VANGUARD (R)
U.S. STOCK INDEX FUNDS
INVESTOR SHARES AND ADMIRAL(TM) SHARES
PROSPECTUS
NOVEMBER 1, 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*
*INVESTOR SHARES ONLY
This prospectus contains
financial data for the Funds
through the period ended
June 30, 2000.
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>
VANGUARD U.S. STOCK INDEX FUNDS
INVESTOR SHARES AND ADMIRAL SHARES
Prospectus
November 1, 2000
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CONTENTS
1 AN INTRODUCTION TO INDEX FUNDS 35 INVESTMENT ADVISER
2 FUND PROFILES 35 DIVIDENDS, CAPITAL GAINS, AND TAXES
2 Vanguard Total Stock Market Index Fund 37 SHARE PRICE
5 Vanguard 500 Index Fund 38 FINANCIAL HIGHLIGHTS
8 Vanguard Extended Market Index Fund 44 INVESTING WITH VANGUARD
11 Vanguard Mid-Cap Index Fund 44 Buying Shares
14 Vanguard Small-Cap Index Fund 46 Converting Shares
17 Vanguard Value Index Fund 46 Redeeming Shares
20 Vanguard Small-Cap Value Index Fund 48 Other Rules You Should Know
23 Vanguard Growth Index Fund 51 Fund and Account Updates
26 Vanguard Small-Cap Growth Index Fund 51 Contacting Vanguard
29 MORE ON THE FUNDS GLOSSARY (inside back cover)
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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SHARE CLASSES
Each of the Vanguard U.S. Stock Index Funds offers two or three separate classes
of shares. This prospectus offers Investor Shares for all of the Funds as well
as Admiral Shares for six of the Funds (500 Index Fund, Total Stock Market Index
Fund, Extended Market Index Fund, Growth Index Fund, Value Index Fund, and
Small-Cap Index Fund). Please note that Admiral Shares are NOT available to:
o SIMPLE IRAs and 403(b)(7) custodial accounts;
o Other retirement plan accounts receiving special administrative services
from Vanguard; or
o Accounts maintained by financial intermediaries, except in limited
circumstances.
Please call Vanguard at 1-800-523-1036 to obtain a separate prospectus that
offers Institutional Shares for all of the Funds (except 500 Index Fund).
Institutional Shares have an investment minimum of $10 million and generally are
not available through financial intermediaries or retirement plans receiving
special administrative services from Vanguard.
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<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 make up 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.
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2
FUND PROFILE
VANGUARD(R) 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 make up 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 following bar chart and table 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. Both the bar chart and the table
present information for the Fund's Investor Shares only, since Admiral Shares
were not available during the time periods shown. 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-INVESTOR SHARES
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SCALE -20% - 50%
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. The Fund's year-to-date return as of the calendar quarter ended September
30, 2000 was -0.45%.
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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-
Investor Shares** 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 Investor Shares or Admiral Shares of the Fund. The expenses shown under
Annual Fund Operating Expenses for Investor Shares are based upon those incurred
in the fiscal year ended December 31, 1999; for Admiral Shares, the expenses are
based on estimated amounts for the current fiscal year.
INVESTOR ADMIRAL
SHARES SHARES
---------- -----------
SHAREHOLDER FEES (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None None
Transaction Fee on Purchases: None* None*
Sales Charge (Load) Imposed on Reinvested None None
Dividends:
Redemption Fee: None None
Exchange Fee: None None
Account Maintenance Fee (for accounts under $2.50/ None
$10,000): quarter**
ANNUAL FUND OPERATING EXPENSES (expenses deducted from the Fund's assets)
Management Expenses: 0.18% 0.13%
12b-1 Distribution Fee: None None
Other Expenses: 0.02% 0.02%
TOTAL ANNUAL FUND OPERATING EXPENSES: 0.20% 0.15%
*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's Investor Shares or Admiral Shares 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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4
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1 YEAR 3 YEARS 5 YEARS 10 YEARS
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Investor Shares $20 $64 $113 $255
Admiral Shares $15 $48 $85 $192
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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.
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ADDITIONAL INFORMATION
DIVIDENDS AND CAPITAL GAINS CONVERSION FEATURES
Dividends are distributed quarterly Investor Shares--May be converted to
in March, June, September, and Admiral Shares if you meet certain
December; capital gains, if any account balance and tenure requirements
are distributed annually in December Admiral Shares--Will be converted to
Investor Shares if you are no longer
INVESTMENT ADVISER eligible for Admiral Shares
The Vanguard Group, Valley Forge, Pa.,
since inception NEWSPAPER ABBREVIATION
Investor Shares--TotSt
INCEPTION DATE Admiral Shares--.
Investor Shares--April 27, 1992
Admiral Shares--November 13, 2000 VANGUARD FUND NUMBER
Investor Shares--085
Admiral Shares--585
NET ASSETS (ALL SHARE CLASSES) AS OF
JUNE 30, 2000 CUSIP NUMBER
$24.3 billion Investor Shares--922908306
Admiral Shares-- 922908728
SUITABLE FOR IRAS
Yes (both classes of shares) TICKER SYMBOL
Investor Shares--VTSMX
MINIMUM INITIAL INVESTMENT
Investor Shares--$3,000; $1,000 for
IRAs and custodial accounts for minors
Admiral Shares--$250,000
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<PAGE>
5
FUND PROFILE--VANGUARD (R) 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 make up the Index. For a
description of the Fund's replication technique, please see "Indexing Methods"
under MORE ON THE FUNDS.
PRIMARY RISKS
o 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.
o 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 following bar chart and table 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. Both the bar chart and the table present
information for the Fund's Investor Shares only, since Admiral Shares were not
available during the time periods shown. 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-INVESTOR SHARES
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SCALE -20% - 50%
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. The Fund's year-to-date return as of the
calendar quarter ended September 30, 2000 was -1.35%.
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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).
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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--
Investor Shares* 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 Investor Shares or Admiral Shares of the Fund. The expenses shown under
Annual Fund Operating Expenses for Investor Shares are based upon those incurred
in the fiscal year ended December 31, 1999; for Admiral Shares, the expenses are
based on estimated amounts for the current fiscal year.
INVESTOR ADMIRAL
SHARES SHARES
------------- ----------
SHAREHOLDER FEES (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None None
Transaction Fee on Purchases: None* None*
Sales Charge (Load) Imposed on Reinvested None None
Dividends:
Redemption Fee: None None
Exchange Fee: None None
Account Maintenance Fee (for accounts under $2.50/ None
$10,000): quarter**
ANNUAL FUND OPERATING EXPENSES (expenses deducted from the Fund's assets)
Management Expenses: 0.16% 0.10%
12b-1 Distribution Fee: None None
Other Expenses: 0.02% 0.02%
TOTAL ANNUAL FUND OPERATING EXPENSES: 0.18% 0.12%
*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's Investor Shares or Admiral Shares 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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Investor Shares $18 $58 $101 $230
Admiral Shares $12 $39 $68 $154
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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 CONVERSION FEATURES
Dividends are distributed quarterly in Investor Shares--May be converted
March, June, September, and December; to Admiral Shares if you meet certain
capital gains, if any, are account balance and tenure
distributed annually in December requirements
Admiral Shares--Will be converted
INVESTMENT ADVISER to Investor Shares if you are no
The Vanguard Group, Valley Forge, Pa., longer eligible for Admiral Shares
since inception
NEWSPAPER ABBREVIATION
INCEPTION DATE Investor Shares--500
Investor Shares--August 31, 1976 Admiral Shares--
Admiral Shares--November 13, 2000
VANGUARD FUND NUMBER
NET ASSETS (ALL SHARE CLASSES) AS OF Investor Shares--040
JUNE 30, 2000 Admiral Shares--540
$105.6 billion
CUSIP NUMBER
SUITABLE FOR IRAS Investor Shares--922908108
Yes (both classes of shares) Admiral Shares--922908710
MINIMUM INITIAL INVESTMENT
Investor Shares--$3,000; $1,000 for TICKER SYMBOL
IRAs and custodial accounts for minors Investor Shares--VFINX
Admiral Shares--$250,000
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<PAGE>
8
FUND PROFILE
VANGUARD (R) 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-sized 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 make up the Index. For a description
of the Fund's sampling technique, please see "Indexing Methods" under MORE ON
THE FUNDS.
PRIMARY RISKS
o 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.
o 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 from the overall
stock market.
PERFORMANCE/RISK INFORMATION
The following bar chart and table 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. Both the bar chart and the table present
information for the Fund's Investor Shares only, since Admiral Shares were not
available during the time periods shown. 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-INVESTOR SHARES
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SCALE -20% - 50%
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. The Fund's year-to-date return as of the calendar quarter ended
September 30, 2000 was 3.95%.
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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--Investor Shares* 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 Investor Shares or Admiral Shares of the Fund. The expenses shown under
Annual Fund Operating Expenses for Investor Shares are based upon those incurred
in the fiscal year ended December 31, 1999; for Admiral Shares, the expenses are
based on estimated amounts for the current fiscal year.
INVESTOR ADMIRAL
SHARES SHARES
----------- ----------
SHAREHOLDER FEES (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None None
Transaction Fee on Purchases: None* None*
Sales Charge (Load) Imposed on Reinvested None None
Dividends:
Redemption Fee: None None
Exchange Fee: None None
Account Maintenance Fee (for accounts under $10/ None
$10,000): year**
ANNUAL FUND OPERATING EXPENSES (expenses deducted from the Fund's assets)
Management Expenses: 0.22% 0.17%
12b-1 Distribution Fee: None None
Other Expenses: 0.03% 0.03%
TOTAL ANNUAL FUND OPERATING EXPENSES: 0.25% 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 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.
<PAGE>
10
The following example is intended to help you compare the cost of investing in
the Fund's Investor Shares or Admiral Shares 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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Investor Shares $26 $80 $141 $318
Admiral Shares $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.
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ADDITIONAL INFORMATION
DIVIDENDS AND CAPITAL GAINS CONVERSION FEATURES
Distributed annually in December Investor Shares--May be converted to
Admiral Shares if you meet certain
INVESTMENT ADVISER account balance and tenure requirements
The Vanguard Group, Valley Forge, Admiral Shares--Will be converted to
Pa., Investor Shares if you are no longer
since inception eligible for Admiral Shares
INCEPTION DATE NEWSPAPER ABBREVIATION
Investor Shares--December 21, 1987 Investor Shares--Extnd
Admiral Shares--November 13, 2000 Admiral Shares--.
NET ASSETS (ALL SHARE CLASSES) VANGUARD FUND NUMBER
AS OF JUNE 30, 2000 Investor Shares--098
$6.1 billion Admiral Shares--598
SUITABLE FOR IRAS CUSIP NUMBER
Yes (both classes of shares) Investor Shares--922908207
Admiral Shares--922908694
MINIMUM INITIAL INVESTMENT
Investor Shares--$3,000; $1,000 for TICKER SYMBOL
IRAs and custodial accounts for Investor Shares--VEXMX
minors
Admiral Shares--$250,000
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<PAGE>
11
FUND PROFILE--VANGUARD (R) 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-sized U.S. companies. The Fund attempts to replicate the target index by
investing all or substantially all of its assets in the stocks that make up the
Index. For a description of the Fund's replication technique, please see
"Indexing Methods" under MORE ON THE FUNDS.
PRIMARY RISKS
o 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.
o 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 from the overall stock market.
PERFORMANCE/RISK INFORMATION
The following bar chart and table 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.
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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. The Fund's year-to-date return as
of the calendar quarter ended September 30, 2000 was 22.60%.
--------------------------------------------------------------------------------
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 15.32% 14.93%
Fund**
S&P MidCap 400 Index 14.72 14.12
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*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, NEWSPAPER ABBREVIATION
Pa., MidCp
since inception
INCEPTION DATE VANGUARD FUND NUMBER
May 21, 1998 859
NET ASSETS (ALL SHARE CLASSES) CUSIP NUMBER
AS OF 922908843
JUNE 30, 2000
$1.1 billion TICKER SYMBOL
VIMSX
SUITABLE FOR IRAS
Yes
--------------------------------------------------------------------------------
<PAGE>
14
FUND PROFILE--VANGUARD (R) 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 made up 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
make up the Index. For a description of the Fund's sampling technique, please
see "Indexing Methods" under MORE ON THE FUNDS.
PRIMARY RISKS
o 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.
o 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 from the overall stock market.
PERFORMANCE/RISK INFORMATION
The following bar chart and table 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. Both the bar chart and the table present
information for the Fund's Investor Shares only, since Admiral Shares were not
available during the time periods shown. Keep in mind that the Fund's past
performance does not indicate how it will perform in the future.
--------------------------------------------------------------------------------
ANNUAL TOTAL RETURNS-INVESTOR SHARES
--------------------------------------------------------------------------------
SCALE -20% - 50%
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. The Fund's year-to-date return as of the calendar quarter ended
September 30, 2000 was 4.39%.
--------------------------------------------------------------------------------
<PAGE>
15
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).
--------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS FOR YEARS ENDED DECEMBER 31, 1999
--------------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS
--------------------------------------------------------------------------------
Vanguard Small-Cap Index Fund--
Investor Shares* 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 Investor Shares or Admiral Shares of the Fund. The expenses shown under
Annual Fund Operating Expenses for Investor Shares are based upon those incurred
in the fiscal year ended December 31, 1999, as restated to reflect expenses in
the current fiscal year; for Admiral Shares, the expenses are based on estimated
amounts for the current fiscal year.
INVESTOR ADMIRAL
SHARES SHARES
---------- ----------
SHAREHOLDER FEES (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None None
Transaction Fee on Purchases: None* None*
Sales Charge (Load) Imposed on Reinvested None None
Dividends:
Redemption Fee: None None
Exchange Fee: None None
Account Maintenance Fee (for accounts under $10/ None
$10,000): year**
ANNUAL FUND OPERATING EXPENSES (expenses deducted from the Fund's assets)
Management Expenses: 0.24% 0.16%
12b-1 Distribution Fee: None None
Other Expenses: 0.03% 0.04%
TOTAL ANNUAL FUND OPERATING EXPENSES: 0.27% 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 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.
<PAGE>
16
The following example is intended to help you compare the cost of investing in
the Fund's Investor Shares or Admiral Shares 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
--------------------------------------------------------------------------------
Investor Shares $28 $87 $152 $343
Admiral Shares $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.
--------------------------------------------------------------------------------
ADDITIONAL INFORMATION
DIVIDENDS AND CAPITAL GAINS CONVERSION FEATURES
Distributed annually in December Investor Shares--May be converted to
Admiral Shares if you meet certain
INVESTMENT ADVISER account balance and tenure requirements
The Vanguard Group, Valley Forge, Admiral Shares--Will be converted to
Pa., Investor Shares if you are no longer
since inception eligible for Admiral Shares
INCEPTION DATE NEWSPAPER ABBREVIATION
Investor Shares--October 3, 1960 Investor Shares--SmCap
Admiral Shares--November 13, 2000 Admiral Shares--.
NET ASSETS (ALL SHARE CLASSES) VANGUARD FUND NUMBER
AS OF Investor Shares--048
JUNE 30, 2000 Admiral Shares--548
$4.6 billion
CUSIP NUMBER
SUITABLE FOR IRAS Investor Shares--922908702
Yes (both classes of shares) Admiral Shares--922908686
MINIMUM INITIAL INVESTMENT TICKER SYMBOL
Investor Shares--$3,000; $1,000 Investor Shares--NAESX
for IRAs and custodial accounts
for minors
Admiral Shares--$250,000
--------------------------------------------------------------------------------
<PAGE>
17
FUND PROFILE--VANGUARD (R) 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 make up the Index. For a description of the Fund's
replication technique, please see "Indexing Methods" under MORE ON THE FUNDS.
PRIMARY RISKS
o 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.
o 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 following bar chart and table 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. Both the bar chart and the table
present information for the Fund's Investor Shares only, since Admiral Shares
were not available during the time periods shown. Keep in mind that the Fund's
past performance does not indicate how it will perform in the future.
--------------------------------------------------------------------------------
ANNUAL TOTAL RETURNS-INVESTOR SHARES
--------------------------------------------------------------------------------
SCALE -20% - 50%
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. The Fund's year-to-date return as of the
calendar quarter ended September 30, 2000 was 4.31%.
--------------------------------------------------------------------------------
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--
Investor Shares** 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 Investor Shares or Admiral Shares of the Fund. The expenses shown under
Annual Fund Operating Expenses for Investor Shares are based upon those incurred
in the fiscal year ended December 31, 1999; for Admiral Shares, the expenses are
based on estimated amounts for the current fiscal year.
INVESTOR ADMIRAL
SHARES SHARES
------------ ----------
SHAREHOLDER FEES (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None None
Transaction Fee on Purchases: None* None*
Sales Charge (Load) Imposed on Reinvested None None
Dividends:
Redemption Fee: None None
Exchange Fee: None None
Account Maintenance Fee (for accounts under $2.50/ None
$10,000): quarter**
ANNUAL FUND OPERATING EXPENSES (expenses deducted from the Fund's assets)
Management Expenses: 0.19% 0.14%
12b-1 Distribution Fee: None None
Other Expenses: 0.03% 0.03%
TOTAL ANNUAL FUND OPERATING EXPENSES: 0.22% 0.17%
*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.
<PAGE>
19
The following example is intended to help you compare the cost of investing
in the Fund's Investor Shares or Admiral Shares 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
--------------------------------------------------------------------------------
Investor Shares $23 $71 $124 $280
Admiral Shares $17 $55 $96 $217
--------------------------------------------------------------------------------
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.
--------------------------------------------------------------------------------
ADDITIONAL INFORMATION
DIVIDENDS AND CAPITAL GAINS CONVERSION FEATURES
Dividends are distributed quarterly Investor Shares--May be converted to
in March, June, September, and Admiral Shares if you meet certain
December; capital gains, if any, account balance and tenure requirements
are distributed annually in December Admiral Shares--Will be converted to
Investor Shares if you are no longer
INVESTMENT ADVISER eligible for Admiral Shares
The Vanguard Group, Valley Forge, Pa.,
since inception NEWSPAPER ABBREVIATION
Investor Shares--Value
INCEPTION DATE Admiral Shares--.
Investor Shares--November 2, 1992
Admiral Shares--November 13, 2000 VANGUARD FUND NUMBER
Investor Shares--006
NET ASSETS (ALL SHARE CLASSES) AS OF Admiral Shares--506
JUNE 30, 2000
$4 billion CUSIP NUMBER
Investor Shares--922908405
SUITABLE FOR IRAS Admiral Shares--922908678
Yes (both classes of shares)
TICKER SYMBOL
MINIMUM INITIAL INVESTMENT Investor Shares--VIVAX
Investor Shares--$3,000; $1,000 for
IRAs and custodial accounts for minors
Admiral Shares--$250,000
--------------------------------------------------------------------------------
<PAGE>
20
FUND PROFILE--
VANGUARD (R) 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 make up the Index. For a
description of the Fund's replication technique, please see "Indexing Methods"
under MORE ON THE FUNDS.
PRIMARY RISKS
o 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.
o 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 from the overall stock market.
PERFORMANCE/RISK INFORMATION
The following bar chart and table 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.
The Fund's year-to-date return as of the calendar quarter ended September 30,
2000 was 13.29%.
--------------------------------------------------------------------------------
<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 2.83% -6.31%
Index Fund**
S&P SmallCap 600/BARRA 3.03 -6.73
Value Index
--------------------------------------------------------------------------------
*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, as
restated to reflect expenses in the current fiscal year.
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: 0.21%
12b-1 Distribution Fee: None
Other Expenses: 0.06%
TOTAL ANNUAL FUND OPERATING EXPENSES: 0.27%
*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
--------------------------------------------------------------------------------
$78 $136 $201 $392
--------------------------------------------------------------------------------
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
JUNE 30, 2000 922908793
$279 million
TICKER SYMBOL
SUITABLE FOR IRAS VISVX
Yes
--------------------------------------------------------------------------------
<PAGE>
23
FUND PROFILE--VANGUARD(R) 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 make up 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:
o 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.
o 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 following bar chart and table 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. Both the bar chart and the table
present information for the Fund's Investor Shares only, since Admiral Shares
were not available during the time periods shown. Keep in mind that the Fund's
past performance does not indicate how it will perform in the future.
--------------------------------------------------------------------------------
ANNUAL TOTAL RETURNS-INVESTOR SHARES
--------------------------------------------------------------------------------
SCALE -20% - 50%
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. The Fund's year-to-date return as of the
calendar quarter ended September 30, 2000 was -6.41%.
--------------------------------------------------------------------------------
<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--
Investor Shares** 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 Investor Shares or Admiral Shares of the Fund. The expenses shown under
Annual Fund Operating Expenses for Investor Shares are based upon those incurred
in the fiscal year ended December 31, 1999; for Admiral Shares, the expenses are
based on estimated amounts for the current fiscal year.
INVESTOR ADMIRAL
SHARES SHARES
------------ ----------
SHAREHOLDER FEES (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None None
Transaction Fee on Purchases: None* None*
Sales Charge (Load) Imposed on Reinvested None None
Dividends:
Redemption Fee: None None
Exchange Fee: None None
Account Maintenance Fee (for accounts under $2.50/ None
$10,000): quarter**
ANNUAL FUND OPERATING EXPENSES (expenses deducted from the Fund's assets)
Management Expenses: 0.20% 0.14%
12b-1 Distribution Fee: None None
Other Expenses: 0.02% 0.03%
TOTAL ANNUAL FUND OPERATING EXPENSES: 0.22% 0.17%
*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.
<PAGE>
25
The following example is intended to help you compare the cost of investing
in the Fund's Investor Shares or Admiral Shares 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
--------------------------------------------------------------------------------
Investor Shares $23 $71 $124 $280
Admiral Shares $17 $55 $96 $217
--------------------------------------------------------------------------------
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.
--------------------------------------------------------------------------------
ADDITIONAL INFORMATION
DIVIDENDS AND CAPITAL GAINS CONVERSION FEATURES
Dividends are distributed quarterly Investor Shares--May be converted
in March, June, September, and to Admiral Shares if you meet certain
December; capital gains, if any, account balance and tenure requirements
are distributed annually in December Admiral Shares--Will be converted to
Investor Shares if you are no longer
INVESTMENT ADVISER eligible for Admiral Shares
The Vanguard Group, Valley Forge, Pa.,
since inception NEWSPAPER ABBREVIATION
Investor Shares--Growth
INCEPTION DATE Admiral Shares--.
Investor Shares--November 2, 1992
Admiral Shares--November 13, 2000 VANGUARD FUND NUMBER
Investor Shares--009
Admiral Shares--509
NET ASSETS (ALL SHARE CLASSES) AS OF
JUNE 30, 2000 CUSIP NUMBER
$17.2 billion Investor Shares--922908504
Admiral Shares--922908660
SUITABLE FOR IRAS
Yes (both classes of shares) TICKER SYMBOL
Investor Shares--VIGRX
MINIMUM INITIAL INVESTMENT
Investor Shares--$3,000; $1,000 for
IRAs and custodial accounts for minors
Admiral Shares--$250,000
--------------------------------------------------------------------------------
<PAGE>
26
FUND PROFILE--
VANGUARD (R) 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 make up the Index. For a
description of the Fund's replication technique, please see "Indexing Methods"
under MORE ON THE FUNDS.
PRIMARY RISKS
o 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.
o 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 from the overall stock market.
PERFORMANCE/RISK INFORMATION
The following bar chart and table 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
--------------------------------------------------------------------------------
SCALE -20% - 50%
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.
The Fund's year-to-date return as of the calendar quarter ended September 30,
2000 was 8.52%.
--------------------------------------------------------------------------------
<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 19.57 8.24
Growth Index
--------------------------------------------------------------------------------
*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, as
restated to reflect expenses in the current fiscal year.
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: 0.22%
12b-1 Distribution Fee: None
Other Expenses: 0.05%
TOTAL ANNUAL FUND OPERATING EXPENSES: 0.27%
*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.
<PAGE>
28
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
--------------------------------------------------------------------------------
$78 $136 $201 $392
--------------------------------------------------------------------------------
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.
--------------------------------------------------------------------------------
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, NEWSPAPER ABBREVIATION
Pa., SmGth
since inception
INCEPTION DATE VANGUARD FUND NUMBER
May 21, 1998 861
NET ASSETS (ALL SHARE CLASSES) AS OF CUSIP NUMBER
JUNE 30, 2000 922908827
$386 million
TICKER SYMBOL
SUITABLE FOR IRAS VISGX
Yes
--------------------------------------------------------------------------------
<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:
o Variety of investments. Vanguard index funds generally invest in a wide
variety of companies and industries.
o Relative consistency. Because they seek to track market benchmarks, index
funds by definition will not perform dramatically better or worse than
their target indexes.
o 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.
Compared with actively managed funds, most index funds have lower turnover
rates and lower capital gains distributions. However, from time to time, some
index funds may pay out higher-than-expected taxable distributions. That's
because index funds must adjust their holdings to reflect changes in their
target indexes. In some cases, such changes may force an index fund to sell
securities that have appreciated in value, and, thus, realize a capital gain
that must be distributed to shareholders. A security may move out of an index
for a number of reasons, including a merger or acquisition, or a substantial
change in the market capitalization of the issuer. Generally, these changes tend
to occur more frequently with small and medium-sized companies than they do with
large, well-established companies.
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
6,800 stocks as of June 30, 2000), 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.)
<PAGE>
30
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 June 30, 2000.
--------------------------------------------------------------------------------
NUMBER OF NUMBER OF STOCKS
FUND STOCKS HELD IN TARGET INDEX
--------------------------------------------------------------------------------
Total Stock Market 3,440 6,875
500 516 500
Extended Market 3,008 6,386
Mid-Cap 405 400
Small-Cap 2,029 2,000
Value 401 391
Small-Cap Value 427 423
Growth 120 109
Small-Cap Growth 185 177
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
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 have at times represented 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 $13 billion;
mid-cap funds as those holding stocks of companies with a market value between
$1.5 billion and $13 billion; and small-cap funds as those typically holding
stocks of companies with a market value of less than $1.5 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:
o 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.
o Two of the Funds (Small-Cap Value and Small-Cap Growth) charge a
transaction fee on purchases.
<PAGE>
33
o 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).
o 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 June 30, 2000, the average turnover rate for passively
managed domestic equity index funds investing in common stocks was approximately
21%; for all domestic stock funds, the average turnover rate was approximately
90%, 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 make up 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:
o To keep cash on hand to meet shareholder redemptions or other needs while
simulating full investment in stocks.
o To reduce the Fund's transaction costs or add value when these instruments
are favorably priced.
PENDING LEGAL PROCEEDINGS
On June 8, 2000, Vanguard was sued by McGraw-Hill over Vanguard's right to use
certain Standard & Poor's (S&P) trademarks and other intellectual property owned
by McGraw-Hill. The suit currently is pending in the federal district court for
the Southern District of New York. The suit requests, among other things:
monetary damages; injunctive relief that would prevent Vanguard from using S&P
indexes and S&P trademarks in connection with Vanguard's potential offering of
an exchange-traded class of shares of the Funds; and declaratory relief that
McGraw-Hill is entitled to terminate the license agreement that grants Vanguard
the right to use certain S&P indexes and S&P trademarks. Vanguard believes that
it should prevail in these proceedings; however, there is no assurance that it
will do so.
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 $570 billion.
All of the funds share in the expenses associated with business operations, such
as personnel, office space, equipment, and advertising.
<PAGE>
35
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. As of June 30, 2000, Vanguard served as
adviser for about $388.1 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 six months ended June 30, 2000, 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
Quantitative Equity 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
<PAGE>
36
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.
--------------------------------------------------------------------------------
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.
--------------------------------------------------------------------------------
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:
o Distributions are taxable to you for federal income tax purposes whether or
not you reinvest these amounts in additional Fund shares.
o 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.
o Any dividends and short-term capital gains that you receive are taxable to
you as ordinary income for federal income tax purposes.
o 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.
o Capital gains distributions may vary considerably from year to year as a
result of the Funds' normal investment activities and cash flows.
o 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.
o 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.
ANY CONVERSION BETWEEN CLASSES OF SHARES OF THE SAME FUND IS A NON-TAXABLE
EVENT. BY CONTRAST, A CONVERSION BETWEEN CLASSES OF SHARES OF DIFFERENT FUNDS IS
A TAXABLE EVENT.
GENERAL INFORMATION
BACKUP WITHHOLDING. By law, Vanguard must withhold 31% of any taxable
distributions or redemptions from your account if you do not:
o provide us with your correct taxpayer identification number;
o certify that the taxpayer number is correct; and
o confirm that you are not subject to backup withholding.
Similarly, Vanguard must withhold from your account if the IRS instructs us to
do so.
<PAGE>
37
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
"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). Net asset value per share is computed by dividing the net assets
attributed to each share class by the number of shares outstanding for that
class.
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."
<PAGE>
38
FINANCIAL HIGHLIGHTS
The following financial highlights tables pertain to the Funds' Investor Shares;
Admiral Shares were not available during the periods shown. The tables are
intended to help you understand each Fund's financial performance for the past
five years or since inception, plus the six months ended June 30, 2000, 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 reports to -
shareholders. The information for the six-month period ended June 30, 2000, has
not been audited by independent accountants. You may have the annual reports -
sent to you without charge by contacting Vanguard.
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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 the six months ended June 30, 2000 with a net asset value (price) of
$33.22 per share. During the period, the Fund earned $0.16 per share from
investment income (interest and dividends). There was a decline of 0.39 per
share from investments that had depreciated in value or that were sold for lower
prices than the Fund paid for them.
Shareholders received $0.21 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.
Investment losses ($0.23 per share) plus the distributions ($0.21 per share)
resulted in a share price of $32.78 at the end of the period. This was a
decrease of $0.44 per share (from $33.22 at the beginning of the period to
$32.78 at the end of the period). For a shareholder who reinvested the
distributions in the purchase of more shares, the total return from the Fund was
-0.72% for the period.
As of June 30, 2000, the Fund (Investor Shares only) had $19.8 billion in net
assets. For the six month period, its annualized expense ratio was 0.20% ($2.00
per $1,000 of net assets); and its annualized net investment income amounted to
1.00% of its average net assets. It sold and replaced securities valued at 8% of
its net assets.
--------------------------------------------------------------------------------
<PAGE>
39
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------
VANGUARD TOTAL STOCK MARKET INDEX FUND
INVESTOR SHARES
SIX MONTHS YEAR ENDED DECEMBER 31,
ENDED----------------------------------------------------------------------
JUNE 30, 2000* 1999 1998 1997 1996 1995
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $33.22 $27.42 $22.64 $17.77 $15.04 $11.37
--------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .16 .317 .336 .319 .29 .29
Net Realized and Unrealized Gain (Loss) (.39) 6.133 4.898 5.143 2.84 3.75
on Investments
--------------------------------------------------------------------------------------------------------------------------
Total from Investment Operations (.23) 6.450 5.234 5.462 3.13 4.04
--------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.15) (.330) (.329) (.322) (.29) (.28)
Distributions from Realized Capital Gains (.06) (.320) (.125) (.270) (.11) (.09)
Total Distributions (.21) (.650) (.454) (.592) (.40) (.37)
--------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $32.78 $33.22 $27.42 $22.64 $17.77 $15.04
==========================================================================================================================
TOTAL RETURN** -0.72% 23.81% 23.26% 30.99% 20.96% 35.79%
==========================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $19,829 $18,133 $9,308 $5,092 $3,531 $1,571
Ratio of Total Expenses to
Average Net Assets 0.20%*** 0.20% 0.20% 0.20% 0.22% 0.25%
Ratio of Net Investment Income to
Average Net Assets 1.00%*** 1.15% 1.44% 1.65% 1.86% 2.14%
Turnover Rate 8%***+ 3% 3% 2% 3% 3%
==========================================================================================================================
</TABLE>
*Unaudited.
**Total return figures do not reflect the 0.25% transaction fee on purchases
through 1995 or the annual account maintenance fee of $10 applied on
balances under $10,000.
***Annualized.
+The turnover rate excluding in-kind redemptions was 4%.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------
VANGUARD 500 INDEX FUND INVESTOR SHARES
SIX MONTHS YEAR ENDED DECEMBER 31,
ENDED---------------------------------------------------------------------
JUNE 30, 2000 1999 1998 1997 1996 1995
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $135.33 $113.95 $90.07 $69.17 $57.60 $42.97
--------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .65 1.370 1.33 1.31 1.28 1.22
Net Realized and Unrealized Gain (Loss) (1.21) 22.415 24.30 21.50 11.82 14.76
on Investments
--------------------------------------------------------------------------------------------------------------------------
Total from Investment Operations (.56) 23.785 25.63 22.81 13.10 15.98
--------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.61) 1.410) (1.33) (1.32) (1.28) (1.22)
Distributions from Realized Capital -- (.995) (.42) (.59) (.25) (.13)
Gains
--------------------------------------------------------------------------------------------------------------------------
Total Distributions (.61) (2.405) (1.75) (1.91) (1.53) (1.35)
--------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $134.16 $135.33 $113.95 $90.07 $69.17 $57.60
==========================================================================================================================
TOTAL RETURN** -0.42% 21.07% 28.62% 33.19% 22.88% 37.45%
==========================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $105,583 $104,652 $74,229 $49,358 $30,332 $17,372
Ratio of Total Expenses to
Average Net Assets 0.18%*** 0.18% 0.18% 0.19% 0.20% 0.20%
Ratio of Net Investment Income to
Average Net Assets .97%*** 1.13% 1.35% 1.66% 2.04% 2.38%
Turnover Rate+ 9%*** 6% 6% 5% 5% 4%
==========================================================================================================================
</TABLE>
*Unaudited.
**Total return figures do not reflect the annual account maintenance fee of
$10 applied on balances under $10,000.
***Annualized.
+Turnover rates excluding in-kind redemptions were 7%, 3%, 3%, 3%, 2%, and
2%, respectively.
<PAGE>
40
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------
VANGUARD EXTENDED MARKET INDEX FUND
INVESTOR SHARES
SIX MONTHS YEAR ENDED DECEMBER 31,
ENDED----------------------------------------------------------------------
JUNE 30, 2000 1999 1998 1997 1996 1995
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $37.07 $30.63 $30.76 $26.20 $24.07 $18.52
--------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .143 .297 .388 .351 .34 .30
Net Realized and Unrealized Gain (Loss)
on Investments .077 10.101 2.025 6.479 3.85 5.95
--------------------------------------------------------------------------------------------------------------------------
Total from Investment Operations .220 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 (1.110) (3.640) (2.170) (1.910) (1.72) (.40)
--------------------------------------------------------------------------------------------------------------------------
Total Distributions (1.110) (3.958) (2.543) (2.270) (2.06) (.70)
--------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $36.18 $37.07 $30.63 $30.76 $26.20 $24.07
==========================================================================================================================
TOTAL RETURN** 0.16% 36.22% 8.32% 26.73% 17.65% 33.80%
==========================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $5,028 $4,221 $2,939 $2,723 $2,099 $1,523
Ratio of Total Expenses to
Average Net Assets 0.25%*** 0.25% 0.23% 0.23% 0.25% 0.25%
Ratio of Net Investment Income to Average
Net Assets .82%*** 1.04% 1.21% 1.30% 1.42% 1.51%
Turnover Rate 30%*** 26% 27% 15% 22% 15%
==========================================================================================================================
</TABLE>
*Unaudited.
**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 applied on
balances under $10,000.
***Annualized.
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------
VANGUARD MID-CAP INDEX FUND
INVESTOR SHARES
SIX MONTHS ENDED YEAR ENDED APR. 20** TO
JUNE 30, 2000* DEC. 31, 1999 DEC. 31, 1998
----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $11.30 $10.79 $10.00
----------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .051 .073 .053
Net Realized and Unrealized Gain
(Loss) on Investments 1.009 1.448 .840
----------------------------------------------------------------------------------------------
Total from Investment Operations 1.060 1.521 .893
----------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income -- (.076) (.053)
Distributions from Realized Capital Gains (0.150) (.935) (.050)
----------------------------------------------------------------------------------------------
Total Distributions (0.150) (1.011) (.103)
----------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $12.21 $11.30 $10.79
==============================================================================================
TOTAL RETURN*** 9.34% 15.32% 8.55%
==============================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $905 $605 $206
Ratio of Total Expenses
to Average Net Assets 0.25%+ 0.25% 0.25%+
Ratio of Net Investment Income
to Average Net Assets 0.96%+ 0.99% 1.19%+
Turnover Rate 59%+ 38% 44%
==============================================================================================
</TABLE>
*Unaudited.
**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 applied on balances under $10,000.
+Annualized.
<PAGE>
41
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------
VANGUARD SMALL-CAP INDEX FUND
INVESTOR SHARES
SIX MONTHS YEAR ENDED DECEMBER 31,
ENDED----------------------------------------------------------------- -----
JUNE 30, 2000 1999 1998 1997 1996 1995
------------------------------------------------------------------------------------------------------------------- -------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $23.60 $21.20 $23.75 $20.23 $18.61 $14.99
----------------------------------------------------------------------------------------------------------------- ---------
INVESTMENT OPERATIONS
Net Investment Income .119 .256 .311 .277 .26 .24
Net Realized and Unrealized Gain (Loss) .726 4.491 (1.007) 4.632 3.07 4.06
on Investments
---------------------------------------------------------------------------------------------------------------------------
Total from Investment Operations .845 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 (.215) (2.080) (1.550) (1.115) (1.44) (.45)
------------------------------------------------------------------------------------------------------------------- -------
Total Distributions (.215) (2.347) (1.854) (1.389) (1.71) (.68)
---------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $24.23 $23.60 $21.20 $23.75 $20.23 $18.61
===========================================================================================================================
TOTAL RETURN** 3.50% 23.13% -2.61% 24.59% 18.12% 28.74%
===========================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $4,096 $3,553 $2,768 $2,652 $1,713 $971
Ratio of Total Expenses to
Average Net Assets 0.27%*** 0.25% 0.24% 0.23% 0.25% 0.25%
Ratio of Net Investment Income
to Average Net Assets 1.03%*** 1.25% 1.39% 1.38% 1.51% 1.58%
Turnover Rate 70%*** 42% 35% 29% 28% 28%
===========================================================================================================================
</TABLE>
*Unaudited.
**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 applied on balances under $10,000.
***Annualized.
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------
VANGUARD VALUE INDEX FUND--INVESTOR SHARES
SIX MONTHS YEAR ENDED DECEMBER 31,
ENDED-----------------------------------------------------------------------
JUNE 30, 2000 1999 1998 1997 1996 1995
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $22.89 $22.51 $20.85 $17.02 $14.79 $11.12
---------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .18 .355 .366 .38 .37 .41
Net Realized and Unrealized Gain (Loss) (1.10) 2.342 2.647 4.57 2.81 3.66
on Investments
---------------------------------------------------------------------------------------------------------------------------
Total from Investment Operations (.92) 2.697 3.013 4.95 3.18 4.07
---------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.17) (.362) (.363) (.37) (.38) (.40)
Distributions from Realized Capital Gains (.41) (1.955) (.990) (.75) (.57) --
---------------------------------------------------------------------------------------------------------------------------
Total Distributions (.58) (2.317) (1.353) (1.12) (.95) (.40)
---------------------------------------------------------------------------------------------------------------------- ----
NET ASSET VALUE, END OF YEAR $21.39 $22.89 $22.51 $20.85 $17.02 $14.79
===========================================================================================================================
TOTAL RETURN** -4.12% 12.57% 14.64% 29.77% 21.86% 36.94%
===========================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $3,330 $3,378 $2,421 $1,796 $1,016 $496
Ratio of Total Expenses to
Average Net Assets 0.22%*** 0.22% 0.22% 0.20% 0.20% 0.20%
Ratio of Net Investment Income to Average
Net Assets 1.63%*** 1.59% 1.72% 2.05% 2.54% 3.06%
Turnover Rate 32%*** 41% 33% 25% 29% 27%
===========================================================================================================================
</TABLE>
*Unaudited.
**Total return figures do not reflect the annual account maintenance fee of
$10 applied on balances under $10,000.
***Annualized.
<PAGE>
42
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------
VANGUARD SMALL-CAP VALUE INDEX FUND
INVESTOR SHARES
SIX MONTHS ENDED YEAR ENDED APR.20** TO
JUNE 30, 2000* DEC. 31, 1999 DEC. 31, 1998
----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $8.45 $8.74 $10.00
----------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .034 .065 .045
Net Realized and Unrealized Gain
(Loss) on Investments .396 .210 (1.250)
----------------------------------------------------------------------------------------------
Total from Investment Operations .430 .275 (1.205)
----------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income -- (.070) (.055)
Distributions from Realized Capital Gains (0.250) (.495) --
----------------------------------------------------------------------------------------------
Total Distributions (0.250) (.565) (.055)
----------------------------------------------------------------------------------------------
NET ASSET VALUE, END $8.63 $8.45 $$8.74
OF PERIOD
==============================================================================================
TOTAL RETURN*** 5.13% 3.35% -12.47%
==============================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $229 $204 $113
Ratio of Total Expenses
to Average Net Assets 0.27%+ 0.25% 0.25%+
Ratio of Net Investment Income
to Average Net Assets 0.95%+ 0.96% 1.13%+
Turnover Rate 73%+ 80% 53%
==============================================================================================
</TABLE>
*Unaudited.
**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 applied on balances
under $10,000.
+Annualized.
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------
VANGUARD GROWTH INDEX FUND
INVESTOR SHARES
SIX MONTHS YEAR ENDED DECEMBER 31,
ENDED-----------------------------------------------------------------------
JUNE 30, 2000* 1999 1998 1997 1996 1995
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $39.43 $31.67 $22.53 $16.90 $13.97 $10.28
---------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .07 .207 .230 .23 .22 .21
Net Realized and Unrealized Gain (Loss) .94 8.821 9.244 5.88 3.07 3.68
on Investments
---------------------------------------------------------------------------------------------------------------------------
Total from Investment Operations 1.01 9.028 9.474 6.11 3.29 3.89
---------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.07) (.228) (.219) (.23) (.22) (.20)
Distributions from Realized Capital Gains -- (1.040) (.115) (.25) (.14) --
---------------------------------------------------------------------------------------------------------------------------
Total Distributions (.07) (1.268) (.334) (.48) (.36) (.20)
NET ASSET VALUE, END OF YEAR $40.37 $39.43 $31.67 $22.53 $16.90 $13.97
===========================================================================================================================
TOTAL RETURN** 2.56% 28.76% 42.21% 36.34% 23.74% 38.06%
===========================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $16,476 $15,232 $6,644 $2,365 $787 $271
Ratio of Total Expenses to
Average Net Assets 0.22%*** 0.22% 0.22% 0.20% 0.20% 0.20%
Ratio of Net Investment Income to Average
Net Assets 0.34%*** 0.64% 0.92% 1.19% 1.57% 1.71%
Turnover Rate 27%*** 33% 29% 26% 29% 24%
===========================================================================================================================
</TABLE>
*Unaudited.
**Total return figures do not reflect the annual account maintenance fee of
$10 applied on balances under $10,000.
***Annualized.
<PAGE>
43
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------
VANGUARD SMALL-CAP GROWTH INDEX FUND
INVESTOR SHARES
SIX MONTHS ENDED YEAR ENDED APR.20** TO
JUNE 30, 2000* DEC. 31, 1999 DEC. 31, 1998
----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $11.38 $9.53 $10.00
----------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .012 .025 .03
Net Realized and Unrealized Gain
(Loss) on Investments 1.068 1.860 (.47)
----------------------------------------------------------------------------------------------
Total from Investment Operations 1.080 1.885 (.44)
----------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income -- (.035) (.03)
Distributions from Realized Capital Gains -- -- --
----------------------------------------------------------------------------------------------
Total Distributions -- (.035) (.03)
----------------------------------------------------------------------------------------------
NET ASSET VALUE, END $12.46 $11.38 $9.53
OF PERIOD
==============================================================================================
TOTAL RETURN*** 9.49% 19.80% -4.77%
==============================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $359 $167 $90
Ratio of Total Expenses
to Average Net Assets 0.27%+ 0.25% 0.25%+
Ratio of Net Investment Income
to Average Net Assets 0.12%+ 0.33% 0.63%+
Turnover Rate 103%+ 82% 77%
==============================================================================================
</TABLE>
*Unaudited.
**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 applied on balances under
$10,000.
+Annualized.
"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. Note: McGraw-Hill has sued Vanguard over Vanguard's right
to use certain S&P Indexes. See page 34.
<PAGE>
44
--------------------------------------------------------------------------------
INVESTING WITH VANGUARD
This section of the prospectus explains the basics of doing business with
Vanguard. A special booklet, The Vanguard Service Directory, provides details
of our many shareholder services for individual investors. A separate booklet,
The Compass, does the same for institutional investors. You can request either
booklet by calling or writing Vanguard, using the Contacting Vanguard
instructions found at the end of this section.
BUYING SHARES
CONVERTING SHARES
REDEEMING SHARES
OTHER RULES YOU SHOULD KNOW
FUND AND ACCOUNT UPDATES
CONTACTING VANGUARD
--------------------------------------------------------------------------------
BUYING SHARES
ACCOUNT MINIMUMS FOR TO OPEN AND MAINTAIN AN ACCOUNT: $3,000 for regular
INVESTOR SHARES accounts; $1,000 for IRAs and custodial accounts
for minors.
TO ADD TO AN EXISTING ACCOUNT: $100 by mail or
exchange; $1,000 by wire.
ACCOUNT MINIMUMS FOR TO OPEN AND MAINTAIN AN ACCOUNT: $250,000 for new
ADMIRAL SHARES investors; $150,000 or $50,000 for existing investors
who are eligible to convert Investor Shares into
Admiral Shares (see Converting Shares).
TO ADD TO AN EXISTING ACCOUNT: $100 by mail or
exchange; $1,000 by wire.
HOW TO BUY SHARES BY CHECK: Mail your check and a completed account
registration to Vanguard. When adding to an existing
account, send your check with an Invest-By-Mail form
detached from your last account statement. For
addresses, see Contacting Vanguard.
BY EXCHANGE PURCHASE: You can purchase shares with
the proceeds of a redemption from another Vanguard
fund. All open Vanguard funds permit exchange
purchases requested in writing. MOST VANGUARD
FUNDS--OTHER THAN THE STOCK AND BALANCED INDEX-
ORIENTED FUNDS--ALSO ACCEPT EXCHANGE PURCHASES
REQUESTED ONLINE OR BY TELEPHONE. See Other Rules You
Should Know for specifics.
BY WIRE: Call Vanguard's Client Services Department
to purchase shares by wire. See Contacting Vanguard.
<PAGE>
45
PURCHASE TRANSACTION Each Fund reserves the right to deduct transaction
fees from all share purchases, including shares
purchased by exchange FEES from other Vanguard funds.
These fees, which do not apply to shares purchased
through reinvested dividends and capital gains,
currently are assessed as follows:
Total Stock Market Index Fund--None
500 Index Fund--None
Extended Market Index Fund--None
Mid-Cap Index Fund--None
Small-Cap Index Fund--None
Value Index Fund--None
Small-Cap Value Index Fund--0.50%
Growth Index Fund--None
Small-Cap Growth Index Fund--0.50%
YOUR PURCHASE CHECK When investing by check, make the check payable to:
The Vanguard Group --fund number. For a list of
fund numbers, see Contacting Vanguard.
YOUR PURCHASE PRICE You buy shares at a fund's next-determined net
asset value (NAV) after Vanguard accepts your
purchase request. As long as your request is
accepted before the close of regular trading on
the New York Stock Exchange (generally 4 p.m.
Eastern time), you will buy your shares at that
day's NAV. This is known as your TRADE DATE.
PURCHASE RULES YOU ADMIRAL SHARES. Please note that Admiral Shares are
SHOULD KNOW NOT available to:
o SIMPLE IRAs and 403(b)(7) custodial accounts;
o Other retirement plan accounts receiving
special administrative services from
Vanguard; or
o Accounts maintained by financial intermediaries,
except in limited circumstances.
THIRD PARTY CHECKS. To protect the funds from check
fraud, Vanguard will not accept checks made payable
to third parties.
U.S. CHECKS ONLY. All purchase checks must be written
in U.S. dollars and drawn on a U.S. bank.
LARGE PURCHASES. Vanguard reserves the right to
reject any purchase request that may disrupt a fund's
operation or performance. Please call us before
attempting to invest a large dollar amount.
NO CANCELLATIONS. Place your transaction requests
carefully. Vanguard will NOT cancel any transaction
once it has been initiated and a confirmation number
has been assigned (if applicable).
FUTURE PURCHASES. All Vanguard funds reserve the
right to stop selling shares at any time.
<PAGE>
46
CONVERTING SHARES
ANY CONVERSION BETWEEN CLASSES OF SHARES OF THE SAME
FUND IS A NON-TAXABLE EVENT.
IMMEDIATE CONVERSIONS
INTO ADMIRAL SHARES You may convert Investor Shares into Admiral Shares
of the same Fund (if available), provided that your
account balance in the Fund is at least $250,000.
Registered users of vanguard.com may request a
conversion to Admiral Shares online. Or, you may
contact Vanguard by telephone or mail or request this
transaction.
TENURE CONVERSIONS THREE-YEAR PRIVILEGE. After three years in a Fund,
INTO ADMIRAL SHARES you may convert Investor Shares into Admiral Shares
if your fund account balance is at least $150,000
and you are registered with vanguard.com.
Registered users of vanguard.com may request a tenure
conversion online. Or, you may contact Vanguard by
telephone or mail to request this transaction.
TEN-YEAR PRIVILEGE. After ten years in a Fund, you
may convert Investor Shares into Admiral Shares if
your fund account balance is at least $50,000 and
you are registered with vanguard.com.
CONVERSIONS INTO You may convert Investor Shares or Admiral Shares
INSTITUTIONAL SHARES into Institutional Shares of the same Fund (if
available), provided that your fund account balance
is at least $10 million. The Funds' Institutional
Shares are offered through a separate prospectus.
Please contact Vanguard's Institutional Division for
more information.
MANDATORY CONVERSIONS If an investor no longer meets the requirements
INTO INVESTOR SHARES for Admiral Shares, a Fund may reclassify the
investor's Admiral Shares into Investor Shares. A
decline in the investor's account balance due to
market movement may result in such a conversion.
The Fund will notify the investor in writing before
any mandatory conversion into Investor Shares.
REDEEMING SHARES
HOW TO REDEEM SHARES Be sure to check Other Rules You Should Know before
initiating your request.
ONLINE: Request a redemption through our website at
vanguard.com.
BY TELEPHONE: Contact Vanguard by telephone to
request a redemption. For telephone numbers, see
Contacting Vanguard.
BY MAIL: Send your written redemption instructions to
Vanguard. For addresses, see Contacting Vanguard.
<PAGE>
47
YOUR REDEMPTION PRICE You redeem shares at a fund's next-determined
net asset value (NAV) after Vanguard accepts
your redemption request, including any special
documentation required under the cir cumstances . As
long as your request is accepted before the close
of regular trading on the New York Stock Exchange
(generally 4 p.m. Eastern time), your shares are
redeemed at that day's NAV. This is known as your
TRADE DATE.
TYPES OF REDEMPTIONS CHECK REDEMPTIONS: Unless instructed otherwise,
Vanguard will mail you a check, normally within two
business days of your redemption.
EXCHANGE REDEMPTIONS: You may instruct Vanguard to
apply the proceeds of your redemption to purchase
shares of another Vanguard fund. All open Vanguard
funds accept exchange redemptions requested in
writing. Most Vanguard funds--other than the index-
oriented funds--also accept exchange redemptions
requested online or by telephone. See Other Rules You
Should Know for specifics.
WIRE REDEMPTIONS: When redeeming from a money market
fund, bond fund, or the Preferred Stock Fund, you
may instruct Vanguard to wire your redemption
proceeds to a previously designated bank account.
Wire redemptions are not available for Vanguard's
other funds, except by exchanging into a bond or
money market fund first. The wire redemption
option is not automatic ; you must establish
it by completing a special form or the
appropriate section of your account registration.
Also, wire redemptions must be requested in
writing or by telephone, not online. A $5 fee
applies to wire redemptions under $5,000.
Money Market Funds: For telephone requests accepted
at Vanguard by 10:45 a.m., Eastern time, the
redemption proceeds will arrive at your bank by the
close of business that same day. For other requests
accepted before 4 p.m., the redemption proceeds
will arrive at your bank by the close of business on
the following business day.
Bond Funds: For requests accepted at Vanguard by
4 p.m. Eastern time, the redemption proceeds will
arrive at your bank by the close of business on the
following business day.
REDEMPTION RULES YOU SPECIAL ACCOUNTS. Special documentation may be
SHOULD KNOW required to redeem from certain types of accounts,
such as trust, corporate, non-profit, or
retirement accounts. Please call us before
attempting to redeem from these types of accounts.
POTENTIALLY DISRUPTIVE REDEMPTIONS. Vanguard reserves
the right to pay all or part of your redemption in-
kind--that is, in the form of securities--if we
believe that a cash redemption would disrupt the
fund's operation or performance. Under these
circumstances, Vanguard also reserves the right to
<PAGE>
48
delay payment of your redemption proceeds for up to
seven days. By calling us before you attempt to
redeem a large dollar amount, you are more likely to
avoid in-kind or delayed payment of your redemption.
RECENTLY PURCHASED SHARES. While you can redeem
shares at any time, proceeds will not be made
available to you until the Fund collects payment for
your purchase. This may take up to ten calendar days
for shares purchased by check or Van guard Fund
Express (R).
PAYMENT TO A DIFFERENT PERSON OR ADDRESS. We can make
your redemption check payable to a different
person or send it to a different address. However,
this requires the written consent of all registered
account owners, which must be provided under
signature guarantees. You can obtain a signature
guarantee from most commercial and savings banks,
credit unions, trust companies, or member firms of a
U.S. stock exchange.
NO CANCELLATIONS. Place your transaction requests
carefully. Vanguard will NOT cancel any transaction
once it has been initiated and a confirmation number
has been assigned (if applicable).
EMERGENCY CIRCUMSTANCES. Vanguard funds can postpone
payment of redemption proceeds for up to seven
calendar days at any time. In addition, Vanguard
funds can suspend redemptions and/or postpone
payments of redemption proceeds at times when the New
York Stock Exchange is closed or during emergency
circumstances, as determined by the U.S. Securities
and Exchange Commission.
OTHER RULES YOU SHOULD KNOW
TELEPHONE TRANSACTIONS AUTOMATIC. In setting up your account, we'll
automatically enable you to do business with us by
regular telephone, unless you instruct us otherwise
in writing.
TELE-ACCOUNT (TM). To conduct account transactions
through Vanguard's automated telephone service,
you must first obtain a personal identification
number (PIN). Call Tele- Account to obtain a PIN,
and allow seven days before using this service.
PROOF OF A CALLER'S AUTHORITY. We reserve the right
to refuse a telephone request if the caller is unable
to provide the following information exactly as
registered on the account:
o Ten-digit account number.
o Complete owner name and address.
o Primary Social Security or employer identification
number.
o Personal Identification Number (PIN), if
applicable.
<PAGE>
49
SUBJECT TO REVISION. We reserve the right to revise
or terminate Vanguard's telephone transaction service
at any time, without notice.
SOME VANGUARD FUNDS DO NOT PERMIT TELEPHONE
EXCHANGES. To discourage market-timing, Vanguard's
Stock Index Funds, Growth and Income Fund, and
Balanced Index Fund generally do not permit telephone
exchanges (in or out), except for IRAs and certain
other retirement accounts.
VANGUARD.COM REGISTRATION. You can use your personal computer to
review your account holdings, to sell or exchange
shares of most Vanguard funds, and to perform other
transactions. To establish this service, you can
register online.
SOME VANGUARD FUNDS DO NOT PERMIT ONLINE EXCHANGES.
To discourage market-timing, Vanguard's Stock Index
funds, Growth and Income Fund, and Balanced
Index Fund do not permit online exchanges (in or
out), except for IRAs and certain other retirement
accounts.
WRITTEN INSTRUCTIONS "GOOD ORDER" REQUIRED. We reserve the right to reject
any written transaction instructions that are not in
"good order." This means that your instructions must
include:
o The fund name and account number.
o The amount of the transaction (in dollars or
shares).
o Signatures of all owners exactly as registered on
the account.
o Signature guarantees, if required for the
type of transaction.
* *For instance, signature guarantees must be
provided by all registered account shareholders
when redemption proceeds are to be sent to a
different person or address.
RESPONSIBILITY FOR Vanguard will not be responsible for any account
FRAUD losses due to fraud, so long as we reasonably believe
that the person transacting on an account is
authorized to do so. Please take precautions to
protect yourself from fraud. Keep your account
information private and immediately review any
account state ments that we send to
you. Contact Vanguard immediately about any
transactions you believe to be unauthorized.
UNCASHED CHECKS Please cash your distribution or redemption checks
promptly. Vanguard will not pay interest on uncashed
checks.
<PAGE>
50
LIMITS ON ACCOUNT Because excessive account transactions can disrupt
ACTIVITY management of a fund and increase the fund's costs
for all shareholders, Vanguard limits account
activity as follows:
o You may make no more than two substantive "round
trips" through a non-money market fund during any
12-month period.
o Your round trips through a non-money market fund
must be at least 30 days apart.
o All funds may refuse share purchases at any time,
for any reason.
o Vanguard reserves the right to revise or terminate
the exchange privilege, limit the amount of an
exchange, or reject an exchange, at any time, for
any reason.
A "round trip" is a redemption from a fund followed
by a purchase back into the same 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.
UNUSUAL CIRCUMSTANCES If you experience difficulty contacting Vanguard
online, by telephone, or by Tele-Account, you can
send us your transaction request by regular or
express mail. See Contacting Vanguard for addresses.
INVESTING WITH VANGUARD You may purchase or sell Investor Shares of most
THROUGH OTHER FIRMS Vanguard funds through a financial intermediary,
such as a bank, broker, or investment adviser.
HOWEVER, ACCESS TO ADMIRAL SHARES THROUGH A FINANCIAL
INTERMEDIARY IS RESTRICTED. PLEASE CONSULT YOUR
FINANCIAL INTERMEDIARY TO DETERMINE WHETHER ADMIRAL
SHARES ARE AVAILABLE THROUGH THAT FIRM.
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.
LOW BALANCE ACCOUNTS All Vanguard funds reserve the right to close any
nonretirement account whose balance falls below the
minimum initial investment. Vanguard deducts a $10
fee in June from each nonretirement account whose
balance at that time is below $2,500 ($500 for
Vanguard STAR Fund). The fee is waived if your total
Vanguard account assets are $50,000 or more.
<PAGE>
51
FUND AND ACCOUNT UPDATES
PORTFOLIO SUMMARIES We will send you quarterly portfolio summaries to
help you keep track of your accounts throughout the
year. Each summary shows the market value of your
account at the close of the statement period,
as well as all distributions, purchases,
sales, and exchanges for the current calendar year.
AVERAGE COST REVIEW For most taxable accounts, average cost review
STATEMENTS statements will accompany the quarterly portfolio
summaries. These statements show the average cost
of shares that you redeemed during the current
calendar year, using the average cost single
category method.
CONFIRMATION Each time you buy, sell, or exchange shares, we will
STATEMENTS send you a statement confirming the trade date and
amount of your transaction.
TAX STATEMENTS We will send you annual tax statements to assist in
preparing your income tax returns. These
statements, which are gener ally mailed in
January, will report the previous year's dividend
and capital gains distributions, proceeds from the
sale of shares, and distributions from IRAs or
other retirement plans.
REPORTS You will receive financial reports about your funds
twice a year--in February and August. 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 advisers, and the fund's financial
statements, which include a listing of the fund's
holdings. To keep the funds' costs as low as possible
(so that you and other shareholders can keep more of
the funds' investment earnings), Vanguard attempts to
eliminate duplicate mailings to the same address.
When we find that two or more 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, however, you may notify our
Client Services Department.
CONTACTING VANGUARD
ONLINE VANGUARD.COM
o Your best source of Vanguard news
o For fund, account, and service information
o For most account transactions
o For literature requests
o 24 hours per day, 7 days per week
<PAGE>
52
VANGUARD TELE-ACCOUNT(R) o For automated fund and account information
1-800-662-6273 o For redemptions by check, exchange, or wire
(ON-BOARD) o Toll-free, 24 hours per day, 7 days per week
INVESTOR INFORMATION o For fund and service information
1-800-662-7447 (SHIP) o For literature requests
(Text telephone at o Business hours only
1-800-952-3335)
CLIENT SERVICES o For account information
1-800-662-2739 (CREW) o For most account transactions
(Text telephone at o To arrange a wire transaction
1-800-749-7273) o Business hours only
ADMIRAL SERVICE CENTER o For Admiral account information
1-888-237-9949 o For most Admiral transactions
o Business hours only
INSTITUTIONAL DIVISION o For information and services for large
1-888-809-8102 institutional investors
o Business hours only
VANGUARD ADDRESSES REGULAR MAIL (INDIVIDUALS-CURRENT CLIENTS):
The Vanguard Group
P.O. Box 1110
Valley Forge, PA 19482-1110
REGULAR MAIL (INSTITUTIONS):
The Vanguard Group
P.O. Box 2900
Valley Forge, PA 19482-2900
REGULAR MAIL (GENERAL INQUIRIES):
The Vanguard Group
P.O. Box 2600
Valley Forge, PA 19482-2600
REGISTERED OR EXPRESS MAIL:
The Vanguard Group
455 Devon Park Drive
Wayne, PA 19087-1815
<PAGE>
53
FUND NUMBER Always use these fund numbers when contacting
Vanguard about the Funds:
Total Stock Market Index Fund--085 (Investor Shares)
or 585 (Admiral Shares)
500 Index Fund--040 (Investor Shares) or 540
(Admiral Shares)
Extended Market Index Fund--098 (Investor Shares)
or 598 (Admiral Shares)
Mid-Cap Index Fund--859 (Investor Shares only)
Small-Cap Index Fund--048 (Investor Shares) or 548
(Admiral Shares)
Value Index Fund--006 (Investor Shares) or 506
(Admiral Shares)
Small-Cap Value Index Fund--860 (Investor Shares
only)
Growth Index Fund--009 (Investor Shares) or 509
(Admiral Shares)
Small-Cap Growth Index--861 (Investor Shares only)
<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)
Net asset value per share is computed by dividing the net assets attributed to
each share class by the number of shares outstanding for that class.
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.
PRICE/EARNINGS (P/E) RATIO
The current share price of a stock, divided by its per-share earnings (profits)
from the past year. A stock selling for $20, with earnings of $2 per share, has
a price/earnings ratio of 10.
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 112000
<PAGE>
VANGUARD(R)
U.S. STOCK INDEX FUNDS
Investor Shares
Participant Prospectus
November 1, 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 period ended
June 30, 2000.
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.
[MEMBERS OF
THE VANGUARD GROUP LOGO]
<PAGE>
VANGUARD U.S. STOCK INDEX FUNDS
INVESTOR SHARES
Participant Prospectus
November 1, 2000
<TABLE>
<CAPTION>
<S> <C>
--------------------------------------------------------------------------------
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 Index Fund 35 INVESTMENT ADVISER
5 Vanguard 500 Index Fund 35 DIVIDENDS, CAPITAL GAINS, AND TAXES
8 Vanguard Extended Market Index Fund 36 SHARE PRICE
11 Vanguard Mid-Cap Index Fund 36 FINANCIAL HIGHLIGHTS
14 Vanguard Small-Cap Index Fund 42 INVESTING WITH VANGUARD
17 Vanguard Value Index Fund 43 ACCESSING FUND INFORMATION BY
COMPUTER
20 Vanguard Small-Cap Value Index Fund
GLOSSARY (inside back cover)
23 Vanguard Growth Index Fund
26 Vanguard Small-Cap Growth Index Fund
--------------------------------------------------------------------------------
</TABLE>
--------------------------------------------------------------------------------
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.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SHARE CLASSES
The Fund offers three separate classes of shares: Investor Shares, Admiral
Shares, and Institutional Shares. This prospectus offers the Fund's Investor
Shares and 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.
The Fund's separate share classes have different expenses; as a result,
their investment performances will vary. ALL REFERENCES IN THIS PROSPECTUS TO
FEES, EXPENSES, AND INVESTMENT PERFORMANCE RELATE SPECIFICALLY TO INVESTOR
SHARES, UNLESS OTHERWISE NOTED.
-------------------------------------------------------------------------------
<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 make up 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
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 make up 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 following bar chart and table 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
--------------------------------------------------------------------
SCALE -20% - 50% 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. The Fund's year-to-date return as of the calendar
quarter ended September 30, 2000, was -0.45%.
-------------------------------------------------------------------
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 NEWSPAPER ABREVIATION
DIVIDENDS AND CAPITAL GAINS TotSt
Dividends are distributed quarterly in March,
June, September, and December; capital gains, VANGUARD FUND NUMBER
if any, are 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
JUNE 30, 2000
$24.3 billion
--------------------------------------------------------------------------------
<PAGE>
5
FUND PROFILE--VANGUARD (R) 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 make up 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 following bar chart and table 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
--------------------------------------------------------------------
SCALE -20% - 50% 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%
--------------------------------------------------------------------
The Fund's year-to-date return as of the calendar quarter ended
September 30, 2000, was -1.35%.
-------------------------------------------------------------------
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 March, 500
June, September, and December; capital gains, if
any, are distributed annually in December VANGUARD FUND NUMBER
040
INVESTMENT ADVISER
The Vanguard Group, Valley Forge, Pa., CUSIP NUMBER
since inception 922908108
INCEPTION DATE TICKER SYMBOL
August 31, 1976 VFINX
NET ASSETS AS OF JUNE 30, 2000
$105.6 billion
--------------------------------------------------------------------------------
<PAGE>
8
FUND PROFILE--
VANGUARD(R) 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-sized 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 make up 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 from the overall
stock market.
PERFORMANCE/RISK INFORMATION
The following bar chart and table 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
--------------------------------------------------------------------
SCALE -20% - 50% 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. The Fund's year-to-date return as of the calendar
quarter ended September 30, 2000, was 3.95%.
-------------------------------------------------------------------
<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
JUNE 30, 2000
$6.1 billion
--------------------------------------------------------------------------------
<PAGE>
11
FUND PROFILE--VANGUARD (R) 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 make up 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 from the overall stock market.
PERFORMANCE/RISK INFORMATION
The following bar chart and table 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 RETURNS
--------------------------------------------------------------------
SCALE -20% - 50% 1999 15.32%
--------------------------------------------------------------------
The Fund's year-to-date return as of the calendar quarter ended
September 30, 2000, was 22.60%.
--------------------------------------------------------------------
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
JUNE 30, 2000
$1.1 billion
--------------------------------------------------------------------------------
<PAGE>
14
FUND PROFILE--VANGUARD (R) 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 made up 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
make up 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 from the overall stock market.
PERFORMANCE/RISK INFORMATION
The following bar chart and table 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
--------------------------------------------------------------------
SCALE -20% - 50% 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. The Fund's year-to-date return as of the calendar
quarter ended September 30, 2000, was 4.39%.
-------------------------------------------------------------------
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, as
restated to reflect expenses in the current fiscal year.
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: 0.24%
12b-1 Distribution Fee: None
Other Expenses: 0.03%
TOTAL ANNUAL FUND OPERATING EXPENSES: 0.27%
*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
-------------------------------------------------
$28 $87 $152 $343
-------------------------------------------------
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
JUNE 30, 2000
$4.6 billion
--------------------------------------------------------------------------------
<PAGE>
17
FUND PROFILE--VANGUARD(R) 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 make up 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 following bar chart and table 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
--------------------------------------------------------------------
SCALE -20% - 50% 1993 18.35%
1994 -0.73%
1995 36.94%
1996 21.86%
1997 29.77%
1998 14.64%
1999 12.57%
--------------------------------------------------------------------
The Fund's year-to-date return as of the calendar quarter ended
September 30, 2000, was 4.31%.
-------------------------------------------------------------------
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 NEWSPAPER ABBREVIATION
Dividends are distributed quarterly in March, Value
June, September, and December; capital gains, if
any, are distributed annually in December VANGUARD FUND NUMBER
006
INVESTMENT ADVISER
The Vanguard Group, Valley Forge, Pa., CUSIP NUMBER
since inception 922908405
INCEPTION DATE TICKER SYMBOL
November 2, 1992 VIVAX
NET ASSETS (ALL SHARE CLASSES) AS OF
JUNE 30, 2000
$4 billion
--------------------------------------------------------------------------------
<PAGE>
20
FUND PROFILE--
VANGUARD(R) 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 make up 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 from the overall stock market.
PERFORMANCE/RISK INFORMATION
The following bar chart and table 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 RETURNS
--------------------------------------------------------------------
SCALE -20% - 50% 1999 3.35%
--------------------------------------------------------------------
The Fund's year-to-date return as of the calendar quarter ended
September 30, 2000, was 13.29%.
-------------------------------------------------------------------
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).
<PAGE>
21
--------------------------------------------------------------------------------
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, as
restated to reflect expenses in the current fiscal year.
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: 0.21%
12b-1 Distribution Fee: None
Other Expenses: 0.06%
TOTAL ANNUAL FUND OPERATING EXPENSES: 0.27%
*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
-------------------------------------------------
$78 $136 $201 $392
-------------------------------------------------
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
JUNE 30, 2000
$279 million
--------------------------------------------------------------------------------
<PAGE>
23
FUND PROFILE--VANGUARD(R) 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 make up 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 following bar chart and table 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
--------------------------------------------------------------------
SCALE -20% - 50% 1993 1.53%
1994 2.89%
1995 38.06%
1996 23.74%
1997 36.34%
1998 42.21%
1999 28.76%
--------------------------------------------------------------------
The Fund's year-to-date return as of the calendar quarter ended
September 30, 2000, was -6.41%.
-------------------------------------------------------------------
<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 March, Growth
June, September, and December; capital gains, if
any, are distributed annually in December VANGUARD FUND NUMBER
009
INVESTMENT ADVISER
The Vanguard Group, Valley Forge, Pa., CUSIP NUMBER
since inception 922908504
INCEPTION DATE TICKER SYMBOL
November 2, 1992 VIGRX
NET ASSETS (ALL SHARE CLASSES) AS OF
JUNE 30, 2000
$17.2 billion
--------------------------------------------------------------------------------
<PAGE>
26
FUND PROFILE-- VANGUARD(R) 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 make up 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 from the overall stock market.
PERFORMANCE/RISK INFORMATION
The following bar chart and table 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 RETURNS
--------------------------------------------------------------------
SCALE -20% - 50% 1999 19.80%
--------------------------------------------------------------------
The return figure does not reflect the transaction fee on purchases.
The Fund's year-to-date return as of the calendar quarter ended
September 30, 2000, was 8.52%.
-------------------------------------------------------------------
<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, as
restated to reflect expenses in the current fiscal year.
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: 0.22%
12b-1 Distribution Fee: None
Other Expenses: 0.05%
TOTAL ANNUAL FUND OPERATING EXPENSES: 0.27%
*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
-------------------------------------------------
$78 $136 $201 $392
-------------------------------------------------
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 (ALL SHARE CLASSES) AS OF VISGX
JUNE 30, 2000
$386 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.
Compared with actively managed funds, most index funds have lower turnover
rates and lower capital gains distributions. However, from time to time, some
index funds may pay out higher-than-expected taxable distributions. That's
because index funds must adjust their holdings to reflect changes in their
target indexes. In some cases, such changes may force an index fund to sell
securities that have appreciated in value, and, thus, realize a capital gain
that must be distributed to shareholders. A security may move out of an index
for a number of reasons, including a merger or acquisition, or a substantial
change in the market capitalization of the issuer. Generally, these changes tend
to occur more frequently with small and medium-sized companies than they do with
large, well-established companies.
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
6,800 stocks as of June 30, 2000), 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.
<PAGE>
30
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 June 30, 2000.
-----------------------------------------------------
NUMBER OF NUMBER OF STOCKS
FUND STOCKS HELD IN TARGET INDEX
-----------------------------------------------------
Total Stock Market 3,440 6,875
500 516 500
Extended Market 3,008 6,386
Mid-Cap 405 400
Small-Cap 2,029 2,000
Value 401 391
Small-Cap Value 427 423
Growth 120 109
Small-Cap Growth 185 177
----------------------------------------------------
--------------------------------------------------------------------------------
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--
<PAGE>
31
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.
------------------------------------------------------
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 have at times
represented 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.
<PAGE>
32
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.
--------------------------------------------------------------------------------
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 $13 billion;
mid-cap funds as those holding stocks of companies with a market value between
$1.5 billion and $13 billion; and small-cap funds as those typically holding
stocks of companies with a market value of less than $1.5 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 June 30, 2000, the average turnover rate for passively
managed domestic equity index funds investing in common stocks was approximately
21%; for all domestic stock funds, the average turnover rate was approximately
90%, 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 make up 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.
PENDING LEGAL PROCEEDINGS
On June 8, 2000, Vanguard was sued by McGraw-Hill over Vanguard's right to use
certain Standard & Poor's (S&P) trademarks and other intellectual property owned
by McGraw-Hill. The suit currently is pending in the federal district court for
the Southern District of New York. The suit requests, among other things:
monetary damages; injunctive relief that would prevent Vanguard from using S&P
indexes and S&P trademarks in connection with Vanguard's potential offering of
an exchange-traded class of shares of the Funds; and declaratory relief that
McGraw-Hill is entitled to terminate the license agreement that grants Vanguard
the right to use certain S&P indexes and S&P trademarks. Vanguard believes that
it should prevail in these proceedings; however, there is no assurance that it
will do so.
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 $570 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.
<PAGE>
35
--------------------------------------------------------------------------------
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. As of June 30, 2000, Vanguard served as
adviser for about $388.1 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 six months ended June 30, 2000, 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
Quantitative Equity 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
<PAGE>
36
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.
--------------------------------------------------------------------------------
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). Net asset value per share is computed by dividing the net assets
attributed to each share class by the number of shares outstanding for that
class.
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."
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,
plus the six months ended June 30, 2000, 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 reports to shareholders. The
information for the six-month period ended June 30, 2000, has not been audited
by independent accountants. You may have the annual reports 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 the six months ended June 30, 2000, with a net asset value (price) of
$33.22 per share. During the period, the Fund earned $0.16 per share from
investment income (interest and dividends). There was a decline of $0.39 per
share from investments that had depreciated in value or that were sold for lower
prices than the Fund paid for them.
Shareholders received $0.21 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.
Investment losses ($0.23 per share) plus the distributions ($0.21 per share)
resulted in a share price of $32.78 at the end of the period. This was a
decrease of $0.44 per share (from $33.22 at the beginning of the period to
$32.78 at the end of the period). For a shareholder who reinvested the
distributions in the purchase of more shares, the total return from the Fund was
-0.72% for the period.
As of June 30, 2000, the Fund (investor shares only) had $19.8 billion in net
assets. For the six month period, its annualized expense ratio was 0.20% ($2.00
per $1,000 of net assets); and its annualized net investment income amounted to
1.00% of its average net assets. It sold and replaced securities valued at 8% of
its net assets.
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------
VANGUARD TOTAL STOCK MARKET INDEX FUND
INVESTOR SHARES
SIX MONTHS YEAR ENDED DECEMBER 31,
ENDED--------------------------------------------------------------
JUNE 30, 2000* 1999 1998 1997 1996 1995
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $33.22 $27.42 $22.64 $17.77 $15.04 $11.37
------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .16 .317 .336 .319 .29 .29
Net Realized and Unrealized Gain (Loss)
on Investments (.39) 6.133 4.898 5.143 2.84 3.75
-----------------------------------------------------------------------------
Total from Investment Operations (.23) 6.450 5.234 5.462 3.13 4.04
-----------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.15) (.330) (.329) (.322) (.29) (.28)
Distributions from Realized Capital Gains (.06) (.320) (.125) (.270) (.11) (.09)
-----------------------------------------------------------------------------
Total Distributions (.21) (.650) (.454) (.592) (.40) (.37)
------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $32.78 $33.22 $27.42 $22.64 $17.77 $15.04
========================================================================================================================
TOTAL RETURN** -0.72% 23.81% 23.26% 30.99% 20.96% 35.79%
========================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $19,829 $18,133 $9,308 $5,092 $3,531 $1,571
Ratio of Total Expenses to
Average Net Assets 0.20%*** 0.20% 0.20% 0.20% 0.22% 0.25%
Ratio of Net Investment Income to Average
Net Assets 1.00%*** 1.15% 1.44% 1.65% 1.86% 2.14%
Turnover Rate 8%***+ 3% 3% 2% 3% 3%
========================================================================================================================
</TABLE>
*Unaudited.
**Total return figures do not reflect the 0.25% transaction fee on
purchases through 1995.
***Annualized.
+The turnover rate excluding in-kind redemptions was 4%.
<PAGE>
38
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------
SIX MONTHS VANGUARD 500 INDEX FUND INVESTOR SHARES
ENDED YEAR ENDED DECEMBER 31,
JUNE 30, 2000* 1999 1998 1997 1996 1995
------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $135.33 $113.95 $ 90.07 $69.17 $57.60 $42.97
------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .65 1.370 1.33 1.31 1.28 1.22
Net Realized and Unrealized Gain Loss)
on Investments (1.21) 22.415 24.30 21.50 11.82 14.76
-----------------------------------------------------------------------------
Total from Investment Operations (.56) 23.785 25.63 22.81 13.10 15.98
-----------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.61) (1.410) (1.33) (1.32) (1.28) (1.22)
Distributions from Realized Capital Gains -- (.995) (.42) (.59) (.25) (.13)
-----------------------------------------------------------------------------
Total Distributions (.61) (2.405) (1.75) (1.91) (1.53) (1.35)
------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $134.16 $135.33 $113.95 $90.07 $69.17 $57.60
========================================================================================================================
TOTAL RETURN -0.42% 21.07% 28.62% 33.19% 22.88% 37.45%
========================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $105,583 $104,652 $74,229 $49,358 $30,332 $17,372
Ratio of Total Expenses to
Average Net Assets 0.18%** 0.18% 0.18% 0.19% 0.20% 0.20%
Ratio of Net Investment Income to
Average Net Assets .97%** 1.13% 1.35% 1.66% 2.04% 2.38%
Turnover Rate*** 9%** 6% 6% 5% 5% 4%
------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Unaudited.
**Annualized.
***Turnover rates excluding in-kind redemptions were 7%, 3%, 3%, 3%, 2%, and 2%,
respectively.
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------
VANGUARD EXTENDED MARKET INDEX FUND
INVESTOR SHARES
SIX MONTHS YEAR ENDED DECEMBER 31,
ENDED---------------------------------------------------------------
JUNE 30, 2000* 1999 1998 1997 1996 1995
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $37.07 $30.63 $30.76 $26.20 $24.07 $18.52
-------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .143 .297 .388 .351 .34 .30
Net Realized and Unrealized Gain (Loss) .077 10.101 2.025 6.479 3.85 5.95
on Investments
----------------------------------------------------------------------------
Total from Investment Operations .220 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 (1.110) (3.640) (2.170) (1.910) (1.72) (.40)
----------------------------------------------------------------------------
Total Distributions (1.110) (3.958) (2.543) (2.270) (2.06) (.70)
-------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $36.18 $37.07 $30.63 $30.76 $26.20 $24.07
=========================================================================================================================
TOTAL RETURN** 0.16% 36.22% 8.32% 26.73% 17.65% 33.80%
=========================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $5,028 $4,221 $2,939 $2,723 $2,099 $1,523
Ratio of Total Expenses to
Average Net Assets 0.25%*** 0.25% 0.23% 0.23 0.25% 0.25%
Ratio of Net Investment Income to
Average Net Assets .82%*** 1.04% 1.21% 1.30% 1.42% 1.51%
Turnover Rate 30%*** 26% 27% 15% 22% 15%
=========================================================================================================================
</TABLE>
*Unaudited.
**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).
***Annualized.
<PAGE>
39
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------
VANGUARD MID-CAP INDEX FUND
INVESTOR SHARES
SIX MONTHS ENDED YEAR ENDED APR. 20** TO
JUNE 30, 2000* DEC. 31, 1999 DEC. 31, 1998
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $11.30 $10.79 $10.00
-------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .051 .073 .053
Net Realized and Unrealized Gain (Loss)on Investments 1.009 1.448 .840
-----------------------------------------------------------
Total from Investment Operations 1.060 1.521 .893
-----------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income -- (.076) (.053)
Distributions from Realized Capital Gains (0.150) (.935) (.050)
-----------------------------------------------------------
Total Distributions (0.150) (1.011) (.103)
-------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $12.21 $11.30 $10.79
-------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN*** 9.34% 15.32% 8.55%
=========================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $905 $605 $206
Ratio of Total Expenses to Average Net Assets 0.25%+ 0.25% 0.25%+
Ratio of Net Investment Income to Average Net Assets 0.96%+ 0.99% 1.19%+
Turnover Rate 59%+ 38% 44%
=========================================================================================================================
</TABLE>
*Unaudited.
**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>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------
VANGUARD SMALL-CAP INDEX FUND
INVESTOR SHARES
SIX MONTHS YEAR ENDED DECEMBER 31,
ENDED---------------------------------------------------------------
JUNE 30, 2000* 1999 1998 1997 1996 1995
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $23.60 $21.20 $23.75 $20.23 $18.61 $14.99
-------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .119 .256 .311 .277 .26 .24
Net Realized and Unrealized Gain (Loss) .726 4.491 (1.007) 4.632 3.07 4.06
on Investments ----------------------------------------------------------------------------
Total from Investment Operations .845 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 (.215) (2.080) (1.550) (1.115) (1.44) (.45)
----------------------------------------------------------------------------
Total Distributions (.215) (2.347) (1.854) (1.389) (1.71) (.68)
-------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $24.23 $23.60 $21.20 $23.75 $20.23 $18.61
=========================================================================================================================
TOTAL RETURN** 3.50% 23.13% -2.61% 24.59% 18.12% 28.74%
=========================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $4,096 $3,553 $2,768 $2,652 $1,713 $971
Ratio of Total Expenses to
Average Net Assets 0.27%*** 0.25% 0.24% 0.23% 0.25% 0.25%
Ratio of Net Investment Income to
Average Net Assets 1.03%*** 1.25% 1.39% 1.38% 1.51% 1.58%
Turnover Rate 70%*** 42% 35% 29% 28% 28%
=========================================================================================================================
</TABLE>
*Unaudited.
**Total return figures do not reflect transaction fees on purchases
(0.5% from 1996 through March 31, 2000; 1.0% from 1995 through 1996).
***Annualized.
<PAGE>
40
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------
VANGUARD VALUE INDEX FUND
INVESTOR SHARES
YEAR ENDED DECEMBER 31,
SIX MONTHS ENDED---------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $22.89 $22.51 $20.85 $17.02 $14.79 $11.12
-------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .18 .355 .366 .38 .37 .41
Net Realized and Unrealized Gain (Loss)
on Investments (1.10) 2.342 2.647 4.57 2.81 3.66
----------------------------------------------------------------------------
Total from Investment Operations (.92) 2.697 3.013 4.95 3.18 4.07
----------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.17) (.362) (.363) (.37) (.38) (.40)
Distributions from Realized Capital Gains (.41) (1.955) (.990) (.75) (.57) --
----------------------------------------------------------------------------
Total Distributions (.58) (2.317) (1.353) (1.12) (.95) (.40)
-------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $21.39 $22.89 $22.51 $20.85 $17.02 $14.79
=========================================================================================================================
TOTAL RETURN -4.12% 12.57% 14.64% 29.77% 21.86% 36.94%
=========================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $3,330 $3,378 $2,421 $1,796 $1,016 $496
Ratio of Total Expenses to Average Net Assets 0.22%** 0.22% 0.22% 0.20% 0.20% 0.20%
Ratio of Net Investment Income to Average
Net Assets 1.63%** 1.59% 1.72% 2.05 2.54% 3.06%
Turnover Rate 32%** 41% 33% 25% 29% 27%
=========================================================================================================================
</TABLE>
*Unaudited.
**Annualized.
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------
VANGUARD SMALL-CAP VALUE INDEX FUND
INVESTOR SHARES
SIX MONTHS ENDED YEAR ENDED APR. 20** TO
JUNE 30, 2000* DEC. 31, 1999 DEC. 31, 1998
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $8.45 $8.74 $10.00
-------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .034 .065 .045
Net Realized and Unrealized Gain (Loss)on Investments .396 .210 (1.250)
---------------------------------------------------------------
Total from Investment Operations .430 .275 (1.205)
---------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income -- (.070) (.055)
Distributions from Realized Capital Gains (0.250) (.495) --
--------------------------------------------------------------
Total Distributions (0.250) (.565) (.055)
-------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $8.63 $8.45 $ 8.74
=========================================================================================================================
TOTAL RETURN*** 5.13% 3.35% -12.47%
=========================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $229 $204 $113
Ratio of Total Expenses to Average Net Assets 0.27%+ 0.25% 0.25%
Ratio of Net Investment Income to Average Net Assets 0.95%+ 0.96% 1.13%+
Turnover Rate 73%+ 80% 53%
=========================================================================================================================
</TABLE>
*Unaudited.
**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.
<PAGE>
41
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------
VANGUARD GROWTH INDEX FUND
INVESTOR SHARES
SIX MONTHS YEAR ENDED DECEMBER 31,
ENDED---------------------------------------------------------------
JUNE 30, 2000* 1999 1998 1997 1996 1995
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $39.43 $31.67 $22.53 $16.90 $13.97 $10.28
-------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .07 .207 .230 .23 .22 .21
Net Realized and Unrealized Gain (Loss)
on Investments .94 8.821 9.244 5.88 3.07 3.68
----------------------------------------------------------------------------
Total from Investment Operations 1.01 9.028 9.474 6.11 3.29 3.89
----------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.07) (.228) (.219) (.23) (.22) (.20)
Distributions from Realized Capital Gains -- (1.040) (.115) (.25) (.14) --
----------------------------------------------------------------------------
Total Distributions (.07) (1.268) (.334) (.48) (.36) (.20)
-------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $40.37 $39.43 $31.67 $22.53 $16.90 $13.97
=========================================================================================================================
TOTAL RETURN 2.56% 28.76% 42.21% 36.34% 23.74% 38.06%
=========================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $16,476 $15,232 $6,644 $2,365 $787 $271
Ratio of Total Expenses to
Average Net Assets 0.22%** 0.22% 0.22% 0.20% 0.20% 0.20%
Ratio of Net Investment Income to
Average Net Assets 0.34%** 0.64% 0.92% 1.19% 1.57% 1.71%
Turnover Rate 27%** 33% 29% 26% 29% 24%
=========================================================================================================================
</TABLE>
*Unaudited.
**Annualized.
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------
VANGUARD SMALL-CAP GROWTH INDEX FUND
INVESTOR SHARES
SIX MONTHS ENDED YEAR ENDED APR. 20** TO
JUNE 30, 2000* DEC. 31, 1999 DEC. 31, 1998
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $11.38 $ 9.53 $10.00
-------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .012 .025 .03
Net Realized and Unrealized Gain (Loss)on Investments 1.068 1.860 (.47)
-----------------------------------------------------------
Total from Investment Operations 1.080 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 $12.46 $11.38 $ 9.53
=========================================================================================================================
TOTAL RETURN*** 9.49% 19.80% -4.77%
=========================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $359 $167 $90
Ratio of Total Expenses to Average Net Assets 0.27%+ 0.25% 0.25%+
Ratio of Net Investment Income to Average Net Assets 0.12%+ 0.33% 0.63%+
Turnover Rate 103%+ 82% 77%
=========================================================================================================================
</TABLE>
*Unaudited.
**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.
"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. Note: McGraw-Hill has sued Vanguard over Vanguard's right
to use certain S&P Indexes. See page 34.
<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)
Net asset value per share is computed by dividing the net assets attributed to
each share class by the number of shares outstanding for that class.
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.
PRICE/EARNINGS (P/E) RATIO
The current share price of a stock, divided by its per-share earnings (profits)
from the past year. A stock selling for $20, with earnings of $2 per share, has
a price/earnings ratio of 10.
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) LOGO]
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: 811-26521
(C) 2000 The Vanguard Group, Inc.
All rights reserved.
Vanguard Marketing Corporation,
Distributor.
I040N 112000
<PAGE>
VANGUARD(R)
U.S. STOCK INDEX
FUNDS
Institutional Shares
Prospectus
November 1, 2000
VANGUARD INSTITUTIONAL
INDEX FUND
VANGUARD TOTAL STOCK
MARKET INDEX FUND
VANGUARD EXTENDED
MARKET INDEX FUND
VANGUARD MID-CAP
INDEX FUND
VANGUARD SMALL-CAP
INDEX FUND
VANGUARD VALUE
INDEX FUND
VANGUARD SMALL-CAP
VALUE INDEX FUND
VANGUARD GROWTH
INDEX FUND
VANGUARD SMALL-CAP
GROWTH INDEX FUND
This prospectus contains
financial data for the Funds
through the period ended
June 30, 2000.
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.
[THE VANGUARD GROUP LOGO]
<PAGE>
VANGUARD U.S. STOCK INDEX FUNDS
INSTITUTIONAL SHARES
Prospectus
November 1, 2000
--------------------------------------------------------------------------------
CONTENTS
1 FUND PROFILES 33 INVESTMENT ADVISER
1 Vanguard Institutional Index Fund 34 DIVIDENDS, CAPITAL GAINS, AND TAXES
4 Vanguard Total Stock Market Index Fund 36 SHARE PRICE
7 Vanguard Extended Market Index Fund 36 FINANCIAL HIGHLIGHTS
10 Vanguard Mid-Cap Index Fund 43 INVESTING WITH VANGUARD
13 Vanguard Small-Cap Index Fund 43 Buying Shares
16 Vanguard Value Index Fund 45 Redeeming Shares
19 Vanguard Small-Cap Value Index Fund 47 Other Rules You Should Know
22 Vanguard Growth Index Fund 49 Fund and Account Updates
25 Vanguard Small-Cap Growth Index Fund 50 Contacting Vanguard
28 MORE ON THE FUNDS GLOSSARY (inside back cover)
33 THE FUNDS AND VANGUARD
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
WHY READING THIS PROSPECTUS IS IMPORTANT
This prospectus explains the objectives, risks, and strategies of certain
Vanguard 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.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SHARE CLASSES
Each of the Vanguard U.S. Stock Index Funds offers two or three separate classes
of shares. This prospectus offers Institutional Shares for all of the Funds as
well as Institutional Plus Shares for Vanguard Institutional Index Fund.
Institutional Shares have an investment minimum of $10 million and generally are
not available through financial intermediaries or retirement plans receiving
special administrative services from Vanguard. For Institutional Plus Shares,
the investment minimum is $200 million.
Please call Vanguard at 1-800-. to obtain a separate prospectus that offers
Investor Shares for all of the Vanguard Stock Index Funds (excluding Vanguard
Institutional Index Fund) as well as Admiral Shares for six of these Funds (500
Index Fund, Total Stock Market Index Fund, Extended Market Index Fund, Growth
Index Fund, Value Index Fund, and Small-Cap Index Fund). Investor Shares and
Admiral Shares have investment minimums of $3,000 ($1,000 for IRAs) and
$250,000, respectively.
The Funds' separate share classes have different expenses; as a result,
their investment performances will vary. ALL REFERENCES IN THIS PROSPECTUS TO
FEES, EXPENSES AND INVESTMENT PERFORMANCE RELATE SPECIFICALLY TO INSTITUTIONAL
SHARES, UNLESS OTHERWISE NOTED.
-------------------------------------------------------------------------------
<PAGE>
1
FUND PROFILE-- VANGUARD(R) INSTITUTIONAL 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 make up 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 following bar chart and table provide an indication of the risk of investing
in the Fund. The bar chart shows the performance of the Fund's Institutional
Shares 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 (for Institutional Shares) and for one calendar year and since
inception (for Institutional Plus Shares) 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-INSTITUTIONAL SHARES
----------------------------------------------------
SCALE -20% -50%
1991 30.34%
1992 7.54%
1993 10.02%
1994 1.31%
1995 37.60%
1996 23.06%
1997 33.36%
1998 28.79%
1999 21.17%
----------------------------------------------------
The Fund's year-to-date return as of the calendar
quarter ended September 30, 2000 was -1.27%.
----------------------------------------------------
During the period shown in the bar chart, the highest return for a calendar
quarter was 14.99% (quarter ended December 31, 1999) and the lowest return for a
quarter was -6.23% (quarter ended September 30, 1999).
<PAGE>
2
--------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS FOR YEARS ENDED DECEMBER 31, 1999
--------------------------------------------------------------------------------
SINCE
1 YEAR 5 YEARS INCEPTION*
--------------------------------------------------------------------------------
Vanguard Institutional Index Fund
Institutional Shares 21.17% 28.65% 19.10%
S&P 500 Index 21.04 28.56 19.09
--------------------------------------------------------------------------------
*July 31, 1990.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS FOR YEARS ENDED DECEMBER 31, 1999
--------------------------------------------------------------------------------
1 YEAR SINCE INCEPTION*
--------------------------------------------------------------------------------
Vanguard Institutional Index Fund
Institutional Plus Shares 21.21% 23.08%
S&P 500 Index 21.04 22.90
--------------------------------------------------------------------------------
*July 7, 1997.
--------------------------------------------------------------------------------
FEES AND EXPENSES
The following table describes the fees and expenses you may pay if you buy and
hold Institutional Shares or Institutional Plus 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.
<TABLE>
<CAPTION>
<S> <C> <C>
INSTITUTIONAL INSTITUTIONAL
SHARES PLUS SHARES
------------------- ----------------
SHAREHOLDER FEES (fees paid directly from your investment)
Sales Charge (Load) Imposed on None None
Purchases:
Transaction Fee on Purchases: None* None*
Sales Charge (Load) Imposed on Reinvested Dividends: None None
Redemption Fee: None None
Exchange Fee: None None
ANNUAL FUND OPERATING EXPENSES (expenses deducted from the Fund's assets)
Management Expenses: 0.06% 0.025%
12b-1 Distribution Fee: None None
Other Expenses: 0% 0%
TOTAL ANNUAL FUND OPERATING EXPENSES: 0.06% 0.025%
</TABLE>
*The Fund reserves the right to deduct a transaction fee from future purchases
of shares.
<PAGE>
3
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
-------------------------------------------------------------------
Institutional Shares $6 $19 $34 $77
Institutional Plus Shares $3 $8 $14 $32
-------------------------------------------------------------------
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.
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------
<S> <C>
ADDITIONAL INFORMATION
DIVIDENDS AND CAPITAL GAINS NEWSPAPER ABBREVIATION
Dividends are distributed quarterly in March, Institutional Shares--InstIdx
June, September, and December; capital gains, Institutional Plus Shares--InstPlus
if any, are distributed annually in December
VANGUARD FUND NUMBER
INVESTMENT ADVISER Institutional Shares--094
The Vanguard Group, Valley Forge, Pa., Institutional Plus Shares--854
since inception
CUSIP NUMBER
INCEPTION DATE Institutional Shares--922040100
Institutional Shares--July 31, 1990 Institutional Plus--Shares--922040209
Institutional Plus Shares--July 7, 1997
TICKER SYMBOL
NET ASSETS AS OF JUNE 30, 2000 Institutional Shares--VINIX
Institutional Shares--$29.6 billion Institutional Plus Shares--VIIIX
Institutional Plus Shares--$7.3 billion
---------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
4
FUND PROFILE--VANGUARD(R) TOTAL STOCK MARKET
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 make up 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 following bar chart and table provide an indication of the risk of investing
in the Fund. The bar chart shows the Fund's performance in each calendar year
since inception of the Institutional class of shares. The table shows how the
Fund's average annual total returns for one calendar 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 RETURNS-INSTITUTIONAL SHARES
----------------------------------------------------
SCALE -20% -50%
1998 23.37%
1999 23.93%
----------------------------------------------------
The Fund's year-to-date return as of the calendar
quarter ended September 30, 2000 was -0.38%.
----------------------------------------------------
During the period shown in the bar chart, the highest return for a calendar
quarter was 21.55% (quarter ended December 31, 1998) and the lowest return for a
quarter was -12.05% (quarter ended September 30, 1998).
--------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS FOR YEARS ENDED DECEMBER 31, 1999
--------------------------------------------------------------------------------
1 YEAR SINCE INCEPTION*
--------------------------------------------------------------------------------
Vanguard Total Stock Market Index Fund 23.93% 22.64%
Wilshire 5000 Index 23.77 22.69
--------------------------------------------------------------------------------
*July 7, 1997.
--------------------------------------------------------------------------------
<PAGE>
5
FEES AND EXPENSES
The following table describes the fees and expenses you may pay if you buy and
hold Institutional 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: 0.08%
12b-1 Distribution Fee: None
Other Expenses: 0.02%
TOTAL ANNUAL FUND OPERATING EXPENSES: 0.10%
*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
-------------------------------------------------
$10 $32 $56 $128
-------------------------------------------------
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>
6
--------------------------------------------------------------------------------
ADDITIONAL INFORMATION
DIVIDENDS AND CAPITAL GAINS NEWSPAPER ABBREVIATION
Dividends are distributed quarterly in March, TotStIst
June, September, and December; capital gains, if
any, are distributed annually in December VANGUARD FUND NUMBER
855
INVESTMENT ADVISER
The Vanguard Group, Valley Forge, Pa., CUSIP NUMBER
since inception 922908801
INCEPTION DATE TICKER SYMBOL
July 7, 1997 VITSX
NET ASSETS (ALL SHARE CLASSES) AS OF
JUNE 30, 2000
$24.3 billion
--------------------------------------------------------------------------------
<PAGE>
7
FUND PROFILE-- VANGUARD(R) 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-sized 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 make up 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 from the overall
stock market.
PERFORMANCE/RISK INFORMATION
The following bar chart and table provide an indication of the risk of investing
in the Fund. The bar chart shows the Fund's performance in each calendar year
since inception of the Institutional class of shares. The table shows how the
Fund's average annual total returns for one calendar 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 RETURNS-INSTITUTIONAL SHARES
----------------------------------------------------
SCALE -20% -50%
1998 8.45%
1999 36.45%
----------------------------------------------------
Return figures do not reflect the transaction fee on
purchases through March 31, 2000. The Fund's year-to-
date return as of the calendar quarter ended September
30, 2000 was 4.03%.
----------------------------------------------------
<PAGE>
8
During the period shown in the bar chart, the highest return for a calendar
quarter was 29.63% (quarter ended December 31, 1999) and the lowest return for a
quarter was -18.66% (quarter ended September 30, 1998).
--------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS FOR YEARS ENDED DECEMBER 31, 1999
--------------------------------------------------------------------------------
1 YEAR SINCE INCEPTION*
--------------------------------------------------------------------------------
Vanguard Extended Market Index Fund 36.45% 22.47%
Institutional Shares**
Wilshire 4500 Index 35.37 22.26
--------------------------------------------------------------------------------
*July 7, 1997.
**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 Institutional 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: 0.07%
12b-1 Distribution Fee: None
Other Expenses: 0.03%
TOTAL ANNUAL FUND OPERATING EXPENSES: 0.10%
*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
-------------------------------------------------
$10 $32 $56 $128
-------------------------------------------------
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>
9
--------------------------------------------------------------------------------
ADDITIONAL INFORMATION
DIVIDENDS AND CAPITAL GAINS NEWSPAPER ABBREVIATION
Distributed annually in December ExtndIst
INVESTMENT ADVISER VANGUARD FUND NUMBER
The Vanguard Group, Valley Forge, Pa., 856
since inception
CUSIP NUMBER
INCEPTION DATE 922908884
July 7, 1997
TICKER SYMBOL
NET ASSETS (ALL SHARE CLASSES) AS OF VIEIX
JUNE 30, 2000
$6.1 billion
--------------------------------------------------------------------------------
<PAGE>
10
FUND PROFILE--VANGUARD(R) 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-sized U.S. companies. The Fund attempts to replicate the target index by
investing all or substantially all of its assets in the stocks that make up 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 from the overall stock market.
PERFORMANCE/RISK INFORMATION
The following bar chart and table 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 inception of the Institutional class of shares. 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 RETURNS-INSTITUTIONAL SHARES
----------------------------------------------------
SCALE -20% -50%
1999 15.41%
----------------------------------------------------
The Fund's year-to-date return as of the calendar quarter
ended September 30, 2000 was 22.77%.
----------------------------------------------------
During the period shown in the bar chart, the highest return for a calendar
quarter was 17.26% (quarter ended December 31, 1999) and the lowest return for a
quarter was -8.20% (quarter ended September 30, 1999).
<PAGE>
11
--------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS FOR YEARS ENDED DECEMBER 31, 1999
--------------------------------------------------------------------------------
1 YEAR SINCE INCEPTION*
--------------------------------------------------------------------------------
Vanguard Mid-Cap Index Fund Institutional Shares 15.41% 15.03%
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 Institutional 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: 0.10%
12b-1 Distribution Fee: None
Other Expenses: 0.02%
TOTAL ANNUAL FUND OPERATING EXPENSES: 0.12%
*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
-------------------------------------------------
$12 $39 $68 $154
-------------------------------------------------
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>
12
--------------------------------------------------------------------------------
ADDITIONAL INFORMATION
DIVIDENDS AND CAPITAL GAINS NEWSPAPER ABBREVIATION
Distributed annually in December MidCpIst
INVESTMENT ADVISER VANGUARD FUND NUMBER
The Vanguard Group, Valley Forge, Pa., 864
since inception
CUSIP NUMBER
INCEPTION DATE 922908835
May 21, 1998
TICKER SYMBOL
NET ASSETS (ALL SHARE CLASSES) AS OF VMCIX
JUNE 30, 2000
$1.1 billion
--------------------------------------------------------------------------------
<PAGE>
13
FUND PROFILE--VANGUARD(R) 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 made up 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
make up 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 from the overall stock market.
PERFORMANCE/RISK INFORMATION
The following bar chart and table provide an indication of the risk of investing
in the Fund. The bar chart shows the Fund's performance in each calendar year
since inception of the Institutional class of shares. The table shows how the
Fund's average annual total returns for one calendar 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 RETURNS-INSTITUTIONAL SHARES
----------------------------------------------------
SCALE -20% -50%
1998 -2.50%
1999 23.33%
----------------------------------------------------
Return figures do not reflect the transaction fee on
purchases through March 31, 2000. The Fund's year-to-
date return as of the calendar quarter ended September
30, 2000 was 4.48%.
----------------------------------------------------
During the period shown in the bar chart, the highest return for a calendar
quarter was 18.63% (quarter ended December 31, 1999) and the lowest return for a
quarter was -20.12% (quarter ended September 30, 1998).
<PAGE>
14
--------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS FOR YEARS ENDED DECEMBER 31, 1999
--------------------------------------------------------------------------------
1 YEAR SINCE INCEPTION*
--------------------------------------------------------------------------------
Vanguard Small-Cap Index Fund 23.33% 12.49%
Institutional Shares**
Russell 2000 Index 21.26 11.58
--------------------------------------------------------------------------------
*July 7, 1997.
**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 Institutional 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, as restated to reflect expenses in the current fiscal year.
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: 0.09%
12b-1 Distribution Fee: None
Other Expenses: 0.04%
TOTAL ANNUAL FUND OPERATING EXPENSES: 0.13%
*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
-------------------------------------------------
$13 $42 $73 $166
-------------------------------------------------
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>
15
--------------------------------------------------------------------------------
ADDITIONAL INFORMATION
DIVIDENDS AND CAPITAL GAINS NEWSPAPER ABBREVIATION
Distributed annually in December SmCapIst
INVESTMENT ADVISER VANGUARD FUND NUMBER
The Vanguard Group, Valley Forge, Pa., 857
since inception
CUSIP NUMBER
INCEPTION DATE 922908876
July 7, 1997
TICKER SYMBOL
NET ASSETS (ALL SHARE CLASSES) AS OF VSCIX
JUNE 30, 2000
$4.6 billion
--------------------------------------------------------------------------------
<PAGE>
16
FUND PROFILE--VANGUARD(R) 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 make up 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 following bar chart and table 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 inception of the Institutional class of shares. The table shows how
the Fund's average annual total returns for one calendar 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 RETURNS-INSTITUTIONAL SHARES
----------------------------------------------------
SCALE -20% -50%
1999 12.67%
----------------------------------------------------
The Fund's year-to-date return as of the calendar quarter
ended September 30, 2000 was 4.39%.
----------------------------------------------------
During the period shown in the bar chart, the highest return for a calendar
quarter was 10.78% (quarter ended June 30, 1999) and the lowest return for a
quarter was -9.22% (quarter ended September 30, 1999).
<PAGE>
17
--------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS FOR YEARS ENDED DECEMBER 31, 1999
--------------------------------------------------------------------------------
1 YEAR SINCE INCEPTION*
--------------------------------------------------------------------------------
Vanguard Value Index Fund Institutional Shares 12.67% 8.79%
S&P 500/BARRA Value Index 12.72 8.78
--------------------------------------------------------------------------------
*July 2, 1998.
--------------------------------------------------------------------------------
FEES AND EXPENSES
The following table describes the fees and expenses you may pay if you buy and
hold Institutional 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: 0.10%
12b-1 Distribution Fee: None
Other Expenses: 0.02%
TOTAL ANNUAL FUND OPERATING EXPENSES: 0.12%
*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
-------------------------------------------------
$12 $39 $68 $154
-------------------------------------------------
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>
18
--------------------------------------------------------------------------------
ADDITIONAL INFORMATION
DIVIDENDS AND CAPITAL GAINS NEWSPAPER ABBREVIATION
Dividends are distributed quarterly in March, ValueIst
June, September, and December; capital gains, if
any, are distributed annually in December VANGUARD FUND NUMBER
867
INVESTMENT ADVISER
The Vanguard Group, Valley Forge, Pa., CUSIP NUMBER
since inception 922908850
INCEPTION DATE TICKER SYMBOL
July 2, 1998 VIVIX
NET ASSETS (ALL SHARE CLASSES) AS OF
JUNE 30, 2000
$4 billion
--------------------------------------------------------------------------------
<PAGE>
19
FUND PROFILE-- VANGUARD(R) 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 make up 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
from the overall stock market.
PERFORMANCE/RISK INFORMATION
The following bar chart and table provide an indication of the risk of investing
in the Fund. Because calendar-year performance information is not yet available
for the Fund's Institutional Shares, the information presented in the bar chart
and table reflects the performance of the Fund's Investor Shares (which are
offered through a separate prospectus). Performance information for the
Institutional Shares would be substantially similar, since both share classes
represent the same portfolio of securities; their returns differ only to the
extent that the expenses of the two classes differ.
The bar chart shows the performance of the Fund's Investor Shares in the
one full calendar year since inception of the Fund. The table shows how the
Fund's average annual total returns for one year and since inception (for the
Fund's Investor Shares) 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.
<PAGE>
20
----------------------------------------------------
ANNUAL TOTAL RETURNS-INVESTOR SHARES
----------------------------------------------------
SCALE -20% -50%
1999 3.35%
----------------------------------------------------
The return figure does not reflect the account maintenance
fee imposed on accounts with balances of less than $10,000
for Investor Shares or the transaction fee on purchases.
The Fund's year-to-date return as of the calendar quarter
ended September 30, 2000 was 13.29%.
----------------------------------------------------
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-
Investor Shares** 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 for Investor Shares 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 Institutional 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: 0.10%
12b-1 Distribution Fee: None
Other Expenses: 0.03%
TOTAL ANNUAL FUND OPERATING EXPENSES: 0.13%
*The transaction fee is deducted from all purchases (including exchanges
from other Vanguard funds), but not from reinvested dividends or capital
gains.
<PAGE>
21
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
-------------------------------------------------
$63 $92 $123 $216
-------------------------------------------------
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.
--------------------------------------------------------------------------------
ADDITIONAL INFORMATION
DIVIDENDS AND CAPITAL GAINS NEWSPAPER ABBREVIATION
Distributed annually in December SmValIst
INVESTMENT ADVISER VANGUARD FUND NUMBER
The Vanguard Group, Valley Forge, Pa., 865
since inception
CUSIP NUMBER
INCEPTION DATE 922908785
December 7, 1999
NET ASSETS (ALL SHARE CLASSES) AS OF
JUNE 30, 2000
$279 million
--------------------------------------------------------------------------------
<PAGE>
22
FUND PROFILE--VANGUARD(R) 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 make up 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 following bar chart and table 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 inception of the Institutional class of shares. The table shows how
the Fund's average annual total returns for one calendar 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 RETURNS-INSTITUTIONAL SHARES
----------------------------------------------------
SCALE -20% -50%
1999 28.91%
----------------------------------------------------
The Fund's year-to-date return as of the calendar quarter
ended September 30, 2000 was -6.36%.
----------------------------------------------------
<PAGE>
23
During the period shown in the bar chart, the highest return for a calendar
quarter was 20.21% (quarter ended December 31, 1999) and the lowest return for a
quarter was -3.52% (quarter ended September 30, 1999).
--------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS FOR YEARS ENDED DECEMBER 31, 1999
--------------------------------------------------------------------------------
1 YEAR SINCE INCEPTION*
--------------------------------------------------------------------------------
Vanguard Growth Index Fund Institutional Shares 28.91% 31.15%
S&P 500/BARRA Growth Index 28.25 30.61
--------------------------------------------------------------------------------
*May 14, 1998.
--------------------------------------------------------------------------------
FEES AND EXPENSES
The following table describes the fees and expenses you may pay if you buy and
hold Institutional 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: 0.10%
12b-1 Distribution Fee: None
Other Expenses: 0.02%
TOTAL ANNUAL FUND OPERATING EXPENSES: 0.12%
*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
-------------------------------------------------
$12 $39 $68 $154
-------------------------------------------------
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>
24
--------------------------------------------------------------------------------
ADDITIONAL INFORMATION
DIVIDENDS AND CAPITAL GAINS NEWSPAPER ABBREVIATION
Dividends are distributed quarterly in March, GrowthIst
June, September, and December; capital gains, if
any, are distributed annually in December VANGUARD FUND NUMBER
868
INVESTMENT ADVISER
The Vanguard Group, Valley Forge, Pa., CUSIP NUMBER
since inception 922908868
INCEPTION DATE TICKER SYMBOL
May 14, 1998 VIGIX
NET ASSETS (ALL SHARE CLASSES) AS OF
JUNE 30, 2000
$17.2 billion
--------------------------------------------------------------------------------
<PAGE>
25
FUND PROFILE-- VANGUARD(R) 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 make up 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 from the overall stock market.
PERFORMANCE/RISK INFORMATION
The following bar chart and table provide an indication of the risk of investing
in the Fund. Because calendar-year performance information is not yet available
for the Fund's Institutional Shares, the information presented in the bar chart
and table reflects the performance of the Fund's Investor Shares (which are
offered through a separate prospectus). Performance information for the
Institutional Shares would be substantially similar, since both share classes
represent the same portfolio of securities; their returns differ only to the
extent that the expenses of the two classes differ.
The bar chart shows the performance of the Fund's Investor Shares in the
one full calendar year since inception of the Fund. The table shows how the
Fund's average annual total returns for one year and since inception (for the
Fund's Investor Shares) 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.
<PAGE>
26
----------------------------------------------------
ANNUAL TOTAL RETURNS-INVESTOR SHARES
----------------------------------------------------
SCALE -20% -50%
1999 19.80%
----------------------------------------------------
The return figure does not reflect the account maintenance
fee imposed on accounts with balances of less than $10,000
for Investor Shares or the transaction fee on purchases.
The Fund's year-to-date return as of the calendar quarter
ended September 30, 2000 was 8.52%.
----------------------------------------------------
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-
Investor Shares** 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 for Investor Shares 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 Institutional Shares of the Fund. Because the Institutional shares of the
Fund have not had a full fiscal year of operating history, the expenses shown
under Annual Fund Operating Expenses are estimates.
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: 0.10%
12b-1 Distribution Fee: None
Other Expenses: 0.03%
TOTAL ANNUAL FUND OPERATING EXPENSES: 0.13%
*The transaction fee is deducted from all purchases (including exchanges
from other Vangaurd funds), but not from reinvested dividends or capital
gains.
<PAGE>
27
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
-------------------------------------------------
$63 $92 $123 $216
-------------------------------------------------
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.
--------------------------------------------------------------------------------
ADDITIONAL INFORMATION
DIVIDENDS AND CAPITAL GAINS NEWSPAPER ABBREVIATION
Distributed annually in December SmGthIst
INVESTMENT ADVISER VANGUARD FUND NUMBER
The Vanguard Group, Valley Forge, Pa., 866
since inception
CUSIP NUMBER
INCEPTION DATE 922908819
May 21, 1998
NET ASSETS (ALL SHARE CLASSES) AS OF
JUNE 30, 2000
$386 million
--------------------------------------------------------------------------------
<PAGE>
28
MORE ON THE FUNDS
The following sections discuss other important features of Vanguard
Institutional Index Fund and the Vanguard U.S. Stock Index Funds.
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 the
Institutional Index Fund) would invest about 5% of its assets in that company.
The Institutional Index Fund and the 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
6,800 stocks as of June 30, 2000), 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 June 30, 2000.
------------------------------------------------------
NUMBER OF NUMBER OF STOCKS
FUND STOCKS HELD IN TARGET INDEX
------------------------------------------------------
Institutional Index 514 500
Total Stock Market 3,440 6,875
Extended Market 3,008 6,386
Mid-Cap 405 400
Small-Cap 2,029 2,000
Value 401 391
Small-Cap Value 427 423
Growth 120 109
Small-Cap Growth 185 177
------------------------------------------------------
<PAGE>
29
--------------------------------------------------------------------------------
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 the Institutional 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.
------------------------------------------------------
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.
<PAGE>
30
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, the Institutional Index Fund and the U.S. Stock Index
Funds each hold the largest stocks in their target indexes in approximately the
same percentages as those stocks are represented in their indexes. 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, have at times represented 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.
--------------------------------------------------------------------------------
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 $13 billion;
mid-cap funds as those holding stocks of companies with a market value between
$1.5 billion and $13 billion; and small-cap funds as those typically holding
stocks of companies with a market value of less than $1.5 billion. Vanguard
periodically reassesses these classifications.
--------------------------------------------------------------------------------
<PAGE>
31
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 Institutional Index Fund and the U.S. Stock Index 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. The other Funds reserve the right to impose
such a fee on selected purchases.
- 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
<PAGE>
32
years (or since inception of the applicable share class, 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 June 30, 2000, the average turnover rate for passively
managed domestic equity index funds investing in common stocks was approximately
21%; for all domestic stock funds, the average turnover rate was approximately
90%, 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 make up 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.
<PAGE>
33
- To reduce the Fund's transaction costs or add value when these instruments
are favorably priced.
PENDING LEGAL PROCEEDINGS
On June 8, 2000, Vanguard was sued by McGraw-Hill over Vanguard's right to use
certain Standard & Poor's (S&P) trademarks and other intellectual property owned
by McGraw-Hill. The suit currently is pending in the federal district court for
the Southern District of New York. The suit requests, among other things:
monetary damages; injunctive relief that would prevent Vanguard from using S&P
indexes and S&P trademarks in connection with Vanguard's potential offering of
an exchange-traded class of shares of the Funds; and declaratory relief that
McGraw-Hill is entitled to terminate the license agreement that grants Vanguard
the right to use certain S&P indexes and S&P trademarks. Vanguard believes that
it should prevail in these proceedings; however, there is no assurance that it
will do so.
THE FUNDS AND VANGUARD
All Vanguard U.S. Stock Index Funds, except Vanguard Institutional Index Fund,
are members of The Vanguard Group, a family of more than 35 investment companies
with more than 100 funds holding assets worth more than $570 billion.* All of
the funds that are members of The Vanguard Group share in the expenses
associated with business operations, such as personnel, office space, equipment,
and advertising.
Vanguard also provides marketing services to the member 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.
*Vanguard Institutional Index Fund is not a member of The Vanguard Group, but is
administered by Vanguard and pays Vanguard a fee to provide management,
advisory, marketing, and other services.
--------------------------------------------------------------------------------
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. As of June 30, 2000, Vanguard served as
adviser for about $388.1 billion in assets.
Under the terms of a service and advisory agreement, Vanguard pays for all
of the Institutional Index Fund's expenses (except taxes and brokerage
commissions). In turn, the Fund pays Vanguard a monthly management fee based on
an annual rate of 0.06% of the average daily net assets of the Institutional
Shares and 0.025% of the average daily net
<PAGE>
34
assets of the Institutional Plus Shares. Vanguard manages the other Funds on an
at-cost basis, subject to the control of the Trustees and officers of the Funds.
For the six months ended June 30, 2000, the investment advisory expenses
for the Institutional Share classes of the U.S. Stock Index Funds 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 Quantitative Equity
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 Institutional Index Fund
(Institutional and Institutional Plus Shares) and the Total Stock Market, 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.
--------------------------------------------------------------------------------
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>
35
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.
- 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.
ANY CONVERSION BETWEEN CLASSES OF SHARES OF THE SAME FUND IS A NON-TAXABLE
EVENT. BY CONTRAST, A CONVERSION BETWEEN CLASSES OF SHARES OF DIFFERENT FUNDS IS
A TAXABLE EVENT.
--------------------------------------------------------------------------------
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.
--------------------------------------------------------------------------------
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.
<PAGE>
36
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.
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). Net asset value per share is computed by dividing the net assets
attributed to each share class by the number of shares outstanding for that
class.
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.".
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,
plus the six months ended June 30, 2000, 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
period 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 reports--along with the Funds' financial statements--is
included in the Institutional Index Fund's and the U.S. Stock Index Funds' most
recent annual reports to shareholders. The information for the six-month period
ended June 30, 2000, has not been audited by independent accountants. You may
have the annual reports for the Institutional Index Fund and the U.S. Stock
Index Funds sent to you without charge by contacting Vanguard.
<PAGE>
37
--------------------------------------------------------------------------------
PLAIN TALK ABOUT
HOW TO READ THE FINANCIAL HIGHLIGHTS TABLE
This explanation uses the Institutional Index Fund Institutional Shares as an
example. The Fund began the six months ended June 30, 2000 with a net asset
value (price) of $134.02 per share. During the period, the Fund earned $0.71 per
share from investment income (interest and dividends). There was a decline of
$1.20 per share from investments that had depreciated in value or that were sold
for lower prices than the Fund paid for them.
Shareholders received $0.68 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.
Investment losses ($0.49 per share) plus the distributions ($0.68 per share)
resulted in a share price of $132.85 at the end of the period. This was a
decrease of $1.17 per share (from $134.02 at the beginning of the period to
$132.85 at the end of the period). For a shareholder who reinvested the
distributions in the purchase of more shares, the total return from the Fund was
-0.37% for the period.
As of June 30, 2000, the Fund had $29.6 billion in net assets. For the six month
period, its annualized expense ratio was 0.06% ($0.60 per $1,000 of net assets);
and its annualized net investment income amounted to 1.10% of its average net
assets. It sold and replaced securities valued at 11% of its net assets.
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------------
VANGUARD INSTITUTIONAL INDEX FUND
INSTITUTIONAL SHARES
YEAR ENDED DECEMBER 31,
SIX MONTHS ENDED -------------------------------------------------------
JUNE 30, 2000* 1999 1998 1997 1996 1995
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $134.02 $112.85 $189.56 $68.86 $57.93 $43.22
---------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .71 1.501 1.429 1.391 1.38 1.28
Net Realized and Unrealized Gain
(Loss) on Investments (1.20) 22.143 24.177 21.415 11.90 14.86
-------------------------------------------------------------------------
Total from Investment Operations (.49) 23.644 25.606 22.806 13.28 16.14
-------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment
Income (.68) (1.514) (1.416) (1.391) (1.36) (1.27)
Distributions from Realized Capital Gains -- (.960) (.900) (.715) (.99) (.16)
-------------------------------------------------------------------------
Total Distributions (.68) (2.474) (2.316) (2.106) (2.35) (1.43)
---------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $132.85 $134.02 $112.85 $89.56 $68.86 $57.93
===========================================================================================================================
TOTAL RETURN -0.37% 21.17% 28.79% 33.36% 23.06% 37.60%
===========================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $29,644 $28,918 $22,338 $15,348 $11,426 $6,674
Ratio of Total Expenses to
Average Net Assets 0.06%** 0.06% 0.06% 0.06% 0.06% 0.06%
Ratio of Net Investment Income to
Average Net Assets 1.10%** 1.25% 1.46% 1.77% 2.18% 2.49%
Turnover Rate*** 11%** 14% 11% 7% 9% 4%
===========================================================================================================================
</TABLE>
*Unaudited.
**Annualized.
***Turnover rates excluding in-kind redemptions were 7%, 3%,7%, 6%, 9%, and 4%,
respectively.
<PAGE>
38
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
VANGUARD INSTITUTIONAL INDEX FUND
PLUS SHARES
YEAR ENDED DEC. 31,
SIX MONTHS ENDED --------------------- JULY 7** TO
JUNE 30, 2000* 1999 1998 DEC. 31, 1997
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $134.02 $112.85 $ 89.56 $84.91
-------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .734 1.542 1.464 .681
Net Realized and Unrealized Gain (Loss)
on Investments (1.192) 22.143 24.177 5.455
-----------------------------------------------------------------
Total from
Investment Operations (.458) 23.685 25.641 6.136
-----------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.702) (1.555) (1.451) (.866)
Distributions from Realized Capital Gains -- (.960) (.900) (.620)
-----------------------------------------------------------------
Total Distributions (.702) (2.515) (2.351) (1.486)
-------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $132.86 $134.02 $112.85 $89.56
===================================================================================================================
TOTAL RETURN -0.35% 21.21% 28.83% 7.29%
===================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $7,347 $6,861 $4,951 $3,488
Ratio of Total Expenses to Average Net Assets 0.025%*** 0.025% 0.025% 0.025%***
Ratio of Net Investment Income to
Average Net Assets 1.14%*** 1.29% 1.49% 1.72%***
Turnover Rate+ 11%*** 14% 11% 7%
===================================================================================================================
</TABLE>
*Unaudited.
**Inception.
***Annualized.
+Turnover rates excluding in-kind redemptions were 7%, 3%, 7%, and 6%,
respectively.
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
VANGUARD TOTAL STOCK MARKET INDEX FUND
INSTITUTIONAL SHARES
YEAR ENDED DEC. 31,
SIX MONTHS ENDED --------------------- JULY 7** TO
JUNE 30, 2000* 1999 1998 DEC. 31, 1997
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $33.22 $27.42 $22.64 $21.27
-------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .177 .344 .359 .172
Net Realized and Unrealized Gain (Loss)
on Investments (.382) 6.133 4.898 1.642
-----------------------------------------------------------------
Total from Investment Operations (.205) 6.477 5.257 1.814
-----------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.165) (.357) (.352) (.214)
Distributions from Realized Capital Gains (.060) (.320) (.125) (.230)
-------------------------------------------------------------
Total Distributions (.225) (.677) (.477) (.444)
-------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $32.79 $33.22 $27.42 $22.64
===================================================================================================================
TOTAL RETURN -0.64% 23.93% 23.37% 8.60%
===================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $4,505 $4,006 $2,445 $1,504
Ratio of Total Expenses to Average Net Assets 0.10%*** 0.10% 0.10% 0.10%***
Ratio of Net Investment Income to
Average Net Assets 1.10%*** 1.26% 1.53% 1.70%***
Turnover Rate 8%***+ 3% 3% 2%
===================================================================================================================
</TABLE>
*Unaudited.
**Inception.
***Annualized.
+The turnover rate excluding in-kind redemptions was 4%.
<PAGE>
39
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
VANGUARD EXTENDED MARKET INDEX FUND
INSTITUTIONAL SHARES
YEAR ENDED DEC. 31,
SIX MONTHS ENDED --------------------- JULY 7** TO
JUNE 30, 2000* 1999 1998 DEC. 31, 1997
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $37.09 $30.63 $30.76 $29.28
-------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .163 .363 .427 .200
Net Realized and Unrealized Gain (Loss)
on Investments .077 10.101 2.025 3.191
-----------------------------------------------------------------
Total from Investment Operations .240 10.464 2.452 3.391
-----------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income -- (.364) (.412) (.371)
Distributions from Realized Capital Gains (1.110) (3.640) (2.170) (1.540)
-----------------------------------------------------------------
Total Distributions (1.110) (4.004) (2.582) (1.911)
-------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $36.22 $37.09 $30.63 $30.76
===================================================================================================================
TOTAL RETURN*** 0.22% 36.45% 8.45% 11.82%
===================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $1,069 $870 $456 $415
Ratio of Total Expenses to Average Net Assets 0.10%+ 0.10% 0.10% 0.10%+
Ratio of Net Investment Income to Average
Net Assets 0.96%+ 1.18% 1.34% 1.43%+
Turnover Rate 30%+ 26% 27% 15%
===================================================================================================================
</TABLE>
*Unaudited.
**Inception.
***Total return figures do not reflect transaction fees on purchases (0.25% from
October 31, 1997 through March 31, 2000; 0.5% from inception through October 31,
1997).
+Annualized.
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
VANGUARD MID-CAP INDEX FUND
INSTITUTIONAL SHARES
SIX MONTHS ENDED YEAR ENDED MAY 20** TO
JUNE 30, 2000* DEC. 31, 1999 DEC. 31, 1998
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $11.30 $10.79 $10.03
-------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .061 .083 .055
Net Realized and Unrealized Gain (Loss)
on Investments 1.009 1.448 .814
-----------------------------------------------------------------
Total from Investment Operations 1.070 1.531 .869
-----------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income -- (.086) (.059)
Distributions from Realized Capital Gains (0.150) (.935) (.050)
-----------------------------------------------------------------
Total Distributions (0.150) (1.021) (.109)
-------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $12.22 $11.30 $10.79
===================================================================================================================
TOTAL RETURN*** 9.43% 15.41% 8.61%
===================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $239 $143 $39
Ratio of Total Expenses to Average Net Assets 0.12%+ 0.12% 0.12%+
Ratio of Net Investment Income to Average
Net Assets 1.08%+ 1.11% 1.30%+
Turnover Rate 59%+ 38% 44%
===================================================================================================================
</TABLE>
*Unaudited.
**Initial share purchase date. 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.
<PAGE>
40
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
VANGUARD SMALL-CAP INDEX FUND
INSTITUTIONAL SHARES
YEAR ENDED DEC. 31,
SIX MONTHS ENDED --------------------- JULY 7** TO
JUNE 30, 2000* 1999 1998 DEC. 31, 1997
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $23.61 $21.20 $23.75 $22.56
-------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .129 .295 .336 .158
Net Realized and Unrealized Gain (Loss)
on Investments .726 4.491 (1.007) 2.370
-----------------------------------------------------------------
Total from Investment Operations .855 4.786 (.671) 2.528
-----------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income -- (.296) (.329) (.288)
Distributions from Realized Capital Gains (.215) (2.080) (1.550) (1.050)
-----------------------------------------------------------------
Total Distributions (.215) (2.376) (1.879) (1.338)
-------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $24.25 $23.61 $21.20 $23.75
===================================================================================================================
TOTAL RETURN*** 3.54% 23.33% -2.50% 11.42%
===================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $492 $415 $264 $137
Ratio of Total Expenses to Average Net Assets 0.13%+ 0.12% 0.12% 0.12%+
Ratio of Net Investment Income to Average
Net Assets 1.17%+ 1.37% 1.53% 1.52%+
Turnover Rate 70%+ 42% 35% 29%
===================================================================================================================
</TABLE>
*Unaudited.
**Inception.
***Total return figures do not reflect the 0.5% transaction fee on purchases
(from inception through March 31, 2000).
+Annualized.
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
VANGUARD VALUE INDEX FUND
INSTITUTIONAL SHARES
SIX MONTHS ENDED YEAR ENDED JULY 2** TO
JUNE 30, 2000* DEC. 31, 1999 DEC. 31, 1998
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $22.89 $22.51 $23.22
-------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .19 .377 .196
Net Realized and Unrealized Gain (Loss)
on Investments (1.10) 2.342 (.060)
-----------------------------------------------------------------
Total from Investment Operations (.91) 2.719 .136
-----------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.18) (.384) (.236)
Distributions from Realized Capital Gains (.41) (1.955) (.610)
-----------------------------------------------------------------
Total Distributions (.59) (2.339) (.846)
-------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $21.39 $22.89 $22.51
===================================================================================================================
TOTAL RETURN -4.08% 12.67% 0.69%
===================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $694 $460 $186
Ratio of Total Expenses to Average Net Assets 0.12%*** 0.12% 0.12%***
Ratio of Net Investment Income to Average
Net Assets 1.74%*** 1.68% 1.90%***
Turnover Rate 32%*** 41% 33%
===================================================================================================================
</TABLE>
*Unaudited.
**Inception.
***Annualized.
<PAGE>
41
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
VANGUARD SMALL-CAP VALUE INDEX FUND
INSTITUTIONAL SHARES
SIX MONTHS ENDED DEC. 7** TO
JUNE 30, 2000* DEC. 31, 1999
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $8.45 $8.74
-------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .044 .009
Net Realized and Unrealized Gain (Loss)
on Investments .396 .226
---------------------------------------------------
Total from Investment Operations .440 .235
---------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income -- (.070)
Distributions from Realized Capital Gains (.250) (.455)
---------------------------------------------------
Total Distributions (.250) (.525)
-------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $8.64 $8.45
===================================================================================================================
TOTAL RETURN*** 5.25% 2.83%
===================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $50 $10
Ratio of Total Expenses to Average Net Assets 0.13%+ 0.13%+
Ratio of Net Investment Income
to Average Net Assets 1.15%+ 1.37%+
Turnover Rate 73%+ 80%
===================================================================================================================
</TABLE>
*Unaudited.
**Inception.
***Total return does not reflect the 0.5% transaction fee on purchases.
+Annualized.
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
VANGUARD GROWTH INDEX FUND
INSTITUTIONAL SHARES
SIX MONTHS ENDED YEAR ENDED MAY 14** TO
JUNE 30, 2000* DEC. 31, 1999 DEC. 31, 1998
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $39.44 $31.67 $26.49
-------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .086 .249 .167
Net Realized and Unrealized Gain (Loss)
on Investments .933 8.821 5.315
-----------------------------------------------------------------
Total from Investment Operations 1.019 9.070 5.482
-----------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.089) (.260) (.187)
Distributions from Realized Capital Gains -- (1.040) (.115)
-----------------------------------------------------------------
Total Distributions (.089) (.260) (.302)
-------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $40.37 $39.44 $31.67
===================================================================================================================
TOTAL RETURN 2.58% 28.91% 20.79%
===================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $695 $452 $224
Ratio of Total Expenses to Average Net Assets 0.12%*** 0.12% 0.12%***
Ratio of Net Investment Income to Average
Net Assets 0.43%*** 0.74% 0.97%***
Turnover Rate 27%*** 33% 29%
===================================================================================================================
</TABLE>
*Unaudited.
**Inception.
***Annualized.
<PAGE>
42
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------
VANGUARD SMALL-CAP GROWTH INDEX FUND
INSTITUTIONAL SHARES
MAY 24* TO
JUNE 30, 2000
-------------------------------------------------------------------------------------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $11.03
-------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .002
Net Realized and Unrealized Gain (Loss)
on Investments 1.428
---------------------------
Total from Investment Operations 1.430
---------------------------
DISTRIBUTIONS
Dividends from Net Investment Income ---
Distributions from Realized Capital Gains ---
---------------------------
Total Distributions ---
-------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $12.46
===========================================================================================
TOTAL RETURN** 12.96%
===========================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $27
Ratio of Total Expenses to Average Net Assets 0.13%+
Ratio of Net Investment Income to Average Net Assets 0.25%+
Turnover Rate 103%+
===========================================================================================
</TABLE>
*Inception.
**Inception.
***Total return does not reflect the 0.5% transaction fee on purchases.
+Annualized.
"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 Institutional Index
Fund, 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. Note: McGraw-Hill has
sued Vanguard over Vanguard's right to use certain S&P Indexes. See page 33.
<PAGE>
43
--------------------------------------------------------------------------------
INVESTING WITH VANGUARD
This section of the prospectus explains the basics of doing business with
Vanguard. A special booklet, The Vanguard Service Directory, provides details of
our many shareholder services for individual investors. A separate booklet, The
Compass, does the same for institutional investors. You can request either
booklet by calling or writing Vanguard, using the Contacting Vanguard
instructions found at the end of this section.
BUYING SHARES
REDEEMING SHARES
OTHER RULES YOU SHOULD KNOW
FUND AND ACCOUNT UPDATES
CONTACTING VANGUARD
--------------------------------------------------------------------------------
BUYING SHARES
ACCOUNT MINIMUMS
TO OPEN AND MAINTAIN AN ACCOUNT:$10 million ($200 million
for Institutional Plus Shares).
TO ADD TO AN EXISTING ACCOUNT:$100 by mail or exchange;
$1,000 by wire.
HOW TO BUY SHARES
BY CHECK:Mail your check and a completed account
registration to Vanguard. When adding to an existing
account,send your check with an Invest-By-Mail form detached
from your last account statement. For addresses, see
Contacting Vanguard.
BY EXCHANGE PURCHASE: You can purchase shares with the
proceeds of a redemption from another Vanguard fund. All
open Vanguard funds permit exchange purchases requested in
writing. MOST VANGUARD FUNDS--OTHER THAN THE INDEX-
ORIENTED FUNDS--ALSO ACCEPT EXCHANGE PURCHASES
REQUESTED ONLINE OR BY TELEPHONE.See Other Rules You
Should Know for specifics.
BY WIRE:Call Vanguard's Institutional Division to purchase
shares by wire. See Contacting Vanguard.
<PAGE>
44
PURCHASE
TRANSACTION Each Fund reserves the right to deduct transaction fees from
FEES all share purchases, including shares purchased by exchange
from other Vanguard funds. These fees, which do not apply to
shares purchased through reinvested dividends and capital
gains, currently are assessed as follows:
Institutional Index Fund-None
Institutional Index Fund Institutional Plus Shares-None
Total Stock Market Index Fund-None
Extended Market Index Fund-None
Mid-Cap Index Fund-None
Small-Cap Index Fund-None
Value Index Fund-None
Small-Cap Value Index Fund-0.50%
Growth Index Fund-None
Small-Cap Growth Index Fund-0.50%
YOUR PURCHASE CHECK When investing by check, make the check payable to:
The Vanguard Group--fund number. For a list of fund
numbers, see Contacting Vanguard.
YOUR PURCHASE PRICE You buy shares at a fund's next-determined net asset value
(NAV) after Vanguard accepts your purchase request. As long
as your request is accepted before the close of regular
trading on the New York Stock Exchange (generally 4 p.m.
Eastern time), you will buy your shares at that day's NAV.
This is known as your TRADE DATE.
PURCHASE RULES YOU THIRD PARTY CHECKS. To protect the funds from check fraud,
SHOULD KNOW Vanguard will not accept checks made payable to third
parties.
U.S. CHECKS ONLY. All purchase checks must be written in
U.S. dollars and drawn on a U.S. bank.
LARGE PURCHASES. Vanguard reserves the right to reject
any purchase request that may disrupt a fund's operation or
performance. Please call us before attempting to invest a
large dollar amount.
NO CANCELLATIONS. Place your transaction requests carefully.
Vanguard will NOT cancel any transaction once it has
been initiated and a confirmation number has been assigned
(if applicable).
FUTURE PURCHASES. All Vanguard funds reserve the right to
stop selling shares at any time.
<PAGE>
45
REDEEMING SHARES
HOW TO REDEEM Be sure to check Other Rules You Should Know before
SHARES initiating your request.
ONLINE: Request a redemption through our website at
vanguard.com.
BY TELEPHONE: Contact Vanguard by telephone to request
a redemption. For telephone numbers, see Contacting
Vanguard.
BY MAIL: Send your written redemption instructions to
Vanguard. For addresses, see Contacting Vanguard.
YOUR REDEMPTION You redeem shares at a fund's next-determined net asset
PRICE value (NAV) after Vanguard accepts your redemption request,
including any special documentation required under the
circumstances. As long as your request is accepted before
the close of regular trading on the New York Stock Exchange
(generally 4 p.m. Eastern time), your shares are redeemed at
that day's NAV. This is known as your TRADE DATE.
TYPES OF CHECK REDEMPTIONS: Unless instructed otherwise,
REDEMPTIONS Vanguard will mail you a check, normally within two
business days of your redemption.
EXCHANGE REDEMPTIONS: You may instruct Vanguard to
apply the proceeds of your redemption to purchase shares of
another Vanguard fund. All open Vanguard funds accept
exchange redemptions requested in writing. Most Vanguard
funds--OTHER THAN THE INDEX-ORIENTED FUNDS--also accept
exchange redemptions requested online or by telephone. See
Other Rules You Should Know for specifics.
WIRE REDEMPTIONS: When redeeming from a money
market fund, bond fund, or the Preferred Stock Fund, you may
instruct Vanguard to wire your redemption proceeds to a
previously designated bank account. Wire redemptions are
not available for Vanguard's other funds, except by
exchanging into a bond or money market fund first. The wire
redemption option is not automatic ; you must establish it
by completing a special form or the appropriate section
of your account registration. Also, wire redemptions
must be requested in writing or by telephone, not online.
A $5 fee applies to wire redemptions under $5,000.
Money Market Funds: For telephone requests accepted at
Vanguard by 10:30 a.m., Eastern time, the redemption
proceeds will arrive at your bank by the close of
business that same day. For other requests accepted
before 4 p.m., the redemption proceeds will arrive at
your bank by the close of business on the following
business day.
Bond Funds: For requests accepted at Vanguard by 4 p.m.
Eastern time, the redemption proceeds will arrive at
your bank by the close of business on the following
business day.
<PAGE>
46
REDEMPTION RULES SPECIAL ACCOUNTS. Special documentation may be required
YOU SHOULD KNOW to redeem from certain types of accounts, such as trust,
corporate, non-profit, or retirement accounts. Please call
us before attempting to redeem from these types of accounts.
POTENTIALLY DISRUPTIVE REDEMPTIONS. Vanguard reserves
the right to pay all or part of your redemption in-kind--
that is, in the form of securities--if we believe that a
cash redemption would disrupt the fund's operation or
performance. Under these circumstances, Vanguard also
reserves the right to delay payment of your redemption
proceeds for up to seven days. By calling us before
you attempt to redeem a large
dollar amount, you are more likely to avoid in-kind or
delayed payment of your redemption.
RECENTLY PURCHASED SHARES. While you can redeem shares
at any time, proceeds will not be made available to you
until the Fund collects payment for your purchase. This may
take up to ten calendar days for shares purchased by check
or Vanguard Fund Express(R).
PAYMENT TO A DIFFERENT PERSON OR ADDRESS. We can make
your redemption check payable to a different person or send
it to a different address. However, this requires the
written consent of all registered account owners, which must
be provided under signature guarantees. You can obtain a
signature guarantee from most commercial and savings
banks, credit unions, trust companies, or member firms of
a U.S. stock exchange.
NO CANCELLATIONS. Place your transaction requests carefully.
Vanguard will NOT cancel any transaction once it has been
initiated and a confirmation number has been assigned
(if applicable).
EMERGENCY CIRCUMSTANCES. Vanguard funds can postpone
payment of redemption proceeds for up to seven calendar
days at any time. In addition, Vanguard funds can suspend
redemptions and/or postpone payments of redemption pro
ceeds at times when the New York Stock Exchange is closed
or during emergency circumstances, as determined by the
U.S. Securities and Exchange Commission.
<PAGE>
47
OTHER RULES YOU SHOULD KNOW
TELEPHONE AUTOMATIC. In setting up your account, we'll automatically
TRANSACTIONS enable you to do business with us by regular telephone,
unless you instruct us otherwise in writing.
TELE-ACCOUNT(TM). To conduct account transactions through
Vanguard's automated telephone service, you must first
obtain a personal identification number (PIN). Call Tele-
Account to obtain a PIN, and allow seven days before using
this service.
PROOF OF A CALLER'S AUTHORITY. We reserve the right to
refuse a telephone request if the caller is unable to
provide the following information exactly as registered on
the account:
- Ten-digit account number.
- Complete owner name and address.
- Primary Social Security or employer identification
number.
- Personal Identification Number (PIN), if applicable.
SUBJECT TO REVISION. We reserve the right to revise or
terminate Vanguard's telephone transaction service at any
time, without notice.
SOME VANGUARD FUNDS DO NOT PERMIT TELEPHONE EXCHANGES. To
discourage market-timing, Vanguard's Stock Index Funds,
Growth and Income Fund, and Balanced Index Fund generally do
not permit telephone exchanges (in or out), except for IRAs
and certain other retirement accounts.
VANGUARD.COM REGISTRATION. You can use your personal computer to review
your account holdings, to sell or exchange shares of most
Vanguard funds, and to perform other transactions. To
establish this service, you can register online.
SOME VANGUARD FUNDS DO NOT PERMIT ONLINE EXCHANGES. To
discourage market-timing, Vanguard's Stock Index Funds,
Growth and Income Fund, and Balanced Index Fund do not
permit online exchanges (in or out), except for IRAs and
certain other retirement accounts.
WRITTEN "GOOD ORDER" REQUIRED. We reserve the right to reject any
INSTRUCTIONS written transaction instructions that are not in "good
order." This means that your instructions 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.
- Signature guarantees, if required for the type
of transaction.*
*For instance, signature guarantees must be provided by all
registered account shareholders when redemption proceeds
are to be sent to a different person or address.
<PAGE>
48
RESPONSIBILITY FOR Vanguard will not be responsible for any account losses
FRAUD due to fraud, so long as we reasonably believe that the
person transacting on an account is authorized to do so.
Pleasetake pre- cautions to protect yourself from fraud.
Keep your account information private and immediately
review any account state ments that we send to you.
Contact Vanguard immediately about any transactions
you believe to be unauthorized.
UNCASHED CHECKS Please cash your distribution or redemption checks promptly.
Vanguard will not pay interest on uncashed checks.
LIMITS ON ACCOUNT Because excessive account transactions can disrupt
ACTIVITY management of a 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 a non-money market fund during any
12-month period.
-Your round trips through a non-money market fund
must be at least 30 days apart.
-All funds may refuse share purchases at any time, for
any reason.
-Vanguard reserves the right to revise or terminate the
exchange privilege, limit the amount of an exchange, or
reject an exchange, at any time, for any reason.
A "round trip" is a redemption from a fund followed by a
purchase back into the same 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.
UNUSUAL If you experience difficulty contacting Vanguard online, by
CIRCUMSTANCES telephone, or by Tele-Account, you can send us your
transaction request by regular or express mail. See
Contacting Vanguard for addresses.
<PAGE>
49
LOW BALANCE Each fund (except Vanguard Institutional Index Fund)
ACCOUNTS reserves the right to convert an investor's
Institutional Shares into Investor Shares of the fund if
the investor's account balance falls below the minimum
initial investment.
Vanguard Institutional Index Fund reserves the right to
convert an investor's Institutional Plus Shares into
Institutional Shares of the fund if the investor's account
balance falls below the minimum initial investment.
In addition, the fund reserves the right to redeem an
investor's Institutional Shares if the investor's account
balance falls below the minimum initial investment for that
share class.
Any such conversion or redemption will be preceded by
written notice to the investor. No transaction fee will be
imposed on share class conversions.
FUND AND ACCOUNT
UPDATES
PORTFOLIO SUMMARIES We will send you quarterly portfolio summaries to help you
keep track of your accounts throughout the year. Each sum
mary shows the market value of your account at the close of
the statement period, as well as all distributions,
purchases, sales, and exchanges for the current calendar
year.
AVERAGE COST REVIEW For most taxable accounts, average cost review statements
STATEMENTS will accompany the quarterly portfolio summaries. These
statements show the average cost of shares that you
redeemed during the current calendar year, using the average
cost single category method.
CONFIRMATION Each time you buy, sell, or exchange shares, we will send
STATEMENTS you a statement confirming the trade date and amount of
your transaction.
TAX STATEMENTS We will send you annual tax statements to assist in
preparing your income tax returns. These statements, which
are generally mailed in January, will report the previous
year's dividend and capital gains distributions, proceeds
from the sale of shares, and distributions from IRAs or
other retirement plans.
<PAGE>
50
REPORTS You will receive financial reports about your funds twice a
year--in February and August. These comprehensive reports
include an assessment of the fund's performance (and a com
parison to its industry benchmark), an overview of the
financial markets, a report from the advisers, and the
fund's financial statements, which include a listing of
the fund's holdings. To keep the funds' costs as low as
possible (so that you and other shareholders can keep more
of the funds' investment earnings), Vanguard attempts to
eliminate duplicate mailings to the same address. When we
find that two or more 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, however, you may
notify our Client Services Department.
CONTACTING VANGUARD
ONLINE VANGUARD.COM
-Your best source of Vanguard news
-For fund, account, and service information
-For most account transactions
-For literature requests
-24 hours per day, 7 days per week
VANGUARD TELE- -For automated fund and account information
ACCOUNT(R) -For redemptions by check, exchange, or wire
1-800-662-6273 -Toll-free, 24 hours per day, 7 days per week
(ON-BOARD)
INVESTOR INFORMATION
1-800-662-7447
(SHIP) -For fund and service information
(Text telephone at -For literature requests
1-800-952-3335) -Business hours only
CLIENT SERVICES -For account information
1-800-662-2739 -For most account transactions
(CREW) -Business hours only
(Text telephone at
1-800-749-7273)
INSTITUTIONAL
DIVISION -For information and services for large institutional
1-888-809-8102 investors
-Business hours only
<PAGE>
51
VANGUARD ADDRESSES REGULAR MAIL (INDIVIDUALS-CURRENT CLIENTS):
The Vanguard Group
P.O. Box 1110
Valley Forge, PA 19482-1110
REGULAR MAIL (INSTITUTIONS):
The Vanguard Group
P.O. Box 2900
Valley Forge, PA 19482-2900
REGULAR MAIL (GENERAL INQUIRIES):
The Vanguard Group
P.O. Box 2600
Valley Forge, PA 19482-2600
REGISTERED OR EXPRESS MAIL:
The Vanguard Group
455 Devon Park Drive
Wayne, PA 19087-1815
FUND NUMBER Always use these fund numbers when contacting Vanguard
about the Funds:
Institutional Index Fund-094
Institutional Index Fund Institutional Plus Shares-854
Total Stock Market Index Fund Institutional Shares-855
Extended Market Index Fund Institutional Shares-856
Mid-Cap Index Fund Institutional Shares-864
Small-Cap Index Fund Institutional Shares-857
Value Index Fund Institutional Shares-867
Small-Cap Value Index Fund Institutional Shares-865
Growth Index Fund Institutional Shares-868
Small-Cap Growth Index Fund Institutional Shares-866
<PAGE>
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<PAGE>
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<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)
Net asset value per share is computed by dividing the net assets attributed to
each share class by the number of shares outstanding for that class.
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.
PRICE/EARNINGS (P/E) RATIO
The current share price of a stock, divided by its per-share earnings (profits)
from the past year. A stock selling for $20, with earnings of $2 per share, has
a price/earnings ratio of 10.
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 LOGO]
Institutional Division
Post Office Box 2900
Valley Forge, PA 19482-2900
FOR MORE INFORMATION
If you'd like more information about
Vanguard Institutional Index Fund or
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. (The
Institutional Index Fund's reports are
separate from those of the U.S.
Stock Index Funds.)
STATEMENT OF ADDITIONAL
INFORMATION (SAI)
The SAI provides more detailed
information about the Funds. (The
SAI for the Institutional Index Fund
is separate from that of the U.S.
Stock Index Funds.)
The current annual and semiannual
reports and the SAIs 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:
If you are an Individual Investor:
THE VANGUARD GROUP
INVESTOR INFORMATION
DEPARTMENT
P.O. BOX 2900
VALLEY FORGE, PA 19482-2900
TELEPHONE:
1-800-662-7447 (SHIP)
TEXT TELEPHONE:
1-800-952-3335
If you are a client of Vanguard's
Institutional Division:
THE VANGUARD GROUP
INSTITUTIONAL INVESTOR
INFORMATION
P.O. BOX 2900
VALLEY FORGE, PA 19482-2900
TELEPHONE:
1-888-809-8102
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.
Vanguard Institutional Index Fund's
Investment Company Act
file number: 811-6093
Vanguard U.S. Stock Index Funds'
Investment Company Act
file number: 811-2652
(C) 2000 The Vanguard Group, Inc.
All rights reserved.
Vanguard Marketing Corporation,
Distributor.
I854N 112000
<PAGE>
PART B
VANGUARD(R) INDEX FUNDS
(THE TRUST)
STATEMENT OF ADDITIONAL INFORMATION
NOVEMBER 1, 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 November 1, 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-8
PURCHASE OF SHARES...............................................B-9
SHARE PRICE......................................................B-10
REDEMPTION OF SHARES.............................................B-11
YIELD AND TOTAL RETURN...........................................B-11
MANAGEMENT OF THE FUNDS..........................................B-14
PORTFOLIO TRANSACTIONS...........................................B-18
COMPARATIVE INDEXES..............................................B-19
FINANCIAL STATEMENTS.............................................B-21
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 and
classes of shares:
SHARE CLASSES
FUND* INVESTOR ADMIRAL INSTITUTIONAL
----- -------- ------- -------------
500 Index Fund.............. Yes Yes No
Total Stock Market Index Fund Yes Yes Yes
Extended Market Index Fund.. Yes Yes Yes
Mid-Cap Index Fund.......... Yes No Yes
Small-Cap Index Fund........ Yes Yes Yes
Value Index Fund............ Yes Yes Yes
Small-Cap Value Index Fund.. Yes No Yes
Growth Index Fund........... Yes Yes Yes
Small-Cap Growth Index Fund. Yes No Yes
*(EACH, A FUND; COLLECTIVELY, THE FUNDS)
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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.
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, MA 02110, and First Union National Bank, PA4943, 530 Walnut Street,
Philadelphia, PA 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, Two Commerce Square,
Suite 1700, 2001 Market Street, Philadelphia, PA 19103-7042, 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 or class may
be terminated by reorganization into another mutual fund or by liquidation and
distribution of the assets of the affected Fund or class. Unless terminated by
reorganization or liquidation, each Fund and each class 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. Unless otherwise required by
applicable law, 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. In
addition, each class has exclusive voting rights on any matter submitted to
shareholders that relates solely to that class, and each class has separate
voting rights on any matter submitted to shareholders in which the interests of
one class differ from the interests of another. 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. In
the event that a class of shares is
B-2
<PAGE>
liquidated, shareholders of that class will be entitled to receive a pro rata
share of the Fund's net assets that are attributable to that class.
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.
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.
B-3
<PAGE>
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 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
B-4
<PAGE>
date and underlying financial instrument are traded on national futures
exchanges. Futures exchanges and trading are regulated under the Commodity
Exchange Act by the Commodity Futures Trading Commission (CFTC), a U.S.
Government agency. Assets committed to futures contracts will be segregated to
the extent required by law.
Although futures contracts by their terms call for actual delivery or
acceptance of the underlying securities, in most cases the contracts are closed
out before the settlement date without the making or taking of delivery. Closing
out an open futures position is done by taking an opposite position ("buying" a
contract which has previously been "sold," or "selling" a contract previously
"purchased") in an identical contract to terminate the position. Brokerage
commissions are incurred when a futures contract is bought or sold.
Futures traders are required to make a good faith margin deposit in cash or
government securities with a broker or custodian to initiate and maintain open
positions in futures contracts. A margin deposit is intended to assure
completion of the contract (delivery or acceptance of the underlying security)
if it is not terminated prior to the specified delivery date. Minimal initial
margin requirements are established by the futures exchange and may be changed.
Brokers may establish deposit requirements which are higher than the exchange
minimums. Futures contracts are customarily purchased and sold on deposits which
may range upward from less than 5% of the value of the contract being traded.
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
B-5
<PAGE>
addition, a Fund may be required to make delivery of the instruments underlying
futures contracts it holds. The inability to close options and futures positions
also could have an adverse impact on the ability to effectively hedge. Each Fund
will minimize the risk that it will be unable to close out a futures contract by
only entering into futures which are traded on national futures exchanges and
for which there appears to be a liquid secondary market.
The risk of loss in trading futures contracts in some strategies can be
substantial, due both to the low margin deposits required, and the extremely
high degree of leverage involved in futures pricing. As a result, a relatively
small price movement in a futures contract may result in immediate and
substantial loss (as well as gain) to the investor. For example, if at the time
of purchase, 10% of the value of the futures contract is deposited as margin, a
subsequent 10% decrease in the value of the futures contract would result in a
total loss of the margin deposit, before any deduction for the transaction
costs, if the account were then closed out. A 15% decrease would result in a
loss equal to 150% of the original margin deposit if the contract were closed
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.
B-6
<PAGE>
FOREIGN INVESTMENTS
Each Fund may invest in foreign securities to the extent necessary to carry out
its investment strategy of holding all, or a representative sample, of the
stocks that comprise the index it tracks. Investors should recognize that
investing in foreign companies involves certain special considerations which are
not typically associated with investing in U.S. companies.
CURRENCY RISK. Since the stocks of foreign companies are frequently
denominated in foreign currencies, and since the Funds may temporarily hold
uninvested reserves in bank deposits in foreign currencies, the Funds will be
affected favorably or unfavorably by changes in currency rates and in exchange
control regulations, and may incur costs in connection with conversions between
various currencies. The investment policies of the Funds permit them to enter
into forward foreign currency exchange contracts in order to hedge a Fund's
holdings and commitments against changes in the level of future currency rates.
Such contracts 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
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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.
INVESTMENT POLICIES RELATING TO THE SALE OF INVESTOR SHARES OF VANGUARD
SMALL-CAP INDEX FUND IN JAPAN
In connection with the offering of the Small-Cap Index Fund's Investor Shares in
Japan, the Fund has undertaken to the Japanese Securities Dealers Association
that the Fund may not:
1. borrow money, except for temporary or emergency purposes in an amount not
exceeding 10% of the Fund's net assets;
2. together with other mutual funds managed by The Vanguard Group, Inc.,
acquire more than 50% of the outstanding voting securities of any issuer;
3. invest more than 15% of its net assets in illiquid securities (which
include securities restricted as to resale unless they are determined to be
readily marketable in accordance with procedures established by the Board
of Trustees); and
4. sell securities short at any time in excess of its net asset value.
If the undertaking is violated, the Fund will, promptly after discovery,
take such action as may be necessary to cause the violation to cease, which
shall be the only obligation of the Fund and the only remedy in respect of the
violation. This undertaking will remain in effect as long as (i) shares of the
Fund are qualified for offer or sale in Japan and (ii) the undertaking is
required by the "Standards of Selection of Foreign Investment Fund Securities"
established under the Rules of Foreign Securities Transactions by the Japanese
Securities Dealers Association.
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 shares voted, so long as more than 50% of
a Fund's outstanding shares are present or represented by proxy; or (ii) shares
representing more than 50% of the Fund's outstanding shares.
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.
B-8
<PAGE>
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.
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.
B-9
<PAGE>
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 net asset value for each share class of the each Fund is calculated by
dividing the net assets attributable to each such 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 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."
B-10
<PAGE>
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.
YIELD AND TOTAL RETURN
The annualized yield of each Fund for the 30-day period ended December 31,
1999 is set forth below for the then-available share classes.
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.
B-11
<PAGE>
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.
1 YEAR ENDED 5 YEARS ENDED 10 YEARS ENDED
INVESTOR SHARES (1) 12/31/1999 12/31/1999(3) 12/31/1999(4)
------------------ ---------- ------------- -------------
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 --
1 YEAR ENDED 5 YEARS ENDED 10 YEARS ENDED
INSTITUTIONAL SHARES (1) 12/31/1999 12/31/1999(3) 12/31/1999(4)
-------------------- ---------- ------------- -------------
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(2).. -- -- --
Growth Index Fund.............. 28.91 31.15 --
Small-Cap Growth Index Fund(2). -- -- --
---------
(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 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):
B-12
<PAGE>
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).
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 hundreth 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):
B-13
<PAGE>
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 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 Argentaria, Gestion, BKF
Capital (Investment Management), The Jeffrey Co. (Holding Company), NeuVis, Inc.
(Software Co.), and Select Sector SPDR Trust (Exchange-Traded Mutual Fund).
B-14
<PAGE>
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).
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 and CEO of Rohm & Haas Co. (Chemicals); Director of Cummins
Engine Co. (Diesel Engines), The Mead Corp. (Paper Products); and AmeriSource
Health Corp. (Pharmaceutical Distribution); 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.
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.
B-15
<PAGE>
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:
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
Vanguard Small-Cap Growth Index Fund.... N/A $65,000* $203,000
---------
* Since Inception, April 20, 1998.
B-16
<PAGE>
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:
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
Vanguard Small-Cap Index Fund........ $67,000 $100,000 $167,000
---------
*Since Inception, April 20, 1998.
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-18), 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-17
<PAGE>
VANGUARD INDEX TRUST
COMPENSATION TABLE
<TABLE>
<CAPTION>
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 EXPENSES(1) RETIREMENT TRUSTEES(2)
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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
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:
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
B-18
<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.
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.
B-19
<PAGE>
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.
B-20
<PAGE>
FINANCIAL STATEMENTS
The Funds' Financial Statements as of and for the year ended December 31, 1999,
appearing in the Vanguard Index Trust 1999 Annual Reports 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 Reports to Shareholders, which may
be obtained without charge.
B-21
<PAGE>
SAI040 112000
B-22
<PAGE>
