-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT (NO. 2-17620) UNDER
THE SECURITIES ACT OF 1933
PRE-EFFECTIVE AMENDMENT NO.
POST-EFFECTIVE AMENDMENT NO. 80
AND
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 80
VANGUARD WORLD FUNDS
(EXACT NAME OF REGISTRANT AS SPECIFIED IN DECLARATION OF TRUST)
P.O. BOX 2600, VALLEY FORGE, PA 19482
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)
REGISTRANT'S TELEPHONE NUMBER (610) 669-1000
R. GREGORY BARTON, ESQUIRE
P.O. BOX 876
VALLEY FORGE, PA 19482
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
IT IS PROPOSED THAT THIS FILING BECOME EFFECTIVE:
ON DECEMBER 20, 2000, PURSUANT TO PARAGRAPH (A) OF RULE 485.
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
<PAGE>
VANGUARD U.S. GROWTH FUND
INVESTOR SHARES - DECEMBER 20, 2000
This prospectus
contains financial data
for the Fund through
the fiscal year ended
August 31, 2000.
STOCK
PROSPECTUS
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
accurace or adequacy of this prospectus. Any representation to the contrary is a
criminal offense.
[A MEMBER OF
THE VANGUARD GROUP(R) LOGO]
<PAGE>
VANGUARD U.S. GROWTH FUND
Prospectus
December 20, 2000
A Growth Stock Mutual Fund
--------------------------------------------------------------------------------
1 FUND PROFILE
3 ADDITIONAL INFORMATION
3 MORE ON THE FUND
7 THE FUND AND VANGUARD
8 INVESTMENT ADVISER
9 DIVIDENDS, CAPITAL GAINS, AND TAXES
10 SHARE PRICE
11 FINANCIAL HIGHLIGHTS
13 INVESTING WITH VANGUARD
13 Buying Shares
14 Redeeming Shares
15 Other Rules You Should Know
17 Fund and Account Updates
18 Contacting Vanguard
GLOSSARY (inside back cover)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
WHY READING THIS PROSPECTUS IS IMPORTANT
This prospectus explains the investment objective, policies, strategies, and
risks associated with the Fund. 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 decide whether the Fund is the right
investment for you. We suggest that you keep this prospectus for future
reference.
--------------------------------------------------------------------------------
<PAGE>
1
FUND PROFILE
INVESTMENT OBJECTIVE
The Fund seeks to provide long-term capital growth.
INVESTMENT STRATEGIES
The Fund invests mainly in large-capitalization stocks of seasoned U.S.
companies with records of superior growth. The Fund chooses companies with
strong positions in their markets, reasonable financial strength, and low
sensitivity to changing economic conditions.
PRIMARY RISKS
An investment in the Fund could lose money over short or even long periods. You
should expect the Fund's share price and total return to fluctuate within a wide
range, like the overall stock market. 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. The Fund's performance
could also be hurt by:
- Investment style risk, which is the chance that returns from
large-capitalization growth stocks will trail returns from the overall
stock market. Specific types of 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.
- Manager risk, which is the chance that poor security selection will cause
the Fund to underperform other funds with similar investment objectives.
PERFORMANCE/RISK INFORMATION
The following bar chart is intended to help you understand the risk of investing
in the Fund. It shows how the Fund's performance has varied from one calendar
year to another over the past ten years. In addition, there is a table that
shows how the Fund's average annual total returns compare with those of relevant
market indexes over set periods of time. 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 4.60%
1991 46.76%
1992 2.76%
1993 -1.45%
1994 3.88%
1995 38.44%
1996 26.05%
1997 25.93%
1998 39.98%
1999 22.28%
-----------------------------------------------------
The Fund's year-to-date return as of the most recent
calendar quarter ended September 30, 2000, was 6.43%.
-----------------------------------------------------
During the period shown in the bar chart, the highest return for a calendar
quarter was 24.73% (quarter ended December 31, 1998), and the lowest return for
a quarter was -15.63% (quarter ended September 30, 1990).
<PAGE>
2
--------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS FOR YEARS ENDED DECEMBER 31, 1999
--------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS
--------------------------------------------------------------------
Vanguard U.S. Growth Fund 22.28% 30.34% 19.77%
Russell 1000 Growth Index 33.16 32.41 20.32
Standard & Poor's 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 on those incurred in the fiscal year ended August 31, 2000.
SHAREHOLDER FEES (fees paid directly from your investment)
Sales Charge (Load) Imposed 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: 0.36%
12b-1 Distribution Fee: None
Other Expenses: 0.02%
TOTAL ANNUAL FUND OPERATING EXPENSES: 0.38%
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's shares. 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 the given period.
--------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
--------------------------------------------------
$39 $122 $213 $480
--------------------------------------------------
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>
3
--------------------------------------------------------------------------------
PLAIN TALK ABOUT
FUND EXPENSES
All mutual funds have operating expenses. These expenses, which are deducted
from a fund's gross income, are expressed as a percentage of the net assets of
the fund. Vanguard U.S. Growth Fund's expense ratio in fiscal year 2000 was
0.38%, or $3.80 per $1,000 of average net assets. The average large-cap growth
mutual fund had expenses in 1999 of 1.41%, or $14.10 per $1,000 of average net
assets (derived from data provided by Lipper Inc., which reports on the mutual
fund industry). Management expenses, which are one part of operating expenses,
include investment advisory fees as well as other costs of managing a fund--such
as account maintenance, reporting, accounting, legal, and other administrative
expenses.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
PLAIN TALK ABOUT
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 expenses can, over time, have
a dramatic effect on a fund's performance.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
ADDITIONAL INFORMATION
DIVIDENDS AND CAPITAL GAINS MINIMUM INITIAL INVESTMENT
Distributed annually in December $3,000; $1,000 for IRAs and custodial
accountsfor minors
INVESTMENT ADVISER
Lincoln Capital Management NEWSPAPER ABBREVIATION
Company, Chicago, Ill., USGro
since 1987
VANGUARD FUND NUMBER
INCEPTION DATE 023
January 6, 1959
CUSIP NUMBER
NET ASSETS AS OF AUGUST 31, 2000 921910105
$22.3 billion
TICKER SYMBOL
SUITABLE FOR IRAS VWUSX
Yes
--------------------------------------------------------------------------------
MORE ON THE FUND
This prospectus describes risks you would face as a Fund investor. It is
important to keep in mind one of the main axioms of investing: The higher the
risk of losing money, the higher the potential reward. The reverse, also, is
generally true: The lower the risk, the lower the potential reward. As you
consider an investment in any mutual fund, you should take into account your
personal tolerance for daily fluctuations in securities markets. Look for this
[FLAG] symbol throughout the prospectus. It is used to mark detailed information
about each type of risk that you would confront as a Fund shareholder.
The following sections explain the primary investment strategies and
policies that the Fund uses in pursuit of its objective. The Fund's board of
trustees, which oversees the
<PAGE>
4
Fund's management, may change investment strategies or policies in the interest
of shareholders without a shareholder vote.
Finally, you'll find information on other important features of the Fund.
--------------------------------------------------------------------------------
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 to such factors as
earnings and book value, and these stocks typically pay 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.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
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, on average, 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.
--------------------------------------------------------------------------------
MARKET EXPOSURE
The Fund invests mainly in common stocks of large-capitalization companies that
offer favorable prospects for capital growth but produce little current income.
Because it invests mainly in stocks, the Fund is subject to certain risks.
[FLAG] THE FUND IS SUBJECT TO STOCK 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 PRICES AND PERIODS OF
FALLING PRICES.
<PAGE>
5
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, a widely used barometer of 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 this Fund in particular.
[FLAG] THE FUND IS SUBJECT TO INVESTMENT STYLE RISK, WHICH IS THE CHANCE THAT
RETURNS FROM THE MARKET SECTOR IN WHICH IT INVESTS WILL TRAIL RETURNS FROM
OTHER MARKET SECTORS. AS A GROUP, LARGE-CAPITALIZATION GROWTH STOCKS TEND
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.
--------------------------------------------------------------------------------
PLAIN TALK ABOUT
FUND DIVERSIFICATION
In general, the more diversified a fund's stock or bond holdings, the less
likely that a specific security's poor performance will hurt the fund. One
measure of a fund's diversification is the percentage of its assets represented
by its ten largest holdings. The average U.S. equity mutual fund has about 35%
of its assets invested in its ten largest holdings, while some less-diversified
mutual funds have more than 50% of assets invested in their top ten.
--------------------------------------------------------------------------------
SECURITY SELECTION
Lincoln Capital Management Company (Lincoln), adviser to the Fund, selects
common stocks of large companies that are generally market leaders and, in the
adviser's opinion, have above-average prospects for continued growth and are
selling at attractive prices. Such companies tend to have strong positions in
their industry, reasonable financial strength, and relatively low sensitivity to
changing economic conditions.
[FLAG] BECAUSE THE FUND INVESTS A HIGHER PERCENTAGE OF ASSETS IN ITS TEN LARGEST
HOLDINGS THAN THE AVERAGE STOCK FUND DOES, THE FUND IS SUBJECT TO THE RISK
THAT ITS PERFORMANCE MAY BE HURT DISPROPOR-TIONATELY BY THE POOR
PERFORMANCE OF RELATIVELY FEW STOCKS.
<PAGE>
6
As of August 31, 2000, the Fund had invested 42.4% of net assets in its top
ten holdings.
The Fund is run according to traditional methods of active investment
management. This means that securities are bought and sold according to the
adviser's judgments about companies and their financial prospects, within the
context of the stock market and economy in general.
The Fund is generally managed without regard to tax ramifications.
[FLAG] THE FUND IS SUBJECT TO MANAGER RISK, WHICH IS THE CHANCE THAT THE ADVISER
WILL DO A POOR JOB OF SELECTING STOCKS.
OTHER INVESTMENT POLICIES AND RISKS
Besides investing in common stocks of growth companies, the Fund may make
certain other kinds of investments to achieve its objective.
The Fund may invest, to a limited extent, in foreign securities.
The Fund may also invest in stock futures and options contracts, which are
traditional 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. The Fund will not use futures for speculative purposes or as leveraged
investments that magnify gains or losses. The Fund's obligation under futures
contracts will not exceed 20% of its total assets.
The reasons for which the Fund will invest in futures and options are:
- To keep cash on hand to meet shareholder redemptions or other needs while
simulating full investment in stocks.
- To reduce the Fund's transaction costs or add value when these instruments
are favorably priced.
The Fund may temporarily depart from its normal investment policies--for
instance, by investing substantially in cash reserves--in response to
extraordinary market, economic, political, or other conditions. In doing so, the
Fund may succeed in avoiding losses but otherwise fail to achieve its investment
objective.
--------------------------------------------------------------------------------
PLAIN TALK ABOUT
DERIVATIVES
A derivative is a financial contract whose value is based on (or "derived" from)
a traditional security (such as a stock or a bond), an asset (such as a
commodity like gold), or a market index (such as the S&P 500 Index). Some forms
of derivatives, such as exchange-traded futures and options on securities,
commodities, or indexes, have been trading on regulated exchanges for more than
two decades. These types of derivatives are standardized contracts that can
easily be bought and sold, and whose market values are determined and published
daily. Non-standardized derivatives, on the other hand, tend to be more
specialized or complex, and may be harder to value. If used for speculation or
as leveraged investments, derivatives can carry considerable risks.
--------------------------------------------------------------------------------
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 inves-
<PAGE>
7
tors who do not generate the costs. This is why all Vanguard funds have adopted
special policies to discourage short-term trading. Specifically:
- Each Vanguard fund reserves the right to reject any purchase
request--including exchanges from other Vanguard funds--that it regards as
disruptive to efficient portfolio management. A purchase request could be
rejected because of the timing of the investment or because of a history of
excessive trading by the investor.
- Each Vanguard fund (except the money market funds) limits the number of
times that an investor can exchange into and out of the fund.
- Each Vanguard fund reserves the right to stop offering shares at any time.
- Vanguard U.S. Stock Index Funds, International Stock Index Funds, REIT
Index Fund, Balanced Index Fund, and Growth and Income Fund generally do
NOT accept exchanges by telephone or fax, or online. (IRAs and other
retirement accounts are not subject to this rule.)
- Certain Vanguard funds charge transaction fees on purchases and/or
redemptions oftheir shares.
See the INVESTING WITH VANGUARD section of this prospectus for further details
on Vanguard's transaction policies.
THE VANGUARD FUNDS DO NOT PERMIT MARKET-TIMING. DO NOT INVEST WITH VANGUARD
IF YOU ARE A MARKET-TIMER.
TURNOVER RATE
Although the Fund normally seeks to invest for the long term, it may sell
securities regardless of how long they have been held. The FINANCIAL HIGHLIGHTS
section of this prospectus shows historic turnover rates for the Fund. A
turnover rate of 100%, for example, would mean that the Fund had sold and
replaced securities valued at 100% of its net assets within a one-year period.
--------------------------------------------------------------------------------
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 taxable
income. As of August 31, 2000, the average turnover rate for all large-cap
growth funds was approximately 129%, according to Morningstar, Inc.
--------------------------------------------------------------------------------
THE FUND AND VANGUARD
The Fund is a member 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 Vanguard funds share in the expenses associated with business
operations, such as personnel, office space, equipment, and advertising.
Vanguard also provides marketing services to the funds. Although
shareholders do not pay sales commissions or 12b-1 distribution fees, each fund
pays its allocated share of The Vanguard Group's marketing costs.
<PAGE>
8
--------------------------------------------------------------------------------
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
Lincoln Capital Management (Lincoln), 200 South Wacker Drive, Chicago, IL 60606,
adviser to the Fund, is an investment advisory firm founded in 1967. It provides
investment counseling services to a limited number of clients, most of which are
institutional clients such as pension funds. As of August 31, 2000, Lincoln
managed about $76 billion in assets. The firm manages the Fund subject to the
control of the trustees and officers of the Fund. Lincoln's advisory fee is paid
quarterly, and is based on certain annual percentage rates applied to the Fund's
average month-end assets for each quarter. In addition, the firm's advisory fee
may be increased or decreased, based on the cumulative total return of the Fund
over a trailing 36-month period as compared with the cumulative total return of
the Russell 1000 Growth Index over the same period. Please consult the Fund's
Statement of Additional Information for a complete explanation of how advisory
fees are calculated.
The performance adjustment will not be fully operable until the quarter
ended August 31, 2003. Until that date, the performance adjustment will be
calculated using certain transition rules that are explained in the Statement of
Additional Information.
For the fiscal year ended August 31, 2000, the advisory fee represented an
effective annual rate of 0.11% of the Fund's average net assets.
The adviser is authorized to choose broker-dealers to handle the purchase
and sale of the Fund's securities, and to gain the best available price and most
favorable execution for all transactions. Also, the Fund may direct the adviser
to use a particular broker for certain transactions in exchange for commission
rebates or research services provided to the Fund.
In the interest of obtaining better execution of a transaction, the adviser
may at times choose brokers who charge higher commissions. If more than one
broker can obtain the best available price and most favorable execution, then
the adviser is authorized to choose a broker who, in addition to executing the
transaction, will provide research services to the adviser or the Fund.
The board of trustees may, without prior approval from shareholders, change
the terms of an advisory agreement or hire a new investment adviser--either as a
replacement for an existing adviser or as an additional adviser. Any significant
change in the Fund's advisory arrangements will be communicated to shareholders
in writing. In addition, as the Fund's sponsor and overall manager, The Vanguard
Group may provide investment advisory services to the Fund, on an at-cost basis,
at any time.
<PAGE>
9
--------------------------------------------------------------------------------
PLAIN TALK ABOUT
THE FUND'S ADVISER
The managers primarily responsible for overseeing the Fund's investments are:
J. PARKER HALL III, Chairman of Lincoln Capital Management Company. He has
worked in investment management since 1957; has been with Lincoln since 1971;
and has managed the Fund since 1987. Education: B.A., Swarthmore College;
M.B.A., Harvard Business School.
DAVID M. FOWLER, President of Lincoln. He has worked in investment management
since 1972; has been with Lincoln since 1984; and has managed the Fund since
1987. Education: B.S., Loyola University; M.B.A., Northwestern University.
JOHN S. COLE, Executive Vice President of Lincoln. He worked in investment
management as Executive Vice President and Chief Equity Officer at Boatman's
Trust Company from 1992 until he joined Lincoln in 1997; and has managed the
Fund since 1999. Education: B.S., Bentley College; M.B.A., University of Notre
Dame.
--------------------------------------------------------------------------------
DIVIDENDS, CAPITAL GAINS, AND TAXES
FUND DISTRIBUTIONS
The 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. Distributions generally occur in December. 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 portion 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 any stock
holdings and the interest it receives from any 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:
- Distributions are taxable to you for federal income tax purposes whether or
not you reinvest these amounts in additional Fund shares.
- Distributions declared in December--if paid to you by the end of
January--are taxable for federal income tax purposes as if received in
December.
- Any dividends and short-term capital gains that you receive are taxable to
you as ordinary income for federal income tax purposes.
<PAGE>
10
- 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 Fund's normal investment activities and cash flows.
- A sale or exchange of Fund shares is a taxable event. This means that you
may have a capital gain to report as income, or a capital loss to report as
a deduction, when you complete your federal income tax return.
- Dividend and capital gains distributions that you receive, as well as your
gains or losses from any sale or exchange of Fund shares, may be subject to
state and local income taxes.
GENERAL INFORMATION
BACKUP WITHHOLDING. By law, Vanguard must withhold 31% of any taxable
distributions or redemptions from your account if you do not:
- provide us with your correct taxpayer identification number;
- certify that the taxpayer identification number is correct; and
- confirm that you are not subject to backup withholding.
Similarly, Vanguard must withhold from your account if the IRS instructs us to
do so.
FOREIGN INVESTORS. The Vanguard funds generally do not offer their shares for
sale outside of the United States. Foreign investors should be aware that U.S.
withholding and estate taxes may apply to any investments in Vanguard funds.
INVALID ADDRESSES. If a dividend or capital gains distribution check mailed to
your address of record is returned as undeliverable, Vanguard will automatically
reinvest all future distributions until you provide us with a valid mailing
address.
TAX CONSEQUENCES. This prospectus provides general tax information only. If you
are investing through a tax-deferred retirement account, such as an IRA, special
tax rules apply. Please consult your tax adviser for detailed information about
a fund's tax consequences for you.
--------------------------------------------------------------------------------
PLAIN TALK ABOUT
"BUYING A DIVIDEND"
Unless you are investing through a tax-deferred retirement account (such as an
IRA), you should avoid buying 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.
--------------------------------------------------------------------------------
<PAGE>
11
SHARE PRICE
The 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 of the
Fund by the number of Fund shares outstanding:
Knowing the daily net asset value is useful to you as a shareholder because
it indicates the current value of your investment. The Fund's NAV, multiplied by
the number of shares you own, gives you the dollar amount you would have
received had you sold all of your shares back to the Fund that day.
A NOTE ON PRICING: The 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 Fund's board of trustees.
The Fund's share price can be found daily in the mutual fund listings of
most major newspapers under the heading "Vanguard Funds."
FINANCIAL HIGHLIGHTS
The following financial highlights table is intended to help you understand the
Fund's financial performance for the past five years, and certain information
reflects financial results for a single Fund share. The total returns in the
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 the Fund's financial statements--is included in the Fund's
most recent annual report to shareholders. You may have the annual report sent
to you without charge by contacting Vanguard.
<PAGE>
12
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------
VANGUARD U.S. GROWTH FUND
YEAR ENDED AUGUST 31,
-------------------------------------------------------------
2000 1999 1998 1997 1996
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF YEAR $38.92 $30.36 $27.74 $22.62 $18.83
-------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .10 .21 .21 .27 .26
Net Realized and
Unrealized Gain
(Loss) on
Investments 12.47 10.85 3.57 6.73 4.39
-------------------------------------------------------------
Total from
Investment
Operations 12.57 11.06 3.78 7.00 4.65
-------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net
Investment Income (.21) (.19) (.27) (.26) (.29)
Distributions from
Realized Capital Gains (2.02) (2.31) (.89) (1.62) (.57)
-------------------------------------------------------------
Total Distributions (2.23) (2.50) (1.16) (1.88) (.86)
-------------------------------------------------------------------------------------
NET ASSET VALUE, END
OF YEAR $49.26 $38.92 $30.36 $27.74 $22.62
=====================================================================================
TOTAL RETURN 33.29% 37.38% 14.01% 32.50% 25.28%
=====================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of
Year (Millions) $22,331 $16,007 $9,587 $7,445 $4,544
Ratio of Total
Expenses to Average
Net Assets 0.38% 0.39% 0.41% 0.42% 0.43%
Ratio of Net
Investment Income to
Average Net Assets 0.24% 0.59% 0.69% 1.13% 1.32%
Turnover Rate 76% 49% 48% 35% 44%
=====================================================================================
</TABLE>
--------------------------------------------------------------------------------
PLAIN TALK ABOUT
HOW TO READ THE FINANCIAL HIGHLIGHTS TABLE
The Fund began fiscal 2000 with a net asset value (price) of $38.92 per share.
During the year, the Fund earned $0.10 per share from investment income
(interest and dividends) and $12.47 per share from investments that had
appreciated in value or that were sold for higher prices than the Fund paid for
them.
Shareholders received $2.23 per share in the form of dividend and capital gains
distributions. A portion of each year's distributions may come from the prior
year's income or capital gains.
The earnings ($12.57 per share) minus the distributions ($2.23 per share)
resulted in a share price of $49.26 at the end of the year. This was an increase
of $10.34 per share (from $38.92 at the beginning of the year to $49.26 at the
end of the year). For a shareholder who reinvested the distributions in the
purchase of more shares, the total return from the Fund was 33.29% for the year.
As of August 31, 2000, the Fund had $22.3 billion in net assets. For the year,
its expense ratio was 0.38% ($3.80 per $1,000 of net assets); and its net
investment income amounted to 0.24% of its average net assets. It sold and
replaced securities valued at 76% of its net assets.
--------------------------------------------------------------------------------
<PAGE>
13
--------------------------------------------------------------------------------
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: $3,000 for regular 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.
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 to purchase shares by wire. See Contacting Vanguard.
YOUR PURCHASE CHECK
When investing by check, make the check payable to: The Vanguard Group-23.
YOUR PURCHASE PRICE
You buy shares at a fund's next-determined 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 SHOULD KNOW
^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.
<PAGE>
14
^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.
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.
YOUR REDEMPTION PRICE
You redeem shares at a fund's next-determined 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 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.
<PAGE>
15
REDEMPTION RULES YOU SHOULD KNOW
^SPECIAL ACCOUNTS. Special documentation may be 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
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.
^SHARE CERTIFICATES. If share certificates have been issued for your account,
those shares cannot be redeemed until you return the certificates (unsigned) to
Vanguard by registered mail. For the correct address, see Contacting Vanguard.
^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:
- 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
<PAGE>
16
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:
- 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.
RESPONSIBILITY FOR FRAUD
Vanguard will not be responsible for any account 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 statements 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 ACTIVITY
Because excessive account transactions can disrupt 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.
<PAGE>
17
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 THROUGH OTHER FIRMS
You may purchase or sell shares of most Vanguard funds through a financial
intermediary, such as a bank, broker, or investment adviser. If you invest with
Vanguard through an intermediary, please read that firm's program materials
carefully to learn of any special rules that may apply. For example, special
terms may apply to additional service features, fees, or other policies. Consult
your intermediary to determine when your order will be priced.
LOW BALANCE ACCOUNTS
All Vanguard funds reserve the right to close any investment-only
retirement-plan account or 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(TM) Fund). The fee
is waived if your total Vanguard account assets are $50,000 or more.
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 STATEMENTS
For most taxable accounts, average cost review 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 STATEMENTS
Each time you buy, sell, or exchange shares, we will 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 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.
REPORTS
You will receive financial reports about your funds twice a year--in April and
October. 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.
<PAGE>
18
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 n 24 hours per day, 7 days per week
VANGUARD TELE-ACCOUNT(R)
1-800-662-6273
(ON-BOARD)
- For automated fund and account information
- For redemptions by check, exchange, or wire
- Toll-free, 24 hours per day, 7 days per week
INVESTOR INFORMATION
1-800-662-7447
(SHIP)
(Text telephone at
1-800-952-3335)
- For fund and service information
- For literature requests
- Business hours only
CLIENT SERVICES
1-800-662-2739 (CREW)
(Text telephone at
1-800-749-7273)
- For account information
- For most account transactions
- Business hours only
INSTITUTIONAL DIVISION
1-888-809-8102
- For information and services for large institutional investors
- Business hours only
<PAGE>
19
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 this fund number when contacting Vanguard about the Fund: U.S.
Growth-23.
<PAGE>
GLOSSARY OF INVESTMENT TERMS
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 that
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.
FUND DIVERSIFICATION
Holding a variety of securities so that a fund's return is not badly hurt by the
poor performance of a single security, industry, or country.
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.
INVESTMENT ADVISER
An organization that makes the day-to-day decisions regarding a fund's
investments.
MUTUAL FUND
An investment company that pools the money of many people and invests it in a
variety of securities in an effort to achieve a specific objective over time.
NET ASSET VALUE (NAV)
The market value of a mutual fund's total assets, minus liabilities, divided by
the number of shares outstanding. The value of a single share is called its
share value or share price.
PRICE/EARNINGS (P/E) RATIO
The current share price of a stock, divided by its per-share earnings (profits).
A stock selling for $20, with earnings of $2 per share, has a price/earnings
ratio of 10.
PRINCIPAL
The amount of money you put into an investment.
SECURITIES
Stocks, bonds, money market instruments, and other investment vehicles.
TOTAL RETURN
A percentage change, over a specified time period, in a mutual fund's net asset
value, assuming 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]
Post Office Box 2600
Valley Forge, PA 19482-2600
FOR MORE INFORMATION
If you'd like more information
about Vanguard U.S. Growth Fund, the
following documents are available
free upon request:
ANNUAL/SEMIANNUAL REPORTS
TO SHAREHOLDERS
Additional information about the
Fund's investments is available in
the Fund's annual and semiannual
reports to shareholders.
STATEMENT OF ADDITIONAL
INFORMATION (SAI)
The SAI provides more detailed
information about the Fund.
The current annual and semiannual
reports and the SAI are
incorporated by reference into
(and are thus legally a part of)
this prospectus.
All market indexes referenced in
this prospectus are the exclusive
property of their respective owners.
To receive a free copy of the latest
annual or semiannual report or the
SAI, or to request additional
information about the Fund 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 Fund
(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 Fund 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.
Fund's Investment Company Act
file number: 811-1027
(C) 2000 The Vanguard Group, Inc.
All rights reserved.
Vanguard Marketing
Corporation, Distributor.
P023 122000
<PAGE>
VANGUARD U.S. GROWTH FUND
FOR PARTICIPANTS - DECEMBER 20, 2000
This prospectus
contains financial data
for the Fund through
the fiscal year ended
August 31, 2000.
STOCK
PROSPECTUS
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
accurace or adequacy of this prospectus. Any representation to the contrary is a
criminal offense.
[A MEMBER OF
THE VANGUARD GROUP(R) LOGO]
<PAGE>
VANGUARD U.S. GROWTH FUND
Participant Prospectus
December 20, 2000
A Growth Stock Mutual Fund
--------------------------------------------------------------------------------
1 FUND PROFILE
3 ADDITIONAL INFORMATION
3 MORE ON THE FUND
7 THE FUND AND VANGUARD
8 INVESTMENT ADVISER
9 DIVIDENDS, CAPITAL GAINS, AND TAXES
9 SHARE PRICE
10 FINANCIAL HIGHLIGHTS
12 INVESTING WITH VANGUARD
13 ACCESSING FUND INFORMATION BY COMPUTER
GLOSSARY (inside back cover)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
WHY READING THIS PROSPECTUS IS IMPORTANT
This prospectus explains the investment objective, policies, strategies, and
risks associated with the Fund. 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 decide whether the Fund is the right
investment for you. We suggest that you keep this prospectus for future
reference.
This Prospectus is intended for participants in employer-sponsored
retirement or savings plans. Another version--for investors who would like to
open a personal investment account--can be obtained by calling Vanguard at
1-800-662-7447.
--------------------------------------------------------------------------------
<PAGE>
1
FUND PROFILE
INVESTMENT OBJECTIVE
The Fund seeks to provide long-term capital growth.
INVESTMENT STRATEGIES
The Fund invests mainly in large-capitalization stocks of seasoned U.S.
companies with records of superior growth. The Fund chooses companies with
strong positions in their markets, reasonable financial strength, and low
sensitivity to changing economic conditions.
PRIMARY RISKS
An investment in the Fund could lose money over short or even long periods. You
should expect the Fund's share price and total return to fluctuate within a wide
range, like the overall stock market. 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. The Fund's performance
could also be hurt by:
- Investment style risk, which is the chance that returns from
large-capitalization growth stocks will trail returns from the overall
stock market. Specific types of 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.
- Manager risk, which is the chance that poor security selection will cause
the Fund to underperform other funds with similar investment objectives.
PERFORMANCE/RISK INFORMATION
The following bar chart is intended to help you understand the risk of investing
in the Fund. It shows how the Fund's performance has varied from one calendar
year to another over the past ten years. In addition, there is a table that
shows how the Fund's average annual total returns compare with those of relevant
market indexes over set periods of time. 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 4.60%
1991 46.76%
1992 2.76%
1993 -1.45%
1994 3.88%
1995 38.44%
1996 26.05%
1997 25.93%
1998 39.98%
1999 22.28%
-----------------------------------------------------
The Fund's year-to-date return as of the most recent
calendar quarter ended September 30, 2000, was 6.43%.
-----------------------------------------------------
During the period shown in the bar chart, the highest return for a calendar
quarter was 24.73% (quarter ended December 31, 1998), and the lowest return for
a quarter was -15.63% (quarter ended September 30, 1990).
<PAGE>
2
--------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS FOR YEARS ENDED DECEMBER 31, 1999
--------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS
--------------------------------------------------------------------
Vanguard U.S. Growth Fund 22.28% 30.34% 19.77%
Russell 1000 Growth Index 33.16 32.41 20.32
Standard & Poor's 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 on those incurred in the fiscal year ended August 31, 2000.
SHAREHOLDER FEES (fees paid directly from your investment)
Sales Charge (Load) Imposed 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: 0.36%
12b-1 Distribution Fee: None
Other Expenses: 0.02%
TOTAL ANNUAL FUND OPERATING EXPENSES: 0.38%
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's shares. 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 the given period.
--------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
--------------------------------------------------
$39 $122 $213 $480
--------------------------------------------------
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>
3
--------------------------------------------------------------------------------
PLAIN TALK ABOUT
FUND EXPENSES
All mutual funds have operating expenses. These expenses, which are deducted
from a fund's gross income, are expressed as a percentage of the net assets of
the fund. Vanguard U.S. Growth Fund's expense ratio in fiscal year 2000 was
0.38%, or $3.80 per $1,000 of average net assets. The average large-cap growth
mutual fund had expenses in 1999 of 1.41%, or $14.10 per $1,000 of average net
assets (derived from data provided by Lipper Inc., which reports on the mutual
fund industry). Management expenses, which are one part of operating expenses,
include investment advisory fees as well as other costs of managing a fund--such
as account maintenance, reporting, accounting, legal, and other administrative
expenses.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
PLAIN TALK ABOUT
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 expenses can, over time, have
a dramatic effect on a fund's performance.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
ADDITIONAL INFORMATION
DIVIDENDS AND CAPITAL GAINS NEWSPAPER ABBREVIATION
Distributed annually in December USGro
INVESTMENT ADVISER VANGUARD FUND NUMBER
Lincoln Capital Management 023
Company, Chicago, Ill.,
since 1987 CUSIP NUMBER
921910105
INCEPTION DATE
January 6, 1959 TICKER SYMBOL
VWUSX
NET ASSETS AS OF AUGUST 31, 2000
$22.3 billion
--------------------------------------------------------------------------------
MORE ON THE FUND
This prospectus describes risks you would face as a Fund investor. It is
important to keep in mind one of the main axioms of investing: The higher the
risk of losing money, the higher the potential reward. The reverse, also, is
generally true: The lower the risk, the lower the potential reward. As you
consider an investment in any mutual fund, you should take into account your
personal tolerance for daily fluctuations in securities markets. Look for this
[FLAG] symbol throughout the prospectus. It is used to mark detailed information
about each type of risk that you would confront as a Fund shareholder.
The following sections explain the primary investment strategies and
policies that the Fund uses in pursuit of its objective. The Fund's board of
trustees, which oversees the Fund's management, may change investment strategies
or policies in the interest of shareholders without a shareholder vote.
Finally, you'll find information on other important features of the Fund.
<PAGE>
4
--------------------------------------------------------------------------------
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 to such factors as
earnings and book value, and these stocks typically pay 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.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
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, on average, 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.
--------------------------------------------------------------------------------
MARKET EXPOSURE
The Fund invests mainly in common stocks of large-capitalization companies that
offer favorable prospects for capital growth but produce little current income.
Because it invests mainly in stocks, the Fund is subject to certain risks.
[FLAG] THE FUND IS SUBJECT TO STOCK 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 PRICES AND PERIODS OF
FALLING 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, a widely used barometer of 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
<PAGE>
5
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 this Fund in particular.
[FLAG] THE FUND IS SUBJECT TO INVESTMENT STYLE RISK, WHICH IS THE CHANCE THAT
RETURNS FROM THE MARKET SECTOR IN WHICH IT INVESTS WILL TRAIL RETURNS FROM
OTHER MARKET SECTORS. AS A GROUP, LARGE-CAPITALIZATION GROWTH STOCKS TEND
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.
--------------------------------------------------------------------------------
PLAIN TALK ABOUT
FUND DIVERSIFICATION
In general, the more diversified a fund's stock or bond holdings, the less
likely that a specific security's poor performance will hurt the fund. One
measure of a fund's diversification is the percentage of its assets represented
by its ten largest holdings. The average U.S. equity mutual fund has about 35%
of its assets invested in its ten largest holdings, while some less-diversified
mutual funds have more than 50% of assets invested in their top ten.
--------------------------------------------------------------------------------
SECURITY SELECTION
Lincoln Capital Management Company (Lincoln), adviser to the Fund, selects
common stocks of large companies that are generally market leaders and, in the
adviser's opinion, have above-average prospects for continued growth and are
selling at attractive prices. Such companies tend to have strong positions in
their industry, reasonable financial strength, and relatively low sensitivity to
changing economic conditions.
[FLAG] BECAUSE THE FUND INVESTS A HIGHER PERCENTAGE OF ASSETS IN ITS TEN LARGEST
HOLDINGS THAN THE AVERAGE STOCK FUND DOES, THE FUND IS SUBJECT TO THE RISK
THAT ITS PERFORMANCE MAY BE HURT DISPROPOR-TIONATELY BY THE POOR
PERFORMANCE OF RELATIVELY FEW STOCKS.
As of August 31, 2000, the Fund had invested 42.4% of net assets in its top
ten holdings.
The Fund is run according to traditional methods of active investment
management. This means that securities are bought and sold according to the
adviser's judgments about
<PAGE>
6
companies and their financial prospects, within the context of the stock market
and economy in general.
The Fund is generally managed without regard to tax ramifications.
[FLAG] THE FUND IS SUBJECT TO MANAGER RISK, WHICH IS THE CHANCE THAT THE ADVISER
WILL DO A POOR JOB OF SELECTING STOCKS.
OTHER INVESTMENT POLICIES AND RISKS
Besides investing in common stocks of growth companies, the Fund may make
certain other kinds of investments to achieve its objective.
The Fund may invest, to a limited extent, in foreign securities.
The Fund may also invest in stock futures and options contracts, which are
traditional 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. The Fund will not use futures for speculative purposes or as leveraged
investments that magnify gains or losses. The Fund's obligation under futures
contracts will not exceed 20% of its total assets.
The reasons for which the Fund will invest in futures and options are:
- To keep cash on hand to meet shareholder redemptions or other needs while
simulating full investment in stocks.
- To reduce the Fund's transaction costs or add value when these instruments
are favorably priced.
The Fund may temporarily depart from its normal investment policies--for
instance, by investing substantially in cash reserves--in response to
extraordinary market, economic, political, or other conditions. In doing so, the
Fund may succeed in avoiding losses but otherwise fail to achieve its investment
objective.
--------------------------------------------------------------------------------
PLAIN TALK ABOUT
DERIVATIVES
A derivative is a financial contract whose value is based on (or "derived" from)
a traditional security (such as a stock or a bond), an asset (such as a
commodity like gold), or a market index (such as the S&P 500 Index). Some forms
of derivatives, such as exchange-traded futures and options on securities,
commodities, or indexes, have been trading on regulated exchanges for more than
two decades. These types of derivatives are standardized contracts that can
easily be bought and sold, and whose market values are determined and published
daily. Non-standardized derivatives, on the other hand, tend to be more
specialized or complex, and may be harder to value. If used for speculation or
as leveraged investments, derivatives can carry considerable risks.
--------------------------------------------------------------------------------
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.
This is why all Vanguard funds have adopted special policies to discourage
short-term trading. Specifically:
<PAGE>
7
- Each Vanguard fund reserves the right to reject any purchase
request--including exchanges from other Vanguard funds--that it regards as
disruptive to efficient portfolio management. A purchase request could be
rejected because of the timing of the investment or because of a history of
excessive trading by the investor.
- Each Vanguard fund (except the money market funds) limits the number of
times that an investor can exchange into and out of the fund.
- Each Vanguard fund reserves the right to stop offering shares at any time.
- Certain Vanguard funds charge transaction fees on purchases and/or
redemptions oftheir shares.
See the INVESTING WITH VANGUARD section of this prospectus for further details
on Vanguard's transaction policies.
THE VANGUARD FUNDS DO NOT PERMIT MARKET-TIMING. DO NOT INVEST WITH VANGUARD
IF YOU ARE A MARKET-TIMER.
TURNOVER RATE
Although the Fund normally seeks to invest for the long term, it may sell
securities regardless of how long they have been held. The FINANCIAL HIGHLIGHTS
section of this prospectus shows historic turnover rates for the Fund. A
turnover rate of 100%, for example, would mean that the Fund had sold and
replaced securities valued at 100% of its net assets within a one-year period.
--------------------------------------------------------------------------------
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 taxable
income. As of August 31, 2000, the average turnover rate for all large-cap
growth funds was approximately 129%, according to Morningstar, Inc.
--------------------------------------------------------------------------------
THE FUND AND VANGUARD
The Fund is a member 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 Vanguard funds share in the expenses associated with business
operations, such as personnel, office space, equipment, and advertising.
Vanguard also provides marketing services to the funds. Although
shareholders do not pay sales commissions or 12b-1 distribution fees, each fund
pays its allocated share of The Vanguard Group's marketing costs.
<PAGE>
8
--------------------------------------------------------------------------------
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
Lincoln Capital Management (Lincoln), 200 South Wacker Drive, Chicago, IL 60606,
adviser to the Fund, is an investment advisory firm founded in 1967. It provides
investment counseling services to a limited number of clients, most of which are
institutional clients such as pension funds. As of August 31, 2000, Lincoln
managed about $74 billion in assets. The firm manages the Fund subject to the
control of the trustees and officers of the Fund. Lincoln's advisory fee is paid
quarterly, and is based on certain annual percentage rates applied to the Fund's
average month-end assets for each quarter. In addition, the firm's advisory fee
may be increased or decreased, based on the cumulative total return of the Fund
over a trailing 36-month period as compared with the cumulative total return of
the Russell 1000 Growth Index over the same period. Please consult the Fund's
Statement of Additional Information for a complete explanation of how advisory
fees are calculated.
The performance adjustment will not be fully operable until the quarter
ended August 31, 2003. Until that date, the performance adjustment will be
calculated using certain transition rules that are explained in the Statement of
Additional Information.
For the fiscal year ended August 31, 2000, the advisory fee represented an
effective annual rate of 0.11% of the Fund's average net assets.
The adviser is authorized to choose broker-dealers to handle the purchase
and sale of the Fund's securities, and to gain the best available price and most
favorable execution for all transactions. Also, the Fund may direct the adviser
to use a particular broker for certain transactions in exchange for commission
rebates or research services provided to the Fund.
In the interest of obtaining better execution of a transaction, the adviser
may at times choose brokers who charge higher commissions. If more than one
broker can obtain the best available price and most favorable execution, then
the adviser is authorized to choose a broker who, in addition to executing the
transaction, will provide research services to the adviser or the Fund.
The board of trustees may, without prior approval from shareholders, change
the terms of an advisory agreement or hire a new investment adviser--either as a
replacement for an existing adviser or as an additional adviser. Any significant
change in the Fund's advisory arrangements will be communicated to shareholders
in writing. In addition, as the Fund's sponsor and overall manager, The Vanguard
Group may provide investment advisory services to the Fund, on an at-cost basis,
at any time.
<PAGE>
9
--------------------------------------------------------------------------------
PLAIN TALK ABOUT
THE FUND'S ADVISER
The managers primarily responsible for overseeing the Fund's investments are:
J. PARKER HALL III, Chairman of Lincoln Capital Management Company. He has
worked in investment management since 1957; has been with Lincoln since 1971;
and has managed the Fund since 1987. Education: B.A., Swarthmore College;
M.B.A., Harvard Business School.
DAVID M. FOWLER, President of Lincoln. He has worked in investment management
since 1972; has been with Lincoln since 1984; and has managed the Fund since
1987. Education: B.S., Loyola University; M.B.A., Northwestern University.
JOHN S. COLE, Executive Vice President of Lincoln. He worked in investment
management as Executive Vice President and Chief Equity Officer at Boatman's
Trust Company from 1992 until he joined Lincoln in 1997; and has managed the
Fund since 1999. Education: B.S., Bentley College; M.B.A., University of Notre
Dame.
--------------------------------------------------------------------------------
DIVIDENDS, CAPITAL GAINS, AND TAXES
The 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. Distributions generally occur in December.
Your dividend and capital gains distributions will be reinvested in
additional Fund shares and accumulate on a tax-deferred basis if you are
investing through an employer-sponsored retirement or savings plan. You will not
owe taxes on these distributions until you begin withdrawals from the plan. You
should consult your plan administrator, your plan's Summary Plan Description, or
your tax adviser about the tax consequences of plan withdrawals.
--------------------------------------------------------------------------------
PLAIN TALK ABOUT
DISTRIBUTIONS
As a shareholder, you are entitled to your portion 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 any stock
holdings and the interest it receives from any 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
The 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 of the
Fund by the number of Fund shares outstanding.
<PAGE>
10
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: The 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 Fund's board of trustees.
The Fund's share price can be found daily in the mutual fund listings of
most major newspapers under the heading "Vanguard Funds."
FINANCIAL HIGHLIGHTS
The following financial highlights table is intended to help you understand the
Fund's financial performance for the past five years, and certain information
reflects financial results for a single Fund share. The total returns in the
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 the Fund's financial statements--is included in the Fund's
most recent annual report to shareholders. You may have the annual report sent
to you without charge by contacting Vanguard.
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------
VANGUARD U.S. GROWTH FUND
YEAR ENDED AUGUST 31,
-------------------------------------------------------------
2000 1999 1998 1997 1996
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF YEAR $38.92 $30.36 $27.74 $22.62 $18.83
-------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .10 .21 .21 .27 .26
Net Realized and
Unrealized Gain
(Loss) on
Investments 12.47 10.85 3.57 6.73 4.39
-------------------------------------------------------------
Total from
Investment
Operations 12.57 11.06 3.78 7.00 4.65
-------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net
Investment Income (.21) (.19) (.27) (.26) (.29)
Distributions from
Realized Capital Gains (2.02) (2.31) (.89) (1.62) (.57)
-------------------------------------------------------------
Total Distributions (2.23) (2.50) (1.16) (1.88) (.86)
-------------------------------------------------------------------------------------
NET ASSET VALUE, END
OF YEAR $49.26 $38.92 $30.36 $27.74 $22.62
=====================================================================================
TOTAL RETURN 33.29% 37.38% 14.01% 32.50% 25.28%
=====================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of
Year (Millions) $22,331 $16,007 $9,587 $7,445 $4,544
Ratio of Total
Expenses to Average
Net Assets 0.38% 0.39% 0.41% 0.42% 0.43%
Ratio of Net
Investment Income to
Average Net Assets 0.24% 0.59% 0.69% 1.13% 1.32%
Turnover Rate 76% 49% 48% 35% 44%
=====================================================================================
</TABLE>
<PAGE>
11
--------------------------------------------------------------------------------
PLAIN TALK ABOUT
HOW TO READ THE FINANCIAL HIGHLIGHTS TABLE
The Fund began fiscal 2000 with a net asset value (price) of $38.92 per share.
During the year, the Fund earned $0.10 per share from investment income
(interest and dividends) and $12.47 per share from investments that had
appreciated in value or that were sold for higher prices than the Fund paid for
them.
Shareholders received $2.23 per share in the form of dividend and capital gains
distributions. A portion of each year's distributions may come from the prior
year's income or capital gains.
The earnings ($12.57 per share) minus the distributions ($2.23 per share)
resulted in a share price of $49.26 at the end of the year. This was an increase
of $10.34 per share (from $38.92 at the beginning of the year to $49.26 at the
end of the year). For a shareholder who reinvested the distributions in the
purchase of more shares, the total return from the Fund was 33.29% for the year.
As of August 31, 2000, the Fund had $22.3 billion in net assets. For the year,
its expense ratio was 0.38% ($3.80 per $1,000 of net assets); and its net
investment income amounted to 0.24% of its average net assets. It sold and
replaced securities valued at 76% of its net assets.
--------------------------------------------------------------------------------
<PAGE>
12
INVESTING WITH VANGUARD
The Fund is an investment option in your retirement or savings plan. Your plan
administrator or your employee benefits office can provide you with detailed
information on how to participate in your plan and how to elect the Fund as an
investment option.
- If you have any questions about the Fund or Vanguard, including those about
the 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 the Fund's shares are processed as
soon as they have been received by Vanguard in good order. Good order means that
your request includes complete information on your contribution, exchange, or
redemption, and that Vanguard has received the appropriate assets.
In all cases, your transaction will be based on the 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. Contact your plan
administrator for special cut off times that may apply to transaction requests
placed with another service provider.
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 the 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>
13
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>
GLOSSARY OF INVESTMENT TERMS
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 that
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.
FUND DIVERSIFICATION
Holding a variety of securities so that a fund's return is not badly hurt by the
poor performance of a single security, industry, or country.
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.
INVESTMENT ADVISER
An organization that makes the day-to-day decisions regarding a fund's
investments.
MUTUAL FUND
An investment company that pools the money of many people and invests it in a
variety of securities in an effort to achieve a specific objective over time.
NET ASSET VALUE (NAV)
The market value of a mutual fund's total assets, minus liabilities, divided by
the number of shares outstanding. The value of a single share is called its
share value or share price.
PRICE/EARNINGS (P/E) RATIO
The current share price of a stock, divided by its per-share earnings (profits).
A stock selling for $20, with earnings of $2 per share, has a price/earnings
ratio of 10.
PRINCIPAL
The amount of money you put into an investment.
SECURITIES
Stocks, bonds, money market instruments, and other investment vehicles.
TOTAL RETURN
A percentage change, over a specified time period, in a mutual fund's net asset
value, assuming 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. Growth Fund, the
following documents are available
free upon request:
ANNUAL/SEMIANNUAL REPORTS
TO SHAREHOLDERS
Additional information about the
Fund's investments is available in
the Fund's annual and semiannual
reports to shareholders.
STATEMENT OF ADDITIONAL
INFORMATION (SAI)
The SAI provides more detailed
information about the Fund.
The current annual and semiannual
reports and the SAI are
incorporated by reference into
(and are thus legally a part of)
this prospectus.
All market indexes referenced in
this prospectus are the exclusive
property of their respective owners.
To receive a free copy of the latest
annual or semiannual report or the
SAI, or to request additional
information about the Fund 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 Fund
(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 Fund 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.
Fund's Investment Company Act
file number: 811-1027
(C) 2000 The Vanguard Group, Inc.
All rights reserved.
Vanguard Marketing
Corporation, Distributor.
I023 122000
<PAGE>
VANGUARD INTERNATIONAL GROWTH FUND
INVESTOR SHARES - DECEMBER 20, 2000
This prospectus
contains financial data
for the Fund through
the fiscal year ended
August 31, 2000.
STOCK
PROSPECTUS
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
accurace or adequacy of this prospectus. Any representation to the contrary is a
criminal offense.
[A MEMBER OF
THE VANGUARD GROUP(R) LOGO]
<PAGE>
VANGUARD INTERNATIONAL GROWTH FUND
Prospectus
December 20, 2000
An International Stock Mutual Fund
--------------------------------------------------------------------------------
CONTENTS
1 FUND PROFILE 14 INVESTING WITH VANGUARD
3 ADDITIONAL INFORMATION 15 Buying Shares
3 MORE ON THE FUND 17 Redeeming Shares
9 THE FUND AND VANGUARD 19 Other Rules You Should Know
9 INVESTMENT ADVISER 21 Fund and Account Updates
10 DIVIDENDS, CAPITAL GAINS, AND TAXES 22 Contacting Vanguard
12 SHARE PRICE 22 Contacting Vanguard
12 FINANCIAL HIGHLIGHTS GLOSSARY (inside back cover)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
WHY READING THIS PROSPECTUS IS IMPORTANT
This prospectus explains the investment objective, policies, strategies, and
risks associated with the Fund. 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 decide whether the Fund is the right
investment for you. We suggest that you keep this prospectus for future
reference.
--------------------------------------------------------------------------------
<PAGE>
1
FUND PROFILE
INVESTMENT OBJECTIVE
The Fund seeks to provide long-term capital growth.
INVESTMENT STRATEGIES
The Fund invests mainly in the stocks of seasoned companies located outside the
United States. In selecting stocks, the Fund's adviser evaluates foreign markets
around the world and chooses companies with above-average growth potential.
PRIMARY RISKS
An investment in the Fund could lose money over short or even long periods. You
should expect the Fund's share price and total return to fluctuate within a wide
range like the overall stock market. The Fund's performance could be hurt by:
- Country risk, which is the chance that domestic events--such as political
upheaval, financial troubles, or a natural disaster--will weaken a
country's securities markets.
- Currency risk, which is the chance that investments in a particular country
will decrease in value if the U.S. dollar rises in value against that
country's currency.
- Manager risk, which is the chance that poor security selection will cause
the Fund to underperform other funds with similar investment objectives.
- Investment style risk, which is the chance that returns from growth stocks
will trail returns from the overall stock market. Specific types of 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 is intended to help you understand the risk of investing
in the Fund. It shows how the Fund's performance has varied from one calendar
year to another over the past ten years. In addition, there is a table that
shows how the Fund's average annual total returns compare with those of a
relevant market index over set periods of time. 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 -12.05%
1991 4.74%
1992 -5.79%
1993 44.74%
1994 0.76%
1995 14.89%
1996 14.65%
1997 4.12%
1998 16.93%
1999 26.34%
----------------------------------------------------
The Fund's year-to-date return as of the most recent
calendar quarter ended September 30, 2000, was -7.56%.
----------------------------------------------------
During the period shown in the bar chart, the highest return for a calendar
quarter was 21.86% (quarter ended December 31, 1999), and the lowest return for
a quarter was -18.25% (quarter ended September 30, 1990).
<PAGE>
2
-------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS FOR YEARS ENDED DECEMBER 31, 1999
-------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS
-------------------------------------------------------------------------
Vanguard International Growth Fund 26.34% 15.17% 9.87%
MSCI EAFE* 27.30 13.15 7.33
-------------------------------------------------------------------------
*Morgan Stanley Capital International Europe, Australasia, Far East Index.
-------------------------------------------------------------------------
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 on those incurred in the fiscal year ended August 31, 2000.
SHAREHOLDER FEES (fees paid directly from your investment)
Sales Charge (Load) Imposed 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: 0.46%
12b-1 Distribution Fee: None
Other Expenses: 0.07%
TOTAL ANNUAL FUND OPERATING EXPENSES: 0.53%
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's shares. 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 the given period.
--------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
--------------------------------------------------
$54 $170 $296 $665
--------------------------------------------------
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>
3
--------------------------------------------------------------------------------
PLAIN TALK ABOUT
FUND EXPENSES
All mutual funds have operating expenses. These expenses, which are deducted
from a fund's gross income, are expressed as a percentage of the net assets of
the fund. Vanguard International Growth Fund's expense ratio in fiscal year 2000
was 0.53%, or $5.30 per $1,000 of average net assets. The average actively
managed international equity mutual fund had expenses in 1999 of 1.72%, or
$17.20 per $1,000 of average net assets (derived from data provided by Lipper
Inc., which reports on the mutual fund industry). Management expenses, which are
one part of operating expenses, include investment advisory fees as well as
other costs of managing a fund--such as account maintenance, reporting,
accounting, legal, and other administrative expenses.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
PLAIN TALK ABOUT
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 expenses can, over time, have
a dramatic effect on a fund's performance.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
ADDITIONAL INFORMATION
DIVIDENDS AND CAPITAL GAINS MINIMUM INITIAL INVESTMENT
Distributed annually in December $3,000; $1,000 for IRAs and custodial
accountsfor minors
INVESTMENT ADVISER
Schroder Investment Management North NEWSPAPER ABBREVIATION
America Inc., London, England, since IntlGr
inception
VANGUARD FUND NUMBER
INCEPTION DATE 081
September 30, 1981
CUSIP NUMBER
NET ASSETS AS OF AUGUST 31, 2000 921910204
$10.1 billion
TICKER SYMBOL
SUITABLE FOR IRAS VWIGX
Yes
--------------------------------------------------------------------------------
MORE ON THE FUND
This prospectus describes risks you would face as a Fund shareholder. It is
important to keep in mind one of the main axioms of investing: The higher the
risk of losing money, the higher the potential reward. The reverse, also, is
generally true: The lower the risk, the lower the potential reward. As you
consider an investment in any mutual fund, you should take into account your
personal tolerance for daily fluctuations in the securities markets. Look for
this [FLAG] symbol throughout the prospectus. It is used to mark detailed
information about each type of risk that you would confront as a Fund
shareholder.
The following sections explain the primary investment strategies and
policies that the Fund uses in pursuit of its objective. The Fund's board of
trustees, which oversees the
<PAGE>
4
Fund's management, may change investment strategies or policies in the interest
of shareholders without a shareholder vote.
Finally, you'll find information on other important features of the Fund.
--------------------------------------------------------------------------------
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 to such factors as
earnings and book value, and these stocks typically pay 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.
--------------------------------------------------------------------------------
MARKET EXPOSURE
The Fund invests mainly in common stocks of non-U.S. companies that have above-
average potential for growth. About two-thirds of the Fund's assets are invested
in long-term growth stocks; the remainder is invested in stocks of companies
that pursue shorter-term opportunities.
Because it invests mainly in foreign stocks, the Fund is subject to certain
risks.
[FLAG] THE FUND IS SUBJECT TO INVESTMENT STYLE RISK, WHICH IS THE CHANCE THAT
RETURNS FROM THE MARKET SECTOR IN WHICH IT INVESTS WILL TRAIL RETURNS FROM
OTHER MARKET SECTORS. AS A GROUP, GROWTH STOCKS TEND 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.
[FLAG]THE FUND IS SUBJECT TO STOCK 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 PRICES AND PERIODS OF
FALLING PRICES.
IN ADDITION, INVESTMENTS IN FOREIGN STOCK MARKETS CAN BE RISKIER THAN U.S.
STOCK INVESTMENTS. THE PRICES OF INTERNATIONAL STOCKS AND THE PRICES OF
U.S. STOCKS HAVE OFTEN MOVED IN OPPOSITE DIRECTIONS. THESE PERIODS HAVE, IN
THE PAST, LASTED FOR AS LONG AS SEVERAL YEARS.
To illustrate the volatility of international stock prices, the following
table shows the best, worst, and average total returns for foreign stock markets
over various periods as measured
<PAGE>
5
by the Morgan Stanley Capital International Europe, Australasia, Far East (MSCI
EAFE) Index, a widely used barometer of international 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.
----------------------------------------------------------
INTERNATIONAL STOCK MARKET RETURNS (1969-1999)
----------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS 20 YEARS
----------------------------------------------------------
Best 69.9% 36.5% 22.8% 16.3%
Worst -23.2 1.5 5.9 12.0
Average 15.2 13.6 14.5 14.7
----------------------------------------------------------
The table covers all of the 1-, 5-, 10-, and 20-year periods from 1969
through 1999. Keep in mind that this was a particularly favorable period for all
stock markets. These average returns reflect past performance on international
stocks; you should not regard them as an indication of future returns from
either foreign markets as a whole or this Fund in particular.
Note that the preceding chart does not take into account returns measured
by the Select Emerging Markets Free Index, a widely used barometer of less
developed stock markets. Emerging markets can be substantially more volatile
than more developed foreign markets. In addition, because the MSCI EAFE Index
tracks the European and Pacific markets collectively, the above returns do not
reflect the variability of returns from year to year for these markets
individually, or the variability across these and other geographic regions or
market sectors. To illustrate this variability, the following table shows
returns for different international markets--as well as the U.S. market for
comparison--from 1990-1999, as measured by their respective indexes. 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.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------
STOCK MARKET RETURNS FOR DIFFERENT INTERNATIONAL MARKETS*
--------------------------------------------------------------------------------------
EUROPEAN MARKET PACIFIC EMERGING U.S.
MARKET MARKETS MARKETS
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1990 -2.00% -34.43% -10.55% -3.10%
1991 14.12 11.51 59.91 30.47
1992 -3.92 -18.51 11.40 7.62
1993 29.25 36.15 74.84 10.08
1994 2.82 12.82 -7.31 1.32
1995 22.08 2.89 0.01** 37.58
1996 21.42 -8.23 15.19 22.96
1997 23.75 -25.74 -16.37 33.36
1998 28.68 2.64 -18.39 28.58
1999 15.77 56.38 60.86 21.04
--------------------------------------------------------------------------------------
* European market returns are measured by the MSCI Europe Index; Pacific
market returns are measured by the MSCI Pacific Free Index; emerging
markets returns are measured by the Select Emerging Markets Free Index; and
U.S. market returns are measured by the Standard & Poor's 500 Index.
** The inception date of the Select Emerging Markets Free Index was May 4,
1994; returns shown for 1990 to 1994 are measured by the MSCI Emerging
Markets Free Index.
--------------------------------------------------------------------------------------
</TABLE>
<PAGE>
6
Keep in mind, however, that these average returns reflect past performance
of the various indexes; you should not consider them as an indication of future
returns from the indexes, or from this Fund in particular.
--------------------------------------------------------------------------------
PLAIN TALK ABOUT
INTERNATIONAL INVESTING
Because foreign stock and bond markets operate differently from the U.S. market,
Americans investing abroad will encounter risks not typically associated with
U.S. companies. For instance, foreign companies are not subject to the same
accounting, auditing, and financial reporting standards and practices as U.S.
companies; and their stocks may not be as liquid as those of similar U.S. firms.
In addition, foreign stock exchanges, brokers, and companies generally have less
government supervision and regulation than their counterparts in the United
States. These factors, among others, could negatively impact the returns
Americans receive from foreign investments.
--------------------------------------------------------------------------------
[FLAG]THE FUND IS SUBJECT TO COUNTRY RISK AND CURRENCY RISK. COUNTRY RISK IS THE
CHANCE THAT DOMESTIC EVENTS--SUCH AS POLITICAL UPHEAVAL, FINANCIAL
TROUBLES, OR A NATURAL DISASTER--WILL WEAKEN A COUNTRY'S SECURITIES MARKET.
CURRENCY RISK IS THE CHANCE THAT INVESTMENTS IN A PARTICULAR COUNTRY WILL
DECREASE IN VALUE IF THE U.S. DOLLAR RISES IN VALUE AGAINST THAT COUNTRY'S
CURRENCY.
SECURITY SELECTION
Schroder Investment Management North America Inc. (Schroder), adviser to the
Fund, believes that the two most important factors in managing the investments
of an international stock fund are country selection and stock selection.
Schroder continually evaluates financial markets around the world--including
Japan, the United Kingdom, the Netherlands, Germany, France, Switzerland,
Sweden, Australia, Hong Kong, Singapore, Malaysia, and Italy--and identifies
those countries with, in the adviser's opinion, the most favorable business
climates.
Once an attractive market has been identified, Schroder analyzes the
companies there and ranks them according to their potential for above-average
earnings growth. Schroder generally considers on-site evaluations an important
part of the security selection process, and members of its team therefore visit
more than 6,000 companies in more than 20 countries each year. The companies
chosen by Schroder reflect a wide variety of countries and industries.
The Fund is run according to traditional methods of active investment
management, which means securities are bought and sold according to the
adviser's judgments about companies and their financial prospects, and about
foreign stock markets and economies in general.
The Fund is generally managed without regard to tax ramifications.
[FLAG]THE FUND IS SUBJECT TO MANAGER RISK, WHICH IS THE CHANCE THAT THE ADVISER
WILL DO A POOR JOB OF SELECTING STOCKS.
<PAGE>
7
OTHER INVESTMENT POLICIES AND RISKS
Besides investing in stocks of foreign companies, the Fund may make certain
other kinds of investments to achieve its objective.
The Fund may enter into forward foreign currency contracts, which may help
protect its holdings against unfavorable short-term changes in exchange rates. A
forward foreign currency contract is an agreement to buy or sell a country's
currency at a specific price on a specific date, usually 30, 60, or 90 days in
the future. In other words, the contract guarantees an exchange rate on a given
date. Managers of funds that invest in foreign securities use these contracts to
guard against sudden, unfavorable changes in U.S. dollar/foreign currency
exchange rates. These contracts will not prevent the Fund's securities from
falling in value during foreign market downswings.
The Fund may also invest in stock futures and options contracts, which are
traditional 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. The Fund will not use futures for speculative purposes or as leveraged
investments that magnify gains or losses. The Fund's obligation under futures
contracts will not exceed 20% of its total assets.
The reasons for which the Fund will invest in futures and options are:
- To keep cash on hand to meet shareholder redemptions or other needs while
simulating full investment in stocks.
- To reduce the Fund's transaction costs or add value when these instruments
are favorably priced.
The Fund may temporarily depart from its normal investment policies--for
instance, by investing substantially in cash reserves--in response to
extraordinary market, economic, political, or other conditions. In doing so, the
Fund may succeed in avoiding losses but otherwise fail to achieve its investment
objective.
--------------------------------------------------------------------------------
PLAIN TALK ABOUT
DERIVATIVES
A derivative is a financial contract whose value is based on (or "derived" from)
a traditional security (such as a stock or a bond), an asset (such as a
commodity like gold), or a market index (such as the S&P 500 Index). Some forms
of derivatives, such as exchange-traded futures and options on securities,
commodities, or indexes, have been trading on regulated exchanges for more than
two decades. These types of derivatives are standardized contracts that can
easily be bought and sold, and whose market values are determined and published
daily. Non-standardized derivatives, on the other hand, tend to be more
specialized or complex, and may be harder to value. If used for speculation or
as leveraged investments, derivatives can carry considerable risks.
--------------------------------------------------------------------------------
COSTS AND MARKET-TIMING
Some investors try to profit from a strategy called market-timing--switching
money into mutual funds 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.
This is why all Vanguard funds have adopted special policies to discourage
short-term trading. Specifically:
<PAGE>
8
- Each Vanguard fund reserves the right to reject any purchase
request--including exchanges from other Vanguard funds--that it regards as
disruptive to efficient portfolio management. A purchase request could be
rejected because of the timing of the investment or because of a history of
excessive trading by the investor.
- Each Vanguard fund (except the money market funds) limits the number of
times that an investor can exchange into and out of the fund.
- Each Vanguard fund reserves the right to stop offering shares at any time.
- Vanguard U.S. Stock Index Funds, International Stock Index Funds, REIT
Index Fund, Balanced Index Fund, and Growth and Income Fund generally do
NOT accept exchanges by telephone or fax, or online. (IRAs and other
retirement accounts are not subject to this rule.)
- Certain Vanguard funds charge transaction fees on purchases and/or
redemptions oftheir shares.
See the INVESTING WITH VANGUARD section of this prospectus for further details
on Vanguard's transaction policies.
THE VANGUARD FUNDS DO NOT PERMIT MARKET-TIMING. DO NOT INVEST WITH VANGUARD
IF YOU ARE A MARKET-TIMER.
TURNOVER RATE
Although the Fund normally seeks to invest for the long term, it may sell
securities regardless of how long they have been held. The FINANCIAL HIGHLIGHTS
section of this prospectus shows historic turnover rates for the Fund. A
turnover rate of 100%, for example, would mean that the Fund had sold and
replaced securities valued at 100% of its net assets within a one-year period.
--------------------------------------------------------------------------------
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 taxable
income. As of August 31, 2000, the average turnover rate for all international
stock funds was approximately 87%, according to Morningstar, Inc.
--------------------------------------------------------------------------------
THE FUND AND VANGUARD
The Fund is a member 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 Vanguard funds share in the expenses associated with business
operations, such as personnel, office space, equipment, and advertising.
Vanguard also provides marketing services to the funds. Although
shareholders do not pay sales commissions or 12b-1 distribution fees, each fund
pays its allocated share of The Vanguard Group's marketing costs.
<PAGE>
9
--------------------------------------------------------------------------------
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
Schroder Investment Management North America Inc. (Schroder), 31 Gresham Street,
London EC2V 7QA, England, adviser to the Fund, is an investment advisory firm
founded in 1979. Schroder is part of a worldwide group of banks and financial
services companies known as The Schroder Group. As of August 31, 2000, The
Schroder Group managed about $210 billion in assets. The firm manages the Fund
subject to the control of the trustees and officers of the Fund.
Schroder's advisory fee is paid quarterly, and is based on certain annual
percentage rates applied to the Fund's average month-end assets for each
quarter. In addition, the firm's advisory fee may be increased or decreased,
based on the cumulative total return of the Fund over a trailing 36-month period
as compared with the cumulative total return of the MSCI EAFE Index over the
same period. Please consult the Fund's Statement of Additional Information for a
complete explanation of how advisory fees are calculated.
For the fiscal year ended August 31, 2000, the advisory fee represented an
effective annual rate of 0.13% of the Fund's average net assets with no
adjustment based on performance.
The adviser is authorized to choose broker-dealers to handle the purchase
and sale of the Fund's securities, and to obtain the best available price and
most favorable execution for all transactions. Also, the Fund may direct the
adviser to use a particular broker for certain transactions in exchange for
commission rebates or research services provided to the Fund.
In the interest of obtaining better execution of a transaction, the adviser
may at times choose brokers who charge higher commissions. If more than one
broker can obtain the best available price and most favorable execution, then
the adviser is authorized to choose a broker who, in addition to executing the
transaction, will provide research services to the adviser or the Fund.
The board of trustees may, without prior approval from shareholders, change
the terms of an advisory agreement or hire a new investment adviser--either as a
replacement for an existing adviser or as an additional adviser. Any significant
change in the Fund's advisory arrangements will be communicated to shareholders
in writing. In addition, as the Fund's sponsor and overall manager, The Vanguard
Group may provide investment advisory services to the Fund, on an at-cost basis,
at any time.
<PAGE>
10
--------------------------------------------------------------------------------
PLAIN TALK ABOUT
THE FUND'S ADVISER
The manager primarily responsible for overseeing the Fund's investments is:
RICHARD FOULKES, Executive Vice President and Deputy Chairman of Schroder. He
has been with The Schroder Group since 1968 and has managed the Fund since 1981.
Education: the Sorbonne, France; B.A. and M.A., Cambridge University, England.
--------------------------------------------------------------------------------
DIVIDENDS, CAPITAL GAINS, AND TAXES
FUND DISTRIBUTIONS
The 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. Distributions generally occur in December. 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 portion 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 any stock
holdings and the interest it receives from any 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:
- 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 Fund's 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.
<PAGE>
11
- 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.
- The Fund may be subject to foreign taxes or foreign tax withholding on
dividends, interest and some capital gains that it receives on foreign
securities. You may qualify for an offsetting credit or deduction under
U.S. tax laws for your portion of the Fund's foreign tax obligations,
provided that you meet certain requirements. See your tax adviser or IRS
Publications for more information.
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 identification number is correct; and
- confirm that you are not subject to backup withholding.
Similarly, Vanguard must withhold from your account if the IRS instructs us to
do so.
FOREIGN INVESTORS. The Vanguard funds generally do not offer their shares for
sale outside of the United States. Foreign investors should be aware that U.S.
withholding and estate taxes may apply to any investments in Vanguard funds.
INVALID ADDRESSES. If a dividend or capital gains distribution check mailed to
your address of record is returned as undeliverable, Vanguard will automatically
reinvest all future distributions until you provide us with a valid mailing
address.
TAX CONSEQUENCES. This prospectus provides general tax information only. If you
are investing through a tax-deferred retirement account, such as an IRA, special
tax rules apply. Please consult your tax adviser for detailed information about
a fund's tax consequences for you.
--------------------------------------------------------------------------------
PLAIN TALK ABOUT
"BUYING A DIVIDEND"
Unless you are investing through a tax-deferred retirement account (such as an
IRA), you should avoid buying 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
The 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 of the
Fund by the number of Fund shares outstanding.
<PAGE>
12
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. Because
foreign securities markets may operate on days that are not business days in the
United States, the value of the Fund's holdings may change on days when
shareholders will not be able to purchase or redeem the Fund's shares.
A NOTE ON PRICING: The 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 Fund's Board of Trustees. The
Fund may also use fair-value pricing if the value of a security held by the Fund
is materially affected by events occurring after the close of the primary
markets or exchanges on which the security is traded. In these situations,
prices used by the Fund to calculate its net asset value may differ from quoted
or published prices for the underlying securities.
The Fund's share price can be found daily in the mutual fund listings of
most major newspapers under the heading "Vanguard Funds."
FINANCIAL HIGHLIGHTS
The following financial highlights table is intended to help you understand the
Fund's financial performance for the past five years, and certain information
reflects financial results for a single Fund share. The total returns in the
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 the Fund's financial statements--is included in the Fund's
most recent annual report to shareholders. You may have the annual report sent
to you without charge by contacting Vanguard.
<PAGE>
13
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------
VANGUARD INTERNATIONAL GROWTH FUND
YEAR ENDED AUGUST 31,
------------------------------------------------------------------
2000 1999 1998 1997 1996
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $19.75 $16.57 $17.86 $16.13 $14.70
---------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .26 .27 .25 .19 .19
Net Realized and Unrealized Gain (Loss) on
Investments 3.38 3.29 (.81) 2.28 1.65
------------------------------------------------------------------
Total from Investment Operations 3.64 3.56 (.56) 2.47 1.84
------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.26) (.22) (.21) (.19) (.20)
Distributions from
Realized Capital Gains (.90) (.16) (.52) (.55) (.21)
------------------------------------------------------------------
Total Distributions (1.16) (.38) (.73) (.74) (.41)
---------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $22.23 $19.75 $16.57 $17.86 $16.13
=========================================================================================================
TOTAL RETURN 18.68% 21.70% -2.99% 15.84% 12.72%
=========================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $10,144 $8,000 $6,820 $7,089 $4,997
Ratio of Total Expenses to Average
Net Assets 0.53% 0.58% 0.59% 0.57% 0.56%
Ratio of Net Investment Income to
Average Net Assets 1.26% 1.42% 1.39% 1.26% 1.35%
Turnover Rate 48% 37% 37% 22% 22%
=========================================================================================================
</TABLE>
--------------------------------------------------------------------------------
PLAIN TALK ABOUT
HOW TO READ THE FINANCIAL HIGHLIGHTS TABLE
The Fund began fiscal 2000 with a net asset value (price) of $19.75 per share.
During the year, the Fund earned $0.26 per share from investment income
(interest and dividends) and $3.38 per share from investments that had
appreciated in value or that were sold for higher prices than the Fund paid for
them.
Shareholders received $1.16 per share in the form of dividend and capital gains
distributions. A portion of each year's distributions may come from the prior
year's income or capital gains.
The earnings ($3.64 per share) minus the distributions ($1.16 per share)
resulted in a share price of $22.23 at the end of the year. This was an increase
of $2.48 per share (from $19.75 at the beginning of the year to $22.23 at the
end of the year). For a shareholder who reinvested the distributions in the
purchase of more shares, the total return from the Fund was 18.68% for the year.
As of August 31, 2000, the Fund had $10.1 billion in net assets. For the year,
its expense ratio was 0.53% ($5.30 per $1,000 of net assets); and its net
investment income amounted to 1.26% of its average net assets. It sold and
replaced securities valued at 48% of its net assets.
--------------------------------------------------------------------------------
<PAGE>
14
--------------------------------------------------------------------------------
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: $3,000 for regular accounts; $1,000 for IRA
ADDON custodial accounts for minors.
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 to purchase shares by wire. See Contacting Vanguard.
YOUR PURCHASE CHECK
When investing by check, make the check payable to: The Vanguard Group-81.
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 SHOULD KNOW
-THIRD PARTY CHECKS. To protect the funds from check fraud, Vanguard will not
accept checks made payable to third parties.
<PAGE>
15
-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, or to reject specific purchase requests, including purchases by
exchange from another Vanguard fund.
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.
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 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 REDEMPTIONS
-CHECK REDEMPTIONS: Unless instructed otherwise, Vanguard will mail you a check,
normally within two business days of your trade date.
-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.
<PAGE>
16
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 SHOULD KNOW
-SPECIAL ACCOUNTS. Special documentation may be 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
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).
-SHARE CERTIFICATES. If share certificates have been issued for your account,
those shares cannot be redeemed until you return the certificates (unsigned) to
Vanguard by registered mail. For the correct address, see Contacting Vanguard.
-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.
<PAGE>
17
-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 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:
- 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.
RESPONSIBILITY FOR FRAUD
Vanguard will not be responsible for any account 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 statements 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>
18
LIMITS ON ACCOUNT ACTIVITY
Because excessive account transactions can disrupt 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 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 THROUGH OTHER FIRMS
You may purchase or sell shares of most Vanguard funds through a financial
intermediary, such as a bank, broker, or investment adviser. If you invest with
Vanguard through an intermediary, please read that firm's program materials
carefully to learn of any special rules that may apply. For example, special
terms may apply to additional service features, fees, or other policies. Consult
your intermediary to determine when your order will be priced.
LOW BALANCE ACCOUNTS
All Vanguard funds reserve the right to close any investment-only
retirement-plan account or 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(TM) Fund). The fee
is waived if your total Vanguard account assets are $50,000 or more.
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 STATEMENTS
For most taxable accounts, average cost review statements will accompany the
quarterly portfolio summaries. These statements show the average cost of shares
that you
<PAGE>
19
redeemed during the current calendar year, using the average cost single
category method.
CONFIRMATION STATEMENTS
Each time you buy, sell, or exchange shares, we will 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 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.
REPORTS
You will receive financial reports about your funds twice a year--in April and
October. 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
- 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-ACCOUNT(R) 1-800-662-6273 (ON-BOARD)
- For automated fund and account information
- For redemptions by check, exchange, or wire
- Toll-free, 24 hours per day, 7 days per week
INVESTOR INFORMATION
1-800-662-7447 (SHIP)
(Text telephone at 1-800-952-3335)
<PAGE>
20
- For fund and service information
- For literature requests
- Business hours only
CLIENT SERVICES 1-800-662-2739 (CREW) (Text telephone at 1-800-749-7273)
- For account information
- For most account transactions
- Business hours only
INSTITUTIONAL DIVISION 1-888-809-8102
- For information and services for large institutional investors
- 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
FUND NUMBER
Always use this fund number when contacting Vanguard about the Fund:
International Growth-81.
<PAGE>
GLOSSARY OF INVESTMENT TERMS
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 that
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.
COUNTRY RISK
The chance that domestic events--such as political upheaval, financial troubles,
or a natural disaster--will weaken a country's securities markets.
CURRENCY RISK
The chance that a foreign investment will decrease in value because of
unfavorable changes in currency exchange rates.
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.
INTERNATIONAL STOCK FUND
A mutual fund that invests in the stocks of companies located outside the United
States.
INVESTMENT ADVISER
An organization that makes the day-to-day decisions regarding a fund's
investments.
NET ASSET VALUE (NAV)
The market value of a mutual fund's total assets, minus liabilities, divided by
the number of shares outstanding. The value of a single share is called its
share value or share price.
PRICE/EARNINGS (P/E) RATIO
The current share price of a stock, divided by its per-share earnings (profits).
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, assuming 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 pay 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]
Post Office Box 2600
Valley Forge, PA 19482-2600
FOR MORE INFORMATION
If you'd like more information
about Vanguard International Growth
Fund, the following documents are
available free upon request:
ANNUAL/SEMIANNUAL REPORTS
TO SHAREHOLDERS
Additional information about the
Fund's investments is available in
the Fund's annual and semiannual
reports to shareholders.
STATEMENT OF ADDITIONAL
INFORMATION (SAI)
The SAI provides more detailed
information about the Fund.
The current annual and semiannual
reports and the SAI are
incorporated by reference into
(and are thus legally a part of)
this prospectus.
All market indexes referenced in
this prospectus are the exclusive
property of their respective owners.
To receive a free copy of the latest
annual or semiannual report or the
SAI, or to request additional
information about the Fund 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 Fund
(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 Fund 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.
Fund's Investment Company Act
file number: 811-1027
(C) 2000 The Vanguard Group, Inc.
All rights reserved.
Vanguard Marketing
Corporation, Distributor.
P081 122000
<PAGE>
VANGUARD INTERNATIONAL GROWTH FUND
FOR PARTICIPANTS - DECEMBER 20, 2000
This prospectus
contains financial data
for the Fund through
the fiscal year ended
August 31, 2000.
STOCK
PROSPECTUS
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
accurace or adequacy of this prospectus. Any representation to the contrary is a
criminal offense.
[A MEMBER OF
THE VANGUARD GROUP(R) LOGO]
<PAGE>
VANGUARD INTERNATIONAL GROWTH FUND
Participant Prospectus
December 20, 2000
An International Stock Mutual Fund
--------------------------------------------------------------------------------
CONTENTS
1 FUND PROFILE 12 SHARE PRICE
3 ADDITIONAL INFORMATION 12 FINANCIAL HIGHLIGHTS
3 MORE ON THE FUND 14 INVESTING WITH VANGUARD
8 THE FUND AND VANGUARD 11 ACCESSING FUND INFORMATION BY COMPUTER
9 INVESTMENT ADVISER GLOSSARY (inside back cover)
10 DIVIDENDS, CAPITAL GAINS, AND TAXES
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
WHY READING THIS PROSPECTUS IS IMPORTANT
This prospectus explains the investment objective, policies, strategies, and
risks associated with the Fund. 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 decide whether the Fund is the right
investment for you. We suggest that you keep this prospectus for future
reference.
This prospectus is intended for participants in employer-sponsored
retirement or savings plans. Another version--for investors who would like to
open a personal investment account--can be obtained by calling Vanguard at
1-800-662-7447.
--------------------------------------------------------------------------------
<PAGE>
1
FUND PROFILE
INVESTMENT OBJECTIVE
The Fund seeks to provide long-term capital growth.
INVESTMENT STRATEGIES
The Fund invests mainly in the stocks of seasoned companies located outside the
United States. In selecting stocks, the Fund's adviser evaluates foreign markets
around the world and chooses companies with above-average growth potential.
PRIMARY RISKS
An investment in the Fund could lose money over short or even long periods. You
should expect the Fund's share price and total return to fluctuate within a wide
range like the overall stock market. The Fund's performance could be hurt by:
- Country risk, which is the chance that domestic events--such as political
upheaval, financial troubles, or a natural disaster--will weaken a
country's securities markets.
- Currency risk, which is the chance that investments in a particular country
will decrease in value if the U.S. dollar rises in value against that
country's currency.
- Manager risk, which is the chance that poor security selection will cause
the Fund to underperform other funds with similar investment objectives.
- Investment style risk, which is the chance that returns from growth stocks
will trail returns from the overall stock market. Specific types of 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 is intended to help you understand the risk of investing
in the Fund. It shows how the Fund's performance has varied from one calendar
year to another over the past ten years. In addition, there is a table that
shows how the Fund's average annual total returns compare with those of a
relevant market index over set periods of time. 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 -12.05%
1991 4.74%
1992 -5.79%
1993 44.74%
1994 0.76%
1995 14.89%
1996 14.65%
1997 4.12%
1998 16.93%
1999 26.34%
----------------------------------------------------
The Fund's year-to-date return as of the most recent
calendar quarter ended September 30, 2000, was -7.56%.
----------------------------------------------------
During the period shown in the bar chart, the highest return for a calendar
quarter was 21.86% (quarter ended December 31, 1999), and the lowest return for
a quarter was -18.25% (quarter ended September 30, 1990).
<PAGE>
2
-------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS FOR YEARS ENDED DECEMBER 31, 1999
-------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS
-------------------------------------------------------------------------
Vanguard International Growth Fund 26.34% 15.17% 9.87%
MSCI EAFE* 27.30 13.15 7.33
-------------------------------------------------------------------------
*Morgan Stanley Capital International Europe, Australasia, Far East Index.
-------------------------------------------------------------------------
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 on those incurred in the fiscal year ended August 31, 2000.
SHAREHOLDER FEES (fees paid directly from your investment)
Sales Charge (Load) Imposed 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: 0.46%
12b-1 Distribution Fee: None
Other Expenses: 0.07%
TOTAL ANNUAL FUND OPERATING EXPENSES: 0.53%
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's shares. 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 the given period.
--------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
--------------------------------------------------
$54 $170 $296 $665
--------------------------------------------------
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>
3
--------------------------------------------------------------------------------
PLAIN TALK ABOUT
FUND EXPENSES
All mutual funds have operating expenses. These expenses, which are deducted
from a fund's gross income, are expressed as a percentage of the net assets of
the fund. Vanguard International Growth Fund's expense ratio in fiscal year 2000
was 0.53%, or $5.30 per $1,000 of average net assets. The average actively
managed international equity mutual fund had expenses in 1999 of 1.72%, or
$17.20 per $1,000 of average net assets (derived from data provided by Lipper
Inc., which reports on the mutual fund industry). Management expenses, which are
one part of operating expenses, include investment advisory fees as well as
other costs of managing a fund--such as account maintenance, reporting,
accounting, legal, and other administrative expenses.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
PLAIN TALK ABOUT
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 expenses can, over time, have
a dramatic effect on a fund's performance.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
ADDITIONAL INFORMATION
DIVIDENDS AND CAPITAL GAINS NEWSPAPER ABBREVIATION
Distributed annually in December IntlGr
INVESTMENT ADVISER VANGUARD FUND NUMBER
Schroder Investment Management North America 081
Inc., London, England, since inception
CUSIP NUMBER
INCEPTION DATE 921910204
September 30, 1981
TICKER SYMBOL
NET ASSETS AS OF AUGUST 31, 2000 VWIGX
$10.1 billion
--------------------------------------------------------------------------------
MORE ON THE FUND
This prospectus describes risks you would face as a Fund shareholder. It is
important to keep in mind one of the main axioms of investing: The higher the
risk of losing money, the higher the potential reward. The reverse, also, is
generally true: The lower the risk, the lower the potential reward. As you
consider an investment in any mutual fund, you should take into account your
personal tolerance for daily fluctuations in the securities markets. Look for
this [FLAG] symbol throughout the prospectus. It is used to mark detailed
information about each type of risk that you would confront as a Fund
shareholder.
The following sections explain the primary investment strategies and
policies that the Fund uses in pursuit of its objective. The Fund's board of
trustees, which oversees the Fund's management, may change investment strategies
or policies in the interest of shareholders without a shareholder vote.
Finally, you'll find information on other important features of the Fund.
<PAGE>
4
--------------------------------------------------------------------------------
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 to such factors as
earnings and book value, and these stocks typically pay 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.
--------------------------------------------------------------------------------
MARKET EXPOSURE
The Fund invests mainly in common stocks of non-U.S. companies that have above-
average potential for growth. About two-thirds of the Fund's assets are invested
in long-term growth stocks; the remainder is invested in stocks of companies
that pursue shorter-term opportunities.
Because it invests mainly in foreign stocks, the Fund is subject to certain
risks.
[FLAG]THE FUND IS SUBJECT TO INVESTMENT STYLE RISK, WHICH IS THE CHANCE THAT
RETURNS FROM THE MARKET SECTOR IN WHICH IT INVESTS WILL TRAIL RETURNS FROM
OTHER MARKET SECTORS. AS A GROUP, GROWTH STOCKS TEND 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.
[FLAG]THE FUND IS SUBJECT TO STOCK 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 PRICES AND PERIODS OF
FALLING PRICES.
IN ADDITION, INVESTMENTS IN FOREIGN STOCK MARKETS CAN BE RISKIER THAN U.S.
STOCK INVESTMENTS. THE PRICES OF INTERNATIONAL STOCKS AND THE PRICES OF
U.S. STOCKS HAVE OFTEN MOVED IN OPPOSITE DIRECTIONS. THESE PERIODS HAVE, IN
THE PAST, LASTED FOR AS LONG AS SEVERAL YEARS.
To illustrate the volatility of international stock prices, the following
table shows the best, worst, and average total returns for foreign stock markets
over various periods as measured by the Morgan Stanley Capital International
Europe, Australasia, Far East (MSCI EAFE) Index, a widely used barometer of
international 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
<PAGE>
5
would incur. Note, also, that the gap between best and worst tends to narrow
over the long term.
----------------------------------------------------------
INTERNATIONAL STOCK MARKET RETURNS (1969-1999)
----------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS 20 YEARS
----------------------------------------------------------
Best 69.9% 36.5% 22.8% 16.3%
Worst -23.2 1.5 5.9 12.0
Average 15.2 13.6 14.5 14.7
----------------------------------------------------------
The table covers all of the 1-, 5-, 10-, and 20-year periods from 1969
through 1999. Keep in mind that this was a particularly favorable period for all
stock markets. These average returns reflect past performance on international
stocks; you should not regard them as an indication of future returns from
either foreign markets as a whole or this Fund in particular.
Note that the preceding chart does not take into account returns measured
by the Select Emerging Markets Free Index, a widely used barometer of less
developed stock markets. Emerging markets can be substantially more volatile
than more developed foreign markets. In addition, because the MSCI EAFE Index
tracks the European and Pacific markets collectively, the above returns do not
reflect the variability of returns from year to year for these markets
individually, or the variability across these and other geographic regions or
market sectors. To illustrate this variability, the following table shows
returns for different international markets--as well as the U.S. market for
comparison--from 1990-1999, as measured by their respective indexes. 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.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------
STOCK MARKET RETURNS FOR DIFFERENT INTERNATIONAL MARKETS*
--------------------------------------------------------------------------------------
EUROPEAN MARKET PACIFIC EMERGING U.S.
MARKET MARKETS MARKETS
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1990 -2.00% -34.43% -10.55% -3.10%
1991 14.12 11.51 59.91 30.47
1992 -3.92 -18.51 11.40 7.62
1993 29.25 36.15 74.84 10.08
1994 2.82 12.82 -7.31 1.32
1995 22.08 2.89 0.01** 37.58
1996 21.42 -8.23 15.19 22.96
1997 23.75 -25.74 -16.37 33.36
1998 28.68 2.64 -18.39 28.58
1999 15.77 56.38 60.86 21.04
--------------------------------------------------------------------------------------
* European market returns are measured by the MSCI Europe Index; Pacific
market returns are measured by the MSCI Pacific Free Index; emerging
markets returns are measured by the Select Emerging Markets Free Index; and
U.S. market returns are measured by the Standard & Poor's 500 Index.
** The inception date of the Select Emerging Markets Free Index was May 4,
1994; returns shown for 1990 to 1994 are measured by the MSCI Emerging
Markets Free Index.
--------------------------------------------------------------------------------------
</TABLE>
Keep in mind, however, that these average returns reflect past performance
of the various indexes; you should not consider them as an indication of future
returns from the indexes, or from this Fund in particular.
<PAGE>
6
--------------------------------------------------------------------------------
PLAIN TALK ABOUT
INTERNATIONAL INVESTING
Because foreign stock and bond markets operate differently from the U.S. market,
Americans investing abroad will encounter risks not typically associated with
U.S. companies. For instance, foreign companies are not subject to the same
accounting, auditing, and financial reporting standards and practices as U.S.
companies; and their stocks may not be as liquid as those of similar U.S. firms.
In addition, foreign stock exchanges, brokers, and companies generally have less
government supervision and regulation than their counterparts in the United
States. These factors, among others, could negatively impact the returns
Americans receive from foreign investments.
--------------------------------------------------------------------------------
[FLAG]THE FUND IS SUBJECT TO COUNTRY RISK AND CURRENCY RISK. COUNTRY RISK IS THE
CHANCE THAT DOMESTIC EVENTS--SUCH AS POLITICAL UPHEAVAL, FINANCIAL
TROUBLES, OR A NATURAL DISASTER--WILL WEAKEN A COUNTRY'S SECURITIES MARKET.
CURRENCY RISK IS THE CHANCE THAT INVESTMENTS IN A PARTICULAR COUNTRY WILL
DECREASE IN VALUE IF THE U.S. DOLLAR RISES IN VALUE AGAINST THAT COUNTRY'S
CURRENCY.
SECURITY SELECTION
Schroder Investment Management North America Inc. (Schroder), adviser to the
Fund, believes that the two most important factors in managing the investments
of an international stock fund are country selection and stock selection.
Schroder continually evaluates financial markets around the world--including
Japan, the United Kingdom, the Netherlands, Germany, France, Switzerland,
Sweden, Australia, Hong Kong, Singapore, Malaysia, and Italy--and identifies
those countries with, in the adviser's opinion, the most favorable business
climates.
Once an attractive market has been identified, Schroder analyzes the
companies there and ranks them according to their potential for above-average
earnings growth. Schroder generally considers on-site evaluations an important
part of the security selection process, and members of its team therefore visit
more than 6,000 companies in more than 20 countries each year. The companies
chosen by Schroder reflect a wide variety of countries and industries.
The Fund is run according to traditional methods of active investment
management, which means securities are bought and sold according to the
adviser's judgments about companies and their financial prospects, and about
foreign stock markets and economies in general.
The Fund is generally managed without regard to tax ramifications.
[FLAG]THE FUND IS SUBJECT TO MANAGER RISK, WHICH IS THE CHANCE THAT THE ADVISER
WILL DO A POOR JOB OF SELECTING STOCKS.
OTHER INVESTMENT POLICIES AND RISKS
Besides investing in stocks of foreign companies, the Fund may make certain
other kinds of investments to achieve its objective.
The Fund may enter into forward foreign currency contracts, which may help
protect its holdings against unfavorable short-term changes in exchange rates. A
forward foreign currency contract is an agreement to buy or sell a country's
currency at a specific price on a
<PAGE>
7
specific date, usually 30, 60, or 90 days in the future. In other words, the
contract guarantees an exchange rate on a given date. Managers of funds that
invest in foreign securities use these contracts to guard against sudden,
unfavorable changes in U.S. dollar/foreign currency exchange rates. These
contracts will not prevent the Fund's securities from falling in value during
foreign market downswings.
The Fund may also invest in stock futures and options contracts, which are
traditional 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. The Fund will not use futures for speculative purposes or as leveraged
investments that magnify gains or losses. The Fund's obligation under futures
contracts will not exceed 20% of its total assets.
The reasons for which the Fund will invest in futures and options are:
- To keep cash on hand to meet shareholder redemptions or other needs while
simulating full investment in stocks.
- To reduce the Fund's transaction costs or add value when these instruments
are favorably priced.
The Fund may temporarily depart from its normal investment policies--for
instance, by investing substantially in cash reserves--in response to
extraordinary market, economic, political, or other conditions. In doing so, the
Fund may succeed in avoiding losses but otherwise fail to achieve its investment
objective.
--------------------------------------------------------------------------------
PLAIN TALK ABOUT
DERIVATIVES
A derivative is a financial contract whose value is based on (or "derived" from)
a traditional security (such as a stock or a bond), an asset (such as a
commodity like gold), or a market index (such as the S&P 500 Index). Some forms
of derivatives, such as exchange-traded futures and options on securities,
commodities, or indexes, have been trading on regulated exchanges for more than
two decades. These types of derivatives are standardized contracts that can
easily be bought and sold, and whose market values are determined and published
daily. Non-standardized derivatives, on the other hand, tend to be more
specialized or complex, and may be harder to value. If used for speculation or
as leveraged investments, derivatives can carry considerable risks.
--------------------------------------------------------------------------------
COSTS AND MARKET-TIMING
Some investors try to profit from a strategy called market-timing--switching
money into mutual funds 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.
This is why all Vanguard funds have adopted special policies to discourage
short-term trading. Specifically:
- Each Vanguard fund reserves the right to reject any purchase
request--including exchanges from other Vanguard funds--that it regards as
disruptive to efficient portfolio management. A purchase request could be
rejected because of the timing of the investment or because of a history of
excessive trading by the investor.
- Each Vanguard fund (except the money market funds) limits the number of
times that an investor can exchange into and out of the fund.
- Each Vanguard fund reserves the right to stop offering shares at any time.
<PAGE>
8
- Certain Vanguard funds charge transaction fees on purchases and/or
redemptions oftheir shares.
See the INVESTING WITH VANGUARD section of this prospectus for further details
on Vanguard's transaction policies.
THE VANGUARD FUNDS DO NOT PERMIT MARKET-TIMING. DO NOT INVEST WITH VANGUARD
IF YOU ARE A MARKET-TIMER.
TURNOVER RATE
Although the Fund normally seeks to invest for the long term, it may sell
securities regardless of how long they have been held. The FINANCIAL HIGHLIGHTS
section of this prospectus shows historic turnover rates for the Fund. A
turnover rate of 100%, for example, would mean that the Fund had sold and
replaced securities valued at 100% of its net assets within a one-year period.
--------------------------------------------------------------------------------
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 taxable
income. As of August 31, 2000, the average turnover rate for all international
stock funds was approximately 87%, according to Morningstar, Inc.
--------------------------------------------------------------------------------
THE FUND AND VANGUARD
The Fund is a member 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 Vanguard funds share in the expenses associated with business
operations, such as personnel, office space, equipment, and advertising.
Vanguard also provides marketing services to the funds. Although
shareholders do not pay sales commissions or 12b-1 distribution fees, each fund
pays its allocated share of The Vanguard Group's marketing costs.
--------------------------------------------------------------------------------
PLAIN TALK ABOUT
VANGUARD'S UNIQUE CORPORATE STRUCTURE
The Vanguard Group is truly a MUTUAL mutual fund company. It is owned jointly by
the funds it oversees and thus indirectly by the shareholders in those funds.
Most other mutual funds are operated by for-profit management companies that may
be owned by one person, by a group of individuals, or by investors who own the
management company's stock. By contrast, Vanguard provides its services on an
"at-cost" basis, and the funds' expense ratios reflect only these costs. No
separate management company reaps profits or absorbs losses from operating the
funds.
--------------------------------------------------------------------------------
<PAGE>
9
INVESTMENT ADVISER
Schroder Investment Management North America Inc. (Schroder), 31 Gresham Street,
London EC2V 7QA, England, adviser to the Fund, is an investment advisory firm
founded in 1979. Schroder is part of a worldwide group of banks and financial
services companies known as The Schroder Group. As of August 31, 2000, The
Schroder Group managed about $210 billion in assets. The firm manages the Fund
subject to the control of the trustees and officers of the Fund.
Schroder's advisory fee is paid quarterly, and is based on certain annual
percentage rates applied to the Fund's average month-end assets for each
quarter. In addition, the firm's advisory fee may be increased or decreased,
based on the cumulative total return of the Fund over a trailing 36-month period
as compared with the cumulative total return of the MSCI EAFE Index over the
same period. Please consult the Fund's Statement of Additional Information for a
complete explanation of how advisory fees are calculated.
For the fiscal year ended August 31, 2000, the advisory fee represented an
effective annual rate of 0.13% of the Fund's average net assets with no
adjustment based on performance.
The adviser is authorized to choose broker-dealers to handle the purchase
and sale of the Fund's securities, and to obtain the best available price and
most favorable execution for all transactions. Also, the Fund may direct the
adviser to use a particular broker for certain transactions in exchange for
commission rebates or research services provided to the Fund.
In the interest of obtaining better execution of a transaction, the adviser
may at times choose brokers who charge higher commissions. If more than one
broker can obtain the best available price and most favorable execution, then
the adviser is authorized to choose a broker who, in addition to executing the
transaction, will provide research services to the adviser or the Fund.
The board of trustees may, without prior approval from shareholders, change
the terms of an advisory agreement or hire a new investment adviser--either as a
replacement for an existing adviser or as an additional adviser. Any significant
change in the Fund's advisory arrangements will be communicated to shareholders
in writing. In addition, as the Fund's sponsor and overall manager, The Vanguard
Group may provide investment advisory services to the Fund, on an at-cost basis,
at any time.
--------------------------------------------------------------------------------
PLAIN TALK ABOUT
THE FUND'S ADVISER
The manager primarily responsible for overseeing the Fund's investments is:
RICHARD FOULKES, Executive Vice President and Deputy Chairman of Schroder. He
has been with The Schroder Group since 1968 and has managed the Fund since 1981.
Education: the Sorbonne, France; B.A. and M.A., Cambridge University, England.
--------------------------------------------------------------------------------
DIVIDENDS, CAPITAL GAINS, AND TAXES
The 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. Distributions generally occur in December.
<PAGE>
10
--------------------------------------------------------------------------------
PLAIN TALK ABOUT
DISTRIBUTIONS
As a shareholder, you are entitled to your portion 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 any stock
holdings and the interest it receives from any 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.
--------------------------------------------------------------------------------
Your dividend and capital gains distributions will be reinvested in
additional Fund shares and accumulate on a tax-deferred basis if you are
investing through an employer-sponsored retirement or savings plan. You will not
owe taxes on these distributions until you begin withdrawals from the plan. You
should consult your plan administrator, your plan's Summary Plan Description, or
your tax adviser about the tax consequences of plan withdrawals.
SHARE PRICE
The 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 of the
Fund by the number of Fund shares outstanding.
Knowing the daily net asset value is useful to you as a shareholder because
it indicates the current value of your investment. The Fund's NAV, multiplied by
the number of shares you own, gives you the dollar amount you would have
received had you sold all of your shares back to the Fund that day. Because
foreign securities markets may operate on days that are not business days in the
United States, the value of the Fund's holdings may change on days when
shareholders will not be able to purchase or redeem the Fund's shares.
A NOTE ON PRICING: The 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 Fund's Board of Trustees. The
Fund may also use fair-value pricing if the value of a security held by the Fund
is materially affected by events occurring after the close of the primary
markets or exchanges on which the security is traded. In these situations,
prices used by the Fund to calculate its net asset value may differ from quoted
or published prices for the underlying securities.
The Fund's share price can be found daily in the mutual fund listings of
most major newspapers under the heading "Vanguard Funds."
FINANCIAL HIGHLIGHTS
The following financial highlights table is intended to help you understand the
Fund's financial performance for the past five years, and certain information
reflects financial results for a single Fund share. The total returns in the
table represent the rate that an investor would
<PAGE>
11
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 the Fund's financial
statements--is included in the Fund's most recent annual report to shareholders.
You may have the annual report sent to you without charge by contacting
Vanguard.
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------
VANGUARD INTERNATIONAL GROWTH FUND
YEAR ENDED AUGUST 31,
------------------------------------------------------------------
2000 1999 1998 1997 1996
---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $19.75 $16.57 $17.86 $16.13 $14.70
---------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .26 .27 .25 .19 .19
Net Realized and Unrealized Gain (Loss) on
Investments 3.38 3.29 (.81) 2.28 1.65
------------------------------------------------------------------
Total from Investment Operations 3.64 3.56 (.56) 2.47 1.84
------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.26) (.22) (.21) (.19) (.20)
Distributions from
Realized Capital Gains (.90) (.16) (.52) (.55) (.21)
------------------------------------------------------------------
Total Distributions (1.16) (.38) (.73) (.74) (.41)
---------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $22.23 $19.75 $16.57 $17.86 $16.13
=========================================================================================================
TOTAL RETURN 18.68% 21.70% -2.99% 15.84% 12.72%
=========================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $10,144 $8,000 $6,820 $7,089 $4,997
Ratio of Total Expenses to Average
Net Assets 0.53% 0.58% 0.59% 0.57% 0.56%
Ratio of Net Investment Income to
Average Net Assets 1.26% 1.42% 1.39% 1.26% 1.35%
Turnover Rate 48% 37% 37% 22% 22%
=========================================================================================================
</TABLE>
--------------------------------------------------------------------------------
PLAIN TALK ABOUT
HOW TO READ THE FINANCIAL HIGHLIGHTS TABLE
The Fund began fiscal 2000 with a net asset value (price) of $19.75 per share.
During the year, the Fund earned $0.26 per share from investment income
(interest and dividends) and $3.38 per share from investments that had
appreciated in value or that were sold for higher prices than the Fund paid for
them.
Shareholders received $1.16 per share in the form of dividend and capital gains
distributions. A portion of each year's distributions may come from the prior
year's income or capital gains.
The earnings ($3.64 per share) minus the distributions ($1.16 per share)
resulted in a share price of $22.23 at the end of the year. This was an increase
of $2.48 per share (from $19.75 at the beginning of the year to $22.23 at the
end of the year). For a shareholder who reinvested the distributions in the
purchase of more shares, the total return from the Fund was 18.68% for the year.
As of August 31, 2000, the Fund had $10.1 billion in net assets. For the year,
its expense ratio was 0.53% ($5.30 per $1,000 of net assets); and its net
investment income amounted to 1.26% of its average net assets. It sold and
replaced securities valued at 48% of its net assets.
--------------------------------------------------------------------------------
<PAGE>
12
INVESTING WITH VANGUARD
The Fund is an investment option in your retirement or savings plan. Your plan
administrator or your employee benefits office can provide you with detailed
information on how to participate in your plan and how to elect the Fund as an
investment option.
- If you have any questions about the Fund or Vanguard, including those about
the 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 the Fund's shares are processed as
soon as they have been received by Vanguard in good order. Good order means that
your request includes complete information on your contribution, exchange, or
redemption, and that Vanguard has received the appropriate assets.
In all cases, your transaction will be based on the 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 the 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: n 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>
13
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>
GLOSSARY OF INVESTMENT TERMS
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 that
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.
COUNTRY RISK
The chance that domestic events--such as political upheaval, financial troubles,
or a natural disaster--will weaken a country's securities markets.
CURRENCY RISK
The chance that a foreign investment will decrease in value because of
unfavorable changes in currency exchange rates.
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.
INTERNATIONAL STOCK FUND
A mutual fund that invests in the stocks of companies located outside the United
States.
INVESTMENT ADVISER
An organization that makes the day-to-day decisions regarding a fund's
investments.
NET ASSET VALUE (NAV)
The market value of a mutual fund's total assets, minus liabilities, divided by
the number of shares outstanding. The value of a single share is called its
share value or share price.
PRICE/EARNINGS (P/E) RATIO
The current share price of a stock, divided by its per-share earnings (profits).
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, assuming 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 pay 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.
FOR MORE INFORMATION
If you'd like more information about Vanguard International Growth Fund, the
following documents are available free upon request:
ANNUAL/SEMIANNUAL REPORTS TO SHAREHOLDERS
Additional information about the Fund's investments is available in the Fund's
annual and semiannual reports to shareholders.
<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 International Growth
Fund, the following documents are
available free upon request:
ANNUAL/SEMIANNUAL REPORTS
TO SHAREHOLDERS
Additional information about the
Fund's investments is available in
the Fund's annual and semiannual
reports to shareholders.
STATEMENT OF ADDITIONAL
INFORMATION (SAI)
The SAI provides more detailed
information about the Fund.
The current annual and semiannual
reports and the SAI are
incorporated by reference into
(and are thus legally a part of)
this prospectus.
All market indexes referenced in
this prospectus are the exclusive
property of their respective owners.
To receive a free copy of the latest
annual or semiannual report or the
SAI, or to request additional
information about the Fund 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 Fund
(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 Fund 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.
Fund's Investment Company Act
file number: 811-1027
(C) 2000 The Vanguard Group, Inc.
All rights reserved.
Vanguard Marketing
Corporation, Distributor.
I081 122000
<PAGE>
VANGUARD(R) CALVERT
SOCIAL INDEX(TM) FUND
INVESTOR SHARES - DECEMBER 20, 2000
This prospectus
contains financial data
for the Fund through
the fiscal year ended
August 31, 2000.
STOCK
PROSPECTUS
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 CALVERT SOCIAL INDEX FUND
Prospectus
December 20, 2000
A Stock Index Mutual Fund
--------------------------------------------------------------------------------
CONTENTS
--------------------------------------------------------------------------------
1 FUND PROFILE
2 ADDITIONAL INFORMATION
3 AN INTRODUCTION TO INDEX FUNDS
3 MORE ON THE FUND
8 THE FUND AND VANGUARD
9 INVESTMENT ADVISER
9 DIVIDENDS, CAPITAL GAINS, AND TAXES
10 SHARE PRICE
11 FINANCIAL HIGHLIGHTS
13 INVESTING WITH VANGUARD
13 Buying Shares
14 Redeeming Shares
16 Other Rules You Should Know
18 Fund and Account Updates
19 Contacting Vanguard
GLOSSARY (inside back cover)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
WHY READING THIS PROSPECTUS IS IMPORTANT
This prospectus explains the investment objective, policies, strategies, and
risks associated with the Fund. 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 decide whether the Fund is the right
investment for you. We suggest that you keep this prospectus for future
reference.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
IMPORTANT NOTE ON THE CALVERT SOCIAL INDEX FUND
The Calvert Social Index Fund features two separate classes of shares: Investor
and Institutional. This prospectus offers the Fund's Investor Shares, which have
an investment minimum of $3,000. Another prospectus offers the Fund's
Institutional Shares, which are for investors who do not require special
employee benefit plan services and who are willing to invest a minimum of $10
million.
Investor Shares and Institutional Shares do not have the same expenses; as
a result, their investment performances will differ.
--------------------------------------------------------------------------------
<PAGE>
1
FUND PROFILE
INVESTMENT OBJECTIVE
The Fund seeks to track the performance of a benchmark index that measures the
investment return of large- and mid-capitalization stocks.
INVESTMENT STRATEGIES
The Fund employs a passive management strategy designed to track the performance
of the Calvert Social Index. The Index is composed of large- and mid-cap stocks
that have been screened for certain social and environmental criteria by the
Index sponsor, which is independent of Vanguard. The Fund attempts to replicate
the 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 FUND.
PRIMARY RISKS
An investment in the Fund could lose money over short or even long periods. You
should expect the Fund's share price and total return to fluctuate within a wide
range like the overall stock market. The Fund's performance could be hurt by:
- Investment style risk, which is the chance that returns from large- and
mid-cap stocks generally, or from stocks included in the Calvert Social
Index specifically, will trail returns from other asset classes or the
overall stock market.
- Nondiversification risk, which is the chance that the Fund's performance
may be hurt disproportionately by the poor performance of relatively few
securities. The Fund is considered nondiversified, which means that it may
invest a greater percentage of its assets in the securities of particular
issuers as compared with other mutual funds.
PERFORMANCE/RISK INFORMATION
The Fund was in operation for less than one calendar year as of the date of this
prospectus, so it has no meaningful performance information to report.
FEES AND EXPENSES
The following table describes the fees and expenses you may pay if you buy and
hold Investor Shares of the Fund. The expenses shown under Annual Fund Operating
Expenses are based on those incurred in the fiscal year ended August 31, 2000.
SHAREHOLDER FEES (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fee: None
Exchange Fee: None
Account Maintenance Fee (for accounts under $10,000): $10/year*
ANNUAL FUND OPERATING EXPENSES (expenses deducted from the Fund's
assets)
Management Expenses: 0.21%
12b-1 Distribution Fee: None
Other Expenses: 0.04%
TOTAL ANNUAL FUND OPERATING EXPENSES: 0.25%
*The 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 may be automatically redeemed to make up the difference.
<PAGE>
2
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's Investor Shares. 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 the given
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.
--------------------------------------------------------------------------------
PLAIN TALK ABOUT
FUND EXPENSES
All mutual funds have operating expenses. These expenses, which are deducted
from a fund's gross income, are expressed as a percentage of the net assets of
the fund. Vanguard Calver Social Index Fund's expense ratio in fiscal year 2000
was 0.25%, or $2.50 per $1,000 of average net assets. The average large-cap
growth mutual fund had expenses in 1999 of 1.41%, or $14.10 per $1,000 of
average net assets (derived from data provided by Lipper Inc., which reports on
the mutual fund industry). Management expenses, which are one part of operating
expenses, include investment advisory fees, as well as other costs of managing a
fund--such as account maintenance, reporting, accounting, legal, and other
administrative expenses.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
PLAIN TALK ABOUT
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 expenses can, over time, have
a dramatic effect on a fund's performance.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
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., since inception CalSoc
INCEPTION DATE VANGUARD FUND NUMBER
May 8, 2000 213
NET ASSETS (INVESTOR SHARE CLASS) AS OF CUSIP NUMBER
AUGUST 31, 2000 921910303
$40 million
TICKER SYMBOL
SUITABLE FOR IRAS VCSIX
Yes
--------------------------------------------------------------------------------
<PAGE>
3
AN INTRODUCTION TO INDEX FUNDS
WHAT IS INDEXING?
Indexing is an investment strategy for tracking, as closely as possible, the
performance of a specified market benchmark, or "index." 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. There are many types
of indexes. Some represent a broad market segment--for instance, the entire U.S.
stock market or the entire U.S. bond market; other indexes cover a relatively
narrow market segment--for instance, small-cap value stocks or intermediate-term
bonds.
An index fund holds all, or a representative sample, of the securities that
make up its target index. Unlike actively managed funds, index (or "passively
managed") funds do not buy and sell securities based on research and analysis.
Rather, index funds simply attempt to mirror what the target index does, for
better or worse.
An index fund does not always perform exactly like its target index. Like
all mutual funds, index funds have operating expenses and transaction costs.
Market indexes do not, and therefore will always have a slight performance
advantage over funds that track them.
ADVANTAGES OF INDEX FUNDS
Index funds typically have the following characteristics:
- Variety of investments. Vanguard index funds generally invest in a wide
variety of companies and industries.
- Relative performance consistency. Because they seek to track market
benchmarks, index funds by definition will not perform dramatically better
or worse than their benchmarks.
- Low cost. Index funds are inexpensive to run as compared with actively
managed funds. They have no research costs, and 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.
MORE ON THE FUND
This prospectus describes risks you would face as a Fund shareholder. It is
important to keep in mind one of the main axioms of investing: The higher the
risk of losing money, the higher the potential reward. The reverse, also, is
generally true: The lower the risk, the lower the potential reward. As you
consider an investment in any mutual fund, you should take into account your
personal tolerance for daily fluctuations in the securities markets. Look for
this [FLAG] symbol throughout the prospectus. It is used to mark detailed
information about each type of risk that you would confront as a Fund
shareholder.
The following sections explain the primary investment strategies and
policies that the Fund uses in pursuit of its objective. The Fund's board of
trustees, which oversees the
<PAGE>
4
Fund's management, may change investment strategies or policies in the interest
of shareholders without a shareholder vote.
Finally, you'll find information on other important features of the Fund.
INDEXING METHODS
In seeking to track a particular index, a fund generally uses one of two methods
to select the securities in which it invests.
REPLICATION METHOD. Many stock funds--but not bond funds--use the
replication method of indexing. This means that a fund holds each security found
in its target index in about the same proportions as represented in the index
itself. 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 would invest about 5% of its assets
in that company. For bond funds, replication is an inefficient and costly method
of indexing, since there is no liquid market for many of the corporate and
agency bonds typically found in a broad bond index. The Calvert Social Index
Fund uses this method of indexing.
STRAIGHT SAMPLING METHOD. Because it would be very expensive and
inefficient to buy and sell all securities held in certain indexes (the Wilshire
5000 Index, for example, included over 6,800 separate stocks as of August 31,
2000), many funds tracking these larger indexes use a "straight sampling"
technique. Using sophisticated computer programs, a fund selects, from the
target index, a representative sample of securities that will resemble the full
target index in terms of key risk factors. For stock funds, these factors
include industry weightings, country weightings, market capitalization, and
other financial characteristics of stocks.
--------------------------------------------------------------------------------
PLAIN TALK ABOUT
CALVERT SOCIAL INDEX
The Calvert Social Index is maintained by the Calvert Group of Bethesda,
Maryland, a leading organization in the world of social investing. Calvert
selects stocks from approximately 1,000 of the largest public companies in the
United States by evaluating each company's performance in the following
categories: environmental; labor relations; product safety; animal welfare;
military weapons; community relations; human rights; and the rights of
indigenous peoples. Included in the Index are companies (a) with programs
focused on reducing overall environmental impact; (b) with good labor-relations
records, including those with strong diversity programs; (c) that produce
healthy and safe products and services; (d) that have reduced their use of
animal testing; (e) that are responsible citizens in their communities; and (f)
that have adopted human rights standards.
Excluded from the Index are companies that, in Calvert's opinion: (a) have poor
environmental records (including those with significant compliance and waste
management problems); (b) significantly engage in nuclear power; (c) have a
record of employment discrimination; (d) provide unsafe workplaces; (e) are
primarily engaged in tobacco, alcohol, firearms, or gambling; (f) abuse animals
through methods of factory farming; (g) are primarily engaged in weapons
contracting; (h) directly contribute to human rights violations worldwide; and
(i) are significantly engaged in a pattern or practice of violating the rights
of indigenous peoples.
For further information about the Calvert Social Index, please visit Calvert's
website, at www.calvert.com or contact Calvert at 1-800-368-2745.
--------------------------------------------------------------------------------
<PAGE>
5
MARKET EXPOSURE
[FLAG] THE FUND IS SUBJECT TO STOCK 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 PRICES AND PERIODS OF
FALLING 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, a widely used barometer of 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 this fund in particular.
[FLAG] THE FUND IS SUBJECT TO INVESTMENT STYLE RISK, WHICH IS THE CHANCE THAT
RETURNS FROM THE MARKET SECTOR IN WHICH IT INVESTS WILL TRAIL RETURNS FROM
OTHER MARKET SECTORS. AS A GROUP, LARGE- AND MID-CAP STOCKS TEND 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.
--------------------------------------------------------------------------------
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, on average, 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>
6
[FLAG] BECAUSE THE FUND IS NONDIVERSIFIED (WHICH MEANS IT MAY INVEST A GREATER
PERCENTAGE OF ITS ASSETS IN THE SECURITIES OF FEWER ISSUERS AS COMPARED
WITH OTHER MUTUAL FUNDS), THE FUND IS SUBJECT TO THE RISK THAT ITS
PERFORMANCE MAY BE HURT DISPROPORTIONATELY BY THE POOR PERFORMANCE OF
RELATIVELY FEW SECURITIES.
SECURITY SELECTION
The Fund seeks to provide investment results that correspond to the Calvert
Social Index. The correlation between the performance of the Fund and the Index
is expected to be at least 95% (a correlation of 100% would indicate perfect
correlation). Keep in mind that the social screening policies employed by the
Index may result in economic sector weightings that are significantly different
from those of the overall market. For example, as of August 31, 2000 technology
stocks represented 41% of the Calvert Social Index, while that sector
represented approximately 32% of the Russell 1000 Index. In addition, as of the
same date, stocks within the integrated oils sector represented 0% of the
Calvert Social Index, while that sector represented more than 3% of the Russell
1000 Index.
OTHER INVESTMENT POLICIES AND RISKS
The Fund reserves the right to substitute a different index for the index it
currently tracks. This could happen if the current index were discontinued, or
for any other reason determined in good faith by the Fund's board of trustees.
In any such instance, the substitute index would measure the same general market
as the current index.
The Fund may invest in foreign securities to the extent necessary to carry
out its investment strategy of holding all of the stocks that comprise the index
it tracks.
To track its target index as closely as possible, the Fund attempts to remain
fully invested in stocks. The Fund intends to invest at least 95% of its
total assets in the stocks of the Index. To help stay fully invested, and to
reduce transaction costs, the Fund may invest, to a limited extent, in stock
index futures and options contracts, warrants, convertible securities, and swap
agreements, which are types of derivatives. These investments will not be
screened based on social or environmental criteria.
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 the 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).
The Fund 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.
The Fund's obligation under futures contracts will not exceed 20% of its
total assets.
The reasons for which the 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.
Although index funds, by their nature, tend to be tax-efficient investment
vehicles, the Fund is generally managed without regard to tax ramifications.
<PAGE>
7
--------------------------------------------------------------------------------
PLAIN TALK ABOUT
DERIVATIVES
A derivative is a financial contract whose value is based on (or "derived" from)
a traditional security (such as a stock or a bond), an asset (such as a
commodity like gold), or a market index (such as the S&P 500 Index). Some forms
of derivatives, such as exchange-traded futures and options on securities,
commodities, or indexes, have been trading on regulated exchanges for more than
two decades. These types of derivatives are standardized contracts that can
easily be bought and sold, and whose market values are determined and published
daily. Non-standardized derivatives, on the other hand, tend to be more
specialized or complex, and may be harder to value. If used for speculation or
as leveraged investments, derivatives can carry considerable risks.
--------------------------------------------------------------------------------
ACCOUNT MAINTENANCE FEE
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 account maintenance costs more equitably among
shareholders. 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 non-taxable
account). If you are due a dividend that is less than the fee, fractional shares
may be automatically redeemed to make up the difference.
COSTS AND MARKET-TIMING
Some investors try to profit from a strategy called market-timing--switching
money into mutual funds 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.
This is why all Vanguard funds have adopted special policies to discourage
short-term trading. Specifically:
- Each Vanguard fund reserves the right to reject any purchase
request--including exchanges from other Vanguard funds--that it regards as
disruptive to efficient portfolio management. A purchase request could be
rejected because of the timing of the investment or because of a history of
excessive trading by the investor.
- Each Vanguard fund (except the money market funds) limits the number of
times that an investor can exchange into and out of the fund.
- Each Vanguard fund reserves the right to stop offering shares at any time.
- Vanguard U.S. Stock Index Funds, International Stock Index Funds, Reit
Index Fund, Balanced Index Fund, and GROWTH AND INCOME Fund generally do
NOT accept exchanges by telephone or fax, or online. (IRAs and other
retirement accounts are not subject to this rule.)
- Certain Vanguard funds charge transaction fees on purchases and/or
redemptions of their shares.
See the INVESTING WITH VANGUARD section of this prospectus for further details
on Vanguard's transaction policies.
<PAGE>
8
THE VANGUARD FUNDS DO NOT PERMIT MARKET-TIMING. DO NOT INVEST WITH VANGUARD
IF YOU ARE A MARKET-TIMER.
TURNOVER RATE
Although the Fund normally seeks to invest for the long term, it may sell
securities regardless of how long they have been held. Generally, index-oriented
funds sell securities only in response to redemption requests or changes in the
composition of a target index. The FINANCIAL HIGHLIGHTS section of this
prospectus shows historic turnover rates for the Fund. A turnover rate of 100%,
for example, would mean that the Fund had sold and replaced securities valued at
100% of its net assets within a one-year period.
--------------------------------------------------------------------------------
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 taxable
income. As of August 31, 2000, the average turnover rate for passively managed
domestic equity index funds investing in common stocks was approximately 41%;
for all domestic stock funds, the average turnover rate was approximately 93%,
according to Morningstar, Inc.
--------------------------------------------------------------------------------
THE FUND AND VANGUARD
The Fund is a member 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 Vanguard funds share in the expenses associated with business
operations, such as personnel, office space, equipment, and advertising.
Vanguard also provides marketing services to the funds. Although
shareholders do not pay sales commissions or 12b-1 distribution fees, each fund
pays its allocated share of The Vanguard Group's marketing costs.
--------------------------------------------------------------------------------
PLAIN TALK ABOUT
VANGUARD'S UNIQUE CORPORATE STRUCTURE
The Vanguard Group is truly a MUTUAL mutual fund company. It is owned jointly by
the funds it oversees and thus indirectly by the shareholders in those funds.
Most other mutual funds are operated by for-profit management companies that may
be owned by one person, by a group of individuals, or by investors who own the
management company's stock. By contrast, Vanguard provides its services on an
"at-cost" basis, and the funds' expense ratios reflect only these costs. No
separate management company reaps profits or absorbs losses from operating the
funds.
--------------------------------------------------------------------------------
<PAGE>
9
INVESTMENT ADVISER
The Vanguard Group (Vanguard), P.O. BOX 2600, Valley Forge, PA 19482, founded in
1975, serves as the Fund's adviser through its Quantitative Equity Group. As of
August 31, 2000, Vanguard served as adviser for about $406 billion in assets.
Vanguard manages the Fund on an at-cost basis, subject to the control of the
trustees and officers of the Fund.
For the fiscal year ended August 31, 2000, the advisory expenses
represented an effective annual rate of less than 0.01% of the Fund's average
net assets.
The adviser is authorized to choose broker-dealers to handle the purchase
and sale of the Fund's securities, and to obtain the best available price and
most favorable execution for all transactions. Also, the Fund may direct the
adviser to use a particular broker for certain transactions in exchange for
commission rebates or research services provided to the Fund.
In the interest of obtaining better execution of a transaction, the adviser
may at times choose brokers who charge higher commissions. If more than one
broker can obtain the best available price and most favorable execution, then
the adviser is authorized to choose a broker who, in addition to executing the
transaction, will provide research services to the adviser or the Fund.
--------------------------------------------------------------------------------
PLAIN TALK ABOUT
THE FUND'S ADVISER
The manager primarily responsible for overseeing the Fund's investments is:
GEORGE U. SAUTER, Managing Director of Vanguard and head of Vanguard's
Quantitative Equity Group. He has worked in investment management since 1985 and
has had primary responsibility for Vanguard's stock indexing investments and
strategy since joining the company in 1987. Education: A.B., Dartmouth College;
M.B.A., University of Chicago.
--------------------------------------------------------------------------------
DIVIDENDS, CAPITAL GAINS, AND TAXES
FUND DISTRIBUTIONS
The 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. Distributions generally occur in December. 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 portion 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 any stock
holdings and the interest it receives from any 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>
10
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 Fund's normal investment activities and cash flows.
- A sale or exchange of Fund shares is a taxable event. This means that you
may have a capital gain to report as income, or a capital loss to report as
a deduction, when you complete your federal income tax return.
- Dividend and capital gains distributions that you receive, as well as your
gains or losses from any sale or exchange of Fund shares, may be subject to
state and local income taxes.
GENERAL INFORMATION
BACKUP WITHHOLDING. By law, Vanguard must withhold 31% of any taxable
distributions or redemptions from your account if you do not:
- provide us with your correct taxpayer identification number;
- certify that the taxpayer identification number is correct; and
- confirm that you are not subject to backup withholding.
Similarly, Vanguard must withhold from your account if the IRS instructs us to
do so.
FOREIGN INVESTORS. The Vanguard funds generally do not offer their shares for
sale outside of the United States. Foreign investors should be aware that U.S.
withholding and estate taxes may apply to any investments in Vanguard funds.
INVALID ADDRESSES. If a dividend or capital gains distribution check mailed to
your address of record is returned as undeliverable, Vanguard will automatically
reinvest all future distributions until you provide us with a valid mailing
address.
TAX CONSEQUENCES. This prospectus provides general tax information only. If you
are investing through a tax-deferred retirement account, such as an IRA, special
tax rules apply. Please consult your tax adviser for detailed information about
a fund's tax consequences for you.
<PAGE>
11
--------------------------------------------------------------------------------
PLAIN TALK ABOUT
"BUYING A DIVIDEND"
Unless you are investing through a tax-deferred retirement account (such as an
IRA), you should avoid buying 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
The 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 of the
Fund by the number of Fund shares outstanding.
Knowing the daily net asset value is useful to you as a shareholder because
it indicates the current value of your investment. The Fund's NAV, multiplied by
the number of shares you own, gives you the dollar amount you would have
received had you sold all of your shares back to the Fund that day.
A NOTE ON PRICING: The 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 Fund's board of trustees.
The Fund's share price can be found daily in the mutual fund listings of
most major newspapers under the heading "Vanguard Institutional Funds."
FINANCIAL HIGHLIGHTS
The following financial highlights table is intended to help you understand the
Fund's financial performance since inception, and certain information reflects
financial results for a single Fund share. The total returns in the 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
report--along with the Fund's financial statements--is included in the Fund's
most recent annual report to shareholders. You may have the annual report sent
to you without charge by contacting Vanguard.
<PAGE>
12
-------------------------------------------------------------------------
VANGUARD CALVERT SOCIAL INDEX FUND
MAY 8* TO
AUG. 31, 2000
-------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $10.00
-------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .02
Net Realized and Unrealized Gain (Loss) on Investments 1.12
-------------
Total from Investment Operations 1.14
-------------
DISTRIBUTIONS
Dividends from Net Investment Income --
Distributions from Realized Capital Gains --
-------------
Total Distributions --
-------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $11.14
=========================================================================
TOTAL RETURN** 11.07%
=========================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $40
Ratio of Total Expenses to Average Net Assets 0.25%+
Ratio of Net Investment Income to Average Net Assets 0.98%+
Turnover Rate 3%
=========================================================================
*Subscription period for the Fund was May 8, 2000, to May 31, 2000, during
which time all assets were held in money market instruments. Performance
measurement began May 31, 2000.
**Total return figures do not reflect the annual account maintenance fee of $10.
+Annualized.
--------------------------------------------------------------------------------
PLAIN TALK ABOUT
HOW TO READ THE FINANCIAL HIGHLIGHTS TABLE
The Fund began the period ended August 31, 2000 with a net asset value (price)
of $10.00 per share. During the period, the Fund earned $0.02 per share from
investment income (interest and dividends) and $1.12 per share from investments
that had appreciated in value or that were sold for higher prices than the Fund
paid for them. Shareholders received no dividend or capital gains distributions.
The earnings ($1.14 per share) minus the distributions ($0.00 per share)
resulted in a share price of $11.14 at the end of the period. This was an
increase of $1.14 per share (from $10.00 at the beginning of the period to
$11.14 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
11.07% for the period.
As of August 31, 2000, the Fund had $40 million in net assets. For the period,
its annualized expense ratio was 0.12% ($1.20 per $1,000 of net assets); and its
annualized net investment income amounted to 0.98% of its average net assets. It
sold and replaced securities valued at 3% of its net assets.
--------------------------------------------------------------------------------
<PAGE>
13
--------------------------------------------------------------------------------
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 FOR INSTITUTIONAL SHARES
TO OPEN AND MAINTAIN AN ACCOUNT: $3,000 for regular 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.
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 to purchase shares by wire. See Contacting Vanguard.
YOUR PURCHASE CHECK
When investing by check, make the check payable to: The Vanguard Group-213.
YOUR PURCHASE PRICE
You buy shares at a fund's next-determined 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.
<PAGE>
14
PURCHASE RULES YOU SHOULD KNOW
^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, or to reject specific purchase requests, including purchases by
exchange from another Vanguard fund.
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.
YOUR REDEMPTION PRICE
You redeem shares at a fund's next-determined 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 REDEMPTIONS
^CHECK REDEMPTIONS: Unless instructed otherwise, Vanguard will mail you a check,
normally within two business days of your trade date.
^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.
<PAGE>
15
^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 SHOULD KNOW
^SPECIAL ACCOUNTS. Special documentation may be 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
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).
^SHARE CERTIFICATES. If share certificates have been issued for your account,
those shares cannot be redeemed until you return the certificates (unsigned) to
Vanguard by registered mail. For the correct address, see Contacting Vanguard.
^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
<PAGE>
16
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:
- 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.
<PAGE>
17
^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:
- 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.
RESPONSIBILITY FOR FRAUD
Vanguard will not be responsible for any account 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 statements 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 ACTIVITY
Because excessive account transactions can disrupt 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
<PAGE>
18
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 THROUGH OTHER FIRMS
You may purchase or sell shares of most Vanguard funds through a financial
intermediary, such as a bank, broker, or investment adviser. If you invest with
Vanguard through an intermediary, please read that firm's program materials
carefully to learn of any special rules that may apply. For example, special
terms may apply to additional service features, fees, or other policies. Consult
your intermediary to determine when your order will be priced.
LOW BALANCE ACCOUNTS
All Vanguard funds reserve the right to close any investment-only
retirement-plan account or 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(TM) Fund). The fee
is waived if your total Vanguard account assets are $50,000 or more.
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 STATEMENTS
For most taxable accounts, average cost review 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 STATEMENTS
Each time you buy, sell, or exchange shares, we will 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 generally mailed in January, will report
the previous year's dividend and capital gains distributions, proceeds from
<PAGE>
19
the sale of shares, and distributions from IRAs or other retirement plans.
REPORTS
You will receive financial reports about your fund twice a year--in APRIL and
OCTOBER. These comprehensive reports include an assessment of the fund's
performance (and a comparison to its industry benchmark), an overview of the
financial markets, a report from the adviser, and the fund's financial
statements, which include a listing of the fund's holdings.
To keep the fund's costs as low as possible (so that you and other
shareholders can keep more of the fund's investment earnings), Vanguard attempts
to eliminate duplicate mailings to the same address. When 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-ACCOUNT(R)
1-800-662-6273
(ON-BOARD)
- For automated fund and account information
- For redemptions by check, exchange, or wire
- Toll-free, 24 hours per day, 7 days per week
INVESTOR INFORMATION
1-800-662-7447 (SHIP)
(Text telephone at
1-800-952-3335)
- For fund and service information
- For literature requests
- Business hours only
CLIENT SERVICES
1-800-662-2739 (CREW)
(Text telephone at
1-800-749-7273)
- For account information
- For most account transactions
- Business hours only
INSTITUTIONAL DIVISION
1-888-809-8102
- For information and services for large institutional investors
- Business hours only
<PAGE>
20
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 this fund number when contacting Vanguard about the Fund: Calvert
Social Index-213.
"Calvert," "Calvert Group," and "Calvert Social Index" are trademarks of Calvert
Group, and have been licensed for use by Vanguard Calvert Social Index Fund and
The Vanguard Group. This mutual fund is not sponsored, endorsed, sold, or
promoted by Calvert Group, and Calvert Group makes no representation regarding
the advisability of investing in the Fund. All other market indexes referenced
in this prospectus are the exclusive property of their respective owners.
<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 that
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.
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.
MUTUAL FUND
An investment company that pools the money of many people and invests it in a
variety of securities in an effort to achieve a specific objective over time.
NET ASSET VALUE (NAV)
The market value of a mutual fund's total assets, minus liabilities, divided by
the number of shares outstanding. The value of a single share is called its
share value or share price.
PASSIVE MANAGEMENT
A low-cost investment strategy in which a mutual fund attempts to match--rather
than outperform--a particular stock or bond market index; also known as
indexing.
PRINCIPAL
The amount of money you put into an investment.
SECURITIES
Stocks, bonds, money market instruments, and other investment vehicles.
PRICE/EARNINGS (P/E) RATIO
The current share price of a stock, divided by its per-share earnings (profits).
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, assuming the reinvestment of all distributions of dividends and capital
gains.
VOLATILITY
The fluctuations in value of a mutual fund or other security. The greater a
fund's volatility, the wider the fluctuations between its high and low prices.
YIELD
Income (interest or dividends) earned by an investment, expressed as a
percentage of the investment's price.
<PAGE>
[SHIP]
[THE VANGUARD GROUP(R) LOGO]
Post Office Box 2600
Valley Forge, PA 19482-2600
FOR MORE INFORMATION
If you'd like more information about
Vanguard Calvert Social Index Fund,
the following documents are
available free upon request:
ANNUAL/SEMIANNUAL REPORTS
TO SHAREHOLDERS
Additional information about the
Fund's investments is available in
the Fund's annual and semiannual
reports to shareholders.
STATEMENT OF ADDITIONAL
INFORMATION (SAI)
The SAI provides more detailed
information about the Fund.
The current annual and semiannual
reports and the SAI are
incorporated by reference into
(and are thus legally a part of)
this prospectus.
All market indexes referenced in
this prospectus are the exclusive
property of their respective owners.
To receive a free copy of the latest
annual or semiannual report or the
SAI, or to request additional
information about the Fund 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 Fund
(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 Fund 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.
Fund's Investment Company Act
file number: 811-1027
(C) 2000 The Vanguard Group, Inc.
All rights reserved.
Vanguard Marketing
Corporation, Distributor.
P213 122000
<PAGE>
VANGUARD(R) CALVERT
SOCIAL INDEX(TM) FUND
FOR PARTICIPANTS - DECEMBER 20, 2000
This prospectus
contains financial data
for the Fund through
the fiscal year ended
August 31, 2000.
STOCK
PROSPECTUS
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 CALVERT SOCIAL INDEX FUND
Participant Prospectus
December 20, 2000
A Stock Index Mutual Fund
--------------------------------------------------------------------------------
CONTENTS
--------------------------------------------------------------------------------
1 FUND PROFILE
2 ADDITIONAL INFORMATION
3 AN INTRODUCTION TO INDEX FUNDS
3 MORE ON THE FUND
8 THE FUND AND VANGUARD
8 INVESTMENT ADVISER
9 DIVIDENDS, CAPITAL GAINS, AND TAXES
9 SHARE PRICE
10 FINANCIAL HIGHLIGHTS
11 INVESTING WITH VANGUARD
12 ACCESSING FUND INFORMATION BY COMPUTER
GLOSSARY (inside back cover)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
WHY READING THIS PROSPECTUS IS IMPORTANT
This prospectus explains the investment objective, policies, strategies, and
risks associated with the Fund. 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 decide whether the Fund is the right
investment for you. We suggest that you keep this prospectus for future
reference.
This prospectus is intended for participants in employer-sponsored
retirement or savings plans. Another version--for investors who would like to
open a personal investment account--can be obtained by calling Vanguard at
1-800-662-7447.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
IMPORTANT NOTE ON THE CALVERT SOCIAL INDEX FUND
The Calvert Social Index Fund features two separate classes of shares: Investor
and Institutional. Investor Shares are offered through this prospectus (for
participants in employer-sponsored retirement or savings plans) and through a
separate prospectus (for individual investors). Institutional Shares have an
investment minimum of $10 million, and are offered through another prospectus.
Investor Shares and Institutional Shares do not have the same expenses; as
a result, their performances will differ.
--------------------------------------------------------------------------------
<PAGE>
1
FUND PROFILE
INVESTMENT OBJECTIVE
The Fund seeks to track the performance of a benchmark index that measures the
investment return of large- and mid-capitalization stocks.
INVESTMENT STRATEGIES
The Fund employs a passive management strategy designed to track the performance
of the Calvert Social Index. The Index is composed of large- and mid-cap stocks
that have been screened for certain social and environmental criteria by the
Index sponsor, which is independent of Vanguard. The Fund attempts to replicate
the 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 FUND.
PRIMARY RISKS
An investment in the Fund could lose money over short or even long periods. You
should expect the Fund's share price and total return to fluctuate within a wide
range like the overall stock market. The Fund's performance could be hurt by:
- Investment style risk, which is the chance that returns from large- and
mid-cap stocks generally, or from stocks included in the Calvert Social
Index specifically, will trail returns from other asset classes or the
overall stock market.
- Nondiversification risk, which is the chance that the Fund's performance
may be hurt disproportionately by the poor performance of relatively few
securities. The Fund is considered nondiversified, which means that it may
invest a greater percentage of its assets in the securities of particular
issuers as compared with other mutual funds.
PERFORMANCE/RISK INFORMATION
The Fund was in operation for less than one calendar year as of the date of this
prospectus, so it has no meaningful performance information to report.
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 on those incurred in the fiscal year ended August 31, 2000.
SHAREHOLDER FEES (fees paid directly from your investment)
Sales Charge (Load) Imposed 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: 0.13%
12b-1 Distribution Fee: None
Other Expenses: 0.12%
TOTAL ANNUAL FUND OPERATING EXPENSES: 0.25%
<PAGE>
2
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's Investor Shares. 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 the given
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.
--------------------------------------------------------------------------------
PLAIN TALK ABOUT
FUND EXPENSES
All mutual funds have operating expenses. These expenses, which are deducted
from a fund's gross income, are expressed as a percentage of the net assets of
the fund. Vanguard Calvert Social Index Fund's expense ratio in fiscal year 2000
was 0.25%, or $2.50 per $1,000 of average net assets. The average large-cap
growth mutual fund had expenses in 1999 of 1.41%, or $14.10 per $1,000 of
average net assets (derived from data provided by Lipper Inc., which reports on
the mutual fund industry). Management expenses, which are one part of operating
expenses, include investment advisory fees as well as other costs of managing a
fund--such as account maintenance, reporting, accounting, legal, and other
administrative expenses.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
PLAIN TALK ABOUT
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 expenses can, over time, have
a dramatic effect on a fund's performance.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
ADDITIONAL INFORMATION
DIVIDENDS AND CAPITAL GAINS NEWSPAPER ABBREVIATION
Distributed annually in December CalSoc
INVESTMENT ADVISER VANGUARD FUND NUMBER
The Vanguard Group, Valley Forge, Pa., 213
since inception
CUSIP NUMBER
INCEPTION DATE 921910303
May 8, 2000
TICKER SYMBOL
NET ASSETS (INVESTOR SHARE CLASS) AS OF VCSIX
AUGUST 31, 2000
$40 million
--------------------------------------------------------------------------------
<PAGE>
3
AN INTRODUCTION TO INDEX FUNDS
WHAT IS INDEXING?
Indexing is an investment strategy for tracking, as closely as possible, the
performance of a specified market benchmark, or "index." 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. There are many types
of indexes. Some represent a broad market segment--for instance, the entire U.S.
stock market or the entire U.S. bond market; other indexes cover a relatively
narrow market segment--for instance, small-cap value stocks or intermediate-term
bonds.
An index fund holds all, or a representative sample, of the securities that
make up its target index. Unlike actively managed funds, index (or "passively
managed") funds do not buy and sell securities based on research and analysis.
Rather, index funds simply attempt to mirror what the target index does, for
better or worse.
An index fund does not always perform exactly like its target index. Like
all mutual funds, index funds have operating expenses and transaction costs.
Market indexes do not, and therefore will always have a slight performance
advantage over funds that track them.
ADVANTAGES OF INDEX FUNDS
Index funds typically have the following characteristics:
- Variety of investments. Vanguard index funds generally invest in a wide
variety of companies and industries.
- Relative performance consistency. Because they seek to track market
benchmarks, index funds by definition will not perform dramatically better
or worse than their benchmarks.
- Low cost. Index funds are inexpensive to run as compared with actively
managed funds. They have no research costs, and keep trading activity--and
thus brokerage commissions--to a minimum.
MORE ON THE FUND
This prospectus describes risks you would face as a Fund shareholder. It is
important to keep in mind one of the main axioms of investing: The higher the
risk of losing money, the higher the potential reward. The reverse, also, is
generally true: The lower the risk, the lower the potential reward. As you
consider an investment in any mutual fund, you should take into account your
personal tolerance for daily fluctuations in the securities markets. Look for
this [FLAG] symbol throughout the prospectus. It is used to mark detailed
information about each type of risk that you would confront as a Fund
shareholder.
The following sections explain the primary investment strategies and
policies that the Fund uses in pursuit of its objective. The Fund's board of
trustees, which oversees the Fund's management, may change investment strategies
or policies in the interest of shareholders without a shareholder vote.
Finally, you'll find information on other important features of the Fund.
INDEXING METHODS
In seeking to track a particular index, a fund generally uses one of two methods
to select the securities in which it invests.
REPLICATION METHOD. Many stock funds--but not bond funds--use the
replication method of indexing. This means that a fund holds each security found
in its target index in
<PAGE>
4
about the same proportions as represented in the index itself. 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 would invest about 5% of its assets in that company. For
bond funds, replication is an inefficient and costly method of indexing, since
there is no liquid market for many of the corporate and agency bonds typically
found in a broad bond index. The Calvert Social Index Fund uses this method of
indexing.
STRAIGHT SAMPLING METHOD. Because it would be very expensive and
inefficient to buy and sell all securities held in certain indexes (the Wilshire
5000 Index, for example, included over 6,800 separate stocks as of August 31,
2000), many funds tracking these larger indexes use a "straight sampling"
technique. Using sophisticated computer programs, a fund selects, from the
target index, a representative sample of securities that will resemble the full
target index in terms of key risk factors. For stock funds, these factors
include industry weightings, country weightings, market capitalization, and
other financial characteristics of stocks.
--------------------------------------------------------------------------------
PLAIN TALK ABOUT
CALVERT SOCIAL INDEX
The Calvert Social Index is maintained by the Calvert Group of Bethesda,
Maryland, a leading organization in the world of social investing. Calvert
selects stocks from approximately 1,000 of the largest public companies in the
United States by evaluating each company's performance in the following
categories: environmental; labor relations; product safety; animal welfare;
military weapons; community relations; human rights; and the rights of
indigenous peoples. Included in the Index are companies (a) with programs
focused on reducing overall environmental impact; (b) with good labor-relations
records, including those with strong diversity programs; (c) that produce
healthy and safe products and services; (d) that have reduced their use of
animal testing; (e) that are responsible citizens in their communities; and (f)
that have adopted human rights standards.
Excluded from the Index are companies that, in Calvert's opinion: (a) have poor
environmental records (including those with significant compliance and waste
management problems); (b) significantly engage in nuclear power; (c) have a
record of employment discrimination; (d) provide unsafe workplaces; (e) are
primarily engaged in tobacco, alcohol, firearms, or gambling; (f) abuse animals
through methods of factory farming; (g) are primarily engaged in weapons
contracting; (h) directly contribute to human rights violations worldwide; and
(i) are significantly engaged in a pattern or practice of violating the rights
of indigenous peoples.
For further information about the Calvert Social Index, please visit Calvert's
website, at www.calvert.com or contact Calvert at 1-800-368-2745.
--------------------------------------------------------------------------------
MARKET EXPOSURE
[FLAG] THE FUND IS SUBJECT TO STOCK 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 PRICES AND PERIODS OF
FALLING 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
<PAGE>
5
S&P 500 Index, a widely used barometer of 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 this Fund in particular.
[FLAG] THE FUND IS SUBJECT TO INVESTMENT STYLE RISK, WHICH IS THE CHANCE THAT
RETURNS FROM THE MARKET SECTOR IN WHICH IT INVESTS WILL TRAIL RETURNS FROM
OTHER MARKET SECTORS. AS A GROUP, LARGE- AND MID-CAP STOCKS TEND 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.
--------------------------------------------------------------------------------
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, on average, 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.
--------------------------------------------------------------------------------
[FLAG] BECAUSE THE FUND IS NONDIVERSIFIED (WHICH MEANS IT MAY INVEST A GREATER
PERCENTAGE OF ITS ASSETS IN THE SECURITIES OF FEWER ISSUERS AS COMPARED
WITH OTHER MUTUAL FUNDS), THE FUND IS SUBJECT TO THE RISK THAT ITS
PERFORMANCE MAY BE HURT DISPROPORTIONATELY BY THE POOR PERFORMANCE OF
RELATIVELY FEW SECURITIES.
<PAGE>
6
SECURITY SELECTION
The Fund seeks to provide investment results that correspond to the Calvert
Social Index. The correlation between the performance of the Fund and the Index
is expected to be at least 95% (a correlation of 100% would indicate perfect
correlation). Keep in mind that the social screening policies employed by the
Index may result in economic sector weightings that are significantly different
from those of the overall market. For example, as of August 31, 2000 technology
stocks represented 41% of the Calvert Social Index, while that sector
represented approximately 32% of the Russell 1000 Index. In addition, as of the
same date, stocks within the integrated oils sector represented 0% of the
Calvert Social Index, while that sector represented more than 3% of the Russell
1000 Index.
OTHER INVESTMENT POLICIES AND RISKS
The Fund reserves the right to substitute a different index for the index it
currently tracks. This could happen if the current index were discontinued, or
for any other reason determined in good faith by the Fund's board of trustees.
In any such instance, the substitute index would measure the same general market
as the current index.
The Fund may invest in foreign securities to the extent necessary to carry
out its investment strategy of holding all of the stocks that comprise the index
it tracks.
To track its target index as closely as possible, the Fund attempts to
remain fully invested in stocks. The Fund intends to invest at least 95% of its
total assets in the stocks of the Index. To help stay fully invested, and to
reduce transaction costs, the Fund may invest, to a limited extent, in stock
index futures and options contracts, warrants, convertible securities, and swap
agreements, which are types of derivatives. These investments will not be
screened based on social or environmental criteria.
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 the 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).
The Fund 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.
The Fund's obligation under futures contracts will not exceed 20% of its
total assets.
The reasons for which the 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.
Although index funds, by their nature, tend to be tax-efficient investment
vehicles, the Fund is generally managed without regard to tax ramifications.
<PAGE>
7
--------------------------------------------------------------------------------
PLAIN TALK ABOUT
DERIVATIVES
A derivative is a financial contract whose value is based on (or "derived" from)
a traditional security (such as a stock or a bond), an asset (such as a
commodity like gold), or a market index (such as the S&P 500 Index). Some forms
of derivatives, such as exchange-traded futures and options on securities,
commodities, or indexes, have been trading on regulated exchanges for more than
two decades. These types of derivatives are standardized contracts that can
easily be bought and sold, and whose market values are determined and published
daily. Non-standardized derivatives, on the other hand, tend to be more
specialized or complex, and may be harder to value. If used for speculation or
as leveraged investments, derivatives can carry considerable risks.
--------------------------------------------------------------------------------
COSTS AND MARKET-TIMING
Some investors try to profit from a strategy called market-timing--switching
money into mutual funds 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.
This is why all Vanguard funds have adopted special policies to discourage
short-term trading. Specifically:
- Each Vanguard fund reserves the right to reject any purchase
request--including exchanges from other Vanguard funds--that it regards as
disruptive to efficient portfolio management. A purchase request could be
rejected because of the timing of the investment or because of a history of
excessive trading by the investor.
- Each Vanguard fund (except the money market funds) limits the number of
times that an investor can exchange into and out of the fund.
- Each Vanguard fund reserves the right to stop offering shares at any time.
- Certain Vanguard funds charge transaction fees on purchases and/or
redemptions oftheir shares.
See the INVESTING WITH VANGUARD section of this prospectus for further details
on Vanguard's transaction policies.
THE VANGUARD FUNDS DO NOT PERMIT MARKET-TIMING. DO NOT INVEST WITH VANGUARD
IF YOU ARE A MARKET-TIMER.
TURNOVER RATE
Although the Fund normally seeks to invest for the long term, it may sell
securities regardless of how long they have been held. Generally, index-oriented
funds sell securities only in response to redemption requests or changes in the
composition of a target index. The FINANCIAL HIGHLIGHTS section of this
prospectus shows historic turnover rates for the Fund. A turnover rate of 100%,
for example, would mean that the Fund had sold and replaced securities valued at
100% of its net assets within a one-year period.
<PAGE>
8
--------------------------------------------------------------------------------
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 taxable
income. As of August 31, 2000, the average turnover rate for passively managed
domestic equity index funds investing in common stocks was approximately 41%;
for all domestic stock funds, the average turnover rate was approximately 93%,
according to Morningstar, Inc.
--------------------------------------------------------------------------------
THE FUND AND VANGUARD
The Fund is a member 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 Vanguard funds share in the expenses associated with business
operations, such as personnel, office space, equipment, and advertising.
Vanguard also provides marketing services to the funds. Although
shareholders do not pay sales commissions or 12b-1 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 Fund's adviser through its Quantitative Equity Group. As of
August 31, 2000, Vanguard served as adviser for about $406 billion in assets.
Vanguard manages the Fund on an at-cost basis, subject to the control of the
trustees and officers of the Fund.
For the fiscal year ended August 31, 2000, the advisory expenses
represented an effective annual rate of less than 0.01% of the Fund's average
net assets.
The adviser is authorized to choose broker-dealers to handle the purchase
and sale of the Fund's securities, and to obtain the best available price and
most favorable execution for all transactions. Also, the Fund may direct the
adviser to use a particular broker for certain transactions in exchange for
commission rebates or research services provided to the Fund.
<PAGE>
9
In the interest of obtaining better execution of a transaction, the adviser
may at times choose brokers who charge higher commissions. If more than one
broker can obtain the best available price and most favorable execution, then
the adviser is authorized to choose a broker who, in addition to executing the
transaction, will provide research services to the adviser or the Fund.
--------------------------------------------------------------------------------
PLAIN TALK ABOUT
THE FUND'S ADVISER
The manager primarily responsible for overseeing the Fund's investments is:
GEORGE U. SAUTER, Managing Director of Vanguard and head of Vanguard's
Quantitative Equity Group. He has worked in investment management since 1985 and
has had primary responsibility for Vanguard's stock indexing investments and
strategy since joining the company in 1987. Education: A.B., Dartmouth College;
M.B.A., University of Chicago.
--------------------------------------------------------------------------------
DIVIDENDS, CAPITAL GAINS, AND TAXES
The 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. Distributions generally occur in December.
Your dividend and capital gains distributions will be reinvested in
additional Fund shares and accumulate on a tax-deferred basis if you are
investing through an employer-sponsored retirement or savings plan. You will not
owe taxes on these distributions until you begin withdrawals from the plan. You
should consult your plan administrator, your plan's Summary Plan Description, or
your tax adviser about the tax consequences of plan withdrawals.
--------------------------------------------------------------------------------
PLAIN TALK ABOUT
DISTRIBUTIONS
As a shareholder, you are entitled to your portion 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 any stock
holdings and the interest it receives from any 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
The 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 of the
Fund by the number of Fund shares outstanding.
Knowing the daily net asset value is useful to you as a shareholder because
it indicates the current value of your investment. The Fund's NAV, multiplied by
the number of shares
<PAGE>
10
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: The 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 Fund's board of trustees.
The 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 table is intended to help you understand the
Fund's financial performance since inception, and certain information reflects
financial results for a single Fund share. The total returns in the 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
report--along with the Fund's financial statements--is included in the Fund's
most recent annual report to shareholders. You may have the annual report sent
to you without charge by contacting Vanguard.
-------------------------------------------------------------------------
VANGUARD CALVERT SOCIAL INDEX FUND
MAY 8* TO
AUG. 31, 2000
-------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $10.00
-------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .02
Net Realized and Unrealized Gain (Loss) on Investments 1.12
-------------
Total from Investment Operations 1.14
-------------
DISTRIBUTIONS
Dividends from Net Investment Income --
Distributions from Realized Capital Gains --
-------------
Total Distributions --
-------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $11.14
=========================================================================
TOTAL RETURN 11.07%
=========================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $40
Ratio of Total Expenses to Average Net Assets 0.25%+
Ratio of Net Investment Income to Average Net Assets 0.98%+
Turnover Rate 3%
=========================================================================
*Subscription period for the Fund was May 8, 2000, to May 31, 2000, during which
time all assets were held in money market instruments. Performance measurement
began May 31, 2000.
+Annualized.
<PAGE>
11
--------------------------------------------------------------------------------
PLAIN TALK ABOUT
HOW TO READ THE FINANCIAL HIGHLIGHTS TABLE
The Fund began the period ended August 31, 2000 with a net asset value (price)
of $10.00 per share. During the period, the Fund earned $0.02 per share from
investment income (interest and dividends) and $1.12 per share from investments
that had appreciated in value or that were sold for higher prices than the Fund
paid for them. Shareholders received no dividend or capital gains distributions.
The earnings ($1.14 per share) minus the distributions ($0.00 per share)
resulted in a share price of $11.14 at the end of the period. This was an
increase of $1.14 per share (from $10.00 at the beginning of the period to
$11.14 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
11.07% for the period.
As of August 31, 2000, the Fund had $40 million in net assets. For the period,
its annualized expense ratio was 0.25% ($2.50 per $1,000 of net assets); and its
annualized net investment income amounted to 0.98% of its average net assets. It
sold and replaced securities valued at 3% of its net assets.
--------------------------------------------------------------------------------
INVESTING WITH VANGUARD
The Fund is an investment option in your retirement or savings plan. Your plan
administrator or your employee benefits office can provide you with detailed
information on how to participate in your plan and how to elect the Fund as an
investment option.
- If you have any questions about the Fund or Vanguard, including those about
the 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 the Fund's shares are processed as
soon as they have been received by Vanguard in good order. Good order means that
your request includes complete information on your contribution, exchange, or
redemption, and that Vanguard has received the appropriate assets.
In all cases, your transaction will be based on the 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. Contact your plan
administrator for special rules that may apply to transaction requests placed
with another service provider.
<PAGE>
12
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 the 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.
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.
"Calvert," "Calvert Group," and "Calvert Social Index" are trademarks of Calvert
Group, and have been licensed for use by Vanguard Calvert Social Index Fund and
The Vanguard Group. This mutual fund is not sponsored, endorsed, sold, or
promoted by Calvert Group, and Calvert Group makes no representation regarding
the advisability of investing in the Fund. All other market indexes referenced
in this prospectus are the exclusive property of their respective owners.
<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 that
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.
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.
MUTUAL FUND
An investment company that pools the money of many people and invests it in a
variety of securities in an effort to achieve a specific objective over time.
NET ASSET VALUE (NAV)
The market value of a mutual fund's total assets, minus liabilities, divided by
the number of shares outstanding. The value of a single share is called its
share value or share price.
PASSIVE MANAGEMENT
A low-cost investment strategy in which a mutual fund attempts to match--rather
than outperform--a particular stock or bond market index; also known as
indexing.
PRINCIPAL
The amount of money you put into an investment.
SECURITIES
Stocks, bonds, money market instruments, and other investment vehicles.
PRICE/EARNINGS (P/E) RATIO
The current share price of a stock, divided by its per-share earnings (profits).
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, assuming the reinvestment of all distributions of dividends and capital
gains.
VOLATILITY
The fluctuations in value of a mutual fund or other security. The greater a
fund's volatility, the wider the fluctuations between its high and low prices.
YIELD
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 Calvert Social Index Fund,
the following documents are
available free upon request:
ANNUAL/SEMIANNUAL REPORTS
TO SHAREHOLDERS
Additional information about the
Fund's investments is available in
the Fund's annual and semiannual
reports to shareholders.
STATEMENT OF ADDITIONAL
INFORMATION (SAI)
The SAI provides more detailed
information about the Fund.
The current annual and semiannual
reports and the SAI are
incorporated by reference into
(and are thus legally a part of)
this prospectus.
All market indexes referenced in
this prospectus are the exclusive
property of their respective owners.
To receive a free copy of the latest
annual or semiannual report or the
SAI, or to request additional
information about the Fund 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 Fund
(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 Fund 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.
Fund's Investment Company Act
file number: 811-1027
(C) 2000 The Vanguard Group, Inc.
All rights reserved.
Vanguard Marketing
Corporation, Distributor.
I213 122000
<PAGE>
VANGUARD(R) CALVERT
SOCIAL INDEX(TM) FUND
INSTITUTIONAL SHARES - DECEMBER 20, 2000
This prospectus
contains financial data
for the Fund through
the fiscal year ended
August 31, 2000.
STOCK
PROSPECTUS
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 CALVERT SOCIAL INDEX FUND
INSTITUTIONAL SHARES
Prospectus December 20, 2000
A Stock Index Mutual Fund
--------------------------------------------------------------------------------
CONTENTS
--------------------------------------------------------------------------------
1 FUND PROFILE
2 ADDITIONAL INFORMATION
3 AN INTRODUCTION TO INDEX FUNDS
3 MORE ON THE FUND
8 THE FUND AND VANGUARD
9 INVESTMENT ADVISER
9 DIVIDENDS, CAPITAL GAINS, AND TAXES
11 SHARE PRICE
11 FINANCIAL HIGHLIGHTS
13 INVESTING WITH VANGUARD
13 Buying Shares
14 Redeeming Shares
16 Other Rules You Should Know
18 Fund and Account Updates
18 Contacting Vanguard
GLOSSARY (inside back cover)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
WHY READING THIS PROSPECTUS IS IMPORTANT
This prospectus explains the investment objective, policies, strategies, and
risks associated with the Fund. 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 decide whether the Fund is the right
investment for you. We suggest that you keep this prospectus for future
reference.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
IMPORTANT NOTE ON THE CALVERT SOCIAL INDEX FUND
The Calvert Social Index Fund features two separate classes of shares: Investor
and Institutional. This prospectus offers the Fund's Institutional Shares, which
are for investors who do not require special employee benefit plan services and
who are willing to invest a minimum of $10 million. Another prospectus offers
the Fund's Investor Shares, which have an investment minimum of $3,000. To
obtain a copy of the prospectus for Investor Shares, please call Vanguard at
1-800-662-7447.
Investor Shares and Institutional Shares do not have the same expenses; as
a result, their investment performances will differ.
--------------------------------------------------------------------------------
<PAGE>
1
FUND PROFILE
INVESTMENT OBJECTIVE
The Fund seeks to track the performance of a benchmark index that measures the
investment return of large- and mid-capitalization stocks.
INVESTMENT STRATEGIES
The Fund employs a passive management strategy designed to track the performance
of the Calvert Social Index. The Index is composed of large- and mid-cap stocks
that have been screened for certain social and environmental criteria by the
Index sponsor, which is independent of Vanguard. The Fund attempts to replicate
the 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 FUND.
PRIMARY RISKS
An investment in the Fund could lose money over short or even long periods. You
should expect the Fund's share price and total return to fluctuate within a wide
range like the overall stock market. The Fund's performance could be hurt by:
- Investment style risk, which is the chance that returns from large- and
mid-cap stocks generally, or from stocks included in the Calvert Social
Index specifically, will trail returns from other asset classes or the
overall stock market.
- Nondiversification risk, which is the chance that the Fund's performance
may be hurt disproportionately by the poor performance of relatively few
securities. The Fund is considered nondiversified, which means that it may
invest a greater percentage of its assets in the securities of particular
issuers as compared with other mutual funds.
PERFORMANCE/RISK INFORMATION
The Fund was in operation for less than one calendar year as of the date of this
prospectus, so it has no meaningful performance information to report.
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 estimated amounts for the current fiscal year.
The Institutional Shares of the Fund have no operating history, and actual
operating expenses could be different.
SHAREHOLDER FEES (fees paid directly from your investment)
Sales Charge (Load) Imposed 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%
<PAGE>
2
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's Institutional Shares. This example assumes that the Fund
provides a return of 5% a year, and that operating expenses match our estimates
for the Fund's first year of operations. The results apply whether or not you
redeem your investment at the end of the given 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 FOR THE FUTURE.
--------------------------------------------------------------------------------
PLAIN TALK ABOUT
FUND EXPENSES
All mutual funds have operating expenses. These expenses, which are deducted
from a fund's gross income, are expressed as a percentage of the net assets of
the fund. We expect the Fund's Institutional Shares expense ratio for the
current fiscal year to be 0.12%, or $1.20 per $1,000 of average net assets. The
average large-cap growth mutual fund had expenses in 1999 of 1.41%, or $14.10
per $1,000 of average net assets (derived from data provided by Lipper Inc.,
which reports on the mutual fund industry). Management expenses, which are one
part of operating expenses, include investment advisory fees, as well as other
costs of managing a fund--such as account maintenance, reporting, accounting,
legal, and other administrative expenses.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
PLAIN TALK ABOUT
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 expenses can, over time, have
a dramatic effect on a fund's performance.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
ADDITIONAL INFORMATION
DIVIDENDS AND CAPITAL GAINS SUITABLE FOR IRAS
Distributed annually in December Yes
INVESTMENT ADVISER MINIMUM INITIAL INVESTMENT
The Vanguard Group, Valley Forge, $10 million
Pa., since inception
NEWSPAPER ABBREVIATION
INCEPTION DATE CalScInst
May 8, 2000
VANGUARD FUND NUMBER
NET ASSETS (ALL SHARE CLASSES) AS OF 223
AUGUST 31, 2000
$40 million CUSIP NUMBER
921910402
--------------------------------------------------------------------------------
<PAGE>
3
AN INTRODUCTION TO INDEX FUNDS
WHAT IS INDEXING?
Indexing is an investment strategy for tracking, as closely as possible, the
performance of a specified market benchmark, or "index." 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. There are many types
of indexes. Some represent a broad market segment--for instance, the entire U.S.
stock market or the entire U.S. bond market; other indexes cover a relatively
narrow market segment--for instance, small-cap value stocks or intermediate-term
bonds.
An index fund holds all, or a representative sample, of the securities that
make up its target index. Unlike actively managed funds, index (or "passively
managed") funds do not buy and sell securities based on research and analysis.
Rather, index funds simply attempt to mirror what the target index does, for
better or worse.
An index fund does not always perform exactly like its target index. Like
all mutual funds, index funds have operating expenses and transaction costs.
Market indexes do not, and therefore will always have a slight performance
advantage over funds that track them.
ADVANTAGES OF INDEX FUNDS
Index funds typically have the following characteristics:
- Variety of investments. Vanguard index funds generally invest in a wide
variety of companies and industries.
- Relative performance consistency. Because they seek to track market
benchmarks, index funds by definition will not perform dramatically better
or worse than their benchmarks.
- Low cost. Index funds are inexpensive to run as compared with actively
managed funds. They have no research costs, and 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.
MORE ON THE FUND
This prospectus describes risks you would face as a Fund shareholder. It is
important to keep in mind one of the main axioms of investing: The higher the
risk of losing money, the higher the potential reward. The reverse, also, is
generally true: The lower the risk, the lower the potential reward. As you
consider an investment in any mutual fund, you should take into account your
personal tolerance for daily fluctuations in the securities markets. Look for
this [FLAG] symbol throughout the prospectus. It is used to mark detailed
information about each type of risk that you would confront as a Fund
shareholder.
The following sections explain the primary investment strategies and
policies that the Fund uses in pursuit of its objective. The Fund's board of
trustees, which oversees the
<PAGE>
4
Fund's management, may change investment strategies or policies in the interest
of shareholders without a shareholder vote.
Finally, you'll find information on other important features of the Fund.
INDEXING METHODS
In seeking to track a particular index, a fund generally uses one of two methods
to select the securities in which it invests.
REPLICATION METHOD. Many stock funds--but not bond funds--use the
replication method of indexing. This means that a fund holds each security found
in its target index in about the same proportions as represented in the index
itself. 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 would invest about 5% of its assets
in that company. For bond funds, replication is an inefficient and costly method
of indexing, since there is no liquid market for many of the corporate and
agency bonds typically found in a broad bond index. The Calvert Social Index
Fund uses this method of indexing.
STRAIGHT SAMPLING METHOD. Because it would be very expensive and
inefficient to buy and sell all securities held in certain indexes (the Wilshire
5000 Index, for example, included over 6,800 separate stocks as of August 31,
2000), many funds tracking these larger indexes use a "straight sampling"
technique. Using sophisticated computer programs, a fund selects, from the
target index, a representative sample of securities that will resemble the full
target index in terms of key risk factors. For stock funds, these factors
include industry weightings, country weightings, market capitalization, and
other financial characteristics of stocks.
--------------------------------------------------------------------------------
PLAIN TALK ABOUT
CALVERT SOCIAL INDEX
The Calvert Social Index is maintained by the Calvert Group of Bethesda,
Maryland, a leading organization in the world of social investing. Calvert
selects stocks from approximately 1,000 of the largest public companies in the
United States by evaluating each company's performance in the following
categories: environmental; labor relations; product safety; animal welfare;
military weapons; community relations; human rights; and the rights of
indigenous peoples. Included in the Index are companies (a) with programs
focused on reducing overall environmental impact; (b) with good labor-relations
records, including those with strong diversity programs; (c) that produce
healthy and safe products and services; (d) that have reduced their use of
animal testing; (e) that are responsible citizens in their communities; and (f)
that have adopted human rights standards.
Excluded from the Index are companies that, in Calvert's opinion: (a) have poor
environmental records (including those with significant compliance and waste
management problems); (b) significantly engage in nuclear power; (c) have a
record of employment discrimination; (d) provide unsafe workplaces; (e) are
primarily engaged in tobacco, alcohol, firearms, or gambling; (f) abuse animals
through methods of factory farming; (g) are primarily engaged in weapons
contracting; (h) directly contribute to human rights violations worldwide; and
(i) are significantly engaged in a pattern or practice of violating the rights
of indigenous peoples.
For further information about the Calvert Social Index, please visit Calvert's
website, at www.calvert.com or contact Calvert at 1-800-368-2745.
--------------------------------------------------------------------------------
<PAGE>
5
MARKET EXPOSURE
[FLAG] THE FUND IS SUBJECT TO STOCK 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 PRICES AND PERIODS OF
FALLING 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, a widely used barometer of 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 this fund in particular.
[FLAG] THE FUND IS SUBJECT TO INVESTMENT STYLE RISK, WHICH IS THE CHANCE THAT
RETURNS FROM THE MARKET SECTOR IN WHICH IT INVESTS WILL TRAIL RETURNS FROM
OTHER MARKET SECTORS. AS A GROUP, LARGE- AND MID-CAP STOCKS TEND 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.
--------------------------------------------------------------------------------
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, on average, 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>
6
[FLAG] BECAUSE THE FUND IS NONDIVERSIFIED (WHICH MEANS IT MAY INVEST A GREATER
PERCENTAGE OF ITS ASSETS IN THE SECURITIES OF FEWER ISSUERS AS COMPARED
WITH OTHER MUTUAL FUNDS), THE FUND IS SUBJECT TO THE RISK THAT ITS
PERFORMANCE MAY BE HURT DISPROPORTIONATELY BY THE POOR PERFORMANCE OF
RELATIVELY FEW SECURITIES.
SECURITY SELECTION
The Fund seeks to provide investment results that correspond to the Calvert
Social Index. The correlation between the performance of the Fund and the Index
is expected to be at least 95% (a correlation of 100% would indicate perfect
correlation). Keep in mind that the social screening policies employed by the
Index may result in economic sector weightings that are significantly different
from those of the overall market. For example, as of August 31, 2000 technology
stocks represented 41% of the Calvert Social Index, while that sector
represented approximately 32% of the Russell 1000 Index. In addition, as of the
same date, stocks within the integrated oils sector represented 0% of the
Calvert Social Index, while that sector represented more than 3% of the Russell
1000 Index.
OTHER INVESTMENT POLICIES AND RISKS
The Fund reserves the right to substitute a different index for the index it
currently tracks. This could happen if the current index were discontinued, or
for any other reason determined in good faith by the Fund's board of trustees.
In any such instance, the substitute index would measure the same general market
as the current index.
The Fund may invest in foreign securities to the extent necessary to carry
out its investment strategy of holding all of the stocks that comprise the index
it tracks.
To track its target index as closely as possible, the Fund attempts to remain
fully invested in stocks. The Fund intends to invest at least 95% of its
total assets in the stocks of the Index. To help stay fully invested, and to
reduce transaction costs, the Fund may invest, to a limited extent, in stock
index futures and options contracts, warrants, convertible securities, and swap
agreements, which are types of derivatives. These investments will not be
screened based on social or environmental criteria.
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 the 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).
The Fund 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.
The Fund's obligation under futures contracts will not exceed 20% of its
total assets.
The reasons for which the 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.
Although index funds, by their nature, tend to be tax-efficient investment
vehicles, the Fund is generally managed without regard to tax ramifications.
<PAGE>
7
--------------------------------------------------------------------------------
PLAIN TALK ABOUT
DERIVATIVES
A derivative is a financial contract whose value is based on (or "derived" from)
a traditional security (such as a stock or a bond), an asset (such as a
commodity like gold), or a market index (such as the S&P 500 Index). Some forms
of derivatives, such as exchange-traded futures and options on securities,
commodities, or indexes, have been trading on regulated exchanges for more than
two decades. These types of derivatives are standardized contracts that can
easily be bought and sold, and whose market values are determined and published
daily. Non-standardized derivatives, on the other hand, tend to be more
specialized or complex, and may be harder to value. If used for speculation or
as leveraged investments, derivatives can carry considerable risks.
--------------------------------------------------------------------------------
COSTS AND MARKET-TIMING
Some investors try to profit from a strategy called market-timing--switching
money into mutual funds 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.
This is why all Vanguard funds have adopted special policies to discourage
short-term trading. Specifically:
- Each Vanguard fund reserves the right to reject any purchase
request--including exchanges from other Vanguard funds--that it regards as
disruptive to efficient portfolio management. A purchase request could be
rejected because of the timing of the investment or because of a history of
excessive trading by the investor.
- Each Vanguard fund (except the money market funds) limits the number of
times that an investor can exchange into and out of the fund.
- Each Vanguard fund reserves the right to stop offering shares at any time.
- Vanguard U.S. Stock Index Funds, International Stock Index Funds, Reit
Index Fund, Balanced Index Fund, and GROWTH AND INCOME Fund generally do
NOT accept exchanges by telephone or fax, or online. (IRAs and other
retirement accounts are not subject to this rule.)
- Certain Vanguard funds charge transaction fees on purchases and/or
redemptions of their shares.
See the INVESTING WITH VANGUARD section of this prospectus for further details
on Vanguard's transaction policies.
THE VANGUARD FUNDS DO NOT PERMIT MARKET-TIMING. DO NOT INVEST WITH VANGUARD
IF YOU ARE A MARKET-TIMER.
TURNOVER RATE
Although the Fund normally seeks to invest for the long term, it may sell
securities regardless of how long they have been held. Generally, index-oriented
funds sell securities only in response to redemption requests or changes in the
composition of a target index. The FINANCIAL HIGHLIGHTS section of this
prospectus shows historic turnover rates for the Fund. A turnover rate of 100%,
for example, would mean that the Fund had sold and replaced securities valued at
100% of its net assets within a one-year period.
<PAGE>
8
--------------------------------------------------------------------------------
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 taxable
income. As of August 31, 2000, the average turnover rate for passively managed
domestic equity index funds investing in common stocks was approximately 41%;
for all domestic stock funds, the average turnover rate was approximately 93%,
according to Morningstar, Inc.
--------------------------------------------------------------------------------
THE FUND AND VANGUARD
The Fund is a member 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 Vanguard funds share in the expenses associated with business
operations, such as personnel, office space, equipment, and advertising.
Vanguard also provides marketing services to the funds. Although
shareholders do not pay sales commissions or 12b-1 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 Fund's adviser through its Quantitative Equity Group. As of
August 31, 2000, Vanguard served as adviser for about $406 billion in assets.
Vanguard manages the Fund on an at-cost basis, subject to the control of the
trustees and officers of the Fund.
For the fiscal year ended August 31, 2000, the advisory expenses
represented an effective annual rate of less than 0.01% of the Fund's average
net assets.
The adviser is authorized to choose broker-dealers to handle the purchase
and sale of the Fund's securities, and to obtain the best available price and
most favorable execution for all transactions. Also, the Fund may direct the
adviser to use a particular broker for certain transactions in exchange for
commission rebates or research services provided to the Fund.
In the interest of obtaining better execution of a transaction, the adviser
may at times choose brokers who charge higher commissions. If more than one
broker can obtain the
<PAGE>
9
best available price and most favorable execution, then the adviser is
authorized to choose a broker who, in addition to executing the transaction,
will provide research services to the adviser or the Fund.
--------------------------------------------------------------------------------
PLAIN TALK ABOUT
THE FUND'S ADVISER
The manager primarily responsible for overseeing the Fund's investments is:
GEORGE U. SAUTER, Managing Director of Vanguard and head of Vanguard's
Quantitative Equity Group. He has worked in investment management since 1985 and
has had primary responsibility for Vanguard's stock indexing investments and
strategy since joining the company in 1987. Education: A.B., Dartmouth College;
M.B.A., University of Chicago.
--------------------------------------------------------------------------------
DIVIDENDS, CAPITAL GAINS, AND TAXES
FUND DISTRIBUTIONS
The 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. Distributions generally occur in December. 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 portion 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 any stock
holdings and the interest it receives from any 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:
- 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.
<PAGE>
10
- Capital gains distributions may vary considerably from year to year as a
result of the Fund's normal investment activities and cash flows.
- A sale or exchange of Fund shares is a taxable event. This means that you
may have a capital gain to report as income, or a capital loss to report as
a deduction, when you complete your federal income tax return.
- Dividend and capital gains distributions that you receive, as well as your
gains or losses from any sale or exchange of Fund shares, may be subject to
state and local income taxes.
GENERAL INFORMATION
BACKUP WITHHOLDING. By law, Vanguard must withhold 31% of any taxable
distributions or redemptions from your account if you do not:
- provide us with your correct taxpayer identification number;
- certify that the taxpayer identification number is correct; and
- confirm that you are not subject to backup withholding.
Similarly, Vanguard must withhold from your account if the IRS instructs us to
do so.
FOREIGN INVESTORS. The Vanguard funds generally do not offer their shares for
sale outside of the United States. Foreign investors should be aware that U.S.
withholding and estate taxes may apply to any investments in Vanguard funds.
INVALID ADDRESSES. If a dividend or capital gains distribution check mailed to
your address of record is returned as undeliverable, Vanguard will automatically
reinvest all future distributions until you provide us with a valid mailing
address.
TAX CONSEQUENCES. This prospectus provides general tax information only. If you
are investing through a tax-deferred retirement account, such as an IRA, special
tax rules apply. Please consult your tax adviser for detailed information about
a fund's tax consequences for you.
--------------------------------------------------------------------------------
PLAIN TALK ABOUT
"BUYING A DIVIDEND"
Unless you are investing through a tax-deferred retirement account (such as an
IRA), you should avoid buying 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.
--------------------------------------------------------------------------------
<PAGE>
11
SHARE PRICE
The 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 of the
Fund by the number of Fund shares outstanding.
Knowing the daily net asset value is useful to you as a shareholder because
it indicates the current value of your investment. The Fund's NAV, multiplied by
the number of shares you own, gives you the dollar amount you would have
received had you sold all of your shares back to the Fund that day.
A NOTE ON PRICING: The 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 Fund's board of trustees.
The Fund's share price can be found daily in the mutual fund listings of
most major newspapers under the heading "Vanguard Institutional Funds."
FINANCIAL HIGHLIGHTS
The following financial highlights table is intended to help you understand the
Fund's financial performance since inception, and certain information reflects
financial results for a single Fund share. The total returns in the 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
report--along with the Fund's financial statements--is included in the Fund's
most recent annual report to shareholders. You may have the annual report sent
to you without charge by contacting Vanguard.
NOTE: This prospectus offers the Fund's Institutional Shares, not the
Investor Shares. Information for the Investor Shares is shown here because the
Fund's Institutional Shares have not commenced operations yet. However, the two
share classes are invested in the same portfolio of securities and will have the
same financial performance except to the extent that their operating expenses
differ.
<PAGE>
12
-------------------------------------------------------------------------
VANGUARD CALVERT SOCIAL INDEX FUND
INVESTOR SHARES
MAY 8* TO
AUG. 31, 2000
-------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD $10.00
-------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .02
Net Realized and Unrealized Gain (Loss) on Investments 1.12
-------------
Total from Investment Operations 1.14
-------------
DISTRIBUTIONS
Dividends from Net Investment Income --
Distributions from Realized Capital Gains --
-------------
Total Distributions --
-------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $11.14
=========================================================================
TOTAL RETURN 11.07%
=========================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $40
Ratio of Total Expenses to Average Net Assets 0.25%+
Ratio of Net Investment Income to Average Net Assets 0.98%+
Turnover Rate 3%
=========================================================================
*Subscription period for the Fund was May 8, 2000, to May 31, 2000, during which
time all assets were held in money market instruments. Performance measurement
began May 31, 2000.
+Annualized.
--------------------------------------------------------------------------------
PLAIN TALK ABOUT
HOW TO READ THE FINANCIAL HIGHLIGHTS TABLE
The Fund began the period ended August 31, 2000 with a net asset value (price)
of $10.00 per share. During the period, the Fund earned $0.02 per share from
investment income (interest and dividends) and $1.12 per share from investments
that had appreciated in value or that were sold for higher prices than the Fund
paid for them. Shareholders received no dividend or capital gains distributions.
The earnings ($1.14 per share) minus the distributions ($0.00 per share)
resulted in a share price of $11.14 at the end of the period. This was an
increase of $1.14 per share (from $10.00 at the beginning of the period to
$11.14 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
11.07% for the period.
As of August 31, 2000, the Fund had $40 million in net assets. For the period,
its annualized expense ratio was 0.12% ($1.20 per $1,000 of net assets); and its
annualized net investment income amounted to 0.98% of its average net assets. It
sold and replaced securities valued at 3% of its net assets.
--------------------------------------------------------------------------------
<PAGE>
13
--------------------------------------------------------------------------------
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 FOR INSTITUTIONAL SHARES
TO OPEN AND MAINTAIN AN ACCOUNT: $10 MILLION.
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 to purchase shares by wire. See Contacting Vanguard.
YOUR PURCHASE CHECK
When investing by check, make the check payable to: The Vanguard Group-223.
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 SHOULD KNOW
^THIRD PARTY CHECKS. To protect the funds from check fraud, Vanguard will not
accept checks made payable to third parties.
<PAGE>
14
^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, or to reject specific purchase requests, including purchases by
exchange from another Vanguard fund.
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.
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 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 REDEMPTIONS
^CHECK REDEMPTIONS: Unless instructed otherwise, Vanguard will mail you a check,
normally within two business days of your trade date.
^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
<PAGE>
15
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 SHOULD KNOW
^SPECIAL ACCOUNTS. Special documentation may be 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
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
<PAGE>
16
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:
- 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 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:
- The fund name and account number.
- The amount of the transaction (in dollars or shares).
<PAGE>
17
- 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.
RESPONSIBILITY FOR FRAUD
Vanguard will not be responsible for any account 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 statements 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 ACTIVITY
Because excessive account transactions can disrupt 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 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.
LOW BALANCE ACCOUNTS
The fund 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.
<PAGE>
18
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 STATEMENTS
For most taxable accounts, average cost review 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 STATEMENTS
Each time you buy, sell, or exchange shares, we will 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 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.
REPORTS
You will receive financial reports about your fund twice a year--in APRIL and
OCTOBER. These comprehensive reports include an assessment of the fund's
performance (and a comparison to its industry benchmark), an overview of the
financial markets, a report from the adviser, and the fund's financial
statements, which include a listing of the fund's holdings.
To keep the fund's costs as low as possible (so that you and other
shareholders can keep more of the fund's investment earnings), Vanguard attempts
to eliminate duplicate mailings to the same address. When 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
<PAGE>
19
- For literature requests
- 24 hours per day, 7 days per week
VANGUARD TELE-ACCOUNT(R)
1-800-662-6273
(ON-BOARD)
- For automated fund and account information
- For redemptions by check, exchange, or wire
- Toll-free, 24 hours per day, 7 days per week
INVESTOR INFORMATION
1-800-662-7447 (SHIP)
(Text telephone at
1-800-952-3335)
- For fund and service information
- For literature requests
- Business hours only
CLIENT SERVICES
1-800-662-2739 (CREW)
(Text telephone at
1-800-749-7273)
- For account information
- For most account transactions
- Business hours only
INSTITUTIONAL DIVISION
1-888-809-8102
- For information and services for large institutional investors
- 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
FUND NUMBER
Always use this fund number when contacting Vanguard about the Fund: Calvert
Social Index-223.
"Calvert," "Calvert Group," and "Calvert Social Index" are trademarks of Calvert
Group, and have been licensed for use by Vanguard Calvert Social Index Fund and
The Vanguard Group. This mutual fund is not sponsored, endorsed, sold, or
promoted by Calvert Group, and Calvert Group makes no representation regarding
the advisability of investing in the Fund. All other market indexes referenced
in this prospectus are the exclusive property of their respective owners.
<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 that
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.
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.
MUTUAL FUND
An investment company that pools the money of many people and invests it in a
variety of securities in an effort to achieve a specific objective over time.
NET ASSET VALUE (NAV)
The market value of a mutual fund's total assets, minus liabilities, divided by
the number of shares outstanding. The value of a single share is called its
share value or share price.
PASSIVE MANAGEMENT
A low-cost investment strategy in which a mutual fund attempts to match--rather
than outperform--a particular stock or bond market index; also known as
indexing.
PRINCIPAL
The amount of money you put into an investment.
SECURITIES
Stocks, bonds, money market instruments, and other investment vehicles.
PRICE/EARNINGS (P/E) RATIO
The current share price of a stock, divided by its per-share earnings (profits).
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, assuming the reinvestment of all distributions of dividends and capital
gains.
VOLATILITY
The fluctuations in value of a mutual fund or other security. The greater a
fund's volatility, the wider the fluctuations between its high and low prices.
YIELD
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 Calvert Social Index Fund
Institutional Shares, the following
documents are available free
upon request:
ANNUAL/SEMIANNUAL REPORTS
TO SHAREHOLDERS
Additional information about the
Fund's investments is available in
the Fund's annual and semiannual
reports to shareholders.
STATEMENT OF ADDITIONAL
INFORMATION (SAI)
The SAI provides more detailed
information about the Fund.
The current annual and semiannual
reports and the SAI are
incorporated by reference into
(and are thus legally a part of)
this prospectus.
All market indexes referenced in
this prospectus are the exclusive
property of their respective owners.
To receive a free copy of the latest
annual or semiannual report or the
SAI, or to request additional
information about the Fund 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 DEPARTMENT
P.O. BOX 2900
VALLEY FORGE, PA 19482-2900
TELEPHONE:
1-888-809-8102
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 Fund
(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 Fund 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.
Fund's Investment Company Act
file number: 811-1027
(C) 2000 The Vanguard Group, Inc.
All rights reserved.
Vanguard Marketing
Corporation, Distributor.
I223 122000
<PAGE>
PART B
VANGUARD(R) WORLD FUNDS
(THE TRUST)
STATEMENT OF ADDITIONAL INFORMATION
DECEMBER 20, 2000
This Statement is not a prospectus but should be read in conjunction with
the Trust's current Prospectuses (dated December 20, 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:
INVESTOR INFORMATION DEPARTMENT
1-800-662-7447
TABLE OF CONTENTS
PAGE
DESCRIPTION OF THE TRUST.........................................B-1
INVESTMENT POLICIES..............................................B-3
FUNDAMENTAL INVESTMENT LIMITATIONS...............................B-8
YIELD AND TOTAL RETURN...........................................B-9
SHARE PRICE......................................................B-11
PURCHASE OF SHARES...............................................B-12
REDEMPTION OF SHARES.............................................B-12
MANAGEMENT OF THE FUNDS..........................................B-13
INVESTMENT ADVISORY SERVICES.....................................B-16
PORTFOLIO TRANSACTIONS...........................................B-20
FINANCIAL STATEMENTS.............................................B-21
COMPARATIVE INDEXES..............................................B-21
DESCRIPTION OF THE TRUST
ORGANIZATION
The Trust was organized as Ivest Fund, a Massachusetts corporation, in
1959. It became a Maryland corporation in 1973, and was reorganized as a
Delaware business trust in June 1998. Prior to its reorganization as a Delaware
business trust, the Trust was known as Vanguard World Fund, Inc.
The Trust has the ability to offer additional funds or classes of shares.
There is no limit on the number of full and fractional shares that each Fund may
issue. The Trust currently offers the following funds:
Vanguard(R) U.S. Growth Fund
Vanguard(R) International Growth Fund
Vanguard(R) Calvert(TM) Social Index Fund
(individually, the Fund; collectively, the Funds)
The Vanguard U.S. Growth Fund and Vanguard International Growth Fund are
registered with the United States Securities and Exchange Commission (the
Commission) under the Investment Company Act of 1940 (the 1940 Act) as open-end
diversified management investment companies. Vanguard Calvert Social Index Fund
is registered with the Commission as an open-end nondiversified management
investment company. Vanguard Calvert Social Index Fund offers two classes of
shares, Investor Shares and Institutional Shares. Institutional Shares of the
Fund are available only to those investing at least $10 million in the Fund.
B-1
<PAGE>
SERVICE PROVIDERS
CUSTODIAN. State Street Bank and Trust Company, 225 Franklin Street,
Boston, MA 02110 (for Vanguard U.S. Growth Fund), The Chase Manhattan Bank,
N.A., 4 Chase MetroTech Center, Brooklyn, NY 11245 (for Vanguard International
Growth Fund), and First Union National Bank, PA4943, 530 Walnut Street,
Philadelphia, PA 19106 (for Vanguard Calvert Social Index Fund), serve as the
custodians. The custodians are responsible for maintaining the Funds' assets and
keeping all necessary accounts and records of each Fund's 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, PA 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 the Funds' shares, other
than the possible future termination of the Funds. Each Fund may be terminated
by reorganization into another mutual fund or by liquidation and distribution of
the assets of the affected series. Unless terminated by reorganization or
liquidation, each Fund will continue indefinitely.
SHAREHOLDER LIABILITY. The Funds are organized under Delaware law, which
provides that shareholders of a business trust are entitled to the same
limitations of personal liability as shareholders of a corporation organized
under Delaware law. Effectively, this means that a shareholder of a Fund will
not be personally liable for payment of the Fund's debts except by reason of his
or her own conduct or acts. In addition, a shareholder could incur a financial
loss on account of a Fund obligation only if the Fund itself had no remaining
assets with which to meet such obligation. We believe that the possibility of
such a situation arising is extremely remote.
DIVIDEND RIGHTS. The shareholders of a Fund are entitled to receive any
dividends or other distributions declared for such Fund. No shares have priority
or preference over any other shares of the same Fund with respect to
distributions. Distributions will be made from the assets of a Fund, and will be
paid ratably to all shareholders of the Fund (or class) according to the number
of shares of such Fund (or class) held by shareholders on the record date. The
amount of income dividends per share may vary between separate share classes of
the same Fund based upon differences in the way that expenses are allocated
between share classes pursuant to a multiple class plan.
VOTING RIGHTS. Shareholders 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 Fund or any class of a
Fund; 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 a Fund. Unless otherwise required by applicable
law, shareholders of each Fund receive one vote for each dollar of net asset
value owned on the record date, and a fractional vote for each fractional dollar
of net asset value owned on the record date. However, only the shares of the
Fund affected by a particular matter are entitled to vote on that matter. Voting
rights are non-cumulative and cannot be modified without a majority vote.
LIQUIDATION RIGHTS. In the event of liquidation, shareholders will be
entitled to receive a pro rata share of the Fund's net assets.
PREEMPTIVE RIGHTS. There are no preemptive rights associated with shares of
each Fund.
CONVERSION RIGHTS. Shareholders of a Fund may convert their shares into
another class of shares of the same Fund upon the satisfaction of any then
applicable eligibility requirements.
REDEMPTION PROVISIONS. The Funds' redemption provisions are described in
their current prospectuses 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.
B-2
<PAGE>
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
The following policies supplement each Fund's investment policies set forth
in the Prospectus for each Fund.
FUTURES CONTRACTS AND OPTIONS. Each Fund may enter into stock futures
contracts, options, and options on futures contracts for the following reasons:
to maintain cash reserves while simulating full investment, to facilitate
trading, to reduce transaction costs, or to seek higher investment returns when
a futures contract is priced more attractively than the underlying equity
security or index. Vanguard Calvert Social Index Fund's investments in futures
contracts and options will not be screened based on social or environmental
criteria. Futures contracts provide for the future sale by one party and
purchase by another party of a specified amount of a specific security at a
specified future time and at a specified price. Futures contracts which are
standardized as to maturity date and underlying financial instrument are traded
on national futures exchanges. Futures exchanges and trading are regulated under
the Commodity Exchange Act by the Commodity Futures Trading Commission (CFTC), a
U.S. Government Agency. Assets committed to futures contracts will be segregated
to the extent required by law.
Although futures contracts by their terms call for actual delivery or
acceptance of the underlying securities, in most cases the contracts are closed
out before the settlement date without the making or taking of delivery. Closing
out an open futures position is done by taking an opposite position (buying a
contract which has previously been sold, 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 margin that
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 otherwise held for investment
purposes or expected to be acquired by them. Speculators are less inclined to
own the securities underlying the futures contracts which they trade, and use
futures contracts with the expectation of realizing profits from fluctuations in
the market value of the underlying securities. Each Fund intends to use futures
contracts only for bona fide hedging purposes.
Regulations of the CFTC applicable to each Fund require that all of its
futures transactions constitute bona fide hedging transactions except to the
extent that the aggregate initial margins and premiums required to
B-3
<PAGE>
establish any non-hedging positions do not exceed five percent of the value of
the respective Fund's portfolio. Each Fund will only sell futures contracts to
protect securities it owns against price declines or purchase contracts to
protect against an increase in the price of securities it intends to purchase.
As evidence of this hedging interest, each Fund expects that approximately 75%
of its futures contract purchases will be "completed;" that is, equivalent
amounts of related securities will have been purchased or are being purchased by
each Fund upon sale of open futures contracts.
Although techniques other than the sale and purchase of futures contracts
could be used to control the exposure of a Fund's income to fluctuations in the
market value of the underlying securities, the use of futures contracts may be a
more effective means of hedging this exposure. While the Funds 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
portfolio securities.
Restrictions on the Use of Futures Contracts. Each 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 Fund's
total assets. In addition, each 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, each Fund would continue to be required to make daily cash payments
to maintain its required margin. In such situations, if the Fund has
insufficient cash, it may have to sell portfolio securities to meet daily margin
requirements at a time when it may be disadvantageous to do so. In addition,
each 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 contracts 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. However, because the futures
strategies of each Fund are engaged in only for hedging purposes, the investment
advisers do not believe that the Funds are subject to the risks of loss
frequently associated with futures transactions. Each 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 experience a
decline in the value of its portfolio securities. There is also the risk of loss
by a Fund of margin deposits in the event of bankruptcy of a broker with whom
the Fund has an open position in a futures contract or related option.
Most futures exchanges limit the amount of fluctuation permitted in futures
contract prices during a single trading day. The daily limit establishes the
maximum amount that the price of a futures contract may vary either up or down
from the previous day's settlement price at the end of a trading session. Once
the daily limit has been reached in a particular type of contract, no trades may
be made on that day at a price beyond that limit. The daily limit governs only
price movement during a particular trading day and therefore does not limit
potential losses, because the limit may prevent the liquidation of unfavorable
positions. Futures contract prices have occasionally moved to the daily limit
for several consecutive trading days with little or no trading, thereby
preventing prompt liquidation of future positions and subjecting some futures
traders to substantial losses.
B-4
<PAGE>
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 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
each Fund may affect the holding period of such securities and, consequently,
the nature of the gain or loss on such securities upon disposition. The Funds
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 Funds.
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 foreign currencies, or other income derived with respect to each
Fund's business of investing in securities or currencies. It is anticipated that
any net gain recognized on futures contracts will be considered qualifying
income for purposes of the 90% requirement.
Each Fund will distribute to shareholders annually any net capital gains
which have been recognized for Federal income tax purposes on futures
transactions. Such distributions will be combined with distributions of capital
gains realized on the Fund's other investments and shareholders will be advised
on the nature of the transactions.
FOREIGN INVESTMENTS. Vanguard International Growth Fund seeks to diversify
its assets among various foreign stock markets and, with respect to 65% of its
total assets, will invest in the securities of at least three different
countries. Vanguard U.S. Growth Fund may invest up to 20% of its assets in
securities of foreign companies. Vanguard Calvert Social Index Fund may invest
in foreign securities to the extent necessary to carry out its investment
strategy of holding 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 Vanguard International Growth
Fund and Vanguard Calvert Social Index Fund permit it to enter into forward
foreign currency exchange contracts in order to hedge the 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.
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 foreign 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 or 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, commissions on many foreign stock exchanges are
generally higher than 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
B-5
<PAGE>
will reduce the income received from foreign companies held by the Funds.
However, these foreign withholding taxes are not expected to have a significant
impact on the Funds, since each Fund seeks long-term capital appreciation and
any income should be considered incidental.
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.
Foreign Tax Credit. Foreign governments may withhold taxes on dividends and
interest paid with respect to foreign securities. Foreign governments may also
impose taxes on other payments or gains with respect to foreign securities. If,
at the close of its fiscal year, more than 50% of a Fund's total assets are
invested in securities of foreign issuers, the Fund may elect to pass through
foreign taxes paid, and thereby allow shareholders to take a tax credit or
deduction on their tax returns. If shareholders meet certain holding period
requirements with respect to Fund shares, an offsetting tax credit may be
available. If shareholders do not meet the holding period requirements, they may
still be entitled to a deduction for certain foreign taxes. In either case, a
shareholder's tax statement will show more taxable income or capital gains than
was actually distributed by the Fund, but will also show the amount of the
available offsetting credit or deduction.
A shareholder that is a nonresident alien for U.S. tax purposes may be
subject to adverse U.S. tax consequences. For example, dividends and short-term
capital gains paid by the Fund will generally be subject to U.S. federal
withholding tax at a rate of 30% (or lower treaty rate if applicable). Foreign
investors are urged to consult their tax advisers regarding the U.S. tax
treatment of ownership of shares in the Fund.
TURNOVER RATE. While the turnover rate is not a limiting factor when
management deems changes appropriate, it is anticipated that the annual turnover
rate for each Fund will not normally exceed 100%. A rate of turnover of 100%
could occur, for example, if all of the securities held by a Fund are replaced
within a period of one year. The portfolio turnover rate for each Fund for each
of the fiscal years presented is set forth under "Financial Highlights," in each
Fund's Prospectus.
ILLIQUID SECURITIES. Each Fund may invest up to 15% of its net assets in
illiquid securities. Illiquid securities are securities that may not be sold or
disposed 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.
Each Fund may invest in restricted, privately placed securities that, under
securities law, may be sold only to qualified institutional buyers. Because
these securities can be resold only to qualified institutional buyers, or
B-6
<PAGE>
after they have been held for a number of years, they may be considered illiquid
securities--meaning that they could be difficult for the Fund to convert to cash
if needed.
If a substantial market develops for a restricted security held by the
Fund, it will be treated as a liquid security, in accordance with procedures and
guidelines approved by the Fund's board of trustees. This generally includes
securities that are unregistered that can be sold to qualified institutional
buyers in accordance with Rule 144A under the Securities Act of 1933 (the 1933
Act). While the Fund's investment adviser determines the liquidity of restricted
securities on a daily basis, the board oversees and retains ultimate
responsibility for the adviser's decisions. Several factors that the board
considers in monitoring these decisions include the valuation of a security, the
availability of qualified institutional buyers, and the availability of
information on the security's issuer.
REPURCHASE AGREEMENTS. Each Fund along with other members of the Vanguard
Group may invest in repurchase agreements with commercial banks, brokers or
dealers either for defensive purposes due to market conditions or to generate
income from its excess cash balances. A repurchase agreement is an agreement
under which the Fund acquires a fixed-income security (generally a security
issued by the U.S. Government or an agency thereof, a banker's acceptance or a
certificate of deposit) from a commercial bank, broker or dealer, subject to
resale to the seller at an agreed upon price and date (normally, the next
business day). A repurchase agreement may be considered a loan collateralized by
securities. The resale price reflects an agreed upon interest rate effective for
the period the instrument is held by the Fund and is unrelated to the interest
rate on the underlying instrument. In these transactions, the securities
acquired by the Fund (including accrued interest earned thereon) must have a
total value in excess of the value of the repurchase agreement and are held by a
custodian bank until repurchased. In addition, the Funds' board of trustees
monitors repurchase agreement transactions generally and has established
guidelines and standards for review by the investment adviser of the
creditworthiness of any bank, broker, or dealer party to a repurchase agreement.
The use of repurchase agreements involves certain risks. For example, if
the other party to the agreement defaults on its obligation to repurchase the
underlying security at a time when the value of the security has declined, the
Fund may incur a loss upon disposition of the security. If the other party to
the agreement becomes insolvent and subject to liquidation or reorganization
under the bankruptcy 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 realization by the Fund on such collateral may be
automatically stayed. Finally, it is possible that 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 investment securities 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 investment
securities, a Fund attempts to increase its net investment income through the
receipt of interest on the loan. Any gain or loss in the market price of the
securities loaned that might occur during the term of the loan would be for the
account of the Fund. The terms and the structure and the aggregate amount of
such loans must be consistent with the 1940 Act, and the Rules or
interpretations of the Commission thereunder. These provisions limit the amount
of securities a Fund may lend to 33 1/3% of the Fund's total assets, and require
that (a) the borrower pledge and maintain with the Fund collateral consisting of
cash, an irrevocable letter of credit 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 each Fund will comply with all
other applicable regulatory requirements, including the rules of the New York
Stock Exchange, which 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 Funds' board of trustees.
B-7
<PAGE>
At the present time, the Staff of the Commission does not object if an
investment company pays reasonable negotiated fees in connection with loaned
securities, so long as such fees are set forth in a written contract and
approved by the investment company's trustees. In addition, voting rights pass
with the loaned securities, but if a material event will occur affecting an
investment on loan, the loan must be called and the securities voted.
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.
TEMPORARY INVESTMENTS. The Funds may take temporary investment measures
that are inconsistent with the Funds' 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 Fund; (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, each Fund
may fail to achieve its investment objective.
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 affected Fund's shares. For these purposes, a "majority" of
shares means shares representing the lesser of: (i) 67% or more of the votes
cast to approve a change so long as more than 50% of the Fund's outstanding
shares are present or represented by proxy; or (ii) more than 50% of the Fund's
outstanding shares.
BORROWING. Each Fund may not borrow money, except for temporary or
emergency purposes in an amount not exceeding 15% of the Fund's net assets. Each
Fund may borrow money through banks, or Vanguard's interfund lending program
only, and must comply with all applicable regulatory conditions. Each Fund may
not make any additional investments whenever its outstanding borrowings exceed
5% of net assets.
COMMODITIES. Each Fund may not invest in commodities, except that each Fund
may invest in stock futures contracts, stock options, and options on stock
futures contracts and, in the case of Vanguard International Growth Fund and
Vanguard Calvert Social Index Fund, foreign currency futures contracts and
options. 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, Vanguard U.S.
Growth Fund and Vanguard International Growth 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. Vanguard Calvert Social Index Fund will limit the aggregate
value of all holdings (except U.S. Government and cash items, as defined under
subchapter M of the Internal Revenue Code (the Code)), each of which exceeds 5%
of the Fund's total assets, to an aggregate of 50% of such assets. Additionally,
the Fund will limit the aggregate value of holdings of a single issuer (except
U.S. Government and cash items, as defined in the Code) to a maximum of 25% of
the Fund's total assets.
ILLIQUID SECURITIES. Each 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.
INDUSTRY CONCENTRATION. Each Fund may not invest more than 25% of its total
assets in any one industry.
B-8
<PAGE>
INVESTING FOR CONTROL. Each Fund may not invest in a company for the
purpose of controlling its management.
INVESTMENT COMPANIES. Each 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 the Fund acquires pursuant to Section 12 must have investment objectives
and investment policies consistent with those of the Fund.
LOANS. Each 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. Each Fund may not purchase securities on margin or sell securities
short, except as permitted by the Funds' investment policies relating to
commodities.
PLEDGING ASSETS. Each Fund may not pledge, mortgage or hypothecate more
than 15% of its net assets.
REAL ESTATE. Each Fund may not invest directly in real estate, although it
may invest in securities of companies that deal in real estate and bonds secured
by real estate.
SENIOR SECURITIES. Each Fund may not issue senior securities, except in
compliance with the 1940 Act.
UNDERWRITING. Each 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.
None of these limitations prevents the Fund from participating in The
Vanguard Group (Vanguard). Because each Fund is a member of Vanguard, each Fund
may own securities issued by Vanguard, make loans to Vanguard, and contribute to
Vanguard's costs or other financial requirements. See "Management of the Funds"
for more information.
The investment limitations set forth above are considered at the time
investment securities are purchased. If a percentage restriction is adhered to
at the time the investment is made, a later increase in percentage resulting
from a change in the market value of assets will not constitute a violation of
such restriction.
YIELD AND TOTAL RETURN
The yield of Vanguard U.S. Growth Fund and Calvert Social Index Fund for
the 30-day period ended August 31, 2000, was 0.0% and 0.7%, respectively.
The average annual total return of each Fund for certain periods ended
August 31, 2000, is set forth below:
1 YEAR ENDED 5 YEARS ENDED 10 YEARS ENDED
8/31/2000 8/31/2000 8/31/2000
--------- --------- ---------
Vanguard U.S. Growth Fund 33.29% 28.22% 21.06%
Vanguard International Growth
Fund 18.68% 12.84% 10.30%
Vanguard Calvert Social Index
Fund 11.07%* N/A N/A
*Subscription period for the Fund was May 8, 2000, to May 31, 2000, during which
time all assets were held in money market instruments. Performance measurement
began May 31, 2000.
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 a 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-9
<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 a 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 hundredth of one percent.
CUMULATIVE TOTAL RETURN
Cumulative total return is the cumulative rate of return on a hypothetical
initial investment of $1,000 for a specified period. Cumulative total return
quotations reflect changes in the price of the fund's shares and assume that all
dividends and capital gains distributions during the period were reinvested in
fund shares. Cumulative total return is calculated by finding the cumulative
rates of a return of a hypothetical investment over such periods, according to
the following formula (cumulative total return is then expressed as a
percentage):
C = (ERV/P) - 1
B-10
<PAGE>
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.
SHARE PRICE
Each Fund's share price, or "net asset value" per share, is calculated by
dividing the total assets of each Fund, less all liabilities, by the total
number of shares outstanding. The net asset value for each share class of a Fund
is calculated by dividing the net assets attributable to each share class by the
total number of shares outstanding for that share class. The net asset value is
determined as of the regular close of the New York Stock Exchange (generally 4
p.m., Eastern time) on each day the Exchange is open for trading.
Portfolio securities for which market quotations are readily available
(includes those securities listed on national securities exchanges, as well as
those quoted on the NASDAQ Stock Market) will be valued at the last quoted sales
price on the day the valuation is made. Such securities which are not traded on
the valuation date are valued at the mean of the bid and ask prices. Price
information on exchange-listed securities is taken from the exchange where the
security is primarily traded. Securities may be valued on the basis of prices
provided by a pricing service when such prices are believed to reflect the fair
market value of such securities.
Short-term instruments (those with remaining maturities of 60 days or less)
may be valued at cost, plus or minus any amortized discount or premium, which
approximates market value.
Bonds and other fixed income securities may be valued on the basis of
prices provided by a pricing service when such prices are believed to reflect
the fair market value of such securities. The prices provided by a pricing
service may be determined without regard to bid or last sale prices of each
security, but take into account institutional-size transactions in similar
groups of securities as well as any developments related to specific securities.
Foreign securities are valued at the last quoted sales price, 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 each 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 each Fund's net asset value per share, all assets and
liabilities initially expressed in foreign currencies will be converted into
U.S. dollars using the officially quoted daily exchange rates used by Morgan
Stanley Capital International in calculating various benchmarking indices. This
officially quoted exchange rate may be determined prior to or after the close of
a particular securities market. If such quotations are not available, the rate
of exchange will be determined in accordance with policies established in good
faith by the board of trustees.
B-11
<PAGE>
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 Funds.
PURCHASE OF SHARES
The purchase price of shares of each Fund is the net asset value per share
next determined after the order is received. The net asset value per share is
calculated as of the close of the New York Stock Exchange on each day the
Exchange is open for business. An order received prior to the close of the
Exchange will be executed at the price computed on the date of receipt; and an
order received after the close of the Exchange will be executed at the price
computed on the next day the Exchange is open.
Each Fund reserves the right in its sole discretion (i) to suspend the
offering of its shares, (ii) to 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, (iii) to reject purchase orders when in the
judgment of management such rejection is in the best interest of each Fund, and
(iv) to reduce or waive the minimum investment for or any other restrictions on
initial and subsequent investments for certain fiduciary accounts such as
employee benefit plans or under circumstances where certain economies can be
achieved in sales of a Fund's shares.
TRADING SHARES THROUGH CHARLES SCHWAB
Each Fund has authorized Charles Schwab & Co., Inc. (Schwab) to accept on
its behalf purchase and redemption orders under certain terms and conditions.
Schwab is also authorized to designate other intermediaries to accept purchase
and redemption orders on each Fund's behalf subject to those terms and
conditions. Under this arrangement, the Fund will be deemed to have received a
purchase or redemption order when Schwab or, if applicable, Schwab's authorized
designee, accepts the order in accordance with each Fund's instructions.
Customer orders that are properly transmitted to each Fund by Schwab, or if
applicable, Schwab's authorized designee, will be priced as follows:
Orders received by Schwab before 3 p.m. Eastern time on any business
day, 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.
Orders received by Schwab after 3 p.m. Eastern time, 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.
REDEMPTION OF SHARES
The Funds 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 a 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. No charge is made by a Fund 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.
The Funds have made an election with the Commission to pay in cash all
redemptions requested by any shareholder of record limited in amount during any
90-day period to the lesser of $250,000 or 1% of the net assets of the Fund at
the beginning of such period.
If the board of trustees determines that it would be detrimental to the
best interests of the remaining shareholders of a Fund to make payment wholly or
partly in cash, a Fund may pay the redemption price in whole or in part by a
distribution in kind of readily marketable securities held by the Fund in lieu
of cash in conformity with applicable rules of the Commission. Investors may
incur brokerage charges on the sale of such securities so received in payment of
redemptions.
B-12
<PAGE>
SIGNATURE GUARANTEES. To protect your account, the Funds and Vanguard from
fraud, signature guarantees are required for certain redemptions. Signature
guarantees enable the Funds to verify the identity of a person who has
authorized a redemption from your account. Signature guarantees are required in
connection with: (1) all redemptions, regardless of the amount involved, when
the proceeds are to be paid to someone other than the registered owner(s); and
(2) share transfer requests. These requirements are not applicable to
redemptions in Vanguard's prototype plans except in connection with: (1)
distributions made when the proceeds are to be paid to someone other than the
plan participant; (2) certain authorizations to effect exchanges by telephone;
and (3) when proceeds are to be wired. These requirements may be waived by the
Funds in certain instances.
Signature guarantees can be obtained from a bank, broker or any other
guarantor that Vanguard deems acceptable. Notaries public are not acceptable
guarantors.
The signature guarantees must appear either: (1) on the written request for
redemption; (2) on a separate instrument for assignment (stock power) which
should specify the total number of shares to be redeemed; or (3) on all stock
certificates tendered for redemption and, if shares held by the Fund are also
being redeemed, on the letter or stock power.
MANAGEMENT OF THE FUNDS
OFFICERS AND TRUSTEES
The officers of the Funds manage their day-to-day operations and are
responsible to the Funds' board of trustees. The trustees set broad policies for
each Fund and choose its 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 109 funds administered by Vanguard (107 in the case of Mr. Malkiel and 99
in the case of Mr. MacLaury). The mailing address of the trustees and officers
of the Funds is Post Office Box 876, Valley Forge, PA 19482.
JOHN J. BRENNAN, (DOB: 7/29/1954) Chairman, Chief Executive Officer, and
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 Company), and Select Sector SPDR Trust (Exchange-Traded Mutual Fund).
ALFRED M. RANKIN, JR., (DOB: 10/8/1941) Trustee Chairman, President, Chief
Executive Officer, and Director of NACCO Industries, Inc. (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.
B-13
<PAGE>
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: 9/14/1961) 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 funds.
Vanguard employs a supporting staff of management and administrative
personnel needed to provide the requisite services, 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 each fund. In
addition, each fund bears its own direct expenses such as legal, auditing and
custodian fees. In order to generate additional revenues for Vanguard and
thereby reduce the funds' expenses, Vanguard also provides certain
administrative services to other organizations.
Each fund's officers are also officers and employees of Vanguard. No
officer or employee owns, or is permitted to own, any securities of any external
adviser for the funds.
Vanguard and each Fund's adviser have adopted Codes 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 Codes permit access persons to invest in securities for their own accounts,
including securities that may be held by the Funds, but place substantive and
procedural restrictions on their trading activities. For example, the Codes
require that access persons 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 amounts which each of the funds have 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 August 31, 2000, each
fund had contributed capital to Vanguard representing 0.02% (0.01% for Calvert
Social Index Fund) of each Fund's net assets. The total amount contributed by
the Funds was $5,818,000 which represented 5.91% of Vanguard's capitalization.
The Amended and Restated Funds' Service Agreement provides as follows: (a) each
Vanguard fund may be called upon to invest up to 0.40% of its current assets in
Vanguard, and (b) there is no other limitation on the dollar amount each
Vanguard fund may contribute to Vanguard's capitalization.
MANAGEMENT. Corporate management and administrative services include: (1)
executive staff; (2) accounting and financial; (3) legal and regulatory; (4)
shareholder account maintenance; (5) monitoring and control of custodian
relationships; (6) shareholder reporting; and (7) review and evaluation of
advisory and other services provided to the Funds by third parties.
DISTRIBUTION. Vanguard Marketing Corporation, a wholly-owned subsidiary of
The Vanguard Group, Inc., 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
B-14
<PAGE>
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 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 The Vanguard
Group, and that no fund shall incur annual distribution expenses in excess of 1%
of its average month-end net assets.
During the last three fiscal years, the Funds incurred the following
approximate amounts of The Vanguard Group's management (including transfer
agency), distribution, and marketing expenses.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
FISCAL YEAR ENDED FISCAL YEAR ENDED FISCAL YEAR ENDED
FUND 8/31/1998 8/31/1999 8/31/2000
---- --------- --------- ---------
U.S. Growth Fund $24,303,000 $36,880,000 $47,194,000
International Growth Fund 25,651,000 29,133,000 31,742,000
Calvert Social Index Fund N/A N/A 8,000
</TABLE>
INVESTMENT ADVISORY SERVICES. Vanguard provides investment advisory
services to Vanguard Calvert Social Index Fund and several other Vanguard funds.
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 funds utilizing these services.
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-16), 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" TRUSTEES. Mr. Brennan serves as a 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 each 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-15
<PAGE>
VANGUARD WORLD FUNDS
COMPENSATION TABLE
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
PENSION OR TOTAL COMPENSATION
AGGREGATE RETIREMENT BENEFITS FROM ALL
COMPENSATION ACCRUED AS PART OF ESTIMATED ANNUAL VANGUARD FUNDS
FROM THESE FUNDS' BENEFITS UPON PAID TO
NAMES OF TRUSTEES THESE FUNDS(1) EXPENSES(1) RETIREMENT TRUSTEES(2)
---------------------------------------------------------------------------------------------------------
John C. Bogle(3) None None None None
John J. Brennan None None None None
JoAnn Heffernan Heisen $5,780 $255 $15,000 $100,000
Bruce K. MacLaury $5,979 $425 $12,000 $ 95,000
Burton G. Malkiel $5,813 $421 $15,000 $100,000
Alfred M. Rankin, Jr. $5,780 $308 $15,000 $100,000
James O. Welch, Jr. $5,780 $451 $15,000 $100,000
J. Lawrence Wilson $5,780 $326 $15,000 $100,000
</TABLE>
---------
(1) The amounts shown in this column are based on the Funds' fiscal year ended
August 31, 2000.
(2) The amounts reported in this column reflect the total compensation paid to
each trustee for his or her service as trustee of 109 Vanguard funds (107
in the case of Mr. Malkiel; 99 in the case of Mr. MacLaury) for the 1999
calendar year.
(3) Mr. Bogle has retired from the Funds' board, effective December 31, 1999.
INVESTMENT ADVISORY SERVICES
VANGUARD U.S. GROWTH FUND
The Fund entered into an investment advisory agreement with Lincoln Capital
Management Company (Lincoln), under which Lincoln manages the investment and
reinvestment of the assets included in Vanguard U.S. Growth Fund and
continuously reviews, supervises and administers the Fund. Lincoln will invest
or reinvest such assets primarily in U.S. securities. Lincoln discharges its
responsibilities subject to the control of the officers and trustees of the
Fund. Under this agreement the Fund pays Lincoln, at the end of each of the
Fund's fiscal quarters, a basic fee calculated by applying a quarterly rate,
based on the following annual percentage rates, to the Fund's average month-end
net assets for the quarter:
NET ASSETS RATE
---------- ----
First $25 million. . . . . . . . . . .40%
Next $125 million. . . . . . . . . . .35%
Next $350 million. . . . . . . . . . .25%
Next $500 million. . . . . . . . . . .20%
Next $1.5 billion. . . . . . . . . . .15%
Next $12.5 billion . . . . . . . . . .10%
Over $15 billion . . . . . . . . . . .08%
For the fiscal years ended August 31, 1998, 1999, and 2000, the Fund
incurred advisory fees of $11,377,000, $16,307,000, and $20,280,000,
respectively.
The basic fee, as provided above, will be increased or decreased by
applying a performance fee adjustment based on the investment performance of the
Fund relative to the investment performance of the Russell 1000 Growth Index
(the Index). The investment performance of the Fund will be based on its
cumulative return over a trailing 36-month period ending with the applicable
quarter, compared with the cumulative total return of the Index for the same
period. The adjustment applies as follows:
B-16
<PAGE>
CUMULATIVE 36-MONTH PERFORMANCE PERFORMANCE FEE ADJUSTMENT AS A
THE FUND VS. THE INDEX PERCENTAGE OF THE BASIC FEE*
---------------------- ---------------------------
Exceeds by more than +9% +15%
Exceeds by 0% to +9% Linear increase between 0% and +15%
Trails by 0% to -9% Linear decrease between 0% and -15%
Trails by more than -9% -15%
---------
* For purposes of the adjustment calculation, the basic fee is calculated by
applying the above rate schedule against the average net assets of the Fund
over the same period for which the performance is measured. Linear
application of the adjustment provides for an infinite number of results
within the stated range. Example: Cumulative 36-month performance of the
Fund versus the Index is +7.2%. Accordingly, a performance fee adjustment
of +12% [(7.2% divided by 9.0%) times 15% maximum] of the basic fee, as
calculated over the trailing 36-months, would be due and payable.
The adjustment will not be fully operable until the close of the quarter
ending August 31, 2003. Until that date, the following transition rules will
apply:
(A) SEPTEMBER 1, 2000 THROUGH MAY 31, 2001. Adviser's compensation will be
the basic fee. No adjustment will apply during this period.
(B) JUNE 1, 2001 THROUGH AUGUST 31, 2003. Beginning June 1, 2001, the
adjustment will take effect on a progressive basis with regards to the number of
months elapsed between September 1, 2000, and the quarter for which the
adviser's fee is computed. During this period, the +/-9% hurdle rate, as well as
the adjustment described above, will be multiplied by a fraction, which will
equal the number of months elapsed since September 1, 2000, divided by 36.
Example: Cumulative 18-month performance of the Fund versus the Index is +8.1%.
Accordingly, a performance fee adjustment of +7.5% [(8.1 divided by 4.5%/(1)/)
times 7.5% maximum] of the basic fee, as calculated over the trailing 18-months,
would be due and payable.
(1) Note that the cumulative performance versus the Index exceeds the maximum
hurdle rate (adjusted in this case).
(C) ON AND AFTER SEPTEMBER 1, 2003. The adjustment will be fully operable
at this time.
The following special rules will also apply to Lincoln's compensation:
(A) FUND PERFORMANCE. The investment performance of the Fund for any
period, expressed as a percentage of the "Fund unit value" at the beginning of
the period, will be the sum of: (i) the change in the Fund unit value during
such period; (ii) the unit value of the Fund's cash distributions from the
Fund's net investment income and realized net capital gains (whether short- or
long-term) having an ex-dividend date occurring within the period; and (iii) the
unit value of capital gains taxes per share paid or payable on undistributed
realized long-term capital gains accumulated to the end of such period;
expressed as a percentage of its net asset value per share at the beginning of
such period. For this purpose, the value of distributions per share of realized
capital gains, of dividends per share paid from investment income and of capital
gains taxes per share paid or payable on undistributed realized long-term
capital gains shall be treated as reinvested in shares of the investment company
at the net asset value per share in effect at the close of business on the
record date for the payment of such distributions and dividends and the date on
which provision is made for such taxes, after giving effect to such
distributions, dividends, and taxes.
(B) FUND UNIT VALUE. The Fund unit value will be determined by dividing the
total net assets of the Fund by a given number of units. Initially, the number
of units in the Fund will equal the total Fund shares outstanding on September
1, 2000. Subsequently, as assets are added to or withdrawn from the Fund, the
number of units of the Fund will be adjusted based on the unit value of the Fund
on the day such changes are executed. Any cash buffer maintained by the Fund
outside of the Fund shall neither be included in the total net assets of the
Fund nor included in the computation of the Fund unit value.
(C) INDEX PERFORMANCE. The investment record of the Index for any period
will be obtained from an independent source at the end of each applicable fiscal
quarter. The calculation will be based on the thirty-six month period ending
with the applicable quarter, gross of applicable costs and expenses, and
consistent with the methodology used by the Frank Russell Company.
B-17
<PAGE>
(D) PERFORMANCE COMPUTATIONS. The foregoing notwithstanding, any
computation of the investment performance of the Fund and the investment record
of the Index shall be in accordance with any then applicable rules of the
Commission.
DESCRIPTION OF LINCOLN
Lincoln is an Illinois corporation in which a controlling interest is held
by the following persons: J. Parker Hall III, Chairman; Kenneth R. Meyer, Chief
Executive Officer; David M. Fowler, President; Richard W. Knee, Executive Vice
President; Alan M. Sebulsky, Executive Vice President; John S. Cole, Executive
Vice President; and Peter J. Knez, Executive Vice President.
VANGUARD INTERNATIONAL GROWTH FUND
Vanguard International Growth Fund has entered into an investment advisory
agreement with Schroder Investment Management North America, Inc. (Schroder) to
manage the investment and reinvestment of Fund's assets and to continuously
review, supervise, and administer Vanguard International Growth Fund's
investment program. In this regard, it is the responsibility of Schroder to make
decisions relating to the Fund's investment in foreign securities and to place
the Fund's purchase and sale orders for such securities. Schroder will invest or
reinvest the assets of the Fund only in foreign (non-U.S.) securities. Schroder
discharges its responsibilities subject to the control of the officers and
trustees of the Fund.
As compensation for the services rendered by Schroder under the agreement,
the Fund pays Schroder a basic fee at the end of each fiscal quarter calculated
by applying a quarterly rate, based on the following annual percentage rates, to
the average month-end net assets of the Fund for the quarter:
NET ASSETS RATE
---------- ----
First $50 million. . . . . . . .350%
Next $950 million. . . . . . . .175%
Over $1 billion. . . . . . . . .125%
The basic fee, as provided above, shall be increased or decreased by
applying an adjustment formula based on the investment performance of Vanguard
International Growth Fund relative to that of the Morgan Stanley Capital
International Europe, Australasia, Far East (MSCI EAFE) Index as follows:
(a) On assets of the Fund of $1 billion or less:
THREE-YEAR PERFROMANCE
DIFFERENTIAL VS. MSCI PERFORMANCE FEE
EAFE INDEX ADJUSTMENT RATE
---------------------- ---------------
+12% or above +0.0750%
Between +6% and +12% +0.0375%
Between +6% and -6% -0-
Between -6% and -12% -0.0375%
-12% and below -0.0750%
(b) On assets of the Fund of more than $1 billion:
THREE-YEAR PERFROMANCE
DIFFERENTIAL VS. MSCI PERFORMANCE FEE
EAFE INDEX ADJUSTMENT RATE
---------------------- ---------------
+12% or above +0.0500%
Between +6% and +12% +0.0250%
Between +6% and -6% -0-
Between -6% and -12% -0.0250%
-12% and below -0.0500%
B-18
<PAGE>
The performance fee adjustment for assets in excess of $1 billion was not
fully operable until the quarter ended February 29, 1996, and, until that date,
was calculated according to certain transition rules. From April 1, 1993 through
November 30, 1993, the performance fee on assets in excess of $1 billion was not
operable. For quarters ending after this period, the performance fee adjustment
on assets in excess of $1 billion has been computed based on a comparison of the
investment performance of the Fund and that of the MSCI EAFE Index over the
number of months that have elapsed between March 1, 1993 and the end of the
quarter for which the fee is computed.
For the purpose of determining the fee adjustment for investment
performance, as described above, the net assets of Vanguard International Growth
Fund are averaged over the same period as the investment performance of the Fund
and the investment record of the MSCI EAFE Index are computed.
The investment performance of Vanguard International Growth Fund for such
period, expressed as a percentage of the net asset value per share of the Fund
at the beginning of such period, shall be the sum of: (i) the change in the net
asset value per share of the Fund during such period; (ii) the value of the cash
distributions per share of the Fund accumulated to the end of such period; and
(iii) the value of capital gains taxes per share paid or payable by the Fund on
undistributed realized long-term capital gains accumulated to the end of such
period. For this purpose, the value of distributions per share of realized
capital gains, of dividends per share paid from investment income and of capital
gains taxes per share paid or payable on undistributed realized long-term
capital gains shall be treated as reinvested in shares of the Fund at the net
asset value per share in effect at the close of business on the record date for
the payment of such distributions and dividends and the date on which provision
is made for such taxes, after giving effect to such distributions, dividends and
taxes. The investment record of the MSCI EAFE Index for any period, expressed as
a percentage of the MSCI EAFE Index level at the beginning of such period, shall
be the sum of (i) the change in the level of the MSCI EAFE Index during such
period and (ii) the value, computed consistently with the MSCI EAFE Index, of
cash distributions made by companies whose securities comprise the MSCI EAFE
Index accumulated to the end of such period. For this purpose cash distributions
on the securities which comprise the MSCI EAFE Index shall be treated as
reinvested in the MSCI EAFE Index at least as frequently as the end of each
calendar quarter following the payment of the dividend. The foregoing
notwithstanding, any computation of the investment performance of the Fund and
the investment record of the MSCI EAFE Index shall be in accordance with any
then applicable rules of the Commission.
The trustees believe that the MSCI EAFE Index is an appropriate standard
against which the investment performance of Vanguard International Growth Fund
can be measured.^ The weighting of securities in the MSCI EAFE Index is based on
each stock's relative total market value, that is, its market price per share
times the number of shares outstanding.
During the fiscal years ended August 31, 1998, 1999, and 2000, the Fund
paid Schroder the following advisory fees:
1998 1999 2000
---- ---- ----
Basic Fee $9,793,000 $10,068,000 $12,718,000
Increase/(Decrease) for Performance
Adjustment 2,526,000 418,000 --
--------- ------- --
Total $12,319,000 $10,486,000 $12,718,000
DESCRIPTION OF SCHRODER
Vanguard International Growth Fund is managed by the London branch office
of Schroder Investment Management North America, Inc. (SIMNA). SIMNA is a
wholly-owned subsidiary of Schroders Incorporated, 787 7th Avenue, New York, New
York. Schroders PLC is the holding company parent of a large world-wide group of
banks and financial service companies (referred to as "The Schroder Group") with
associated companies and branch and representative offices located in seventeen
countries. The Schroder Group specializes in providing investment management
services, with Group funds under management currently in excess of $210 billion.
B-19
<PAGE>
VANGUARD CALVERT SOCIAL INDEX FUND
Vanguard Calvert Social Index Fund receives advisory services from
Vanguard's Quantitative Equity Group on an at-cost basis.
DURATION AND TERMINATION OF INVESTMENT ADVISORY AGREEMENTS
The Funds' current agreement with each adviser is renewable for successive
one-year periods, only if each renewal is specifically approved by a vote of the
Funds' board of trustees, including the affirmative votes of a majority of the
trustees who are not parties to the agreement or "interested persons" (as
defined in the 1940 Act) of any such party, cast in person at a meeting called
for the purpose of considering such approval. An agreement is automatically
terminated if assigned, and may be terminated without penalty at any time (1) by
vote of the board of trustees of the Fund on sixty (60) days' written notice to
the adviser, or (2) by the adviser upon ninety (90) days' written notice to the
Fund.
PORTFOLIO TRANSACTIONS
The investment advisory agreements with Lincoln and Schroder authorize the
investment advisers (with the approval of the Funds' board of trustees) to
select the brokers or dealers that will execute the purchases and sales of
portfolio securities for the Funds and direct each investment adviser to use its
best efforts to obtain the best available price and most favorable execution
with respect to all transactions for each Fund. Each investment adviser has
undertaken to execute each investment transaction at a price and commission
which provides the most favorable total cost or proceeds reasonably obtainable
under the circumstances.
In placing portfolio transactions, each investment adviser will use 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 will be
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 may be given to those brokers which supply investment research,
statistical information, or provide other services in addition to execution
services to the Funds and/or the investment advisers. Each investment adviser
considers the investment services it receives useful in the performance of its
obligations under the agreement but is unable to determine the amount by which
such services may reduce its expenses.
Currently, it is each Fund's policy that each investment adviser may at
times pay higher commissions in recognition of brokerage services felt necessary
for the achievement of better execution of certain securities transactions than
otherwise might not be available. An investment adviser will only pay such
higher commissions if it believes this to be in the best interest of a Fund.
Some brokers or dealers who may receive such higher commissions in recognition
of brokerage services related to execution of securities transactions are also
providers of research information to the investment advisers and/or the Funds.
However, each investment adviser has informed the Funds that it generally will
not pay higher commission rates specifically for the purpose of obtaining
research services.
During the fiscal years ended August 31, 1998, 1999, and 2000, the Funds
paid the following amounts in brokerage commissions:
FUND 1998 1999 2000
---- ---- ---- ----
U.S. Growth Fund $6,538,324 $11,950,441 $17,605,000
International Growth Fund 10,369,101 10,770,933 16,882,000
Calvert Social Index Fund N/A N/A 5,000
Some securities considered for investment by the Funds may also be
appropriate for other Vanguard funds or clients served by the investment
advisers. If purchase or sale of securities consistent with the investment
policies of the Funds and one or more of these other funds or clients served by
the investment advisers are considered at or about the same time, transactions
in such securities will be allocated among the Funds and the several funds and
clients in a manner deemed equitable by the respective investment adviser.
Although there
B-20
<PAGE>
will be no specified formula for allocating such transactions, the allocation
methods used, and the results of such allocations, will be subject to periodic
review by the Fund's board of trustees.
FINANCIAL STATEMENTS
The Funds' Financial Statements for the year ended August 31, 2000,
appearing in the Funds' respective 2000 Annual Reports to Shareholders, 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.
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 World Funds, 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 industries and to reflect
the U.S. stock market.
STANDARD & POOR'S MIDCAP 400 INDEX--is composed of 400 medium sized domestic
stocks.
STANDARD & POOR'S SMALL CAP 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 SMALL CAP 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 GROWTH INDEX--measures the performance of those Russell 1000
companies with higher price-to-book ratios, and higher forecasted growth rates.
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.
RUSSELL 3000 STOCK INDEX--a diversified portfolio of approximately 3,000 common
stocks accounting for over 90% of the market value of publicly traded stocks in
the U.S.
RUSSELL 2000 STOCK INDEX--composed of the 2,000 smallest stocks contained in the
Russell 3000, representing approximately 7% of the Russell 3000 total market
capitalization.
RUSSELL 2000 VALUE INDEX--contains stocks from the Russell 2000 Index with a
less-than-average growth orientation.
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, Australia, Asia, and the Far East.
GOLDMAN SACHS 100 CONVERTIBLE BOND INDEX--currently includes 71 bonds and 29
preferreds. 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.
B-21
<PAGE>
LEHMAN BROTHERS LONG-TERM TREASURY BOND INDEX--is a market weighted index that
contains individually priced U.S. Treasury securities with maturities of ten
years or greater.
MERRILL LYNCH CORPORATE & GOVERNMENT BOND INDEX--consists of over 4,500 U.S.
Treasury, agency and investment-grade corporate bonds.
LEHMAN BROTHERS CREDIT (BAA) BOND INDEX--all publicly offered fixed-rate,
nonconvertible domestic corporate bonds rated Baa by Moody's, with a maturity
longer than one year and with more than $100 million outstanding. This index
includes over 1,500 issues.
LEHMAN BROTHERS LONG CREDIT BOND INDEX--is a subset of the Lehman Brothers
Credit 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 ten years.
BOND BUYER MUNICIPAL BOND INDEX--is a yield index on current coupon high-grade
general obligation municipal bonds.
STANDARD & POOR'S PREFERRED INDEX--is a yield index based upon the average yield
of four high-grade, non-callable preferred stock issues.
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.
LEHMAN BROTHERS LONG CREDIT A OR BETTER BOND INDEX--consists of all publicly
issued, fixed rate, nonconvertible investment grade, dollar-denominated,
SEC-registered corporate debt rated AA or AAA.
LEHMAN BROTHERS AGGREGATE BOND INDEX--is a market weighted index that contains
individually priced U.S. Treasury, agency, corporate, and mortgage pass-through
securities corporate rated Baa- or better. The Index has a market value of over
$5 trillion.
LEHMAN BROTHERS CREDIT 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
one and five 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 five and
ten 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 ten years. The
index has a market value of over $1.1 trillion.
LIPPER BALANCED FUND AVERAGE--an industry benchmark of average balanced funds
with similar investment objectives and policies, as measured by Lipper Inc.
LIPPER NON-GOVERNMENT MONEY MARKET FUND AVERAGE--an industry benchmark of
average non-government money market funds with similar investment objectives and
policies, as measured by Lipper Inc.
LIPPER GOVERNMENT MONEY MARKET FUND AVERAGE--an industry benchmark of average
government money market funds with similar investment objectives and policies,
as measured by Lipper Inc.
SAI023 122000
<PAGE>
PART C
VANGUARD WORLD FUNDS
OTHER INFORMATION
ITEM 23. EXHIBITS
(a) Declaration of Trust*
(b) By-Laws*
(c) Reference is made to Articles III and V of the Registrant's Declaration
of Trust
(d) Investment Advisory Contract+
(e) Not applicable
(f) Reference is made to the section entitled "Management of the Funds" in
the Registrant's Statement of Additional Information
(g) Custodian Agreement*
(h) Amended and Restated Funds' Service Agreement*
(i) Legal Opinion*
(j) Consent of Independent Accountants**
(k) Not Applicable
(l) Not Applicable
(m) Not Applicable
(n) Not Applicable
(o) Rule 18f-3 Plan*
(p) Code of Ethics+
----------------
* Filed previously
** Filed herewith
+ Filed herewith for Vanguard U.S. Growth Fund (Lincoln Capital Management
Company); filed previously for the other Funds.
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
Registrant is not controlled by or under common control with any person.
ITEM 25. INDEMNIFICATION
The Registrant's organizational documents contain provisions indemnifying
Trustees and officers against liability incurred in their official capacity.
Article VII, Section 2 of the Declaration of Trust provides that the Registrant
may indemnify and hold harmless each and every Trustee and officer from and
against any and all claims, demands, costs, losses, expenses, and damages
whatsoever arising out of or related to the performance of his or her duties as
a Trustee or officer. However, this provision does not cover any liability to
which a Trustee or officer would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence, or reckless disregard of the duties
involved in the conduct of his or her office. Article VI of the By-Laws
generally provides that the Registrant shall indemnify its Trustees and officers
from any liability arising out of their past or present service in that
capacity. Among other things, this provision excludes any liability arising by
reason of willful misfeasance, bad faith, gross negligence, or the reckless
disregard of the duties involved in the conduct of the Trustee's or officer's
office with the Registrant.
ITEM 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
Lincoln Capital Management Company (Lincoln), is an investment adviser
registered under the Investment Advisers Act of 1940, as amended (the Advisers
Act). The list required by this Item 26 of officers and directors of Lincoln,
together with any information as to any business profession, vocation or
employment of a substantial nature engaged in by such officers and directors
during
C-1
<PAGE>
the past two years, is incorporated herein by reference to Schedules B and D of
Form ADV filed by Lincoln pursuant to the Advisers Act (SEC File No. 801-11417).
Schroder Investment Management North America, Inc. (Schroder), is an investment
adviser registered under the Investment Advisers Act of 1940, as amended (the
Advisers Act). The list required by this Item 26 of officers and directors of
Schroder, together with any information as to any business profession, vocation
or employment of a substantial nature engaged in by such officers and directors
during the past two years, is incorporated herein by reference to Schedules B
and D of Form ADV filed by Schroder pursuant to the Advisers Act (SEC File No.
801-15834).
ITEM 27. PRINCIPAL UNDERWRITERS
(a) Not Applicable
(b) Not Applicable
(c) Not Applicable
ITEM 28. LOCATION OF ACCOUNTS AND RECORDS
All accounts, books and other documents required to be maintained by Section 31
(a) of the 1940 Act and the Rules thereunder will be maintained at the offices
of Registrant; Registrant's Transfer Agent, The Vanguard Group, Inc., 100
Vanguard Boulevard, Malvern, PA 19355; and the Registrant's custodians, State
Street Bank and Trust Company, Boston, MA, The Chase Manhattan Bank, N.A., New
York, NY, and First Union National Bank, PA4943, 530 Walnut Street,
Philadelphia, PA 19106.
ITEM 29. MANAGEMENT SERVICES
Other than as set forth under the description of The Vanguard Group in Part B of
this Registration Statement, the Registrant is not a party to any
management-related service contract.
ITEM 30. UNDERTAKINGS
Not Applicable
C-2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant has duly caused this Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized, in the
Town of Valley Forge and the Commonwealth of Pennsylvania, on the 6th day of
December, 2000.
VANGUARD WORLD FUNDS
BY:_____________(signature)________________
(HEIDI STAM)
JOHN J. BRENNAN*
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Act of 1933, this Post-Effective
Amendment to the Registration Statement has been signed below by the following
persons in the capacities and on the date indicated:
SIGNATURE TITLE DATE
--------------------------------------------------------------------------------
By:/S/ JOHN J. BRENNAN President, Chairman, Chief December 6, 2000
---------------------------Executive Officer, and Trustee
(Heidi Stam)
John J. Brennan*
By:/S/ JOANN HEFFERNAN HEISEN Trustee December 6, 2000
---------------------------
(Heidi Stam)
JoAnn Heffernan Heisen*
By:/S/ BRUCE K. MACLAURY Trustee December 6, 2000
---------------------------
(Heidi Stam)
Bruce K. MacLaury*
By:/S/ BURTON G. MALKIEL Trustee December 6, 2000
---------------------------
(Heidi Stam)
Burton G. Malkiel*
By:/S/ ALFRED M. RANKIN, JR. Trustee December 6, 2000
---------------------------
(Heidi Stam)
Alfred M. Rankin, Jr.*
By:/S/ JOHN C. SAWHILL Trustee December 6, 2000
---------------------------
(Heidi Stam)
John C. Sawhill*
By:/S/ JAMES O. WELCH, JR. Trustee December 6, 2000
---------------------------
(Heidi Stam)
James O. Welch, Jr.*
By:/S/ J. LAWRENCE WILSON Trustee December 6, 2000
---------------------------
(Heidi Stam)
J. Lawrence Wilson*
By:/S/ THOMAS J. HIGGINS Treasurer and Principal December 6, 2000
---------------------------Financial Officer and Principal
(Heidi Stam) Accounting Officer
Thomas J. Higgins*
*By Power of Attorney. See File Number 33-4424, filed on January 25, 1999.
Incorporated by Reference.
<PAGE>
INDEX TO EXHIBITS
Investment Advisory Agreement......................................... Ex-99.BD
Consent of Independent Accountants.................................... Ex-99.BJ
Code of Ethics........................................................ Ex-99.BP