES)
Automatically set up for each Fund unless you notify us otherwise.
Note: Limitations do apply; see pages 48-49.
- --------------------------------------------------------------------------------
VANGUARD(R) DIRECT DEPOSIT SERVICE [BOOKLET]
Automatic method for depositing your paycheck or U.S. government payment
(including Social Security and government pension checks) into your account.
- --------------------------------------------------------------------------------
VANGUARD(R) AUTOMATIC EXCHANGE SERVICE [BOOKLET]
Automatic method for moving a fixed amount of money from one Vanguard fund
account to another.
- --------------------------------------------------------------------------------
VANGUARD FUND EXPRESS(R) [BOOKLET]
Electronic method for buying or selling shares. 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(R) [BOOKLET]
Electronic method for transferring dividend and/or capital gains distributions
directly from your Vanguard fund account to your bank, savings and loan, or
credit union account.
- --------------------------------------------------------------------------------
VANGUARD TELE-ACCOUNT(R) 1-800-662-6273 (ON-BOARD) [BOOKLET]
Toll-free 24-hour access to Vanguard fund and account information--as well as
some transactions--by using any touch-tone phone. Tele-Account provides total
return, share price, price change, and yield quotations for all Vanguard funds;
gives your account balances and history (e.g., last transaction, latest dividend
distribution); and allows you to sell or exchange shares to and from most
Vanguard funds.
- --------------------------------------------------------------------------------
ACCESS VANGUARD(TM) www.vanguard.com [COMPUTER]
You can use your personal computer to perform certain transactions for most
Vanguard funds by accessing our website. To establish this service, you must
register through our website. We will then mail you an account access password
that allows you to process the following financial and administrative
transactions online:
- - Open a new account.*
- - Buy, sell, or exchange shares of most funds.
- - Change your name/address.
<PAGE>
45
- - Add/change fund options (including dividend options, Vanguard Fund Express,
bank instructions, checkwriting, and Vanguard Automatic Exchange Service).
(Some restrictions may apply.) Please call our Client Services Department
for assistance.
*Only current Vanguard shareholders can open a new account online, by exchanging
shares from other existing Vanguard accounts.
- --------------------------------------------------------------------------------
INVESTOR INFORMATION DEPARTMENT: 1-800-662-7447 (SHIP) TEXT TELEPHONE:
1-800-952-3335
Call Vanguard for information on our funds, fund services, and retirement
accounts, and to request literature.
- --------------------------------------------------------------------------------
CLIENT SERVICES DEPARTMENT: 1-800-662-2739 (CREW) TEXT TELEPHONE: 1-800-749-7273
Call Vanguard for information on your account, account transactions, and account
statements.
- --------------------------------------------------------------------------------
SERVICES FOR CLIENTS OF VANGUARD'S INSTITUTIONAL DIVISION: 1-888-809-8102
Vanguard's Institutional Division offers a variety of specialized services for
large institutional investors, including the ability to effect account
transactions through private electronic networks and third-party recordkeepers.
- --------------------------------------------------------------------------------
TYPES OF ACCOUNTS
Individuals and institutions can establish a variety of accounts with Vanguard.
- --------------------------------------------------------------------------------
FOR ONE OR MORE PEOPLE
Open an account in the name of one (individual) or more (joint tenants) people.
- --------------------------------------------------------------------------------
FOR HOLDING PERSONAL TRUST ASSETS [BOOKLET]
Invest assets held in an existing personal trust.
- --------------------------------------------------------------------------------
FOR INDIVIDUAL RETIREMENT ACCOUNTS [BOOKLET]
Open a traditional IRA account or a Roth IRA account. Eligibility and other
requirements are established by federal law and Vanguard custodial account
agreements. For more information, please call 1-800-662-7447 (SHIP).
- --------------------------------------------------------------------------------
FOR AN ORGANIZATION [BOOKLET]
Open an account as a corporation, partnership, endowment, foundation, or other
entity.
- --------------------------------------------------------------------------------
FOR THIRD-PARTY TRUSTEE RETIREMENT INVESTMENTS
Open an account as a retirement trust or plan based on an existing corporate or
institutional plan. These accounts are established by the trustee of the
existing plan.
- --------------------------------------------------------------------------------
VANGUARD PROTOTYPE PLANS
Open a variety of retirement accounts using Vanguard prototype plans for
individuals, sole proprietorships, and small businesses. For more information,
please call 1-800-662-2003.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
A NOTE ON INVESTING WITH VANGUARD THROUGH OTHER FIRMS
You may purchase or sell Fund shares through a financial intermediary such as a
bank, broker, or investment adviser. If you invest with Vanguard through an
intermediary, please read that firm's program materials carefully to learn of
any special rules that may apply. For example, special terms may apply to
additional service features, fees, or other policies. Consult your intermediary
to determine when your order will be priced.
- --------------------------------------------------------------------------------
<PAGE>
46
BUYING SHARES
You buy your shares at a Fund's next-determined net asset value after Vanguard
receives your request. As long as your request is received before the close of
trading on the New York Stock Exchange, generally 4 p.m. Eastern time, you will
buy your shares at that day's net asset value.
- --------------------------------------------------------------------------------
MINIMUM INVESTMENT TO . . .
open a new account
$3,000 (regular account); $1,000 (traditional IRAs and Roth IRAs).
add to an existing account
$100 by mail or exchange; $1,000 by wire.
- --------------------------------------------------------------------------------
A NOTE ON LOW BALANCES
Each Fund reserves the right to close any nonretirement fund account whose
balance falls below the minimum initial investment. The Fund will deduct a $10
annual fee in June if your nonretirement account balance at that time is below
$2,500. The low balance fee is waived for investors who have aggregate Vanguard
account assets of $50,000 or more.
- --------------------------------------------------------------------------------
BY MAIL TO . . . [ENVELOPE]
open a new account
Complete and sign the account registration form and enclose your check.
add to an existing account
Mail your check with an Invest-By-Mail form detached from your confirmation
statement to the address listed on the form. Please do not alter Invest-By-Mail
forms, since they are fund- and account-specific.
Make your check payable to: The Vanguard Group-(insert appropriate Fund number;
see below)
Vanguard Total Stock Market Index Fund-85
Vanguard 500 Index Fund-40
Vanguard Extended Market Index Fund-98
Vanguard Mid-Cap Index Fund-859
Vanguard Small-Cap Index Fund-48
Vanguard Value Index Fund-06
Vanguard Small-Cap Value Index Fund-860
Vanguard Growth Index Fund-09
Vanguard Small-Cap Growth Index Fund-861
All purchases must be made in U.S. dollars, and checks must be drawn on U.S.
banks.
First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 1110 455 Devon Park Drive
Valley Forge, PA 19482-1110 Wayne, PA 19087-1815
<PAGE>
47
For clients of Vanguard's Institutional Division . . .
First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 2900 455 Devon Park Drive
Valley Forge, PA 19482-2900 Wayne, PA 19087-1815
- --------------------------------------------------------------------------------
IMPORTANT NOTE: To prevent check fraud, Vanguard will not accept checks made
payable to third parties.
- --------------------------------------------------------------------------------
BY TELEPHONE TO . . . [TELEPHONE]
open a new account
Call Vanguard Tele-Account* 24 hours a day--or Client Services during business
hours--to exchange from another Vanguard fund account with the same registration
(name, address, taxpayer identification number, and account type). (Note that
some restrictions apply to index fund accounts.)
add to an existing account
Call Vanguard Tele-Account* 24 hours a day--or Client Services during business
hours--to exchange from another Vanguard fund account with the same registration
(name, address, taxpayer identification number, and account type). (Note that
some restrictions apply to index fund accounts.) Use Vanguard Fund Express (see
"Services and Account Features") to transfer assets from your bank account. Call
Client Services before your first use to verify that this option is available.
Vanguard Tele-Account Client Services
1-800-662-6273 1-800-662-2739
*You must obtain a Personal Identification Number (PIN) through Tele-Account at
least seven days before you request your first exchange.
- --------------------------------------------------------------------------------
IMPORTANT NOTE: Once you have initiated a telephone transaction and a
confirmation number has been assigned, the transaction cannot be revoked. We
reserve the right to refuse any purchase request.
- --------------------------------------------------------------------------------
BY WIRE TO OPEN A NEW ACCOUNT OR ADD TO AN EXISTING ACCOUNT [WIRE]
Call Client Services to arrange your wire transaction. Wire transactions to
retirement accounts are only available for asset transfers and rollovers from
other financial institutions. Individual IRA contributions will not be accepted
by wire.
Wire to:
FRB ABA 021001088
HSBC Bank USA
For credit to:
Account: 000112046
Vanguard Incoming Wire Account
In favor of:
Vanguard Total Stock Market Index Fund-85
Vanguard 500 Index Fund-40
Vanguard Extended Market Index Fund-98
Vanguard Mid-Cap Index Fund-859
<PAGE>
48
Vanguard Small-Cap Index Fund-48
Vanguard Value Index Fund-06
Vanguard Small-Cap Value Index Fund-860
Vanguard Growth Index Fund-09
Vanguard Small-Cap Growth Index Fund-861
[Account number, or temporary number for a new account]
[Registered account owner(s)]
[Registered address]
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
A NOTE ON LARGE PURCHASES
It is important that you call Vanguard before you invest a large dollar amount.
It is our responsibility to consider the interests of all Fund shareholders, and
so we reserve the right to refuse any purchase that may disrupt the Fund's
operation or performance.
- --------------------------------------------------------------------------------
REDEEMING SHARES
This section describes how you can redeem--that is, sell or exchange--a Fund's
shares.
When Selling Shares:
- - Vanguard sends the redemption proceeds to you or a designated third party.*
- - You can sell all or part of your Fund shares at any time.
*May require a signature guarantee; see footnote on page 51.
When Exchanging Shares:
- - The redemption proceeds are used to purchase shares of a different Vanguard
fund.
- - You must meet the receiving fund's minimum investment requirements.
- - Vanguard reserves the right to revise or terminate the exchange privilege,
limit the amount of an exchange, or reject an exchange at any time, without
notice.
- - In order to exchange into an account with a different registration
(including a different name, address, or taxpayer identification number),
you must include the guaranteed signatures of all current account owners on
your written instructions.
In both cases, your transaction will be based on the Fund's next-determined
share price, subject to any special rules discussed in the "Redeeming Shares"
section of this prospectus.
- --------------------------------------------------------------------------------
NOTE: Once a redemption is initiated and a confirmation number given, the
transaction CANNOT be canceled.
- --------------------------------------------------------------------------------
HOW TO REQUEST A REDEMPTION
You can request a redemption from your Fund account in any one of three ways:
online (only for IRAs and other retirement accounts), by telephone (sell, but
not exchange), or by mail.
The Vanguard funds whose shares you cannot exchange online or by telephone
are: VANGUARD U.S. STOCK INDEX FUNDS, VANGUARD BALANCED INDEX FUND, VANGUARD
<PAGE>
49
INTERNATIONAL STOCK INDEX FUNDS, VANGUARD REIT INDEX FUND, and VANGUARD GROWTH
AND INCOME FUND. These funds do, however, permit online and telephone exchanges
within IRAs and other retirement accounts. If you sell shares of these funds
online, a redemption check will be sent to your address of record.
- --------------------------------------------------------------------------------
ONLINE REQUESTS [COMPUTER]
ACCESS VANGUARD at www.vanguard.com
You can use your personal computer to sell or exchange shares of most Vanguard
funds by accessing our website. To establish this service, you must register
through our website. We will then mail you an account access password that will
enable you to sell or exchange shares online (as well as perform other
transactions).
- --------------------------------------------------------------------------------
TELEPHONE REQUESTS [TELEPHONE]
All Account Types Except Retirement:
Call Vanguard Tele-Account 24 hours a day--or Client Services during business
hours--to sell shares.
Retirement Accounts:
You can exchange--but not sell--shares by calling Tele-Account or Client
Services.
Vanguard Tele-Account Client Services
1-800-662-6273 1-800-662-2739
- --------------------------------------------------------------------------------
SPECIAL INFORMATION: We will automatically establish the telephone redemption
option for your account, unless you instruct us otherwise in writing. While
telephone redemption is easy and convenient, this account feature involves a
risk of loss from unauthorized or fraudulent transactions. Vanguard will take
reasonable precautions to protect your account from fraud. You should do the
same by keeping your account information private and immediately reviewing any
account statements that we send to you. Make sure to contact Vanguard
immediately about any transaction you believe to be unauthorized.
- --------------------------------------------------------------------------------
We reserve the right to refuse a telephone redemption if the caller is unable to
provide:
- - The ten-digit account number.
- - The name and address exactly as registered on the account.
- - The primary Social Security or employer identification number as registered
on the account.
- - The Personal Identification Number (PIN), if applicable (for instance,
Tele-Account).
Please note that Vanguard will not be responsible for any account losses
due to telephone fraud, so long as we have taken reasonable steps to verify the
caller's identity. If you wish to remove the telephone redemption feature from
your account, please notify us in writing.
- --------------------------------------------------------------------------------
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 U.S. 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 this section.
- --------------------------------------------------------------------------------
<PAGE>
50
MAIL REQUESTS [ENVELOPE]
All Account Types Except Retirement:
Send a letter of instruction signed by all registered account holders. Include
the fund name and account number and (if you are selling) a dollar amount or
number of shares OR (if you are exchanging) the name of the fund you want to
exchange into and a dollar amount or number of shares. To exchange into an
account with a different registration (including a different name, address,
taxpayer identification number, or account type), you must provide Vanguard with
written instructions that include the guaranteed signatures of all current
owners of the fund from which you wish to redeem.
Vanguard Retirement Accounts:
For information on how to request distributions from:
- - Traditional IRAs and Roth IRAs--call Client Services.
- - SEP-IRAs, SIMPLE IRAs, 403(b)(7) custodial accounts, and Profit-Sharing and
Money Purchase Pension (Keogh) Plans--call Individual Retirement Plans at
1-800-662-2003.
Depending on your account registration type, additional documentation may be
required.
First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 1110 455 Devon Park Drive
Valley Forge, PA 19482-1110 Wayne, PA 19087-1815
For clients of Vanguard's Institutional Division . . .
First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 2900 455 Devon Park Drive
Valley Forge, PA 19482-2900 Wayne, PA 19087-1815
- --------------------------------------------------------------------------------
A NOTE ON LARGE REDEMPTIONS
It is important that you call Vanguard before you redeem a large dollar amount.
It is our responsibility to consider the interests of all fund shareholders, and
so we reserve the right to delay delivery of your redemption proceeds--up to
seven days--if the amount may disrupt a Fund's operation or performance.
If you redeem more than $250,000 worth of Fund shares within any 90-day
period, the Fund reserves the right to pay part or all of the redemption
proceeds above $250,000 in-kind, i.e., in securities, rather than in cash. If
payment is made in-kind, you may incur brokerage commissions if you elect to
sell the securities for cash.
- --------------------------------------------------------------------------------
OPTIONS FOR REDEMPTION PROCEEDS
You may receive your redemption proceeds in one of three ways: check, exchange
to another Vanguard fund, or Fund Express Redemption.
- --------------------------------------------------------------------------------
CHECK REDEMPTIONS
Normally, Vanguard will mail your check within two business days of a
redemption.
- --------------------------------------------------------------------------------
EXCHANGE REDEMPTIONS
As described above, an exchange involves using the proceeds of your redemption
to purchase shares of another Vanguard fund.
- --------------------------------------------------------------------------------
<PAGE>
51
- --------------------------------------------------------------------------------
FUND EXPRESS REDEMPTIONS
Vanguard will electronically transfer funds to your pre-linked checking or
savings account.
- --------------------------------------------------------------------------------
FOR OUR MUTUAL PROTECTION
For your best interests and ours, Vanguard applies these additional requirements
to redemptions:
REQUEST IN "GOOD ORDER"
All redemption requests must be received by Vanguard in "good order." This means
that your request must include:
- - The Fund name and account number.
- - The amount of the transaction (in dollars or shares).
- - Signatures of all owners exactly as registered on the account (for mail
requests).
- - Signature guarantees (if required).
- - Any supporting legal documentation that may be required.
- - Any outstanding certificates representing shares to be redeemed.
*For instance, a signature guarantee must be provided by all registered account
shareholders when redemption proceeds are to be sent to a different person or
address. A signature guarantee can be obtained from most commercial and savings
banks, credit unions, trust companies, or member firms of a U.S. stock
exchange.
TRANSACTIONS ARE PROCESSED AT THE NEXT-DETERMINED SHARE PRICE AFTER VANGUARD HAS
RECEIVED ALL REQUIRED INFORMATION.
- --------------------------------------------------------------------------------
LIMITS ON ACCOUNT ACTIVITY
Because excessive account transactions can disrupt management of the Fund and
increase the Fund's costs for all shareholders, Vanguard limits account activity
as follows:
- - You may make no more than TWO SUBSTANTIVE "ROUND TRIPS" THROUGH THE FUND
during any 12-month period.
- - Your round trips through the Fund must be at least 30 days apart.
- - The Fund may refuse a share purchase at any time, for any reason.
- - Vanguard may revoke an investor's telephone exchange privilege at any time,
for any reason.
A "round trip" is a redemption from the Fund followed by a purchase back
into the Fund. Also, a "round trip" covers transactions accomplished by any
combination of methods, including transactions conducted by check, wire, or
exchange to/from another Vanguard fund. "Substantive" means a dollar amount that
Vanguard determines, in its sole discretion, could adversely affect the
management of the Fund.
- --------------------------------------------------------------------------------
RETURN YOUR SHARE CERTIFICATES
Any portion of your account represented by share certificates cannot be redeemed
until you return the certificates to Vanguard. Certificates must be returned
(unsigned), along with a letter requesting the sale or exchange you wish to
process, via certified mail to:
The Vanguard Group
455 Devon Park Drive
Wayne, PA 19087-1815
- --------------------------------------------------------------------------------
<PAGE>
52
- --------------------------------------------------------------------------------
ALL TRADES ARE FINAL
Vanguard will not cancel any transaction request (including any purchase or
redemption) that we believe to be authentic once the request has been initiated
and a confirmation number assigned.
- --------------------------------------------------------------------------------
UNCASHED CHECKS
Please cash your distribution or redemption checks promptly. Vanguard will not
pay interest on uncashed checks.
- --------------------------------------------------------------------------------
TRANSFERRING REGISTRATION
You can transfer the registration of your Fund shares to another owner by
completing a transfer form and sending it to Vanguard.
First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 1110 455 Devon Park Drive
Valley Forge, PA 19482-1110 Wayne, PA 19087-1815
For clients of Vanguard's Institutional Division . . .
First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 2900 455 Devon Park Drive
Valley Forge, PA 19482-2900 Wayne, PA 19087-1815
- --------------------------------------------------------------------------------
FUND AND ACCOUNT UPDATES
STATEMENTS AND REPORTS
We will send you account and tax statements to help you keep track of your Fund
account throughout the year as well as when you are preparing your income tax
returns.
In addition, you will receive financial reports about a Fund twice a year.
These comprehensive reports include an assessment of the Fund's performance (and
a comparison to its industry benchmark), an overview of the financial markets, a
report from the adviser, and the Fund's financial statements which include a
listing of the Fund's holdings.
To keep each Fund's costs as low as possible (so that you and other
shareholders can keep more of the Fund's investment earnings), Vanguard attempts
to eliminate duplicate mailings to the same address. When two or more Fund
shareholders have the same last name and address, we send just one Fund report
to that address--instead of mailing separate reports to each shareholder. If you
want us to send separate reports, notify our Client Services Department at
1-800-662-2739.
- --------------------------------------------------------------------------------
CONFIRMATION STATEMENT
Sent each time you buy, sell, or exchange shares; confirms the trade date and
the amount of your transaction.
- --------------------------------------------------------------------------------
<PAGE>
53
- --------------------------------------------------------------------------------
PORTFOLIO SUMMARY [BOOKLET]
Mailed quarterly for most accounts; 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.
- --------------------------------------------------------------------------------
FUND FINANCIAL REPORTS
Mailed in February and August for all nine Funds.
- --------------------------------------------------------------------------------
TAX STATEMENTS
Generally mailed in January; report previous year's dividend and capital gains
distributions, proceeds from the sale of shares, and distributions from IRAs or
other retirement accounts.
- --------------------------------------------------------------------------------
AVERAGE COST REVIEW STATEMENT [BOOKLET]
Issued quarterly for most taxable accounts (accompanies your Portfolio Summary);
shows the average cost of shares that you redeemed during the calendar year,
using only the average cost single category method.
- --------------------------------------------------------------------------------
<PAGE>
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<PAGE>
(THIS PAGE INTENTIONALLY LEFT BLANK.)
<PAGE>
(THIS PAGE INTENTIONALLY LEFT BLANK.)
<PAGE>
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 on securities that a fund
has sold at a profit, minus any realized losses.
CASH RESERVES
Cash deposits, short-term bank deposits, and money market instruments which
include 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.
EXPENSE RATIO
The percentage of a fund's average net assets used to pay its expenses. The
expense ratio includes management fees, administrative fees, and any 12b-1
distribution fees.
GROWTH STOCK FUND
A mutual fund that emphasizes stocks of companies believed to have above-average
prospects for growth. Reflecting market expectations for superior growth, these
stocks typically have low dividend yields and above-average prices in relation
to such factors as revenue, earnings, and book value.
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 fund's
investments.
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.
SECURITIES
Stocks, bonds, money market instruments, and interests in 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.
VALUE STOCK FUND
A mutual fund that emphasizes stocks of companies whose growth prospects are
generally regarded as subpar by the market. Reflecting these market
expectations, the prices of value stocks typically are below-average in
comparison with such factors as earnings and book value, and these stocks
typically have above-average dividend yields.
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
Income (interest or dividends) earned by an investment, expressed as a
percentage of the investment's price.
<PAGE>
[SHIP]
[THE VANGUARD GROUP(R)]
Post Office Box 2600
Valley Forge, PA 19482-2600
FOR MORE INFORMATION
If you'd like more information about
Vanguard U.S. Stock Index Funds,
the following documents are
available free upon request:
ANNUAL/SEMIANNUAL REPORTS
TO SHAREHOLDERS
Additional information about the
Funds' investments is available in
the Funds' annual and semiannual
reports to shareholders.
STATEMENT OF ADDITIONAL
INFORMATION (SAI)
The SAI provides more detailed
information about the Funds.
The current annual and semiannual
reports and the SAI are
incorporated by reference into
(and are thus legally a part of)
this prospectus.
To receive a free copy of the latest
annual or semiannual report or the
SAI, or to request additional
information about the Funds or other
Vanguard funds, please contact us
as follows:
THE VANGUARD GROUP
INVESTOR INFORMATION
DEPARTMENT
P.O. BOX 2600
VALLEY FORGE, PA 19482-2600
TELEPHONE:
1-800-662-7447 (SHIP)
TEXT TELEPHONE:
1-800-952-3335
WORLD WIDE WEB:
WWW.VANGUARD.COM
If you are a current Fund shareholder
and would like information about
your account, account transactions,
and/or account statements,
please call:
CLIENT SERVICES DEPARTMENT:
TELEPHONE:
1-800-662-2739 (CREW)
TEXT TELEPHONE:
1-800-749-7273
INFORMATION PROVIDED BY THE
SECURITIES AND EXCHANGE
COMMISSION (SEC)
You can review and copy information
about the Funds (including the SAI)
at the SEC's Public Reference Room
in Washington, DC. To find out more
about this public service, call the
SEC at 1-202-942-8090. Reports and
other information about the Funds
are also available on the SEC's
website (www.sec.gov), or you can
receive copies of this information,
for a fee, by electronic request at
the following e-mail address:
[email protected], or by writing the
Public Reference Section, Securities
and Exchange Commission,
Washington, DC 20549-0102.
Funds' Investment Company Act file
number: 811-2652
(C) 2000 The Vanguard Group, Inc.
All rights reserved.
Vanguard Marketing Corporation,
Distributor.
P040N-04/21/2000
<PAGE>
VANGUARD(R)
U.S. STOCK INDEX
FUNDS
Participant Prospectus
April 21, 2000
VANGUARD TOTAL STOCK
MARKET INDEX FUND
VANGUARD 500
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
This prospectus contains
financial data for the
Funds through the
fiscal year ended
December 31, 1999.
[MEMBERS OF
THE VANGUARD GROUP(R)]
<PAGE>
VANGUARD U.S. STOCK INDEX FUNDS
Participant Prospectus
April 21, 2000
- --------------------------------------------------------------------------------
CONTENTS
- --------------------------------------------------------------------------------
1 AN INTRODUCTION TO INDEX FUNDS 29 MORE ON THE FUNDS
2 FUND PROFILES 34 THE FUNDS AND VANGUARD
2 Vanguard Total Stock Market 34 INVESTMENT ADVISER
Index Fund
35 DIVIDENDS, CAPITAL GAINS, AND TAXES
5 Vanguard 500 Index Fund
36 SHARE PRICE
8 Vanguard Extended Market
Index Fund 36 FINANCIAL HIGHLIGHTS
11 Vanguard Mid-Cap Index Fund 42 INVESTING WITH VANGUARD
14 Vanguard Small-Cap Index Fund 43 ACCESSING FUND INFORMATION BY
COMPUTER
17 Vanguard Value Index Fund
GLOSSARY (inside back cover)
20 Vanguard Small-Cap Value
Index Fund
23 Vanguard Growth Index Fund
26 Vanguard Small-Cap Growth
Index Fund
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
WHY READING THIS PROSPECTUS IS IMPORTANT
This prospectus explains the objectives, risks, and strategies of the Vanguard
U.S. Stock Index Funds. To highlight terms and concepts important to mutual fund
investors, we have provided "Plain Talk(R)" explanations along the way. Reading
the prospectus will help you to decide which Funds, if any, are the right
investments for you. We suggest that you keep it for future reference.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
IMPORTANT NOTE
Each of the Vanguard U.S. Stock Index Funds offers two separate classes of
shares: Investor and Institutional (except Vanguard 500 Index Fund, which offers
only Investor Shares). Investor Shares, which have an investment minimum of
$3,000 ($1,000 for IRAs), are offered by two separate prospectuses. This
prospectus is intended 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.
Institutional Shares have an investment minimum of $10 million and generally do
not require special employee benefit plan services. Institutional Shares are
offered by another prospectus, which you can obtain by calling Vanguard's
Institutional Investor Group at 1-800-523-1036.
Note that the Funds' separate share classes have different expenses; as a
result, their investment performances will vary.
- --------------------------------------------------------------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE>
1
AN INTRODUCTION TO INDEX FUNDS
WHAT IS INDEXING?
An index is an unmanaged group of securities whose overall performance is used
as a standard to measure the investment performance of a particular market. An
index (or "passively managed") fund tries to match, as closely as possible, the
performance of an established target index. The fund does this by holding all,
or a representative sample, of the securities that constitute the index.
Stock index funds may seek to track indexes that hold a certain type of
stock--such as growth or value, small-cap or large-cap, or those from just one
industry--or they may seek to track indexes that consist of a broader range of
stocks--for example, the entire U.S. stock market.
Index funds do not have active managers, who buy and sell securities based
on research and analysis in an attempt to outperform a particular benchmark or
the market as a whole. Rather, index funds simply attempt to mirror what the
target index does, for better or worse.
KEEP IN MIND THAT AN INDEX FUND HAS OPERATING EXPENSES AND TRANSACTION
COSTS; A MARKET INDEX DOES NOT. THEREFORE, AN INDEX FUND--WHILE EXPECTED TO
TRACK ITS TARGET INDEX AS CLOSELY AS POSSIBLE--WILL TYPICALLY BE UNABLE TO MATCH
THE PERFORMANCE OF THE INDEX EXACTLY.
WHAT INDEX FUNDS DOES VANGUARD OFFER?
Vanguard offers a variety of stock (both U.S. and international), bond, and
balanced index funds. This prospectus provides information about Vanguard's U.S.
Stock Index Funds. There are nine such funds, each of which seeks to track a
different segment of the U.S. stock market:
- --------------------------------------------------------------------------------
FUND SEEKS TO TRACK
- --------------------------------------------------------------------------------
Vanguard Total Stock Market Index Fund The overall stock market
Vanguard 500 Index Fund Large-cap stocks
Vanguard Extended Market Index Fund Mid- and small-cap stocks
Vanguard Mid-Cap Index Fund Mid-cap stocks
Vanguard Small-Cap Index Fund Small-cap stocks
Vanguard Value Index Fund Large-cap value stocks
Vanguard Small-Cap Value Index Fund Small-cap value stocks
Vanguard Growth Index Fund Large-cap growth stocks
Vanguard Small-Cap Growth Index Fund Small-cap growth stocks
- --------------------------------------------------------------------------------
This prospectus contains profiles that summarize key features of each Fund.
Following the profiles, there is important additional information about the
Funds.
<PAGE>
2
FUND PROFILE--VANGUARD(R) TOTAL STOCK MARKET INDEX FUND
The following profile summarizes key features of Vanguard Total Stock Market
Index Fund.
INVESTMENT OBJECTIVE
The Fund seeks to match the performance of a benchmark index that measures the
investment return of the overall stock market.
INVESTMENT STRATEGIES
The Fund employs a passive management strategy designed to track the performance
of the Wilshire 5000 Total Market Index, which consists of all the U.S. common
stocks regularly traded on the New York and American Stock Exchanges and the
Nasdaq over-the-counter market. The Fund invests all or substantially all of its
assets in a representative sample of the stocks that comprise the Index. For a
description of the Fund's sampling technique, please see "Indexing Methods"
under MORE ON THE FUNDS.
PRIMARY RISK
THE FUND'S TOTAL RETURN, LIKE STOCK PRICES GENERALLY, WILL FLUCTUATE WITHIN A
WIDE RANGE, SO AN INVESTOR COULD LOSE MONEY OVER SHORT OR EVEN LONG PERIODS.
Stock markets tend to move in cycles, with periods of rising prices and periods
of falling prices.
PERFORMANCE/RISK INFORMATION
The bar chart and table below provide an indication of the risk of investing in
the Fund. The bar chart shows the Fund's performance in each calendar year since
the Fund's inception. The table shows how the Fund's average annual total
returns for one and five calendar years and since inception compare with those
of the index that the Fund seeks to track. Keep in mind that the Fund's past
performance does not indicate how it will perform in the future.
- --------------------------------------------------------------------------------
ANNUAL TOTAL RETURNS
- --------------------------------------------------------------------------------
1993 10.62%
1994 -0.17%
1995 35.79%
1996 20.96%
1997 30.99%
1998 23.26%
1999 23.81%
- --------------------------------------------------------------------------------
Return figures do not reflect the transaction fee on purchases through 1995.
- --------------------------------------------------------------------------------
During the period shown in the bar chart, the highest return for a calendar
quarter was 21.51% (quarter ended December 31, 1998) and the lowest return for a
quarter was -12.07% (quarter ended September 30, 1998).
<PAGE>
3
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS FOR YEARS ENDED DECEMBER 31, 1999
- --------------------------------------------------------------------------------
SINCE
1 YEAR 5 YEARS INCEPTION*
- --------------------------------------------------------------------------------
Vanguard Total Stock Market Index Fund** 23.81% 26.84% 19.80%
Wilshire 5000 Index 23.77 27.11 20.11
- --------------------------------------------------------------------------------
*April 27, 1992.
**Return figures do not reflect the transaction fee on purchases through 1995.
- --------------------------------------------------------------------------------
FEES AND EXPENSES
The following table describes the fees and expenses you may pay if you buy and
hold shares of the Fund. The expenses shown under Annual Fund Operating Expenses
are based upon those incurred in the fiscal year ended December 31, 1999.
SHAREHOLDER FEES (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None
Transaction Fee on Purchases: None*
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fee: None
Exchange Fee: None
ANNUAL FUND OPERATING EXPENSES (expenses deducted from the
Fund's assets)
Management Expenses: 0.18%
12b-1 Distribution Fee: None
Other Expenses: 0.02%
TOTAL ANNUAL FUND OPERATING EXPENSES: 0.20%
*The Fund reserves the right to deduct a transaction fee from future
purchases of shares.
The following example is intended to help you compare the cost of investing
in the Fund with the cost of investing in other mutual funds. It illustrates the
hypothetical expenses that you would incur over various periods if you invest
$10,000 in the Fund. This example assumes that the Fund provides a return of 5%
a year, and that operating expenses remain the same. The results apply whether
or not you redeem your investment at the end of each period.
- --------------------------------------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------
$20 $64 $113 $255
- --------------------------------------------------------------------------------
THIS EXAMPLE SHOULD NOT BE CONSIDERED TO REPRESENT ACTUAL EXPENSES OR
PERFORMANCE FROM THE PAST OR FOR THE FUTURE. ACTUAL FUTURE EXPENSES MAY BE
HIGHER OR LOWER THAN THOSE SHOWN.
<PAGE>
4
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION
DIVIDENDS AND CAPITAL GAINS NEWSPAPER ABBREVIATION
Dividends are distributed quarterly in TotSt
March, June, September, and December;
capital gains, if any, are VANGUARD FUND NUMBER
distributed annually in December 085
INVESTMENT ADVISER CUSIP NUMBER
The Vanguard Group, Valley Forge, Pa., 922908306
since inception
TICKER SYMBOL
INCEPTION DATE VTSMX
April 27, 1992
NET ASSETS (ALL SHARE CLASSES) AS OF
DECEMBER 31, 1999
$22.1 billion
- --------------------------------------------------------------------------------
<PAGE>
5
FUND PROFILE--VANGUARD(R) 500 INDEX FUND
The following profile summarizes key features of Vanguard 500 Index Fund.
INVESTMENT OBJECTIVE
The Fund seeks to match the performance of a benchmark index that measures the
investment return of large-capitalization stocks.
INVESTMENT STRATEGIES
The Fund employs a passive management strategy designed to track the performance
of the Standard & Poor's 500 Index, which is dominated by the stocks of large
U.S. companies. The Fund attempts to replicate the target index by investing all
or substantially all of its assets in the stocks that comprise the Index. For a
description of the Fund's replication technique, please see "Indexing Methods"
under MORE ON THE FUNDS.
PRIMARY RISKS
- - THE FUND'S TOTAL RETURN, LIKE STOCK PRICES GENERALLY, WILL FLUCTUATE WITHIN
A WIDE RANGE, SO AN INVESTOR COULD LOSE MONEY OVER SHORT OR EVEN LONG
PERIODS. Stock markets tend to move in cycles, with periods of rising
prices and periods of falling prices.
- - The Fund is also subject to investment style risk, which is the chance that
returns from large-capitalization stocks will trail returns from other
asset classes or the overall stock market. Large-capitalization stocks tend
to go through cycles of doing better--or worse--than the stock market in
general. These periods have, in the past, lasted for as long as several
years.
PERFORMANCE/RISK INFORMATION
The bar chart and table below provide an indication of the risk of investing in
the Fund. The bar chart shows the Fund's performance in each calendar year over
a ten-year period. The table shows how the Fund's average annual total returns
for one, five, and ten calendar years compare with those of the index that the
Fund seeks to track. Keep in mind that the Fund's past performance does not
indicate how it will perform in the future.
- --------------------------------------------------------------------------------
ANNUAL TOTAL RETURNS
- --------------------------------------------------------------------------------
1990 -3.32%
1991 30.22%
1992 7.42%
1993 9.89%
1994 1.18%
1995 37.45%
1996 22.88%
1997 33.19%
1998 28.62%
1999 21.07%
- --------------------------------------------------------------------------------
During the period shown in the bar chart, the highest return for a calendar
quarter was 21.39% (quarter ended December 31, 1998) and the lowest return for a
quarter was -13.76% (quarter ended September 30, 1990).
<PAGE>
6
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS FOR YEARS ENDED DECEMBER 31, 1999
- --------------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------
Vanguard 500 Index Fund 21.07% 28.49% 18.07%
S&P 500 Index 21.04 28.56 18.21
- --------------------------------------------------------------------------------
FEES AND EXPENSES
The following table describes the fees and expenses you may pay if you buy and
hold shares of the Fund. The expenses shown under Annual Fund Operating Expenses
are based upon those incurred in the fiscal year ended December 31, 1999.
SHAREHOLDER FEES (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None
Transaction Fee on Purchases: None*
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fee: None
Exchange Fee: None
ANNUAL FUND OPERATING EXPENSES (expenses deducted from the
Fund's assets)
Management Expenses: 0.16%
12b-1 Distribution Fee: None
Other Expenses: 0.02%
TOTAL ANNUAL FUND OPERATING EXPENSES: 0.18%
*The Fund reserves the right to deduct a transaction fee from future
purchases of shares.
The following example is intended to help you compare the cost of investing
in the Fund with the cost of investing in other mutual funds. It illustrates the
hypothetical expenses that you would incur over various periods if you invest
$10,000 in the Fund. This example assumes that the Fund provides a return of 5%
a year, and that operating expenses remain the same. The results apply whether
or not you redeem your investment at the end of each period.
- --------------------------------------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------
$18 $58 $101 $230
- --------------------------------------------------------------------------------
THIS EXAMPLE SHOULD NOT BE CONSIDERED TO REPRESENT ACTUAL EXPENSES OR
PERFORMANCE FROM THE PAST OR FOR THE FUTURE. ACTUAL FUTURE EXPENSES MAY BE
HIGHER OR LOWER THAN THOSE SHOWN.
<PAGE>
7
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION
DIVIDENDS AND CAPITAL GAINS NEWSPAPER ABBREVIATION
Dividends are distributed quarterly in 500
March, June, September, and December;
capital gains, if any, are VANGUARD FUND NUMBER
distributed annually in December 040
INVESTMENT ADVISER CUSIP NUMBER
The Vanguard Group, Valley Forge, Pa., 922908108
since inception
TICKER SYMBOL
INCEPTION DATE VFINX
August 31, 1976
NET ASSETS AS OF DECEMBER 31, 1999
$104.7 billion
- --------------------------------------------------------------------------------
<PAGE>
8
FUND PROFILE--VANGUARD(R) EXTENDED MARKET INDEX FUND
The following profile summarizes key features of Vanguard Extended Market Index
Fund.
INVESTMENT OBJECTIVE
The Fund seeks to match the performance of a benchmark index that measures the
investment return of mid- and small-capitalization stocks.
INVESTMENT STRATEGIES
The Fund employs a passive management strategy designed to track the performance
of the Wilshire 4500 Completion Index, a broadly diversified index of stocks of
medium-size and small U.S. companies. The Wilshire 4500 Index contains all of
the U.S. common stocks regularly traded on the New York and American Stock
Exchanges and the Nasdaq over-the-counter market, except those stocks included
in the S&P 500 Index. The Fund invests all or substantially all of its assets in
a representative sample of the stocks that comprise the Index. For a description
of the Fund's sampling technique, please see "Indexing Methods" under MORE ON
THE FUNDS.
PRIMARY RISKS
- - THE FUND'S TOTAL RETURN, LIKE STOCK PRICES GENERALLY, WILL FLUCTUATE WITHIN
A WIDE RANGE, SO AN INVESTOR COULD LOSE MONEY OVER SHORT OR EVEN LONG
PERIODS. Stock markets tend to move in cycles, with periods of rising
prices and periods of falling prices.
- - The Fund is also subject to investment style risk, which is the chance that
returns from mid- or small-capitalization stocks will trail returns from
other asset classes or the overall stock market. Small- and mid-cap stocks
historically have been more volatile in price than the large-cap stocks
that dominate the S&P 500 Index, and perform differently than the overall
stock market.
PERFORMANCE/RISK INFORMATION
The bar chart and table below provide an indication of the risk of investing in
the Fund. The bar chart shows the Fund's performance in each calendar year over
a ten-year period. The table shows how the Fund's average annual total returns
for one, five, and ten calendar years compare with those of the index that the
Fund seeks to track. Keep in mind that the Fund's past performance does not
indicate how it will perform in the future.
- --------------------------------------------------------------------------------
ANNUAL TOTAL RETURNS
- --------------------------------------------------------------------------------
1990 -14.05%
1991 41.85%
1992 12.47%
1993 14.49%
1994 -1.76%
1995 33.80%
1996 17.65%
1997 26.73%
1998 8.32%
1999 36.22%
- --------------------------------------------------------------------------------
Return figures do not reflect the transaction fee on purchases through March 31,
2000.
- --------------------------------------------------------------------------------
<PAGE>
9
During the period shown in the bar chart, the highest return for a calendar
quarter was 29.54% (quarter ended December 31, 1999) and the lowest return for a
quarter was -18.87% (quarter ended September 30, 1990).
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS FOR YEARS ENDED DECEMBER 31, 1999
- --------------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------
Vanguard Extended Market Index Fund* 36.22% 24.10% 16.33%
Wilshire 4500 Index 35.37 23.65 16.16
- --------------------------------------------------------------------------------
*Return figures do not reflect the transaction fee on purchases through March
31, 2000.
- --------------------------------------------------------------------------------
FEES AND EXPENSES
The following table describes the fees and expenses you may pay if you buy and
hold shares of the Fund. The expenses shown under Annual Fund Operating Expenses
are based upon those incurred in the fiscal year ended December 31, 1999.
SHAREHOLDER FEES (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None
Transaction Fee on Purchases: None*
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fee: None
Exchange Fee: None
ANNUAL FUND OPERATING EXPENSES (expenses deducted from the
Fund's assets)
Management Expenses: 0.22%
12b-1 Distribution Fee: None
Other Expenses: 0.03%
TOTAL ANNUAL FUND OPERATING EXPENSES: 0.25%
*The Fund reserves the right to deduct a transaction fee from future
purchases of shares.
The following example is intended to help you compare the cost of investing
in the Fund with the cost of investing in other mutual funds. It illustrates the
hypothetical expenses that you would incur over various periods if you invest
$10,000 in the Fund. This example assumes that the Fund provides a return of 5%
a year, and that operating expenses remain the same. The results apply whether
or not you redeem your investment at the end of each period.
- --------------------------------------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------
$26 $80 $141 $318
- --------------------------------------------------------------------------------
THIS EXAMPLE SHOULD NOT BE CONSIDERED TO REPRESENT ACTUAL EXPENSES OR
PERFORMANCE FROM THE PAST OR FOR THE FUTURE. ACTUAL FUTURE EXPENSES MAY BE
HIGHER OR LOWER THAN THOSE SHOWN.
<PAGE>
10
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION
DIVIDENDS AND CAPITAL GAINS NEWSPAPER ABBREVIATION
Distributed annually in December Extnd
INVESTMENT ADVISER VANGUARD FUND NUMBER
The Vanguard Group, Valley Forge, Pa., 098
since inception
CUSIP NUMBER
INCEPTION DATE 922908207
December 21, 1987
TICKER SYMBOL
NET ASSETS (ALL SHARE CLASSES) AS OF VEXMX
DECEMBER 31, 1999
$5.1 billion
- --------------------------------------------------------------------------------
<PAGE>
11
FUND PROFILE--VANGUARD(R) MID-CAP INDEX FUND
The following profile summarizes key features of Vanguard Mid-Cap Index Fund.
INVESTMENT OBJECTIVE
The Fund seeks to match the performance of a benchmark index that measures the
investment return of mid-capitalization stocks.
INVESTMENT STRATEGIES
The Fund employs a passive management strategy designed to track the performance
of the Standard & Poor's MidCap 400 Index, which is made up of a group of
medium-size U.S. companies. The Fund attempts to replicate the target index by
investing all or substantially all of its assets in the stocks that comprise the
Index. For a description of the Fund's replication technique, please see
"Indexing Methods" under MORE ON THE FUNDS.
PRIMARY RISKS
- - THE FUND'S TOTAL RETURN, LIKE STOCK PRICES GENERALLY, WILL FLUCTUATE WITHIN
A WIDE RANGE, SO AN INVESTOR COULD LOSE MONEY OVER SHORT OR EVEN LONG
PERIODS. Stock markets tend to move in cycles, with periods of rising
prices and periods of falling prices.
- - The Fund is also subject to investment style risk, which is the chance that
returns from mid-capitalization stocks will trail returns from other asset
classes or the overall stock market. Mid-cap stocks historically have been
more volatile in price than the large-cap stocks that dominate the S&P 500
Index and perform differently than the overall stock market.
PERFORMANCE/RISK INFORMATION
The bar chart and table below provide an indication of the risk of investing in
the Fund. The bar chart shows the Fund's performance in the one full calendar
year since its inception. The table shows how the Fund's average annual total
returns for one year and since inception compare with those of the index that
the Fund seeks to track. Keep in mind that the Fund's past performance does not
indicate how it will perform in the future.
- --------------------------------------------------------------------------------
ANNUAL TOTAL RETURN
- --------------------------------------------------------------------------------
1999 15.32%
- --------------------------------------------------------------------------------
During the period shown in the bar chart, the highest return for a calendar
quarter was 17.27% (quarter ended December 31, 1999) and the lowest return for a
quarter was -8.20% (quarter ended September 30, 1999).
<PAGE>
12
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS FOR YEARS ENDED DECEMBER 31, 1999
- --------------------------------------------------------------------------------
1 YEAR SINCE INCEPTION*
- --------------------------------------------------------------------------------
Vanguard Mid-Cap Index Fund 15.32% 14.93%
S&P MidCap 400 Index 14.72 14.12
- --------------------------------------------------------------------------------
*May 21, 1998.
- --------------------------------------------------------------------------------
FEES AND EXPENSES
The following table describes the fees and expenses you may pay if you buy and
hold shares of the Fund. The expenses shown under Annual Fund Operating Expenses
are based upon those incurred in the fiscal year ended December 31, 1999.
SHAREHOLDER FEES (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None
Transaction Fee on Purchases: None*
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fee: None
Exchange Fee: None
ANNUAL FUND OPERATING EXPENSES (expenses deducted from the
Fund's assets)
Management Expenses: 0.22%
12b-1 Distribution Fee: None
Other Expenses: 0.03%
TOTAL ANNUAL FUND OPERATING EXPENSES: 0.25%
*The Fund reserves the right to deduct a transaction fee from future
purchases of shares.
The following example is intended to help you compare the cost of investing
in the Fund with the cost of investing in other mutual funds. It illustrates the
hypothetical expenses that you would incur over various periods if you invest
$10,000 in the Fund. This example assumes that the Fund provides a return of 5%
a year, and that operating expenses remain the same. The results apply whether
or not you redeem your investment at the end of each period.
- --------------------------------------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------
$26 $80 $141 $318
- --------------------------------------------------------------------------------
THIS EXAMPLE SHOULD NOT BE CONSIDERED TO REPRESENT ACTUAL EXPENSES OR
PERFORMANCE FROM THE PAST OR FOR THE FUTURE. ACTUAL FUTURE EXPENSES MAY BE
HIGHER OR LOWER THAN THOSE SHOWN.
<PAGE>
13
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION
DIVIDENDS AND CAPITAL GAINS NEWSPAPER ABBREVIATION
Distributed annually in December MidCp
INVESTMENT ADVISER VANGUARD FUND NUMBER
The Vanguard Group, Valley Forge, Pa., 859
since inception
CUSIP NUMBER
INCEPTION DATE 922908843
May 21, 1998
TICKER SYMBOL
NET ASSETS (ALL SHARE CLASSES) AS OF VIMSX
DECEMBER 31, 1999
$748 million
- --------------------------------------------------------------------------------
<PAGE>
14
FUND PROFILE--VANGUARD(R) SMALL-CAP INDEX FUND
The following profile summarizes key features of Vanguard Small-Cap Index Fund.
INVESTMENT OBJECTIVE
The Fund seeks to match the performance of a benchmark index that measures the
investment return of small-capitalization stocks.
INVESTMENT STRATEGIES
The Fund employs a passive management strategy designed to track the performance
of the Russell 2000 Small Stock Index, which is made up of the stocks of smaller
U.S. companies. The Russell 2000 Index is comprised of the 2,000 smallest
companies out of the 3,000 largest U.S. companies. The Fund invests all or
substantially all of its assets in a representative sample of the stocks that
comprise the Index. For a description of the Fund's sampling technique, please
see "Indexing Methods" under MORE ON THE FUNDS.
PRIMARY RISKS
- - THE FUND'S TOTAL RETURN, LIKE STOCK PRICES GENERALLY, WILL FLUCTUATE WITHIN
A WIDE RANGE, SO AN INVESTOR COULD LOSE MONEY OVER SHORT OR EVEN LONG
PERIODS. Stock markets tend to move in cycles, with periods of rising
prices and periods of falling prices.
- - The Fund is also subject to investment style risk, which is the chance that
returns from small-capitalization stocks will trail returns from other
asset classes or the overall stock market. Small-cap stocks historically
have been more volatile in price than the large-cap stocks that dominate
the S&P 500 Index, and perform differently than the overall stock market.
PERFORMANCE/RISK INFORMATION
The bar chart and table below provide an indication of the risk of investing in
the Fund. The bar chart shows the Fund's performance in each calendar year over
a ten-year period. The table shows how the Fund's average annual total returns
for one, five, and ten calendar years compare with those of the index that the
Fund seeks to track. Keep in mind that the Fund's past performance does not
indicate how it will perform in the future.
- --------------------------------------------------------------------------------
ANNUAL TOTAL RETURNS
- --------------------------------------------------------------------------------
1990 -18.13%
1991 45.26%
1992 18.20%
1993 18.70%
1994 -0.51%
1995 28.74%
1996 18.12%
1997 24.59%
1998 -2.61%
1999 23.13%
- --------------------------------------------------------------------------------
Return figures do not reflect the transaction fee on purchases through March 31,
2000.
- --------------------------------------------------------------------------------
During the period shown in the bar chart, the highest return for a calendar
quarter was 29.29% (quarter ended March 31, 1991) and the lowest return for a
quarter was -24.00% (quarter ended September 30, 1990).
<PAGE>
15
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS FOR YEARS ENDED DECEMBER 31, 1999
- --------------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------
Vanguard Small-Cap Index Fund* 23.13% 17.84% 14.20%
Russell 2000 Index 21.26 16.69 13.40
- --------------------------------------------------------------------------------
*Return figures do not reflect the transaction fee on purchases through March
31, 2000.
- --------------------------------------------------------------------------------
FEES AND EXPENSES
The following table describes the fees and expenses you may pay if you buy and
hold shares of the Fund. The expenses shown under Annual Fund Operating Expenses
are based upon those incurred in the fiscal year ended December 31, 1999.
SHAREHOLDER FEES (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None
Transaction Fee on Purchases: None*
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fee: None
Exchange Fee: None
ANNUAL FUND OPERATING EXPENSES (expenses deducted from the
Fund's assets)
Management Expenses: 0.21%
12b-1 Distribution Fee: None
Other Expenses: 0.04%
TOTAL ANNUAL FUND OPERATING EXPENSES: 0.25%
*The Fund reserves the right to deduct a transaction fee from future
purchases of shares.
The following example is intended to help you compare the cost of investing
in the Fund with the cost of investing in other mutual funds. It illustrates the
hypothetical expenses that you would incur over various periods if you invest
$10,000 in the Fund. This example assumes that the Fund provides a return of 5%
a year, and that operating expenses remain the same. The results apply whether
or not you redeem your investment at the end of each period.
- --------------------------------------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------
$26 $80 $141 $318
- --------------------------------------------------------------------------------
THIS EXAMPLE SHOULD NOT BE CONSIDERED TO REPRESENT ACTUAL EXPENSES OR
PERFORMANCE FROM THE PAST OR FOR THE FUTURE. ACTUAL FUTURE EXPENSES MAY BE
HIGHER OR LOWER THAN THOSE SHOWN.
<PAGE>
16
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION
DIVIDENDS AND CAPITAL GAINS NEWSPAPER ABBREVIATION
Distributed annually in December SmCap
INVESTMENT ADVISER VANGUARD FUND NUMBER
The Vanguard Group, Valley Forge, Pa., 048
since inception
CUSIP NUMBER
INCEPTION DATE 922908702
October 3, 1960
TICKER SYMBOL
NET ASSETS (ALL SHARE CLASSES) AS OF NAESX
DECEMBER 31, 1999
$4.0 billion
- --------------------------------------------------------------------------------
<PAGE>
17
FUND PROFILE--VANGUARD(R) VALUE INDEX FUND
The following profile summarizes key features of Vanguard Value Index Fund.
INVESTMENT OBJECTIVE
The Fund seeks to match the performance of a benchmark index that measures the
investment return of large-capitalization value stocks.
INVESTMENT STRATEGIES
The Fund employs a passive management strategy designed to track the performance
of the Standard & Poor's 500/BARRA Value Index, which includes those stocks of
the S&P 500 Index with lower-than-average price/book ratios. The Fund attempts
to replicate the target index by investing all or substantially all of its
assets in the stocks that comprise the Index. For a description of the Fund's
replication technique, please see "Indexing Methods" under MORE ON THE FUNDS.
PRIMARY RISKS
- - THE FUND'S TOTAL RETURN, LIKE STOCK PRICES GENERALLY, WILL FLUCTUATE WITHIN
A WIDE RANGE, SO AN INVESTOR COULD LOSE MONEY OVER SHORT OR EVEN LONG
PERIODS. Stock markets tend to move in cycles, with periods of rising
prices and periods of falling prices.
- - The Fund is also subject to investment style risk, which is the chance that
returns from large-capitalization value stocks will trail returns from
other asset classes or the overall stock market. Value stocks tend to go
through cycles of doing better--or worse--than the stock market in general.
These periods have, in the past, lasted for as long as several years.
PERFORMANCE/RISK INFORMATION
The bar chart and table below provide an indication of the risk of investing in
the Fund. The bar chart shows the Fund's performance in each calendar year since
the Fund's inception. The table shows how the Fund's average annual total
returns for one and five calendar years and since inception compare with those
of the index that the Fund seeks to track. Keep in mind that the Fund's past
performance does not indicate how it will perform in the future.
- --------------------------------------------------------------------------------
ANNUAL TOTAL RETURNS
- --------------------------------------------------------------------------------
1993 18.35%
1994 -0.73%
1995 36.94%
1996 21.86%
1997 29.77%
1998 14.64%
1999 12.57%
- --------------------------------------------------------------------------------
During the period shown in the bar chart, the highest return for a calendar
quarter was 17.50% (quarter ended December 31, 1998) and the lowest return for a
quarter was -12.96% (quarter ended September 30, 1998).
<PAGE>
18
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS FOR YEARS ENDED DECEMBER 31, 1999
- --------------------------------------------------------------------------------
SINCE
1 YEAR 5 YEARS INCEPTION*
- --------------------------------------------------------------------------------
Vanguard Value Index Fund 12.57% 22.82% 18.66%
S&P 500/BARRA Value Index 12.72 22.94 18.81
- --------------------------------------------------------------------------------
*November 2, 1992.
- --------------------------------------------------------------------------------
FEES AND EXPENSES
The following table describes the fees and expenses you may pay if you buy and
hold shares of the Fund. The expenses shown under Annual Fund Operating Expenses
are based upon those incurred in the fiscal year ended December 31, 1999.
SHAREHOLDER FEES (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None
Transaction Fee on Purchases: None*
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fee: None
Exchange Fee: None
ANNUAL FUND OPERATING EXPENSES (expenses deducted from the
Fund's assets)
Management Expenses: 0.19%
12b-1 Distribution Fee: None
Other Expenses: 0.03%
TOTAL ANNUAL FUND OPERATING EXPENSES: 0.22%
*The Fund reserves the right to deduct a transaction fee from future
purchases of shares.
The following example is intended to help you compare the cost of investing
in the Fund with the cost of investing in other mutual funds. It illustrates the
hypothetical expenses that you would incur over various periods if you invest
$10,000 in the Fund. This example assumes that the Fund provides a return of 5%
a year, and that operating expenses remain the same. The results apply whether
or not you redeem your investment at the end of each period.
- --------------------------------------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------
$23 $71 $124 $280
- --------------------------------------------------------------------------------
THIS EXAMPLE SHOULD NOT BE CONSIDERED TO REPRESENT ACTUAL EXPENSES OR
PERFORMANCE FROM THE PAST OR FOR THE FUTURE. ACTUAL FUTURE EXPENSES MAY BE
HIGHER OR LOWER THAN THOSE SHOWN.
<PAGE>
19
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION
DIVIDENDS AND CAPITAL GAINS MINIMUM INITIAL INVESTMENT
Dividends are distributed quarterly in $3,000; $1,000 for IRAs and custodial
March, June, September, and December; accounts for minors
capital gains, if any, are
distributed annually in December NEWSPAPER ABBREVIATION
Value
INVESTMENT ADVISER
The Vanguard Group, Valley Forge, Pa., VANGUARD FUND NUMBER
since inception 006
INCEPTION DATE CUSIP NUMBER
November 2, 1992 922908405
NET ASSETS (ALL SHARE CLASSES) AS OF TICKER SYMBOL
DECEMBER 31, 1999 VIVAX
$3.8 billion
- --------------------------------------------------------------------------------
<PAGE>
20
FUND PROFILE--VANGUARD(R) SMALL-CAP VALUE INDEX FUND
The following profile summarizes key features of Vanguard Small-Cap Value Index
Fund.
INVESTMENT OBJECTIVE
The Fund seeks to match the performance of a benchmark index that measures the
investment return of small-capitalization value stocks.
INVESTMENT STRATEGIES
The Fund employs a passive management strategy designed to track the performance
of the Standard & Poor's SmallCap 600/BARRA Value Index, which includes those
stocks of the S&P SmallCap 600 Index with lower-than-average price/book ratios.
The Fund attempts to replicate the target index by investing all or
substantially all of its assets in the stocks that comprise the Index. For a
description of the Fund's replication technique, please see "Indexing Methods"
under MORE ON THE FUNDS.
PRIMARY RISKS
- - THE FUND'S TOTAL RETURN, LIKE STOCK PRICES GENERALLY, WILL FLUCTUATE WITHIN
A WIDE RANGE, SO AN INVESTOR COULD LOSE MONEY OVER SHORT OR EVEN LONG
PERIODS. Stock markets tend to move in cycles, with periods of rising
prices and periods of falling prices.
- - The Fund is also subject to investment style risk, which is the chance that
returns from small-capitalization value stocks will trail returns from
other asset classes or the overall stock market. Value stocks tend to go
through cycles of doing better--or worse--than the stock market in general.
In addition, small-cap stocks historically have been more volatile in price
than the large-cap stocks that dominate the S&P 500 Index, and perform
differently than the overall stock market.
PERFORMANCE/RISK INFORMATION
The bar chart and table below provide an indication of the risk of investing in
the Fund. The bar chart shows the Fund's performance in the one full calendar
year since its inception. The table shows how the Fund's average annual total
returns for one year and since inception compare with those of the index that
the Fund seeks to track. Keep in mind that the Fund's past performance does not
indicate how it will perform in the future.
- --------------------------------------------------------------------------------
ANNUAL TOTAL RETURN
- --------------------------------------------------------------------------------
1999 3.35%
- --------------------------------------------------------------------------------
The return figure does not reflect the transaction fee on purchases.
- --------------------------------------------------------------------------------
<PAGE>
21
During the period shown in the bar chart, the highest return for a calendar
quarter was 20.08% (quarter ended June 30, 1999) and the lowest return for a
quarter was -9.50% (quarter ended March 31, 1999).
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS FOR YEARS ENDED DECEMBER 31, 1999
- --------------------------------------------------------------------------------
1 YEAR SINCE INCEPTION*
- --------------------------------------------------------------------------------
Vanguard Small-Cap Value Index Fund** 2.83% -6.31%
S&P SmallCap 600/BARRA Value Index 3.03 -6.73
- --------------------------------------------------------------------------------
*May 21, 1998.
**Return figures reflect the transaction fee of 0.50% on purchases.
- --------------------------------------------------------------------------------
FEES AND EXPENSES
The following table describes the fees and expenses you may pay if you buy and
hold shares of the Fund. The expenses shown under Annual Fund Operating Expenses
are based upon those incurred in the fiscal year ended December 31, 1999.
SHAREHOLDER FEES (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None
Transaction Fee on Purchases: 0.50%*
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fee: None
Exchange Fee: None
ANNUAL FUND OPERATING EXPENSES (expenses deducted from the
Fund's assets)
Management Expenses: 0.20%
12b-1 Distribution Fee: None
Other Expenses: 0.05%
TOTAL ANNUAL FUND OPERATING EXPENSES: 0.25%
*The transaction fee is deducted from all purchases (including exchanges
from other Vanguard funds) but not from reinvested dividends or capital
gains.
The following example is intended to help you compare the cost of investing
in the Fund with the cost of investing in other mutual funds. It illustrates the
hypothetical expenses that you would incur over various periods if you invest
$10,000 in the Fund. This example assumes that the Fund provides a return of 5%
a year, and that operating expenses remain the same. The results apply whether
or not you redeem your investment at the end of each period.
- --------------------------------------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------
$75 $130 $190 $367
- --------------------------------------------------------------------------------
THIS EXAMPLE SHOULD NOT BE CONSIDERED TO REPRESENT ACTUAL EXPENSES OR
PERFORMANCE FROM THE PAST OR FOR THE FUTURE. ACTUAL FUTURE EXPENSES MAY BE
HIGHER OR LOWER THAN THOSE SHOWN.
<PAGE>
22
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION
DIVIDENDS AND CAPITAL GAINS NEWSPAPER ABBREVIATION
Distributed annually in December SmVal
INVESTMENT ADVISER VANGUARD FUND NUMBER
The Vanguard Group, Valley Forge, Pa., 860
since inception
CUSIP NUMBER
INCEPTION DATE 922908793
May 21, 1998
TICKER SYMBOL
NET ASSETS (ALL SHARE CLASSES) AS OF VISVX
DECEMBER 31, 1999
$214 million
- --------------------------------------------------------------------------------
<PAGE>
23
FUND PROFILE--VANGUARD(R) GROWTH INDEX FUND
The following profile summarizes key features of Vanguard Growth Index Fund.
INVESTMENT OBJECTIVE
The Fund seeks to match the performance of a benchmark index that measures the
investment return of large-capitalization growth stocks.
INVESTMENT STRATEGIES
The Fund employs a passive management strategy designed to track the performance
of the Standard & Poor's 500/BARRA Growth Index, which includes those stocks of
the S&P 500 Index with higher-than-average price/book ratios. The Fund attempts
to replicate the target index by investing all or substantially all of its
assets in the stocks that comprise the Index. For a description of the Fund's
replication technique, please see "Indexing Methods" under MORE ON THE FUNDS.
PRIMARY RISKS
THE FUND'S TOTAL RETURN, LIKE STOCK PRICES GENERALLY, WILL FLUCTUATE WITHIN A
WIDE RANGE, SO AN INVESTOR COULD LOSE MONEY OVER SHORT OR EVEN LONG PERIODS.
Stock markets tend to move in cycles, with periods of rising prices and periods
of falling prices. The Fund is also subject to:
- - Investment style risk, which is the chance that returns from
large-capitalization growth stocks will trail returns from other asset
classes or the overall stock market. Growth stocks tend to go through
cycles of doing better--or worse--than the stock market in general. These
periods have, in the past, lasted for as long as several years.
- - Nondiversification risk, which is the chance that the Fund's performance
could be hurt disproportionately by a decline in the price of just a few
stocks. This is because the Fund invests a greater percentage of its assets
in the stocks of fewer companies as compared with other mutual funds.
PERFORMANCE/RISK INFORMATION
The bar chart and table below provide an indication of the risk of investing in
the Fund. The bar chart shows the Fund's performance in each calendar year since
the Fund's inception. The table shows how the Fund's average annual total
returns for one and five calendar years and since inception compare with those
of the index that the Fund seeks to track. Keep in mind that the Fund's past
performance does not indicate how it will perform in the future.
- --------------------------------------------------------------------------------
ANNUAL TOTAL RETURNS
- --------------------------------------------------------------------------------
1993 1.53%
1994 2.89%
1995 38.06%
1996 23.74%
1997 36.34%
1998 42.21%
1999 28.76%
- --------------------------------------------------------------------------------
<PAGE>
24
During the period shown in the bar chart, the highest return for a calendar
quarter was 24.64% (quarter ended December 31, 1998) and the lowest return for a
quarter was -7.21% (quarter ended September 30, 1998).
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS FOR YEARS ENDED DECEMBER 31, 1999
- --------------------------------------------------------------------------------
SINCE
1 YEAR 5 YEARS INCEPTION*
- --------------------------------------------------------------------------------
Vanguard Growth Index Fund 28.76% 33.65% 23.74%
S&P 500/BARRA Growth Index 28.25 33.64 23.84
- --------------------------------------------------------------------------------
*November 2, 1992.
- --------------------------------------------------------------------------------
FEES AND EXPENSES
The following table describes the fees and expenses you may pay if you buy and
hold shares of the Fund. The expenses shown under Annual Fund Operating Expenses
are based upon those incurred in the fiscal year ended December 31, 1999.
SHAREHOLDER FEES (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None
Transaction Fee on Purchases: None*
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fee: None
Exchange Fee: None
ANNUAL FUND OPERATING EXPENSES (expenses deducted from the
Fund's assets)
Management Expenses: 0.20%
12b-1 Distribution Fee: None
Other Expenses: 0.02%
TOTAL ANNUAL FUND OPERATING EXPENSES: 0.22%
*The Fund reserves the right to deduct a transaction fee from future
purchases of shares.
The following example is intended to help you compare the cost of investing
in the Fund with the cost of investing in other mutual funds. It illustrates the
hypothetical expenses that you would incur over various periods if you invest
$10,000 in the Fund. This example assumes that the Fund provides a return of 5%
a year, and that operating expenses remain the same. The results apply whether
or not you redeem your investment at the end of each period.
- --------------------------------------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------
$23 $71 $124 $280
- --------------------------------------------------------------------------------
THIS EXAMPLE SHOULD NOT BE CONSIDERED TO REPRESENT ACTUAL EXPENSES OR
PERFORMANCE FROM THE PAST OR FOR THE FUTURE. ACTUAL FUTURE EXPENSES MAY BE
HIGHER OR LOWER THAN THOSE SHOWN.
<PAGE>
25
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION
DIVIDENDS AND CAPITAL GAINS NEWSPAPER ABBREVIATION
Dividends are distributed quarterly in Growth
March, June, September, and December;
capital gains, if any, are VANGUARD FUND NUMBER
distributed annually in December 009
INVESTMENT ADVISER CUSIP NUMBER
The Vanguard Group, Valley Forge, Pa., 922908504
since inception
TICKER SYMBOL
INCEPTION DATE VIGRX
November 2, 1992
NET ASSETS (ALL SHARE CLASSES) AS OF
DECEMBER 31, 1999
$15.7 billion
- --------------------------------------------------------------------------------
<PAGE>
26
FUND PROFILE--VANGUARD(R) SMALL-CAP GROWTH INDEX FUND
The following profile summarizes key features of Vanguard Small-Cap Growth Index
Fund.
INVESTMENT OBJECTIVE
The Fund seeks to match the performance of a benchmark index that measures the
investment return of small-capitalization growth stocks.
INVESTMENT STRATEGIES
The Fund employs a passive management strategy designed to track the performance
of the Standard & Poor's SmallCap 600/BARRA Growth Index, which includes those
stocks of the S&P SmallCap 600 Index with higher-than-average price/book ratios.
The Fund attempts to replicate the target index by investing all or
substantially all of its assets in the stocks that comprise the Index. For a
description of the Fund's replication technique, please see "Indexing Methods"
under MORE ON THE FUNDS.
PRIMARY RISKS
- - THE FUND'S TOTAL RETURN, LIKE STOCK PRICES GENERALLY, WILL FLUCTUATE WITHIN
A WIDE RANGE, SO AN INVESTOR COULD LOSE MONEY OVER SHORT OR EVEN LONG
PERIODS. Stock markets tend to move in cycles, with periods of rising
prices and periods of falling prices.
- - The Fund is also subject to investment style risk, which is the chance that
returns from small-capitalization growth stocks will trail returns from
other asset classes or the overall stock market. Growth stocks tend to go
through cycles of doing better--or worse--than the stock market in general.
In addition, small-cap stocks historically have been more volatile in price
than the large-cap stocks that dominate the S&P 500 Index, and perform
differently than the overall stock market.
PERFORMANCE/RISK INFORMATION
The bar chart and table below provide an indication of the risk of investing in
the Fund. The bar chart shows the Fund's performance in the one full calendar
year since its inception. The table shows how the Fund's average annual total
returns for one year and since inception compare with those of the index that
the Fund seeks to track. Keep in mind that the Fund's past performance does not
indicate how it will perform in the future.
- --------------------------------------------------------------------------------
ANNUAL TOTAL RETURN
- --------------------------------------------------------------------------------
1999 19.80%
- --------------------------------------------------------------------------------
The return figure does not reflect the transaction fee on purchases.
- --------------------------------------------------------------------------------
<PAGE>
27
During the period shown in the bar chart, the highest return for a calendar
quarter was 20.69% (quarter ended December 31, 1999) and the lowest return for a
quarter was -8.29% (quarter ended March 31, 1999).
- --------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS FOR YEARS ENDED DECEMBER 31, 1999
- --------------------------------------------------------------------------------
1 YEAR SINCE INCEPTION*
- --------------------------------------------------------------------------------
Vanguard Small-Cap Growth Index Fund** 19.20% 8.17%
S&P SmallCap 600/BARRA Growth Index 19.57 8.24
- --------------------------------------------------------------------------------
*May 21, 1998.
**Return figures reflect the transaction fee of 0.50% on purchases.
- --------------------------------------------------------------------------------
FEES AND EXPENSES
The following table describes the fees and expenses you may pay if you buy and
hold shares of the Fund. The expenses shown under Annual Fund Operating Expenses
are based upon those incurred in the fiscal year ended December 31, 1999.
SHAREHOLDER FEES (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None
Transaction Fee on Purchases: 0.50%*
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fee: None
Exchange Fee: None
ANNUAL FUND OPERATING EXPENSES (expenses deducted from the
Fund's assets)
Management Expenses: 0.20%
12b-1 Distribution Fee: None
Other Expenses: 0.05%
TOTAL ANNUAL FUND OPERATING EXPENSES: 0.25%
*The transaction fee is deducted from all purchases (including exchanges
from other Vanguard funds), but not from reinvested dividends or capital
gains.
The following example is intended to help you compare the cost of investing
in the Fund with the cost of investing in other mutual funds. It illustrates the
hypothetical expenses that you would incur over various periods if you invest
$10,000 in the Fund. This example assumes that the Fund provides a return of 5%
a year, and that operating expenses remain the same. The results apply whether
or not you redeem your investment at the end of each period.
- --------------------------------------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------
$75 $130 $190 $367
- --------------------------------------------------------------------------------
THIS EXAMPLE SHOULD NOT BE CONSIDERED TO REPRESENT ACTUAL EXPENSES OR
PERFORMANCE FROM THE PAST OR FOR THE FUTURE. ACTUAL FUTURE EXPENSES MAY BE
HIGHER OR LOWER THAN THOSE SHOWN.
<PAGE>
28
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION
DIVIDENDS AND CAPITAL GAINS NEWSPAPER ABBREVIATION
Distributed annually in December SmGth
INVESTMENT ADVISER VANGUARD FUND NUMBER
The Vanguard Group, Valley Forge, Pa., 861
since inception
CUSIP NUMBER
INCEPTION DATE 922908827
May 21, 1998
TICKER SYMBOL
NET ASSETS AS OF DECEMBER 31, 1999 VISGX
$167 million
- --------------------------------------------------------------------------------
<PAGE>
29
MORE ON THE FUNDS
The following sections discuss other important features of Vanguard U.S. Stock
Index Funds.
WHY INVEST IN INDEX FUNDS?
Index funds appeal to many investors for a number of reasons:
- - Variety of investments. Vanguard index funds generally invest in a wide
variety of companies and industries.
- - Relative consistency. Because they seek to track market benchmarks, index
funds by definition will not perform dramatically better or worse than
their target indexes.
- - Low cost. Index funds do not have many of the expenses of an actively
managed fund, such as research costs; in addition, they keep trading
activity--and thus brokerage commissions--to a minimum.
- - Low realization of capital gains. Because an index fund typically sells
securities only to respond to redemption requests or to adjust its holdings
to reflect a change in its target index, the fund's turnover rate--and thus
its realization of taxable capital gains--is usually very low.
INDEXING METHODS
In seeking to track a particular index, a fund generally uses one of two methods
to select stocks.
Some index funds hold each stock found in their target indexes in about the
same proportions as represented in the indexes themselves. This is called a
"replication" method. For example, if 5% of the S&P 500 Index were made up of
the stock of a specific company, a fund tracking that index (such as Vanguard
500 Index Fund) would invest about 5% of its assets in that company. The 500,
Mid-Cap, Value, Small-Cap Value, Growth, and Small-Cap Growth Index Funds employ
the replication method of indexing.
Because it would be very expensive to buy and sell all of the stocks held
in certain indexes (the Wilshire 5000 Index, for example, included more than
7,000 stocks as of December 31, 1999), many funds tracking these larger indexes
use a "sampling" technique. At Vanguard, we use a sophisticated computer program
to select a representative sample of stocks from a Fund's target index that will
resemble the full index in terms of industry weightings, market capitalization,
price/earnings ratio, dividend yield, and other characteristics. For instance,
if 10% of the Wilshire 5000 Index were made up of utility stocks, the Total
Stock Market Index Fund would invest about 10% of its assets in some--but not
all--of those utility stocks. The particular utility stocks selected by the
Fund, as a group, would have investment characteristics similar to those of the
utility stocks in the Index. Although the Funds' adviser attempts to closely
track the performance of the index, there is no guarantee that securities
selected for a Fund will provide investment performance exactly matching that of
its target index. The Total Stock Market, Extended Market, and Small-Cap Index
Funds employ the sampling method of indexing.
Each Fund seeks to provide investment results that correspond to its target
index. The correlation between the performance of a Fund and its target index is
expected to be at least 95%. (A correlation of 100% would indicate perfect
correlation.)
The following table shows the number of stocks held by each of the Funds,
and the number of stocks in each Fund's target index, as of December 31, 1999.
<PAGE>
30
- --------------------------------------------------------------------------------
NUMBER OF NUMBER OF STOCKS
FUND STOCKS HELD IN TARGET INDEX
- --------------------------------------------------------------------------------
Total Stock Market 3,375 7,093
500 507 500
Extended Market 2,843 6,605
Mid-Cap 402 400
Small-Cap 1,768 1,857
Value 398 394
Small-Cap Value 406 403
Growth 110 106
Small-Cap Growth 198 197
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
GROWTH FUNDS AND VALUE FUNDS
Growth investing and value investing are two styles employed by stock fund
managers. Growth funds generally focus on companies believed to have
above-average potential for growth in revenue and earnings. Reflecting the
market's high expectations for superior growth, such stocks typically have low
dividend yields and above-average prices in relation to such measures as
revenue, earnings, and book value. Value funds generally emphasize stocks of
companies from which the market does not expect strong growth. The prices of
value stocks typically are below-average in comparison with such factors as
earnings and book value, and these stocks typically have above-average dividend
yields. Growth and value stocks have, in the past, produced similar long-term
returns, though each category has periods when it outperforms the other. In
general, growth funds appeal to investors who will accept more volatility in
hopes of a greater increase in share price. Growth funds also may appeal to
investors with taxable accounts who want a higher proportion of returns to come
as capital gains (which may be taxed at lower rates than dividend income). Value
funds, by contrast, are appropriate for investors who want some dividend income
and the potential for capital gains, but are less tolerant of share-price
fluctuations.
- --------------------------------------------------------------------------------
ADDITIONAL RISK INFORMATION
[FLAG] EACH FUND IS SUBJECT TO MARKET RISK, WHICH IS THE CHANCE THAT STOCK
PRICES OVERALL WILL DECLINE OVER SHORT OR EVEN LONG 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 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 Vanguard 500 Index Fund--is a widely used barometer of stock market
activity. (Total returns consist of dividend income plus change in market
price.) 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 best and worst tends to narrow over the
long term.
<PAGE>
31
- --------------------------------------------------------------------------------
U.S. STOCK MARKET RETURNS (1926-1999)
- --------------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS 20 YEARS
- --------------------------------------------------------------------------------
Best 54.2% 28.6% 19.9% 17.9%
Worst -43.1 -12.4 -0.9 3.1
Average 13.2 11.0 11.1 11.1
- --------------------------------------------------------------------------------
The table covers all of the 1-, 5-, 10-, and 20-year periods from 1926
through 1999. You can see, for example, that while the average return on common
stocks for all of the 5-year periods was 11.0%, returns for individual 5-year
periods ranged from a -12.4% average (from 1928 through 1932) to 28.6% (from
1995 through 1999). These average returns reflect past performance on common
stocks; you should not regard them as an indication of future returns from
either the stock market as a whole or any Fund in particular.
Even indexes that are subsets of the S&P 500 Index--such as the S&P
500/BARRA Value Index and the S&P 500/BARRA Growth Index (the target indexes for
the Value and Growth Index Funds)--will not perform in the same way as the
broader S&P 500 Index. Historically, stocks of the S&P 500/BARRA Value Index
have been less volatile than the stocks found in the broader S&P 500 Index;
stocks of the S&P 500/BARRA Growth Index, on the other hand, have displayed
somewhat greater short-term volatility than the S&P 500 Index's stocks. However,
both value and growth stocks have the potential at times to be more volatile
than the broader market.
[FLAG] THE FUNDS ARE ALSO SUBJECT, IN VARYING DEGREES, TO INVESTMENT STYLE RISK,
WHICH IS THE CHANCE THAT RETURNS FROM A SPECIFIC TYPE OF STOCK (FOR
INSTANCE, SMALL-CAP OR VALUE) WILL TRAIL RETURNS FROM OTHER ASSET CLASSES
OR THE OVERALL STOCK MARKET. EACH TYPE OF STOCK TENDS TO GO THROUGH CYCLES
OF DOING BETTER--OR WORSE--THAN COMMON STOCKS IN GENERAL. THESE PERIODS
HAVE, IN THE PAST, LASTED FOR AS LONG AS SEVERAL YEARS.
RISK OF NONDIVERSIFICATION
[FLAG] As index funds, each of the U.S. Stock Index Funds holds the largest
stocks in its target index in approximately the same percentages as those stocks
are represented in its index. When a target index becomes less diversified, a
fund that tracks that index similarly becomes less diversified. This has
happened to the GROWTH INDEX FUND. Due to the rapid appreciation of certain
stocks in its target index, the Fund's top four holdings, as of the date of this
prospectus, represent more than 25% of its total assets. By tracking its target
index, the Fund technically has become "nondiversified" under SEC standards,
although it continues to hold more than 100 stock positions in a variety of
market sectors. As the market values of the Fund's largest holdings rise and
fall, there may be times when the Fund is diversified under SEC standards and
other times when it is not. Shareholders in Vanguard Growth Index Fund are
subject to the risk that the Fund's performance could be hurt disproportionately
by a decline in the price of just a few stocks.
In the unlikely event that the target index of any of the other Vanguard
U.S. Stock Index Funds becomes dominated by just a few companies, shareholders
in that Fund would similarly be subject to the risk of nondiversification.
<PAGE>
32
- --------------------------------------------------------------------------------
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.
Market capitalization changes over time, and there is no "official" definition
of the boundaries of large-, mid-, and small-cap stocks. Vanguard generally
defines large-capitalization (large-cap) funds as those holding stocks of
companies whose outstanding shares have a market value exceeding $12 billion;
mid-cap funds as those holding stocks of companies with a market value between
$1 billion and $12 billion; and small-cap funds as those typically holding
stocks of companies with a market value of less than $1 billion. Vanguard
periodically reassesses these classifications.
- --------------------------------------------------------------------------------
TRANSACTION FEES
Some of Vanguard's index funds charge a transaction fee on purchases of fund
shares to offset the higher costs of trading certain securities, particularly
small-company stocks. The transaction fee ensures that these higher costs are
borne by the investors making the transactions--and not by shareholders already
in the fund who do not generate the costs. All transaction fees are paid
directly into the fund itself (unlike a sales charge or load that non-Vanguard
funds may impose to compensate their sales representatives). Without transaction
fees, some index funds would have trouble tracking their target indexes.
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 prices 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 have adopted the following policies, among others, designed
to discourage short-term trading:
- - Each Fund reserves the right to reject any purchase request--including
exchanges from other Vanguard funds--that it regards as disruptive to the
efficient management of the Fund. A purchase request could be rejected
because of the timing of the investment or because of a history of
excessive trading by the investor.
- - Two of the Funds (Small-Cap Value and Small-Cap Growth) charge a
transaction fee on purchases.
- - There is a limit on the number of times you can exchange into and out of a
Fund (see "Exchanges" in the INVESTING WITH VANGUARD section).
- - Telephone and online exchanges are not permitted for non-IRA accounts.
THE VANGUARD FUNDS DO NOT PERMIT MARKET-TIMING. DO NOT INVEST IN THESE
FUNDS IF YOU ARE A MARKET-TIMER.
<PAGE>
33
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
THE COSTS OF INVESTING
Costs are an important consideration in choosing a mutual fund. That's because
you, as a shareholder, pay the costs of operating a fund, plus any transaction
costs associated with the fund's buying and selling of securities. These costs
can erode a substantial portion of the gross income or capital appreciation a
fund achieves. Even seemingly small differences in fund expenses can, over time,
have a dramatic effect on a fund's performance.
- --------------------------------------------------------------------------------
TURNOVER RATE
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 fund's target index. Turnover rates for large-cap stock index funds tend
to be very low because large-cap indexes, such as the S&P 500, typically do not
change much from year to year. Turnover rates for mid-cap and small-cap stock
index funds tend to be higher (although still relatively low, compared to
actively managed stock funds), because the indexes they track are more likely to
change as a result of mergers, acquisitions, business failures, or growth of
companies than a larger-cap index. The turnover rate of each Fund for each of
the last five years (or since inception of the Fund, if shorter) is shown in the
FINANCIAL HIGHLIGHTS section of this prospectus.
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
TURNOVER RATE
Before investing in a mutual fund, you should review its turnover rate. This
gives an indication of how transaction costs could affect 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 turnover rates may be more likely
to generate capital gains that must be distributed to shareholders as income
subject to taxes. As of December 31, 1999, the average turnover rate for
passively managed domestic equity index funds investing in common stocks was
approximately 18%; for all domestic stock funds, the average turnover rate was
approximately 89%, according to Morningstar, Inc. (A turnover rate of 100% would
occur, for example, if a fund sold and replaced securities valued at 100% of its
net assets within a one-year period.)
- --------------------------------------------------------------------------------
INVESTMENT POLICIES
Each Fund reserves the right to substitute a different index for the index it
currently tracks if the current index is discontinued, or for any other reason
determined in good faith by the Fund's Board of Trustees. In every such
instance, the substitute index will measure the same general market (large-,
mid-, or small-cap, growth, or value) as the current index.
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. It is not expected that any Fund will
invest more than 5% of its assets in foreign securities.
Although index funds, by their nature, tend to be tax-efficient investment
vehicles, the Funds generally are managed without regard to tax ramifications.
To track their target indexes as closely as possible, the Funds attempt to
remain fully invested (at least 95% of total assets) in the stocks of the index.
To help stay fully invested,
<PAGE>
34
and to reduce transaction costs, the Funds may invest, to a limited extent, in
futures and options contracts, warrants, convertible securities, and swap
agreements, which are types of derivatives.
Losses (or gains) involving futures can sometimes be substantial--in part
because a relatively small price movement in a futures contract may result in an
immediate and substantial loss (or gain) for a fund. Similar risks exist for
warrants (securities that permit their owners to purchase a specific number of
stock shares at a predetermined price), convertible securities (securities that
may be exchanged for another asset), and swap agreements (contracts in which
each party 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. A
Fund's obligation under futures contracts will not exceed 20% of that Fund's
total assets.
The reasons for which a Fund will invest in futures and options are:
- - To keep cash on hand to meet shareholder redemptions or other needs while
simulating full investment in stocks.
- - To reduce the Fund's transaction costs or add value when these instruments
are favorably priced.
THE FUNDS AND VANGUARD
The Funds are members of The Vanguard Group, a family of more than 35 investment
companies with more than 100 funds holding assets worth more than $550 billion.
All of the 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 distribution fees, each fund
pays its allocated share of The Vanguard Group's marketing costs.
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
VANGUARD'S UNIQUE CORPORATE STRUCTURE
The Vanguard Group is truly a MUTUAL mutual fund company. It is owned jointly by
the funds it oversees and thus indirectly by the shareholders in those funds.
Most 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 own the
management company's stock. By contrast, Vanguard provides its services on an
"at-cost" basis, and the funds' expense ratios reflect only these costs. No
separate management company reaps profits or absorbs losses from operating the
funds.
- --------------------------------------------------------------------------------
INVESTMENT ADVISER
The Vanguard Group (Vanguard), P.O. Box 2600, Valley Forge, PA 19482, founded in
1975, serves as the Funds' adviser through its Core Management Group. As of
December 31, 1999, Vanguard served as adviser for about $371.4 billion in
assets. Vanguard manages the Funds on an at-cost basis, subject to the control
of the Trustees and officers of the Funds.
<PAGE>
35
For the fiscal year ended December 31, 1999, the investment advisory expenses
represented an effective annual rate of approximately 0.01% of each Fund's
average net assets.
The Funds have authorized Vanguard to choose brokers or dealers to handle
the purchase and sale of securities for the Funds, and to get the best available
price and most favorable execution from these brokers with respect to all
transactions. The Funds may direct Vanguard to use a particular broker for
certain transactions in exchange for commission rebates or research services
provided to the Funds.
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
THE FUNDS' ADVISER
The individual responsible for overseeing each Fund's investments is:
GEORGE U. SAUTER, Managing Director of Vanguard and head of Vanguard's Core
Management Group; has worked in investment management since 1985; primary
responsibility for Vanguard's stock indexing policy and strategy since joining
the company in 1987; A.B., Dartmouth College; M.B.A., University of Chicago.
- --------------------------------------------------------------------------------
DIVIDENDS, CAPITAL GAINS, AND TAXES
Each Fund distributes to shareholders virtually all of its net income (interest
and dividends, less expenses), as well as any capital gains realized from the
sale of its holdings. Income dividends for the Total Stock Market, 500, Value,
and Growth Index Funds generally are distributed in March, June, September, and
December; income dividends for the Extended Market, Mid-Cap, Small-Cap,
Small-Cap Value, and Small-Cap Growth Index Funds generally are distributed in
December. Capital gains distributions generally occur in December. In addition,
the Funds may occasionally be required to make supplemental dividend or capital
gains distributions at some other time during the year.
Your dividend and capital gains distributions will be reinvested in
additional Fund shares and accumulate on a tax-deferred basis if you are
investing through an employer-sponsored retirement or savings plan. You will not
owe taxes on these distributions until you begin withdrawals from the plan. You
should consult your plan administrator, your plan's Summary Plan Description, or
your tax adviser about the tax consequences of plan withdrawals.
- --------------------------------------------------------------------------------
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 a capital gains distribution. Income
dividends come from both the dividends that the fund earns from its holdings and
the 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 one year or less, or more than one
year.
- --------------------------------------------------------------------------------
<PAGE>
36
SHARE PRICE
Each Fund's share price, called its net asset value, or NAV, is calculated each
business day after the close of regular trading on the New York Stock Exchange
(the NAV is not calculated on holidays or other days when the Exchange is
closed).
TOTAL ASSETS - LIABILITIES
NET ASSET VALUE = -------------------------------
NUMBER OF SHARES OUTSTANDING
Funds offering more than one class of shares compute a separate net asset
value for each share class. This is done by adding up the total value of the
Fund's investments and other assets attributed to each share class, subtracting
any of its liabilities (debts) attributed to each share class, and then dividing
by the number of Fund shares outstanding for each share class.
The 500 Index Fund, which offers only one class of shares, computes its net
asset value by adding up the total value of its investments and other assets,
subtracting any of its liabilities (debts), and then dividing by the number of
Fund shares outstanding.
Knowing the daily net asset value is useful to you as a shareholder because
it indicates the current value of your investment. The Fund's NAV, multiplied by
the number of shares you own, gives you the dollar amount you would have
received had you sold all of your shares back to the Fund that day.
A NOTE ON PRICING: A Fund's investments will be priced at their market
value when market quotations are readily available. When these quotations are
not readily available, investments will be priced at their fair value,
calculated according to procedures adopted by the Funds' Board of Trustees.
Each Fund'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 Fund, but the most common are:
TOTST, 500, EXTND, MIDCP, SMCAP, VALUE, SMVAL, GROWTH, and SMGTH.
FINANCIAL HIGHLIGHTS
The following financial highlights tables are intended to help you understand
each Fund's financial performance for the past five years or since inception,
and certain information reflects financial results for a single Fund share in
each case. The total returns in each table represent the rate that an investor
would have earned or lost each year on an investment in the Fund (assuming
reinvestment of all dividend and capital gains distributions). This information
has been derived from the financial statements audited by PricewaterhouseCoopers
LLP, independent accountants, whose report--along with each Fund's financial
statements--is included in the Funds' most recent annual report to shareholders.
You may have the annual report sent to you without charge by contacting
Vanguard.
<PAGE>
37
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
HOW TO READ THE FINANCIAL HIGHLIGHTS TABLE
This explanation uses the Total Stock Market Index Fund as an example. The Fund
began fiscal 1999 with a net asset value (price) of $27.42 per share. During the
year, the Fund earned $0.317 per share from investment income (interest and
dividends) and $6.133 per share from investments that had appreciated in value
or that were sold for higher prices than the Fund paid for them.
Shareholders received $0.650 per share in the form of dividend and capital gains
distributions. A portion of each year's distributions may come from the prior
year's income or capital gains.
The earnings ($6.450 per share) minus the distributions ($0.650 per share)
resulted in a share price of $33.22 at the end of the year. This was an increase
of $5.80 per share (from $27.42 at the beginning of the year to $33.22 at the
end of the year). For a shareholder who reinvested the distributions in the
purchase of more shares, the total return from the Fund was 23.81% for the year.
As of December 31, 1999, the Fund (investor shares only) had $18.1 billion in
net assets. For the year, its expense ratio was 0.20% ($2.00 per $1,000 of net
assets); and net investment income amounted to 1.15% of its average net assets.
It sold and replaced securities valued at 3% of its net assets.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
VANGUARD TOTAL STOCK MARKET INDEX FUND
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------
1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $27.42 $22.64 $17.77 $15.04 $11.37
- ---------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .317 .336 .319 .29 .29
Net Realized and Unrealized Gain (Loss)
on Investments 6.133 4.898 5.143 2.84 3.75
--------------------------------------------------------------
Total from Investment Operations 6.450 5.234 5.462 3.13 4.04
--------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.330) (.329) (.322) (.29) (.28)
Distributions from Realized Capital Gains (.320) (.125) (.270) (.11) (.09)
--------------------------------------------------------------
Total Distributions (.650) (.454) (.592) (.40) (.37)
- ---------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $33.22 $27.42 $22.64 $17.77 $15.04
=========================================================================================================
TOTAL RETURN* 23.81% 23.26% 30.99% 20.96% 35.79%
=========================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $18,133 $9,308 $5,092 $3,531 $1,571
Ratio of Total Expenses to Average
Net Assets 0.20% 0.20% 0.20% 0.22% 0.25%
Ratio of Net Investment Income to Average
Net Assets 1.15% 1.44% 1.65% 1.86% 2.14%
Turnover Rate 3% 3% 2% 3% 3%
=========================================================================================================
*Total return figures do not reflect the 0.25% transaction fee on purchases through 1995.
</TABLE>
<PAGE>
38
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
VANGUARD 500 INDEX FUND
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $113.95 $ 90.07 $69.17 $57.60 $42.97
- ---------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income 1.370 1.33 1.31 1.28 1.22
Net Realized and Unrealized Gain (Loss)
on Investments 22.415 24.30 21.50 11.82 14.76
--------------------------------------------------------------
Total from Investment Operations 23.785 25.63 22.81 13.10 15.98
--------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (1.410) (1.33) (1.32) (1.28) (1.22)
Distributions from Realized Capital Gains (.995) (.42) (.59) (.25) (.13)
--------------------------------------------------------------
Total Distributions (2.405) (1.75) (1.91) (1.53) (1.35)
- ---------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $135.33 $113.95 $90.07 $69.17 $57.60
=========================================================================================================
TOTAL RETURN 21.07% 28.62% 33.19% 22.88% 37.45%
=========================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $104,652 $74,229 $49,358 $30,332 $17,372
Ratio of Total Expenses to Average
Net Assets 0.18% 0.18% 0.19% 0.20% 0.20%
Ratio of Net Investment Income to Average
Net Assets 1.13% 1.35% 1.66% 2.04% 2.38%
Turnover Rate* 6% 6% 5% 5% 4%
=========================================================================================================
*Turnover rates excluding in-kind redemptions were 3%, 3%, 3%, 2%, and 2%, respectively.
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
VANGUARD EXTENDED MARKET INDEX FUND
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $30.63 $30.76 $26.20 $24.07 $18.52
- ---------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .297 .388 .351 .34 .30
Net Realized and Unrealized Gain (Loss)
on Investments 10.101 2.025 6.479 3.85 5.95
--------------------------------------------------------------
Total from Investment Operations 10.398 2.413 6.830 4.19 6.25
--------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.318) (.373) (.360) (.34) (.30)
Distributions from Realized Capital Gains (3.640) (2.170) (1.910) (1.72) (.40)
--------------------------------------------------------------
Total Distributions (3.958) (2.543) (2.270) (2.06) (.70)
- ---------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $37.07 $30.63 $30.76 $26.20 $24.07
=========================================================================================================
TOTAL RETURN* 36.22% 8.32% 26.73% 17.65% 33.80%
=========================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $4,221 $2,939 $2,723 $2,099 $1,523
Ratio of Total Expenses to Average
Net Assets 0.25% 0.23% 0.23% 0.25% 0.25%
Ratio of Net Investment Income to Average
Net Assets 1.04% 1.21% 1.30% 1.42% 1.51%
Turnover Rate 26% 27% 15% 22% 15%
=========================================================================================================
*Total return figures do not reflect transaction fees on purchases (0.25% from October 31, 1997 through
March 31, 2000; 0.5% from 1995 through October 31, 1997).
</TABLE>
<PAGE>
39
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
VANGUARD MID-CAP INDEX FUND
YEAR ENDED APR.20* TO
DEC. 31, 1999 DEC. 31,1998
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $10.79 $10.00
- ---------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .073 .053
Net Realized and Unrealized Gain (Loss) on Investments 1.448 .840
-------------------------------
Total from Investment Operations 1.521 .893
-------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.076) (.053)
Distributions from Realized Capital Gains (.935) (.050)
-------------------------------
Total Distributions (1.011) (.103)
- ---------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $11.30 $10.79
=========================================================================================================
TOTAL RETURN** 15.32% 8.55%
=========================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $605 $206
Ratio of Total Expenses to Average Net Assets 0.25% 0.25%+
Ratio of Net Investment Income to Average Net Assets 0.99% 1.19%+
Turnover Rate 38% 44%
=========================================================================================================
*Subscription period for the Fund was April 20, 1998, to May 20, 1998, during which time all assets were
held in money market instruments. Performance measurement begins May 21, 1998.
**Total return figures do not reflect the 0.25% transaction fee on purchases (from inception through
February 28, 1999).
+Annualized.
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
VANGUARD SMALL-CAP INDEX FUND
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $21.20 $23.75 $20.23 $18.61 $14.99
- ---------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .256 .311 .277 .26 .24
Net Realized and Unrealized Gain (Loss)
on Investments 4.491 (1.007) 4.632 3.07 4.06
--------------------------------------------------------------
Total from Investment Operations 4.747 (.696) 4.909 3.33 4.30
--------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.267) (.304) (.274) (.27) (.23)
Distributions from Realized Capital Gains (2.080) (1.550) (1.115) (1.44) (.45)
--------------------------------------------------------------
Total Distributions (2.347) (1.854) (1.389) (1.71) (.68)
- ---------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $23.60 $21.20 $23.75 $20.23 $18.61
=========================================================================================================
TOTAL RETURN* 23.13% -2.61% 24.59% 18.12% 28.74%
=========================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $3,553 $2,768 $2,652 $1,713 $971
Ratio of Total Expenses to Average
Net Assets 0.25% 0.24% 0.23% 0.25% 0.25%
Ratio of Net Investment Income to Average
Net Assets 1.25% 1.39% 1.38% 1.51% 1.58%
Turnover Rate 42% 35% 29% 28% 28%
=========================================================================================================
*Total return figures do not reflect transaction fees on purchases (0.5% from 1996 through March 31, 2000;
1.0% from 1995 through 1996).
</TABLE>
<PAGE>
40
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
VANGUARD VALUE INDEX FUND
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $22.51 $20.85 $17.02 $14.79 $11.12
- ---------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .355 .366 .38 .37 .41
Net Realized and Unrealized Gain (Loss)
on Investments 2.342 2.647 4.57 2.81 3.66
--------------------------------------------------------------
Total from Investment Operations 2.697 3.013 4.95 3.18 4.07
--------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.362) (.363) (.37) (.38) (.40)
Distributions from Realized Capital Gains (1.955) (.990) (.75) (.57) ---
--------------------------------------------------------------
Total Distributions (2.317) (1.353) (1.12) (.95) (.40)
- ---------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $22.89 $22.51 $20.85 $17.02 $14.79
=========================================================================================================
TOTAL RETURN 12.57% 14.64% 29.77% 21.86% 36.94%
=========================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $3,378 $2,421 $1,796 $1,016 $496
Ratio of Total Expenses to Average
Net Assets 0.22% 0.22% 0.20% 0.20% 0.20%
Ratio of Net Investment Income to Average
Net Assets 1.59% 1.72% 2.05% 2.54% 3.06%
Turnover Rate 41% 33% 25% 29% 27%
=========================================================================================================
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
VANGUARD SMALL-CAP VALUE INDEX FUND
YEAR ENDED APR. 20* TO
DEC. 31, 1999 DEC. 31, 1998
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $8.74 $10.00
- ---------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .065 .045
Net Realized and Unrealized Gain (Loss) on Investments .210 (1.250)
-------------------------------
Total from Investment Operations .275 (1.205)
-------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.070) (.055)
Distributions from Realized Capital Gains (.495) --
-------------------------------
Total Distributions (.565) (.055)
- ---------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $8.45 $ 8.74
=========================================================================================================
TOTAL RETURN** 3.35% -12.47%
=========================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $204 $113
Ratio of Total Expenses to Average Net Assets 0.25% 0.25%+
Ratio of Net Investment Income to Average Net Assets 0.96% 1.13%+
Turnover Rate 80% 53%
=========================================================================================================
*Subscription period for the Fund was April 20, 1998, to May 20, 1998, during which time all assets were
held in money market instruments. Performance measurement begins May 21, 1998.
**Total return figures do not reflect transaction fees on purchases (0.5% after February 28, 1999; 1.0%
from inception through February 28, 1999).
+Annualized.
</TABLE>
<PAGE>
41
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
VANGUARD GROWTH INDEX FUND
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------
1999 1998 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $31.67 $22.53 $16.90 $13.97 $10.28
- ---------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .207 .230 .23 .22 .21
Net Realized and Unrealized Gain (Loss)
on Investments 8.821 9.244 5.88 3.07 3.68
--------------------------------------------------------------
Total from Investment Operations 9.028 9.474 6.11 3.29 3.89
--------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.228) (.219) (.23) (.22) (.20)
Distributions from Realized Capital Gains (1.040) (.115) (.25) (.14) ---
--------------------------------------------------------------
Total Distributions (1.268) (.334) (.48) (.36) (.20)
- ---------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $39.43 $31.67 $22.53 $16.90 $13.97
=========================================================================================================
TOTAL RETURN 28.76% 42.21% 36.34% 23.74% 38.06%
=========================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $15,232 $6,644 $2,365 $787 $271
Ratio of Total Expenses to Average
Net Assets 0.22% 0.22% 0.20% 0.20% 0.20%
Ratio of Net Investment Income to Average
Net Assets 0.64% 0.92% 1.19% 1.57% 1.71%
Turnover Rate 33% 29% 26% 29% 24%
=========================================================================================================
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
VANGUARD SMALL-CAP GROWTH INDEX FUND
YEAR ENDED APR. 20* TO
DEC. 31, 1999 DEC. 31, 1998
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 9.53 $10.00
- ---------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .025 .03
Net Realized and Unrealized Gain (Loss) on Investments 1.860 (.47)
-------------------------------
Total from Investment Operations 1.885 (.44)
-------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.035) (.03)
Distributions from Realized Capital Gains -- --
-------------------------------
Total Distributions (.035) (.03)
- ---------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $11.38 $ 9.53
=========================================================================================================
TOTAL RETURN** 19.80% -4.77%
=========================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $167 $90
Ratio of Total Expenses to Average Net Assets 0.25% 0.25%+
Ratio of Net Investment Income to Average Net Assets 0.33% 0.63%+
Turnover Rate 82% 77%
=========================================================================================================
*Subscription period for the Fund was April 20, 1998, to May 20, 1998, during which time all assets were
held in money market instruments. Performance measurement begins May 21, 1998.
**Total return figures do not reflect transaction fees on purchases (0.5% after February 28, 1999; 1.0% from
inception through February 28, 1999).
+Annualized.
</TABLE>
"Standard & Poor's(R)," "S&P(R)," "S&P 500(R)," "Standard & Poor's 500," "500,"
"S&P MidCap 400," and "S&P SmallCap 600" are trademarks of The McGraw-Hill
Companies, Inc., and have been licensed for use by Vanguard U.S. Stock Index
Funds and The Vanguard Group. These mutual funds are not sponsored, endorsed,
sold, or promoted by Standard & Poor's, and Standard & Poor's makes no
representation regarding the advisability of investing in 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>
42
INVESTING WITH VANGUARD
One or more of the Funds is an investment option in your retirement or savings
plan. Your plan administrator or your employee benefits office can provide you
with detailed information on how to participate in your plan and how to elect a
Fund as an investment option.
- - If you have any questions about a Fund or Vanguard, including those about a
Fund's investment objective, strategies, or risks, contact Vanguard's
Participant Access 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 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 contribution, exchange, or
redemption, and that Vanguard has received the appropriate assets.
In all cases, your transaction will be based on a Fund's next-determined
net asset value after Vanguard receives your request (or, in the case of new
contributions, the next-determined net asset value after Vanguard receives the
order from your plan administrator). As long as this request is received before
the close of trading on the New York Stock Exchange, generally 4 p.m. Eastern
time, you will receive that day's net asset value.
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 this 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 Fund and increase its transaction
costs, Vanguard limits participant exchange activity to no more than FOUR
SUBSTANTIVE "ROUND TRIPS" THROUGH THE FUND (at least 90 days apart) during any
12-month period. A "round trip" is a redemption from the Fund followed by a
purchase back into the Fund. "Substantive" means a dollar amount that Vanguard
determines, in its sole discretion, could adversely affect the management of the
Fund.
Before making an exchange to or from another fund available in your plan,
consider the following:
- - Certain investment options, particularly funds made up of company stock or
investment contracts, may be subject to unique restrictions.
- - Make sure to read that fund's prospectus. Contact Vanguard's Participant
Access Center, toll-free, at 1-800-523-1188 for a copy.
- - Vanguard can accept exchanges only as permitted by your plan. Contact your
plan administrator for details on the exchange policies that apply to your
plan.
<PAGE>
43
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>
(THIS PAGE INTENTIONALLY LEFT BLANK.)
<PAGE>
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 on securities that a fund
has sold at a profit, minus any realized losses.
CASH RESERVES
Cash deposits, short-term bank deposits, and money market instruments which
include 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.
EXPENSE RATIO
The percentage of a fund's average net assets used to pay its expenses. The
expense ratio includes management fees, administrative fees, and any 12b-1
distribution fees.
GROWTH STOCK FUND
A mutual fund that emphasizes stocks of companies believed to have above-average
prospects for growth. Reflecting market expectations for superior growth, these
stocks typically have low dividend yields and above-average prices in relation
to such factors as revenue, earnings, and book value.
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 fund's
investments.
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.
SECURITIES
Stocks, bonds, money market instruments, and interests in 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.
VALUE STOCK FUND
A mutual fund that emphasizes stocks of companies whose growth prospects are
generally regarded as subpar by the market. Reflecting these market
expectations, the prices of value stocks typically are below-average in
comparison with such factors as earnings and book value, and these stocks
typically have above-average dividend yields.
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
Income (interest or dividends) earned by an investment, expressed as a
percentage of the investment's price.
<PAGE>
[SHIP]
[THE VANGUARD GROUP(R)]
Institutional Division
Post Office Box 2900
Valley Forge, PA 19482-2900
FOR MORE INFORMATION
If you'd like more information about
Vanguard U.S. Stock Index Funds,
the following documents are
available free upon request:
ANNUAL/SEMIANNUAL REPORTS
TO SHAREHOLDERS
Additional information about the
Funds' investments is available in
the Funds' annual and semiannual
reports to shareholders.
STATEMENT OF ADDITIONAL
INFORMATION (SAI)
The SAI provides more detailed
information about the Funds.
The current annual and semiannual
reports and the SAI are
incorporated by reference into
(and are thus legally a part of)
this prospectus.
To receive a free copy of the latest
annual or semiannual report or the
SAI, or to request additional
information about the Funds or other
Vanguard funds, please contact us
as follows:
THE VANGUARD GROUP
PARTICIPANT ACCESS CENTER
P.O. BOX 2900
VALLEY FORGE, PA 19482-2900
TELEPHONE:
1-800-523-1188
TEXT TELEPHONE:
1-800-523-8004
WORLD WIDE WEB:
WWW.VANGUARD.COM
INFORMATION PROVIDED BY THE
SECURITIES AND EXCHANGE
COMMISSION (SEC)
You can review and copy information
about the Funds (including the SAI)
at the SEC's Public Reference Room
in Washington, DC. To find out more
about this public service, call the
SEC at 1-202-942-8090. Reports and
other information about the Funds
are also available on the SEC's
website (www.sec.gov), or you can
receive copies of this information,
for a fee, by electronic request at
the following e-mail address:
[email protected], or by writing the
Public Reference Section, Securities
and Exchange Commission,
Washington, DC 20549-0102.
Funds' Investment Company Act file
number: 811-2652
(C) 2000 The Vanguard Group, Inc.
All rights reserved.
Vanguard Marketing Corporation,
Distributor.
I040N-04/21/2000
<PAGE>
PART B
VANGUARD(R) INDEX FUNDS
(THE TRUST)
STATEMENT OF ADDITIONAL INFORMATION
APRIL 21, 2000
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 21, 2000. To obtain, without
charge, a Prospectus or the most recent Annual Report to Shareholders, which
contains the Funds' Financial Statements as hereby incorporated by reference,
please call:
VANGUARD INVESTOR INFORMATION DEPARTMENT
1-800-662-7447
TABLE OF CONTENTS
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 FUNDS.....................................................B-13
PORTFOLIO TRANSACTIONS......................................................B-17
COMPARATIVE INDEXES.........................................................B-18
FINANCIAL STATEMENTS........................................................B-19
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(R) 500 Index Fund
Vanguard(R) Total Stock Market Index Fund
Vanguard(R) Extended Market Index Fund
Vanguard(R) Mid-Cap Index Fund
Vanguard(R) Small-Cap Index Fund
Vanguard(R) Value Index Fund
Vanguard(R) Small-Cap Value Index Fund
Vanguard(R) Growth Index Fund
Vanguard(R) Small-Cap Growth Index Fund
(EACH, A FUND; COLLECTIVELY, THE FUNDS)
Note: Each of the Funds listed above is registered as a diversified management
investment company. However, by tracking its target index, Vanguard Growth Index
Fund technically has become "nondiversified" under SEC standards. As the market
values of the Fund's largest holdings rise and fall, there may be times when the
Fund is diversified under SEC standards and other times when it is not.
B-1
<PAGE>
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. Each Fund has the ability to offer additional
funds or classes of shares. There is no limit on the number of full and
fractional shares that each Fund may issue for a particular fund or class of
shares.
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 Funds' custodians. The
custodians are responsible for maintaining each Fund's assets and keeping all
necessary accounts and records of Fund assets.
INDEPENDENT ACCOUNTANTS. PricewaterhouseCoopers LLP, 30 South 17th Street,
Philadelphia, Pennsylvania 19103, serves as the Funds' independent accountants.
The accountants audit each Fund's financial statements and provide other related
services.
TRANSFER AND DIVIDEND-PAYING AGENT. The Funds' transfer agent and
dividend-paying agent is The Vanguard Group, Inc., 100 Vanguard Boulevard,
Malvern, Pennsylvania 19355.
CHARACTERISTICS OF THE FUNDS' SHARES
RESTRICTIONS ON HOLDING OR DISPOSING OF SHARES. There are no restrictions
on the right of shareholders to retain or dispose of each Fund's shares, other
than the possible future termination of any of the Funds. Each Fund 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, each Fund will continue indefinitely.
SHAREHOLDER LIABILITY. The Funds are 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 a Fund will
not be personally liable for payment of the Fund'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 Fund obligation only if the Fund 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 by the 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 each Fund 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 a Fund's net assets, and to
change any fundamental policy of the Fund. Shareholders of a Fund 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 noncumulative and
cannot be modified without a majority vote.
LIQUIDATION RIGHTS. In the event a Fund is liquidated, shareholders of that
Fund will be entitled to receive a pro rata share of the Fund's net assets.
PREEMPTIVE RIGHTS. There are no preemptive rights associated with shares of
each Fund.
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.
REDEMPTION PROVISIONS. Each Fund's redemption provisions are described in
their current prospectus and elsewhere in this Statement of Additional
Information.
B-2
<PAGE>
SINKING FUND PROVISIONS. The Funds have no sinking fund provisions.
CALLS OR ASSESSMENT. Each Fund's shares, when issued, are fully paid and
non-assessable.
TAX STATUS OF THE FUNDS
Each Fund intends to continue to qualify 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 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 the Fund's custodian bank until
repurchased. In addition, the Board of Trustees will monitor the Fund'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 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 bankruptcy 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 adviser acknowledges these risks, it is expected
that they will be controlled through careful monitoring procedures.
LENDING OF SECURITIES
Each Fund 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 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
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
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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.
TEMPORARY INVESTMENTS
The Funds may take temporary defensive measures that are inconsistent with a
Fund's normal fundamental or non-fundamental investment policies and strategies
in response to adverse market, economic, political or other conditions. Such
measures could include investments in (a) highly liquid short-term fixed-income
securities issued by or on behalf of municipal or corporate issuers, obligations
of the U.S. Government and its agencies, commercial paper, and bank certificates
of deposit; (b) shares of other investment companies which have investment
objectives consistent with those of the Funds; (c) repurchase agreements
involving any such securities; and (d) other money market instruments. There is
no limit on the extent to which the Funds may take temporary defensive measures.
In taking such measures, the Funds may fail to achieve their investment
objective.
VANGUARD INTERFUND LENDING PROGRAM
The Commission has issued an exemptive order permitting the Funds and other
Vanguard 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
Vanguard 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 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 transaction costs. The Funds do 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 that 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
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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.
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
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 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
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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 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 futures positions and subjecting some futures
traders to substantial losses.
FEDERAL TAX TREATMENT OF FUTURES CONTRACTS. Each Fund 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 these 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. Gains and losses on
certain other futures contracts (primarily non-U.S. futures contracts) are not
recognized until the contracts are closed and are treated as long-term or
short-term depending on the holding period of the contract. 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 or currencies. It is anticipated that
any net gain on futures contracts will be considered qualifying income for
purposes of the 90% requirement.
A Fund will distribute to shareholders annually any net capital gains which
have been recognized for Federal income tax purposes 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 transactions.
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
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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 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: (i) 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 or similar
financial instrument if such instrument is not marked to market. The disposition
of a currency other than the U.S. dollar by a taxpayer whose functional currency
is the U.S. dollar 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 income 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 Funds 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 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
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shares 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 Funds' 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, except as permitted by the Fund's investment policies relating to
commodities.
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 each Fund 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 Funds"
for more information.
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PURCHASE OF SHARES
The Funds reserve the right in their 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 Fund'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 VALUE INDEX AND SMALL-CAP GROWTH INDEX FUNDS WILL NOT BE SUBJECT
TO THEIR NORMAL TRANSACTION FEE OF 0.5%. 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 in-kind 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 is 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.
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
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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 indexes. 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 or do not
reflect market conditions at the time the Fund is valued, 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 Commission as a result of which it is
not reasonably practicable for the Fund 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.
Each Fund has made an election with the Commission to pay in cash all
redemptions requested by any shareholder of record limited in amount during the
90-day period to the lesser of $250,000 or 1% of the net assets of the Fund at
the beginning of such period.
No charge is made by any of the Funds for redemptions. Shares redeemed may
be worth more or less than what was paid for them, depending on the market value
of the securities held by the Fund.
TRADING SHARES THROUGH CHARLES SCHWAB
The Funds have 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 Funds' behalf subject to those terms and conditions.
Under this arrangement, the Funds' 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 Funds' instructions. Customer orders
that are properly transmitted to the Funds 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.
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<PAGE>
YIELD AND TOTAL RETURN
The annualized yield of each Fund for the 30-day period ended December 31,
1999 is set forth below.
INVESTOR SHARES INSTITUTIONAL SHARES
--------------- --------------------
500 Index Fund.................. 0.98% N/A
Total Stock Market Index Fund... 1.01 1.11%
Extended Market Index Fund...... 0.82 0.96
Mid-Cap Index Fund.............. 0.92 1.04
Small-Cap Index Fund............ 1.15 1.27
Value Index Fund................ 1.52 1.62
Small-Cap Value Index Fund...... 0.97 *
Growth Index Fund............... 0.50 0.60
Small-Cap Growth Index Fund..... 0.22 *
- ---------
*As of December 31, 1999, a 30-day yield was not available for the
Institutional Shares.
The average annual total return of each Fund for the one-, five-, and
ten-year periods ended December 31, 1999, or since inception, is set forth
below.
<TABLE>
<CAPTION>
1 YEAR ENDED 5 YEARS ENDED 10 YEARS ENDED
INVESTOR SHARES(1) 12/31/1999 12/31/1999(3) 12/31/1999(4)
- ------------------ ------------ ------------- --------------
<S> <C> <C> <C>
500 Index Fund.......................... 21.07% 28.49% 18.07%
Total Stock Market Index Fund........... 23.81 26.84 19.80
Extended Market Index Fund.............. 36.22 24.10 16.33
Mid-Cap Index Fund...................... 15.32 14.93 --
Small-Cap Index Fund.................... 23.13 17.84 14.20
Value Index Fund........................ 12.57 22.82 18.66
Small-Cap Value Index Fund(2) .......... 2.83 -6.31 --
Growth Index Fund....................... 28.76 33.65 23.74
Small-Cap Growth Index Fund(2) ......... 19.20 8.17 --
</TABLE>
<TABLE>
<CAPTION>
1 YEAR ENDED 5 YEARS ENDED 10 YEARS ENDED
INSTITUTIONAL SHARES(1) 12/31/1999 12/31/1999(3) 12/31/1999(4)
- ----------------------- ------------ ------------- --------------
<S> <C> <C> <C>
Total Stock Market Index Fund........... 23.93% 22.64% --
Extended Market Index Fund.............. 36.45 22.47 --
Mid-Cap Index Fund ..................... 15.41 15.03 --
Small-Cap Index Fund.................... 23.33 12.49 --
Value Index Fund ....................... 12.67 8.79 --
Small-Cap Value Index Fund.............. -- -- --
Growth Index Fund ...................... 28.91 31.15 --
Small-Cap Growth Index Fund............. -- -- --
</TABLE>
- ---------
(1) Total return figures do not reflect the $10 annual account maintenance fee
for accounts under $10,000 or transaction fees no longer in effect.
(2) Total return figures reflect a 0.50% transaction fee on share purchases.
(3) Average annual total returns since inception for: Mid-Cap Index Fund
(5/21/1998); Small-Cap Value Index Fund (5/21/1998); Small-Cap Growth Index
Fund (5/21/1998); Total Stock Market Index Fund Institutional Shares
(7/7/1997); Extended Market Index Fund Institutional Shares (7/7/1997);
Mid-Cap Index Fund
B-11
<PAGE>
Institutional Shares (5/21/1998); Small-Cap Index Fund Institutional Shares
(7/7/1997); Value Index Fund Institutional Shares (7/2/1998); and Growth
Index Fund Institutional Shares (5/14/1998).
(4) Average annual total returns since inception for: Total Stock Market Index
Fund (4/27/1992); Value Index Fund (11/2/1992); and Growth Index Fund
(11/2/1992).
The Institutional Shares of the Small-Cap Value Index Fund and Small-Cap
Growth Index Fund had no average annual total returns to report as of December
31, 1999.
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
will 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
Where:
T = average annual total return
P = a hypothetical initial investment 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.
AVERAGE ANNUAL AFTER-TAX TOTAL RETURN QUOTATION
We calculate the Fund's average annual after-tax total return by finding the
average annual compounded rate of return over the 1-, 5-, and 10-year periods
(or for periods of the Fund's operations) that would equate the initial amount
invested to the after-tax value, according to the following formulas:
After-tax return:
P(1+T)(N) = ATV
Where:
P = a hypothetical initial payment of $1,000
T = average annual after-tax total return
n = number of years
ATV = after-tax value at the end of the 1-,5-, or 10-year
periods of a hypothetical $1,000 payment made at the
beginning of the time period, assuming no liquidation
of the investment at the end of the measurement
periods.
Instructions:
1. Assume all distributions by the Fund are reinvested--less the taxes due on
such distributions--at the price on the reinvestment dates during the
period. Adjustments may be made for subsequent re-characterizations of
distributions.
2. Calculate the taxes due on distributions by the Fund by applying the
highest federal marginal tax rates to each component of the distributions
on the reinvestment date (e.g., ordinary income, short-term capital gain,
long-term capital gain, etc.). For periods after December 31, 1997, the
federal marginal tax rates used for the calculations are 39.6% for ordinary
income and short-term capital gains and 20% for long-term capital gains.
Note that the applicable tax rates may vary over the measurement period.
Assume no taxes are due on the portions of any distributions classified as
exempt interest or non-taxable (i.e. return of capital). Ignore any
potential tax liabilities other than federal tax liabilities (e.g., state
and local taxes).
B-12
<PAGE>
3. Include all recurring fees that are charged to all shareholder accounts.
For any account fees that vary with the size of the account, assume an
account size equal to the Fund's mean (or median) account size. Assume that
no additional taxes or tax credits result from any redemption of shares
required to pay such fees.
4. State the total return quotation to the nearest hundredth of one percent.
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
Where:
C = cumulative total return
P = a hypothetical initial investment 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.
SEC YIELDS
Yield is the net annualized yield based on a 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)/CD+1)6-1]
Where:
a = dividends and interest earned during the period.
b = expenses 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.
MANAGEMENT OF THE FUNDS
OFFICERS AND TRUSTEES
The officers of the Funds manage its day-to-day operations and are responsible
to the each Fund's Board of Trustees. The Trustees set broad policies for each
Fund and choose their officers. The following is a list of the Trustees and
officers of the Funds and a statement of their present positions and principal
occupations during the past five years. As a group, the Funds' Trustees and
officers own less than 1% of the outstanding shares of each Fund. Each Trustee
also serves as a Director of The Vanguard Group, Inc., and as a Trustee of each
of the 103 funds administered by Vanguard (102 in the case of Mr. Malkiel and 93
in the case of Mr. MacLaury). The mailing address of the Trustees and officers
of each Fund is Post Office Box 876, Valley Forge, PA 19482.
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 & Johnson (Pharmaceuticals/Consumer Products), Director of Johnson &
Johnson*MERCK Consumer
B-13
<PAGE>
Pharmaceuticals Co., 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 Select
Sector SPDR Trust (Exchange-Traded Mutual Fund).
ALFRED M. RANKIN, JR., (DOB: 10/8/1941) Trustee
Chairman, President, Chief Executive Officer, and Director of NACCO Industries
(Machinery/Coal/Appliances); and Director of The BFGoodrich Co. (Aircraft
Systems/Manufacturing/Chemicals).
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
Retired Chairman of Rohm & Haas Co. (Chemicals); Director of Cummins Engine Co.
(Diesel Engine Company), The Mead Corp. (Paper Products), and AmeriSource Health
Corp.; 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.
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 Funds are "interested persons" as defined in the 1940 Act.
THE VANGUARD GROUP
Each Fund is a member of The Vanguard Group of Investment Companies, which
consists of more than 100 funds. Through their jointly-owned subsidiary, The
Vanguard Group, Inc. (Vanguard), the Funds and the other funds 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 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 of the Funds. In addition,
each Fund bears its own direct expenses such as legal, auditing and custodian
fees.
The Funds' officers are officers of Vanguard. No officer or employee owns,
or is permitted to own, any securities of any external adviser for the Funds.
B-14
<PAGE>
Vanguard has adopted a Code of Ethics designed to prevent employees who may
have access to nonpublic information about the trading activities of the Funds
(access persons) from profiting from that information. The Code permits access
persons to invest in securities for their own accounts, including securities
that may be held by the Funds, but places substantive and procedural
restrictions on their trading activities. For example, the Code requires that
access persons of the Funds receive advance approval for every securities trade
to ensure that there is no conflict with the trading activities of the Funds.
Vanguard was established and operates under an Amended and Restated Funds'
Service Agreement which was approved by the shareholders of each of the funds.
The Amended and Restated Funds' Service Agreement provides that each Vanguard
fund 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 fund 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, 1999, each of the Index Trust Funds had contributed capital to
Vanguard representing 0.02% of its net assets. The total amount contributed by
the Funds was $29,702,000, which represented 29.7% 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.
DISTRIBUTION. Vanguard Marketing Corporation, a wholly-owned subsidiary of
Vanguard, provides all distribution and marketing activities for the funds 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 fund, 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 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 Vanguard, and
that no fund 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 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 fund. 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, 1997, 1998, and 1999, the Funds
incurred the following approximate amounts of Vanguard's management (including
transfer agency), distribution, and marketing expenses:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
FUND 1997 1998 1999
- ---- ---- ---- ----
Vanguard Total Stock Market Index Fund.. $9,113,000 $15,330,000 $27,815,000
Vanguard 500 Index Fund................. $75,851,000 $108,134,000 $156,491,000
Vanguard Extended Market Index Fund..... $5,518,000 $6,534,000 $8,139,000
Vanguard Mid-Cap Index Fund............. N/A $174,000* $907,000
Vanguard Small-Cap Index Fund........... $4,817,000 $6,369,000 $6,812,000
Vanguard Value Index Fund............... $2,723,000 $4,562,000 $6,692,000
Vanguard Small-Cap Value Index Fund..... N/A $102,000* $316,000
Vanguard Growth Index Fund.............. $3,147,000 $8,785,000 $23,861,000
</TABLE>
B-15
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Vanguard Small-Cap Growth Index Fund.... N/A $65,000* $203,000
- ---------
* Since Inception, April 20, 1998.
</TABLE>
INVESTMENT ADVISORY SERVICES. The Funds that comprise Vanguard Index Trust
receive all investment advisory services from Vanguard. These services are
provided on an at-cost basis from a 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, 1997, 1998 and 1999, the Funds incurred expenses for investment advisory
services in the following amounts:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
FUND 1997 1998 1999
- ---- ---- ---- ----
Vanguard Total Stock Market Index Fund... $56,000 $82,000 $120,000
Vanguard 500 Index Fund.................. $67,000 $80,000 $100,000
Vanguard Extended Market Index Fund...... $53,000 $73,000 $120,000
Vanguard Mid-Cap Index Fund.............. N/A $20,000* $67,000
Vanguard Small-Cap Index Fund............ $67,000 $100,000 $167,000
Vanguard Value Index Fund................ $22,000 $37,000 $67,000
Vanguard Small-Cap Value Index Fund...... N/A $20,000* $53,000
Vanguard Growth Index Fund............... $22,000 $37,000 $67,000
Vanguard Small-Cap Growth Index Fund..... N/A $20,000* $53,000
- ---------
*Since Inception, April 20, 1998.
</TABLE>
TRUSTEE COMPENSATION
The same individuals serve as Trustees of all Vanguard funds (with two
exceptions, which are noted in the table appearing on page B-17), and each fund
pays a proportionate share of the Trustees' compensation. The funds employ their
officers on a shared basis, as well. However, officers are compensated by The
Vanguard Group, Inc., not the funds.
INDEPENDENT TRUSTEES. The funds compensate their independent Trustees--that
is, the ones who are not also officers of the funds--in three ways:
- - The independent Trustees receive an annual fee for their service to the
funds, which is subject to reduction based on absences from scheduled Board
meetings.
- - The independent 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" TRUSTEE. Mr. Brennan serves as Trustee, but is not paid in
this capacity. He is however, paid in his role as officer 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 Fund for each Trustee. In addition, the table shows
the total amount of benefits that we expect each Trustee to receive from all
Vanguard funds upon retirement, and the total amount of compensation paid to
each Trustee by all Vanguard funds.
B-16
<PAGE>
VANGUARD INDEX TRUST
COMPENSATION TABLE
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
PENSION OR
RETIREMENT TOTAL
BENEFITS COMPENSATION
AGGREGATE ACCRUED AS ESTIMATED FROM ALL
COMPENSATION PART OF THESE ANNUAL VANGUARD
FROM THESE FUNDS' BENEFITS UPON FUNDS PAID TO
NAMES OF TRUSTEES FUNDS(1) EXPENSES(1) RETIREMENT TRUSTEES(2)
- ---------------------------------------------------------------------------------------------------------------
John C. Bogle(3).......... None None None None
John J. Brennan .......... None None None None
JoAnn Heffernan Heisen.... $21,767 $1,199 $15,000 $80,000
Bruce K. MacLaury ........ $22,553 $2,032 $12,000 $75,000
Burton G. Malkiel......... $21,925 $1,985 $15,000 $80,000
Alfred M. Rankin, Jr...... $21,767 $1,452 $15,000 $80,000
John C. Sawhill........... $21,767 $1,839 $15,000 $80,000
James O. Welch, Jr........ $21,767 $2,122 $15,000 $80,000
J. Lawrence Wilson........ $21,767 $1,533 $15,000 $80,000
</TABLE>
- ---------
(1) The amounts shown in this column are based on the Funds' fiscal year ended
December 31, 1999.
(2) The amounts reported in this column reflect the total compensation paid to
each Trustee for his or her service as Trustee of 103 Vanguard funds (102
in the case of Mr. Malkiel; 93 in the case of Mr. MacLaury) for the
calendar year.
(3) Mr. Bogle has retired from the Funds' Board, effective December 31, 1999.
PORTFOLIO TRANSACTIONS
In placing portfolio transactions on behalf of a Fund, The Vanguard Group uses
its best judgment to choose the broker most capable of providing the brokerage
services necessary to obtain the best available price and most favorable
execution. 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 Fund.
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, 1997, 1998 and 1999, the Funds
paid brokerage commissions in the following amounts:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
FUND 1997 1998 1999
- ---- ---- ---- ----
Vanguard Total Stock Market Index Fund... $840,641 $1,104,269 $2,163,000
Vanguard 500 Index Fund.................. $2,956,036 $4,181,268 $6,008,000
Vanguard Extended Market Index Fund...... $830,234 $966,456 $1,122,000
Vanguard Mid-Cap Index Fund.............. N/A $109,539 $223,000
Vanguard Small-Cap Index Fund............ $1,480,436 $1,649,209 $2,284,000
Vanguard Value Index Fund................ $179,361 $254,984 $552,000
Vanguard Small-Cap Value Index Fund...... N/A $88,369 $166,000
Vanguard Growth Index Fund............... $294,025 $827,065 $2,959,000
Vanguard Small-Cap Growth Index Fund..... N/A $62,118 $49,000
</TABLE>
B-17
<PAGE>
COMPARATIVE INDEXES
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 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 TOTAL MARKET 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 COMPLETION 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.
B-18
<PAGE>
LEHMAN BROTHERS 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.
COMPOSITE INDEX--70% Standard & Poor's 500 Index and 30% NASDAQ Industrial
Index.
COMPOSITE INDEX--65% Standard & Poor's 500 Index and 35% Lehman Brothers
Corporate A or Better Bond Index.
COMPOSITE INDEX--65% Lehman Brothers 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 BROTHERS LONG-TERM CORPORATE AA OR BETTER BOND INDEX--consists of all
publicly issued, fixed rate, non-convertible 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 CORPORATE A OR BETTER BOND INDEX--consists of all publicly
issued, investment grade corporate bonds rated A or better, of all maturity
levels.
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 BROTHERS CORPORATE (BAA) BOND INDEX--all publicly offered fixed-rate,
non-convertible 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 Funds' Financial Statements as of and for the year ended December 31, 1999,
appearing in the Vanguard Index Trust 1999 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 Funds' Annual Report to Shareholders, which may
be obtained without charge.
B-19
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SAI040-INDEX FUNDS
B-20
