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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. 78
AND
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 78
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
IT IS PROPOSED THAT THIS FILING BECOME EFFECTIVE:
ON APRIL 28, 2000, PURSUANT TO PARAGRAPH (A) OF RULE 485.
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
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SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS
DATED FEBRUARY 23, 2000
VANGUARD(R) CALVERT SOCIAL INDEX FUND
PROSPECTUS
APRIL 28, 2000
This is the Fund's initial
prospectus, so it contains
no performance data.
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE U.S.
SECURITIES AND EXCHANGE COMMISSION BUT HAS NOT YET BECOME EFFECTIVE. SHARES OF
VANGUARD CALVERT SOCIAL INDEX FUND MAY NOT BE SOLD, NOR MAY OFFERS TO BUY BE
ACCEPTED, PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS
COMMUNICATION SHALL NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY, NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN A STATE IN
WHICH SUCH OFFER, SOLICITATION, OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION
OR QUALIFICATION UNDER THE SECURITIES LAW OF THE STATE.
[A MEMBER OF
THE VANGUARD GROUP LOGO]
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VANGUARD CALVERT SOCIAL INDEX FUND
Prospectus
April 28, 2000
A Stock Index Mutual Fund
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CONTENTS
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. FUND PROFILE . SHARE PRICE
. ADDITIONAL INFORMATION . INVESTING WITH VANGUARD
. AN INTRODUCTION TO INDEX FUNDS . SERVICES AND ACCOUNT FEATURES
. A WORD ABOUT RISK . TYPES OF ACCOUNTS
. WHO SHOULD INVEST . BUYING SHARES
. PRIMARY INVESTMENT STRATEGIES . REDEEMING SHARES
. THE FUND AND VANGUARD . TRANSFERRING REGISTRATION
. INVESTMENT ADVISER . FUND AND ACCOUNT UPDATES
. DIVIDENDS, CAPITAL GAINS, AND TAXES GLOSSARY (inside back cover)
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WHY READING THIS PROSPECTUS IS IMPORTANT
This prospectus explains the objective, risks, and strategies of Vanguard
Calvert Social Index 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 to decide whether the Fund is the right
investment for you. We suggest that you keep it for future reference.
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IMPORTANT NOTE
Vanguard Calvert Social Index Fund offers two separate classes of shares:
Investor and Institutional. Investor Shares, which have an investment minimum of
$3,000 ($1,000) for IRAs), are offered by two separate prospectuses. This
prospectus is intended for individual investors and institutional clients. There
is also a prospectus for participants in employer-sponsored retirement plans,
which you can obtain by calling Vanguard at 1-800-523-1188.
Institutional Shares have an investment minimum of $10 million and generally do
not require special employee benefit plan services. Institutional Shares are
offered by another prospectus, which you can obtain by calling Vanguard's
Institutional Investor Group at 1-800-523-1036.
Note that the Fund's separate share classes have different expenses; as a result
their investment performance will vary.
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NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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1
FUND PROFILE
The following profile summarizes key features of Vanguard Calvert Social Index
Fund.
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 invests in the stocks
that comprise the Index.
PRIMARY RISKS
THE FUND'S TOTAL RETURN, LIKE STOCK PRICES GENERALLY, WILL FLUCTUATE WITHIN A
WIDE RANGE, SO AN INVESOR COULD LOSE MONEY OVER SHORT OR EVEN LONG PERIODS.
Stock markets tend to move in cycles, with periods of rising prices and periods
of falling prices. The Fund is also subject to:
- - Investment style risk, which is the chance that returns from large- 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.
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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 Vanguard Calvert Social Index Fund's expense ratio for the
current fiscal year to be .%, or $. per $1,000 of average net assets. The
average multi-cap mutual fund had expenses in 1999 of .%, or $. 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.
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FEES AND EXPENSES
The following table describes the fees and expenses you may pay if you buy and
hold shares of the Fund. The expenses shown under Annual Fund Operating Expenses
are based upon estimated amounts for the current fiscal year. The Fund has no
operating history, and actual operating expenses could be different.
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2
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: .%
12b-1 Distribution Fee: None
Other Expenses: .%
TOTAL ANNUAL FUND OPERATING EXPENSES: 0.25%
* Vanguard will deduct an account maintenance fee from your
annual distribution of the Fund's dividends. If your
distribution is less than the fee, fractional shares will
be automatically redeemed to make up the difference.
The following example is intended to help you compare the cost of investing
in the Fund with the cost of investing in other mutual funds. It illustrates the
hypothetical expenses that you would incur over one-year and three-year periods
if you invest $10,000 in the Fund. This example assumes that the Fund provides a
return of 5% a year, and that operating expenses match our estimates for the
Fund's first year of operations.The results apply whether or not you redeem your
investment at the end of each period.
------------------------
1 YEAR 3 YEARS
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$. $.
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THIS EXAMPLE SHOULD NOT BE CONSIDERED TO REPRESENT ACTUAL EXPENSES OR
PERFORMANCE FROM THE PAST OR FOR THE FUTURE. ACTUAL FUTURE EXPENSES MAY BE
HIGHER OR LOWER THAN THOSE SHOWN.
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ADDITIONAL INFORMATION
DIVIDENDS AND CAPITAL GAINS NEWSPAPER ABBREVIATION
Distributed annually in December .
INVESTMENT ADVISERS VANGUARD FUND NUMBER
The Vanguard Group, Valley Forge, Pa., .
since inception
CUSIP NUMBER
INCEPTION DATE .
May 8, 2000
TICKER SYMBOL
SUITABLE FOR IRAS .
Yes
MINIMUM INITIAL INVESTMENT
$3,000; $1,000 for IRAs and custodial accounts
for minors
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3
AN INTRODUCTION TO INDEX FUNDS
WHAT IS INDEXING?
An index is an unmanaged group of securities whose overall performance is used
as a standard to measure the investment performance of a particular market. An
index (or "passively managed") fund tries to track, as closely as possible, the
performance of an established target index. The fund does this by holding all,
or a representative sample, of the securities that comprise the index.
Stock index funds may seek to track indexes that hold a certain type of
stock--such as growth or value, small-cap or large-cap, or those from just one
industry--or they may seek to track indexes that consist of a broader range of
stocks--for example the entire U.S. stock market.
Index funds do not have active managers, who buy and sell securities based
on research and analysis in an attempt to outperform a particular benchmark or
the market as a whole. Rather, index funds simply attempt to mirror what the
target index does, for better or worse.
WHY INVEST IN INDEX FUNDS?
Index funds appeal to many investors for a number of reasons:
- - Variety of investments. Vanguard index funds generally invest in a wide
variety of companies and industries.
- - Relative consistency. Because they seek to track market benchmarks, index
funds by definition will not perform dramatically better or worse than
their target indexes.
- - Low cost. Index funds do not have many of the expenses of an actively
managed fund, in addition, they keep trading activity--and thus brokerage
commissions--to a minimum.
- - Low realization of capital gains. Because an index fund typically sells
securities only to respond to redemption requests or to adjust its holdings
to reflect a change in its target index, the fund's turnover rate--and thus
its realization of taxable capital gains--is usually much lower than the
average mutual fund.
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PLAIN TALK ABOUT
THE COSTS OF INVESTING
Costs are an important consideration in choosing a mutual fund. That's because
you, as a shareholder, pay the costs of operating a fund, plus any transaction
costs associated with the fund's buying and selling of securities. These costs
can erode a substantial portion of the gross income or capital appreciation a
fund achieves. Even seemingly small differences in expenses can, over time, have
a dramatic effect on a fund's performance.
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KEEP IN MIND THAT AN INDEX FUND HAS OPERATING EXPENSES AND TRANSACTION COSTS; A
MARKET INDEX DOES NOT. THEREFORE, AN INDEX FUND--WHILE EXPECTED TO TRACK ITS
TARGET INDEX AS CLOSELY AS POSSIBLE--WILL TYPICALLY BE UNABLE TO MATCH THE
PERFORMANCE OF THE INDEX EXACTLY.
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4
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A WORD ABOUT RISK
This prospectus describes risks you would face as an investor in Vanguard
Calvert Social Index Fund. It is important to keep in mind one of the main
axioms of investing: The higher the risk of losing money, the higher the
potential reward. The reverse, also, is generally true: The lower the risk, the
lower the potential reward. As you consider an investment in the Fund, you
should also take into account your personal tolerance for the daily fluctuations
of the stock market.
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
shareholder of the Fund.
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WHO SHOULD INVEST
The Fund may be a suitable investment for you if:
- - You wish to add a fund that invests in large- and mid-capitalization stocks
to your existing holdings, which could include other stock investments as
well as bond, money market, and tax-exempt investments.
- - You seek growth of capital over the long-term--at least five years.
- - You want a fund that considers social and environmental issues as part of
its investment program.
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:
- - Each Vanguard fund reserves the right to reject any purchase
request--including exchanges from other Vangaurd funds--that it regards as
disruptive to efficient portfolio management. The fund may reject a
purchase request 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's 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.
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5
PRIMARY INVESTMENT STRATEGIES
This section explains the strategies that the investment adviser uses in pursuit
of the Fund's investment objective. It also explains how the adviser implements
these strategies. In addition, this section discusses important risks faced by
investors in the Fund. The Board of Trustees oversees the management of the
Fund, and may change the investment strategies in the interest of shareholders.
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PLAIN TALK ABOUT
CALVERT SOCIAL INDEX
The Calvert Social Index is maintained by Calvert Group of Bethesda, Maryland, a
leading organization in the world of social investing. Calvert screens stocks
from approximately 1,000 of the largest companies in the United States by
analyzing each company's record and policies on: environmental issues; workplace
issues; product safety and impact; international operations and human rights;
and weapons contracting.
Calvert excludes from the index any companies that, in Calvert's opinion,
violate fair labor or equal opportunity standards as well as those companies
involved with tobacco, alcohol, gambling, or nuclear power. Companies that pass
Calvert's screenings process are represented in the index on a market
capitalization-weighted basis.
For further information about the Calvert Social Index, please visit Calvert's
web site, at www.calvert.com or contact Calvert at 1-800-368-2745.
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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.
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6
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 Standard & Poor's 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.
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U.S. STOCK MARKET RETURNS (1926-1999)
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1 YEAR 5 YEARS 10 YEARS 20 YEARS
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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
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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 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.
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PLAIN TALK ABOUT
LARGE-CAP, MID-CAP, AND SMALL-CAP STOCKS
Stocks of publicly traded companies--and mutual funds that hold these
stocks--can be classified by the companies' market value, or capitalization.
Market capitalization changes over time, and there is no "official" definition
of the boundaries of large-, mid-, and small-cap stocks. Vanguard generally
defines large-capitalization (large-cap) funds as those holding stocks of
companies whose outstanding shares have a market value exceeding $12 billion;
mid-cap funds as those holding stocks of companies with a market value between
$1 billion and $12 billion; and small-cap funds as those typically holding
stocks of companies with a market value of less than $1 billion. Vanguard
periodically reassesses these classifications.
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[FLAG] THE FUND IS ALSO SUBJECT TO INVESTMENT STYLE RISK, WHICH IS THE CHANCE
THAT RETURNS FROM LARGE- AND MID-CAPITALIZATION STOCKS WILL TRAIL RETURNS
FROM OTHER ASSET CLASSES OR THE OVERALL STOCK MARKET. EACH TYPE OF STOCK
TENDS TO GO THROUGH CYCLES OF DOING BETTER--OR WORSE--THAN COMMON STOCKS IN
GENERAL. THESE PERIODS HAVE, IN THE PAST, LASTED FOR AS LONG AS SEVERAL
YEARS.
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7
RISK OF NONDIVERSIFICATION
[FLAG] As an index fund, the Fund will hold the largest stocks in its target
index in approximately the same percentages as those stocks are represented in
the index. If the target index should become less diversified in the future, the
Fund similarly would become less diversified. In the unlikely event that the
target index becomes dominated by just a few companies, shareholders would be
subject to the risk that the Fund's performance could be hurt disproportionately
by a decline in the price of just a few stocks.
SECURITY SELECTION
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.
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, includes more than 7,000 stocks), funds tracking these
larger indexes sometimes 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 key risk factors include
industry weightings, country weightings, market capitalization, and other
financial characteristices of stocks.
Vanguard Calvert Social Index Fund uses the replication method of indexing
to invest in stocks.
TURNOVER RATE
Generally, a passively managed fund sells securities only to respond to
redemption requests or to adjust the number of shares held to reflect a change
in the fund's target index.
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8
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PLAIN TALK ABOUT
TURNOVER RATE
Before investing in a mutual fund, you should review its turnover rate. This
gives an indication of how transaction costs could affect the fund's future
returns. In general, the greater the volume of buying and selling by the fund,
the greater the impact that brokerage commissions and other transaction costs
will have on its return. Also, funds with high turnover rates may be more likely
to generate capital gains that must be distributed to shareholders as income
subject to taxes. The average turnover rate for all passively managed domestic
equity index funds investing in common stocks is roughly .%; for all domestic
stock funds, the average turnover rate is approximately ., according to
Morningstar, Inc.
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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 the costs of maintaining accounts more equitably among
shareholders. 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 will be automatically redeemed to make up the difference.
OTHER INVESTMENT POLICIES AND RISKS
The Fund reserves the right to substitute a different index for the Calvert
Social Index if the Calvert Social Index is discontinued or for any other reason
determined in good faith by the Fund's Board of Trustees. In such instance, the
substitute index will 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 match its target index as closely as possible, the Fund attempts to
remain fully invested in stocks. 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).
For this reason, 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 to purchase securities under futures contracts will
not exceed 20% of its total assets.
The reasons for which the Fund will invest in futures and options are:
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9
- - 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 generally is managed without regard to tax ramifications.
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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). Futures and
options are derivatives that have been trading on regulated exchanges for more
than two decades. These "traditional" derivatives are standardized contracts
that can easily be bought and sold, and whose market values are determined and
published daily. It is these characteristics that differentiate futures and
options from the relatively new types of derivatives. If used for speculation or
as leveraged investments, derivatives can carry considerable risks.
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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 $. 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.
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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.
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INVESTMENT ADVISER
The Vanguard Group (Vanguard), P.O. Box 2600, Valley Forge, PA 19482, founded in
1974, serves as the Fund's adviser through its Core Management Group. As of
October 31, 1999, Vanguard served as adviser for about $346 billion in assets.
Vanguard manages the fund on an at-cost basis, subject to the control of the
Trustees and officers of the Fund.
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10
The Fund has authorized the adviser to choose brokers or dealers to handle
the purchase and sale of securities for the Fund, and to get the best available
price and most favorable execution from these brokers with respect to 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.
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PLAIN TALK ABOUT
THE FUND'S ADVISER
The individual primarily responsible for overseeing the Fund's investments is:
GEORGE U. SAUTER, Managing Director of Vanguard, and head of Vanguard's Core
Management Group; has worked in investment management since 1985; primary
responsibility for Vanguard's stock indexing policy and strategy since joining
the company in 1987; has served as the Fund's portfolio manager since inception;
A.B., Dartmouth College; M.B.A., University of Chicago.
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PLAIN TALK ABOUT
DISTRIBUTIONS
As a shareholder, you are entitled to your share of the fund's income from
interest and dividends, and gains from the sale of investments. You receive such
earnings as either an income dividend or a capital gains distribution. Income
dividends come from both the dividends that the fund earns from its holdings and
the interest it receives from its money market and bond investments. Capital
gains are realized whenever the fund sells securities for higher prices than it
paid for them. These capital gains are either short-term or long-term, depending
on whether the fund held the securities for one year or less, or more than one
year.
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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. In addition,
the Fund may occasionally be required to make supplemental dividend or capital
gains distributions at some other time during the year. You can receive
distributions of income dividends or capital gains in cash, or you can have them
automatically reinvested in more shares of the Fund.
BASIC TAX POINTS
Vanguard will send you a statement each year showing the tax status of all your
distributions. In addition, taxable investors should be aware of the following
basic tax points:
- - Distributions are taxable to you 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 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.
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11
- - 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.
- - State and local income taxes may apply to any dividend or capital gains
distributions that you receive, as well as to your gains or losses from any
sale or exchange of Fund shares.
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 and certify that it is correct.
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), it is not to your advantage to buy shares of a fund shortly before it
makes a distribution, because doing so can cost you money in taxes. This is
known as "buying a dividend." For example: on December 15, you invest $5,000,
buying 250 shares for $20 each. If the fund pays a distribution of $1 per share
on December 16, its share price would drop to $19 (not counting market change).
You still have only $5,000 (250 shares x $19 = $4,750 in share value, plus 250
shares x $1 = $250 in distributions), but you owe tax on the $250 distribution
you received--even if you reinvest it in more shares. To avoid "buying a
dividend," check a fund's distribution schedule before you invest.
- --------------------------------------------------------------------------------
SHARE PRICE
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 adding up the total value of
the Fund's investments and other assets, subtracting any of its liabilities
(debts), and then dividing the net assets attributable to each class by the
number of Fund shares outstanding for each class.
<PAGE>
12
NET ASSET VALUE = TOTAL ASSETS - LIABILITIES
-------------------------------
NUMBER OF 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 Index Funds." Different
newspapers use different abbreviations of the Fund's name, but the most common
is ..
"Standard & Poor's(R)," "S&P(R)," "S&P 500(R)," "Standard & Poor's 500," and
"500" are trademarks of The McGraw-Hill Companies, Inc.
<PAGE>
13
- --------------------------------------------------------------------------------
INVESTING WITH VANGUARD
Are you looking for the most convenient way to open or add money to a Vanguard
account? Obtain instant access to fund information? Establish an account for a
minor child or for your retirement savings?
Vanguard can help. Our goal is to make it easy and pleasant for you to do
business with us.
The following sections of the prospectus briefly explain the many services
we offer. Booklets providing detailed information are available on the services
marked with a [BOOKLET]. Please call us to request copies.
- --------------------------------------------------------------------------------
SERVICES AND ACCOUNT FEATURES
Vanguard offers many services that make it convenient to buy, sell or exchange
shares, or to obtain fund or account information.
- --------------------------------------------------------------------------------
TELEPHONE REDEMPTIONS (SALES AND EXCHANGES)
Automatically set up for this Fund unless you notify us otherwise.
- --------------------------------------------------------------------------------
VANGUARD(R) DIRECT DEPOSIT SERVICE [BOOKLET]
Automatic method for depositing your paycheck or U.S. government payment
(including Social Security and government pension checks) into your account.
- --------------------------------------------------------------------------------
VANGUARD(R) AUTOMATIC EXCHANGE SERVICE [BOOKLET]
Automatic method for moving a fixed amount of money from one Vanguard fund
account to another.
- --------------------------------------------------------------------------------
VANGUARD FUND EXPRESS(R) [BOOKLET]
Electronic method for buying or selling shares. You can transfer money between
your Vanguard fund account and an account at your bank, savings and loan, or
credit union on a systematic schedule or whenever you wish.
- --------------------------------------------------------------------------------
VANGUARD DIVIDEND EXPRESS(TM) [BOOKLET]
Electronic method for transferring dividend and/or capital gains distributions
directly from your Vanguard fund account to your bank, savings and loan, or
credit union account.
- --------------------------------------------------------------------------------
VANGUARD TELE-ACCOUNT(R) 1-800-662-6273 (ON-BOARD)[BOOKLET]
Toll-free 24-hour access to Vanguard fund and account information--as well as
some transactions--by using any touch-tone phone. Tele-Account provides total
return, share price, price change, and yield quotations for all Vanguard funds;
gives your account balances and history (e.g., last transaction, latest dividend
distribution); and allows you to sell or exchange shares to and from most
Vanguard funds.
- --------------------------------------------------------------------------------
ACCESS VANGUARD/(TM)/ www.vanguard.com [COMPUTER]
You can use your personal computer to perform certain transactions for most
Vanguard funds by accessing our website. To establish this service, you must
register through our website. We will then mail you an account access password
that allows you to process the following financial and administrative
transactions online:
- - Open a new account.*
- - Buy, sell, or exchange shares of most funds.
- - Change your name/address.
<PAGE>
14
- - Add/change fund options (including dividend options, Vanguard Fund Express,
bank instructions, checkwriting, and Vanguard Automatic Exchange Service).
(Some restrictions may apply.) Please call our Client Services Department
for assistance.
*Only current Vanguard shareholders can open a new account online, by exchanging
shares from other existing Vanguard accounts.
- --------------------------------------------------------------------------------
INVESTOR INFORMATION DEPARTMENT: 1-800-662-7447 (SHIP) TEXT TELEPHONE:
1-800-952-3335
Call Vanguard for information on our funds, fund services, and retirement
accounts, and to request literature.
- --------------------------------------------------------------------------------
CLIENT SERVICES DEPARTMENT: 1-800-662-2739 (CREW) TEXT TELEPHONE: 1-800-749-7273
Call Vanguard for information on your account, account transactions, and account
statements.
- --------------------------------------------------------------------------------
SERVICES FOR CLIENTS OF VANGUARD'S INSTITUTIONAL DIVISION: 1-888-809-8102
Vanguard's Institutional Division offers a variety of specialized services for
large institutional investors, including the ability to effect account
transactions through private electronic networks and third-party recordkeepers.
- --------------------------------------------------------------------------------
TYPES OF ACCOUNTS
Individuals and institutions can establish a variety of accounts with Vanguard.
- --------------------------------------------------------------------------------
FOR ONE OR MORE PEOPLE
Open an account in the name of one (individual) or more (joint tenants) people.
- --------------------------------------------------------------------------------
FOR HOLDING PERSONAL TRUST ASSETS [COMPUTER]
Invest assets held in an existing personal trust.
- --------------------------------------------------------------------------------
FOR INDIVIDUAL RETIREMENT ACCOUNTS [COMPUTER]
Open a traditional IRA account or a Roth IRA account. Eligibility and other
requirements are established by federal law and Vanguard custodial account
agreements. For more information, please call 1-800-662-7447 (SHIP).
- --------------------------------------------------------------------------------
FOR AN ORGANIZATION [COMPUTER]
Open an account as a corporation, partnership, endowment, foundation, or other
entity.
- --------------------------------------------------------------------------------
FOR THIRD-PARTY TRUSTEE RETIREMENT INVESTMENTS
Open an account as a retirement trust or plan based on an existing corporate or
institutional plan. These accounts are established by the trustee of the
existing plan.
- --------------------------------------------------------------------------------
VANGUARD PROTOTYPE PLANS
Open a variety of retirement accounts using Vanguard prototype plans for
individuals, sole proprietorships, and small businesses. For more information,
please call 1-800-662-2003.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
A NOTE ON INVESTING WITH VANGUARD THROUGH OTHER FIRMS
You may purchase or sell Fund shares through a financial intermediary such as a
bank, broker, or investment adviser. If you invest with Vanguard through an
intermediary, please read that firm's program materials carefully to learn of
any special rules that may apply. For example, special terms may apply to
additional service features, fees, or other policies. Consult your intermediary
to determine when your order will be priced.
- --------------------------------------------------------------------------------
<PAGE>
15
BUYING SHARES
You buy your shares at the Fund's next-determined net asset value after Vanguard
receives your request. As long as your request is received before the close of
trading on the New York Stock Exchange, generally 4 p.m. Eastern time, you will
buy your shares at that day's net asset value.
- --------------------------------------------------------------------------------
MINIMUM INVESTMENT TO . . .
open a new account
$3,000 (regular account); $1,000 (traditional IRAs and Roth IRAs).
add to an existing account
$100 by mail or exchange; $1,000 by wire.
- --------------------------------------------------------------------------------
A NOTE ON LOW BALANCES
The Fund reserves the right to close any nonretirement account whose balance
falls below the minimum initial investment. The Fund will deduct a $10 annual
fee in June if your nonretirement account balance at that time is below $2,500.
The low balance fee is waived for investors who have aggregate Vanguard account
assets of $50,000 or more.
- --------------------------------------------------------------------------------
BY MAIL TO . . .[ENVELOPE]
open a new account
Complete and sign the account registration form and enclose your check.
add to an existing account
Mail your check with an Invest-By-Mail form detached from your confirmation
statement to the address listed on the form. Please do not alter Invest-By-Mail
forms, since they are fund- and account-specific.
Make your check payable to: The Vanguard Group-.
All purchases must be made in U.S. dollars, and checks must be drawn on U.S.
banks.
First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 1110 455 Devon Park Drive
Valley Forge, PA 19482-1110 Wayne, PA 19087-1815
For clients of Vanguard's Institutional Division . . .
First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 2900 455 Devon Park Drive
Valley Forge, PA 19482-2900 Wayne, PA 19087-1815
- --------------------------------------------------------------------------------
IMPORTANT NOTE: To prevent check fraud, Vanguard will not accept checks made
payable to third parties.
- --------------------------------------------------------------------------------
BY TELEPHONE TO . . .[TELEPHONE]
open a new account
Call Vanguard Tele-Account* 24 hours a day--or Client Services during business
hours--to exchange from another Vanguard fund account with the same registration
(name, address, taxpayer identification number, and account type). (Note that
some restrictions apply to index fund accounts.)
<PAGE>
16
add to an existing account
Call Vanguard Tele-Account* 24 hours a day--or Client Services during business
hours--to exchange from another Vanguard fund account with the same registration
(name, address, taxpayer identification number, and account type). (Note that
some restrictions apply to index fund accounts.) Use Vanguard Fund Express (see
"Services and Account Features") to transfer assets from your bank account. Call
Client Services before your first use to verify that this option is available.
Vanguard Tele-Account Client Services
1-800-662-6273 1-800-662-2739
*You must obtain a Personal Identification Number (PIN) through Tele-Account at
least seven days before you request your first exchange.
- --------------------------------------------------------------------------------
IMPORTANT NOTE: Once you have initiated a telephone transaction and a
confirmation number has been assigned, the transaction cannot be revoked. We
reserve the right to refuse any purchase request.
- --------------------------------------------------------------------------------
BY WIRE TO OPEN A NEW ACCOUNT OR ADD TO AN EXISTING ACCOUNT [WIRE]
Call Client Services to arrange your wire transaction. Wire transactions to
retirement accounts are only available for asset transfers and rollovers from
other financial institutions. Individual IRA contributions will not be accepted
by wire.
Wire to:
FRB ABA 021001088
HSBC Bank USA
For credit to:
Account: 000112046
Vanguard Incoming Wire Account
In favor of:
Vanguard Calvert Social Index Fund-.
[Account number, or temporary number for a new account]
[Registered account owner(s)]
[Registered address]
- --------------------------------------------------------------------------------
You can redeem (that is, sell or exchange) shares purchased by check or Vanguard
Fund Express at any time. However, while your redemption request will be
processed at the next-determined net asset value after it is received, your
redemption proceeds will not be available until payment for your purchase is
collected, which may take up to ten calendar days.
- --------------------------------------------------------------------------------
A NOTE ON LARGE PURCHASES
It is important that you call Vanguard before you invest a large dollar amount.
It is our responsibility to consider the interests of all Fund shareholders, and
so we reserve the right to refuse any purchase that may disrupt the Fund's
operation or performance.
- --------------------------------------------------------------------------------
<PAGE>
17
REDEEMING SHARES
This section describes how you can redeem--that is, sell or exchange--the Fund's
shares.
When Selling Shares:
- - Vanguard sends the redemption proceeds to you or a designated third party.*
- - You can sell all or part of your Fund shares at any time.
*May require a signature guarantee; see footnote on page 18.
When Exchanging Shares:
- - The redemption proceeds are used to purchase shares of a different Vanguard
fund.
- - You must meet the receiving fund's minimum investment requirements.
- - Vanguard reserves the right to revise or terminate the exchange privilege,
limit the amount of an exchange, or reject an exchange at any time, without
notice.
- - In order to exchange into an account with a different registration
(including a different name, address, or taxpayer identification number),
you must include the guaranteed signatures of all current account owners on
your written instructions.
In both cases, your transaction will be based on the Fund's next-determined
share price, subject to any special rules discussed in this prospectus. For
exchanges, the purchase side of the transaction will be based on the receiving
fund's next-determined share price, again subject to any special rules discussed
in this prospectus.
- --------------------------------------------------------------------------------
NOTE: Once a redemption is initiated and a confirmation number given, the
transaction CANNOT be canceled.
- --------------------------------------------------------------------------------
HOW TO REQUEST A REDEMPTION
You can request a redemption from your Fund account in any one of three ways:
online, by telephone, or by mail.
The Vanguard funds whose shares you cannot exchange online or by telephone
are VANGUARD U.S. STOCK INDEX FUNDS, VANGUARD BALANCED INDEX FUND, VANGUARD
INTERNATIONAL STOCK INDEX FUNDS, VANGUARD REIT INDEX FUND, and VANGUARD GROWTH
AND INCOME FUND. These funds do, however, permit online and telephone exchanges
within IRAs and some other retirement accounts. If you sell shares of these
funds online, you will receive a redemption check at your address of record.
- --------------------------------------------------------------------------------
ONLINE REQUESTS [COMPUTER]
ACCESS VANGUARD at www.vanguard.com
You can use your personal computer to sell or exchange shares of most Vanguard
funds by accessing our website. To establish this service, you must register
through our website. We will then mail you an account access password that will
enable you to sell or exchange shares online (as well as perform other
transactions).
- --------------------------------------------------------------------------------
TELEPHONE REQUESTS [TELEPHONE]
All Account Types Except Retirement:
Call Vanguard Tele-Account 24 hours a day--or Client Services during business
hours--to sell or exchange shares. You can exchange shares from this Fund to
open an account in another Vanguard fund or to add to an existing Vanguard fund
account with an identical registration.
<PAGE>
18
Retirement Accounts:
You can exchange--but not sell--shares by calling Tele-Account or Client
Services.
Vanguard Tele-Account Client Services
1-800-662-6273 1-800-662-2739
- --------------------------------------------------------------------------------
SPECIAL INFORMATION: We will automatically establish the telephone redemption
option for your account, unless you instruct us otherwise in writing. While
telephone redemption is easy and convenient, this account feature involves a
risk of loss from unauthorized or fraudulent transactions. Vanguard will take
reasonable precautions to protect your account from fraud. You should do the
same by keeping your account information private and immediately reviewing any
account statements that we send to you. Make sure to contact Vanguard
immediately about any transaction you believe to be unauthorized.
- --------------------------------------------------------------------------------
We reserve the right to refuse a telephone redemption if the caller is unable to
provide:
- - The ten-digit account number.
- - The name and address exactly as registered on the account.
- - The primary Social Security or employer identification number as registered
on the account.
- - The Personal Identification Number (PIN), if applicable (for instance,
Tele-Account).
Please note that Vanguard will not be responsible for any account losses
due to telephone fraud, so long as we have taken reasonable steps to verify the
caller's identity. If you wish to remove the telephone redemption feature from
your account, please notify us in writing.
- --------------------------------------------------------------------------------
A NOTE ON UNUSUAL CIRCUMSTANCES
Vanguard reserves the right to revise or terminate the telephone redemption
privilege at any time, without notice. In addition, Vanguard can stop selling
shares or postpone payment at times when the New York Stock Exchange is closed
or under any emergency circumstances as determined by the U.S. Securities and
Exchange Commission. If you experience difficulty making a telephone redemption
during periods of drastic economic or market change, you can send us your
request by regular or express mail. Follow the instructions on selling or
exchanging shares by mail in this section.
- --------------------------------------------------------------------------------
MAIL REQUESTS [ENVELOPE]
All Account Types Except Retirement:
Send a letter of instruction signed by all registered account holders. Include
the fund name and account number and (if you are selling) a dollar amount or
number of shares OR (if you are exchanging) the name of the fund you want to
exchange into and a dollar amount or number of shares. To exchange into an
account with a different registration (including a different name, address,
taxpayer identification number, or account type), you must provide Vanguard with
written instructions that include the guaranteed signatures of all current
owners of the fund from which you wish to redeem.
Vanguard Retirement Accounts:
For information on how to request distributions from:
- - Traditional IRAs and Roth IRAs--call Client Services.
- - SEP-IRAs, SIMPLE IRAs, 403(b)(7) custodial accounts, and Profit-Sharing and
Money Purchase Pension (Keogh) Plans--call Individual Retirement Plans at
1-800-662-2003.
Depending on your account registration type, additional documentation may be
required.
<PAGE>
19
First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 1110 455 Devon Park Drive
Valley Forge, PA 19482-1110 Wayne, PA 19087-1815
For clients of Vanguard's Institutional Division . . .
First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 2900 455 Devon Park Drive
Valley Forge, PA 19482-2900 Wayne, PA 19087-1815
- --------------------------------------------------------------------------------
A NOTE ON LARGE REDEMPTIONS
It is important that you call Vanguard before you redeem a large dollar amount.
It is our responsibility to consider the interests of all fund shareholders, and
so we reserve the right to delay delivery of your redemption proceeds--up to
seven days--if the amount may disrupt the Fund's operation or performance.
If you redeem more than $250,000 worth of fund shares within any 90-day
period, the Fund reserves the right to pay part or all of the redemption
proceeds above $250,000 in-kind, i.e., in securities, rather than in cash. If
payment is made in-kind, you may incur brokerage commissions if you elect to
sell the securities for cash.
- --------------------------------------------------------------------------------
OPTIONS FOR REDEMPTION PROCEEDS
You may receive your redemption proceeds in one of three ways: check, exchange
to another Vanguard fund, or Fund Express redemption.
- --------------------------------------------------------------------------------
CHECK REDEMPTIONS
Normally, Vanguard will mail your check within two business days of a
redemption.
- --------------------------------------------------------------------------------
EXCHANGE REDEMPTIONS
As described above, an exchange involves using the proceeds of your redemption
to purchase shares of another Vanguard fund.
- --------------------------------------------------------------------------------
FUND EXPRESS REDEMPTIONS
Vanguard will electronically transfer funds to your pre-linked checking or
savings account.
- --------------------------------------------------------------------------------
FOR OUR MUTUAL PROTECTION
For your best interests and ours, Vanguard applies these additional requirements
to redemptions:
REQUEST IN "GOOD ORDER"
All redemption requests must be received by Vanguard in "good order." This means
that your request must include:
- - The Fund name and account number.
- - The amount of the transaction (in dollars or shares).
- - Signatures of all owners exactly as registered on the account (for mail
requests).
- - Signature guarantees (if required).*
- - Any supporting legal documentation that may be required.
- - Any outstanding certificates representing shares to be redeemed.
*For instance, a signature guarantee must be provided by all registered account
shareholders when redemption proceeds are to be sent to a different person or
address. A signature guarantee may be obtained from most commercial and savings
banks, credit unions, trust companies, or member firms of a U.S. stock exchange.
<PAGE>
20
TRANSACTIONS ARE PROCESSED AT THE NEXT-DETERMINED SHARE PRICE AFTER VANGUARD HAS
RECEIVED ALL REQUIRED INFORMATION.
- --------------------------------------------------------------------------------
LIMITS ON ACCOUNT ACTIVITY
Because excessive account transactions can disrupt the management of the Fund
and increase the Fund's costs for all shareholders, Vanguard limits account
activity as follows:
- - You may make no more than TWO SUBSTANTIVE "ROUND TRIPS" THROUGH THE FUND
during any 12-month period.
- - Your round trips through the Fund must be at least 30 days apart.
- - The Fund may refuse a share purchase at any time, for any reason.
- - Vanguard may revoke an investor's telephone exchange privilege at any time,
for any reason.
A "round trip" is a redemption from the Fund followed by a purchase back into
the Fund. Also a "round trip" covers transactions accomplished by any
combination of methods, including transactions conducted by check, wire, or
exchange to/from another Vanguard fund. "Substantive" means a dollar amount that
Vanguard determines, in its sole discretion, could adversely affect the
management of the Fund.
- --------------------------------------------------------------------------------
RETURN YOUR SHARE CERTIFICATES
Any portion of your account represented by share certificates cannot be redeemed
until you return the certificates to Vanguard. Certificates must be returned
(unsigned), along with a letter requesting the sale or exchange you wish to
process, via certified mail to:
The Vanguard Group
455 Devon Park Drive
Wayne, PA 19087-1815
- --------------------------------------------------------------------------------
ALL TRADES ARE FINAL
Vanguard will not cancel any transaction request (including any purchase or
redemption) that we believe to be authentic once the request has been initiated
and a confirmation number assigned.
- --------------------------------------------------------------------------------
UNCASHED CHECKS
Please cash your distribution or redemption checks promptly. Vanguard will not
pay interest on uncashed checks.
- --------------------------------------------------------------------------------
TRANSFERRING REGISTRATION
You can transfer the registration of your Fund shares to another owner by
completing a transfer form and sending it to Vanguard.
First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 1110 455 Devon Park Drive
Valley Forge, PA 19482-1110 Wayne, PA 19087-1815
<PAGE>
21
For clients of Vanguard's Institutional Division . . .
First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 2900 455 Devon Park Drive
Valley Forge, PA 19482-2900 Wayne, PA 19087-1815
FUND AND ACCOUNT UPDATES
STATEMENTS AND REPORTS
We will send you account and tax statements to help you keep track of your Fund
account throughout the year as well as when you are preparing your income tax
returns.
In addition, you will receive financial reports about the Fund twice a
year. These comprehensive reports include an assessment of the Fund's
performance (and a comparison to its industry benchmark), an overview of the
financial markets, a report from the advisers, 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 two or more Fund
shareholders have the same last name and address, we send just one Fund report
to that address--instead of mailing separate reports to each shareholder. If you
want us to send separate reports, notify our Client Services Department at
1-800-662-2739.
- --------------------------------------------------------------------------------
CONFIRMATION STATEMENT
Sent each time you buy, sell, or exchange shares; confirms the trade date and
the amount of your transaction.
- --------------------------------------------------------------------------------
PORTFOLIO SUMMARY [BOOKLET]
Mailed quarterly for most accounts; shows the market value of your account at
the close of the statement period, as well as distributions, purchases, sales,
and exchanges for the current calendar year.
- --------------------------------------------------------------------------------
FUND FINANCIAL REPORTS
Mailed in October and April for this Fund.
- --------------------------------------------------------------------------------
TAX STATEMENTS
Generally mailed in January; report previous year's dividend and capital gains
distributions, proceeds from the sale of shares, and distributions from IRAs or
other retirement accounts.
- --------------------------------------------------------------------------------
AVERAGE COST REVIEW STATEMENT [BOOKLET]
Issued quarterly for most taxable accounts (accompanies your Portfolio Summary);
shows the average cost of shares that you redeemed during the calendar year,
using only the average cost single category method.
- --------------------------------------------------------------------------------
<PAGE>
GLOSSARY OF INVESTMENT TERMS
ACTIVE MANAGEMENT
An investment approach that seeks to exceed the average returns of the financial
markets. Active managers rely on research, market forecasts, and their own
judgment and experience in selecting securities to buy and sell.
CAPITAL GAINS DISTRIBUTION
Payment to mutual fund shareholders of gains realized on securities that a fund
has sold at a profit, minus any realized losses.
CASH RESERVES
Cash deposits, short-term bank deposits, and money market instruments which
include U.S. Treasury bills, bank certificates of deposit (CDs), repurchase
agreements, commercial paper, and banker's acceptances.
COMMON STOCK
A security representing ownership rights in a corporation. A stockholder is
entitled to share in the company's profits, some of which may be paid out as
dividends.
DIVIDEND INCOME
Payment to shareholders of income from interest or dividends generated by a
fund's investments.
EXPENSE RATIO
The percentage of a fund's average net assets used to pay its expenses. The
expense ratio includes management fees, administrative fees, and any 12b-1
distribution fees.
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 your own 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, with the ending net asset value adjusted to account for the reinvestment
of all distributions of dividends and capital gains.
VOLATILITY
The fluctuations in value of a mutual fund or other security. The greater a
fund's volatility, the wider the fluctuations between its high and low prices.
YIELD
Income (interest or dividends) earned by an investment, expressed as a
percentage of the investment's price.
<PAGE>
[SHIP]
[THE VANGUARD GROUP 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.
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 1-800-SEC-0330. 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 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.
.-04/28/2000
<PAGE>
VANGUARD(R) CALVERT SOCIAL INDEX FUND
Participant Prospectus
April 28, 2000
This is the Fund's initial
prospectus, so it contains
no performance data.
[A MEMBER OF
THE VANGUARD GROUP LOGO]
<PAGE>
VANGUARD CALVERT SOCIAL INDEX FUND
Prospectus
April 28, 2000
A Stock Index Mutual Fund
- --------------------------------------------------------------------------------
CONTENTS
- --------------------------------------------------------------------------------
. FUND PROFILE . INVESTMENT ADVISER
. ADDITIONAL INFORMATION . DIVIDENDS, CAPITAL GAINS, AND TAXES
. AN INTRODUCTION TO INDEX FUNDS . SHARE PRICE
. A WORD ABOUT RISK . INVESTING WITH VANGUARD
. WHO SHOULD INVEST . ACCESSING FUND INFORMATION BY COMPUTER
. PRIMARY INVESTMENT STRATEGIES GLOSSARY (inside back cover)
. THE FUND AND VANGUARD
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
WHY READING THIS PROSPECTUS IS IMPORTANT
This prospectus explains the objective, risks, and strategies of Vanguard
Calvert Social Index 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 to decide whether the Fund is the right
investment for you. We suggest that you keep it for future reference.
- -------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
IMPORTANT NOTE
Vanguard Calvert Social Index Fund offers two separate classes of shares:
Investor and Institutional. Investor Shares, which have an investment minimum of
$3,000 ($1,000 for IRAs), are offered by two separate prospectuses. This
prospectus is intended for participants in employer-sponsored retirement or
savings plans. Another version--for investors who would like to open a personal
investment account--can be obtained by calling Vanguard at 1-800-662-7447.
Institutional Shares have an investment minimum of $10 million and generally do
not require special employee benefit plan services. Institutional Shares are
offered by another prospectus, which you can obtain by calling Vanguard's
Institutional Investor Group at 1-800-523-1036.
Note that the Fund's separate share classes have different expenses; as a
result, their investment performances will vary.
- -------------------------------------------------------------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE>
1
FUND PROFILE
The following profile summarizes key features of Vanguard Calvert Social Index
Fund.
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 invests in the stocks
that comprise the Index.
PRIMARY RISKS
THE FUND'S TOTAL RETURN, LIKE STOCK PRICES GENERALLY, WILL FLUCTUATE WITHIN A
WIDE RANGE, SO AN INVESTOR COULD LOSE MONEY OVER SHORT OR EVEN LONG PERIODS.
Stock markets tend to move in cycles, with periods of rising prices and periods
of falling prices. The Fund is also subject to:
- - Investment style risk, which is the chance that returns from large- 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.
- --------------------------------------------------------------------------------
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 Vanguard Calvert Social Index Fund's expense ratio for the
current fiscal year to be .%, or $. per $1,000 of average net assets. The
average multi-cap mutual fund had expenses in 1999 of .%, or $. 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.
- --------------------------------------------------------------------------------
FEES AND EXPENSES
The following table describes the fees and expenses you would pay if you buy and
hold shares of the Fund. The expenses shown under Annual Fund Operating Expenses
are based upon estimated amounts for the current fiscal year. The Fund has no
operating history, and actual operating expenses could be different.
<PAGE>
2
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: .%
12b-1 Distribution Fee: None
Other Expenses: .%
TOTAL ANNUAL FUND OPERATING EXPENSES: 0.25%
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 one-year and three-year periods
if you invest $10,000 in the Fund. This example assumes that the Fund provides a
return of 5% a year, and that operating expenses 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 each period.
------------------------
1 YEAR 3 YEARS
------------------------
$. $.
------------------------
THIS EXAMPLE SHOULD NOT BE CONSIDERED TO REPRESENT ACTUAL EXPENSES OR
PERFORMANCE FROM THE PAST OR FOR THE FUTURE. ACTUAL FUTURE EXPENSES MAY BE
HIGHER OR LOWER THAN THOSE SHOWN.
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION
DIVIDENDS AND CAPITAL GAINS NEWSPAPER ABBREVIATION
Distributed annually in December .
INVESTMENT ADVISERS VANGUARD FUND NUMBER
The Vanguard Group, Valley Forge, Pa., .
since inception
CUSIP NUMBER
INCEPTION DATE .
May 8, 2000
TICKER SYMBOL
.
- --------------------------------------------------------------------------------
AN INTRODUCTION TO INDEX FUNDS
WHAT IS INDEXING?
An index is an unmanaged group of securities whose overall performance is used
as a standard to measure the investment performance of a particular market. An
index (or "passively managed") fund tries to track, as closely as possible, the
performance of an established target index. The fund does this by holding all,
or a representative sample, of the securities that comprise the index.
Stock index funds may seek to track indexes that hold a certain type of
stock--such as growth or value, small-cap or large-cap, or those from just one
industry--or they may seek
<PAGE>
3
to track indexes that consist of a broader range of stocks--for example the
entire U.S. stock market.
Index funds do not have active managers, who buy and sell securities based
on research and analysis in an attempt to outperform a particular benchmark or
the market as a whole. Rather, index funds simply attempt to mirror what the
target index does, for better or worse.
WHY INVEST IN INDEX FUNDS?
Index funds appeal to many investors for a number of reasons:
- - Variety of investments. Vanguard index funds generally invest in a wide
variety of companies and industries.
- - Relative consistency. Because they seek to track market benchmarks, index
funds by definition will not perform dramatically better or worse than
their target indexes.
- - Low cost. Index funds do not have many of the expenses of an actively
managed fund, in addition, they keep trading activity--and thus brokerage
commissions--to a minimum.
- - Low realization of capital gains. Because an index fund typically sells
securities only to respond to redemption requests or to adjust its holdings
to reflect a change in its target index, the fund's turnover rate--and thus
its realization of taxable capital gains--is usually much lower than the
average mutual fund.
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
THE COSTS OF INVESTING
Costs are an important consideration in choosing a mutual fund. That's because
you, as a shareholder, pay the costs of operating a fund, plus any transaction
costs associated with the fund's buying and selling of securities. These costs
can erode a substantial portion of the gross income or capital appreciation a
fund achieves. Even seemingly small differences in expenses can, over time, have
a dramatic effect on a fund's performance.
- --------------------------------------------------------------------------------
KEEP IN MIND THAT AN INDEX FUND HAS OPERATING EXPENSES AND TRANSACTION
COSTS; A MARKET INDEX DOES NOT. THEREFORE, AN INDEX FUND--WHILE EXPECTED TO
TRACK ITS TARGET INDEX AS CLOSELY AS POSSIBLE--WILL TYPICALLY BE UNABLE TO MATCH
THE PERFORMANCE OF THE INDEX EXACTLY.
- --------------------------------------------------------------------------------
================================================================================
A WORD ABOUT RISK
This prospectus describes risks you would face as an investor in Vanguard
Calvert Social Index Fund. It is important to keep in mind one of the main
axioms of investing: The higher the risk of losing money, the higher the
potential reward. The reverse, also, is generally true: The lower the risk, the
lower the potential reward. As you consider an investment in the Fund, you
should also take into account your personal tolerance for the daily fluctuations
of the stock market.
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
shareholder of the Fund.
================================================================================
<PAGE>
4
WHO SHOULD INVEST
The Fund may be a suitable investment for you if:
- - You wish to add a fund that invests in large- and mid-capitalization stocks
to your existing holdings, which could include other stock investments as
well as bond, money market, and tax-exempt investments.
- - You seek growth of capital over the long-term--at least five years.
- - You want a fund that considers social and environmental issues as part of
its investment program.
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:
- - Each Vanguard fund reserves the right to reject any purchase
request--including exchanges from other Vangaurd funds--that it regards as
disruptive to efficient portfolio management. The fund may reject a
purchase request 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's 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.
PRIMARY INVESTMENT STRATEGIES
This section explains the strategies that the investment adviser uses in pursuit
of the Fund's investment objective. It also explains how the adviser implements
these strategies. In addition, this section discusses important risks faced by
investors in the Fund. The Board of Trustees oversees the management of the
Fund, and may change the investment strategies in the interest of shareholders.
<PAGE>
5
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
CALVERT SOCIAL INDEX
The Calvert Social Index is maintained by Calvert Group of Bethesda, Maryland, a
leading organization in the world of social investing. Calvert screens stocks
from approximately 1,000 of the largest companies in the United States by
analyzing each company's record and policies on: environmental issues; workplace
issues; product safety and impact; international operations and human rights;
and weapons contracting.
Calvert excludes from the index any companies that,in Calvert's opinion, violate
fair labor or equal opportunity standards as well as those companies involved
with tobacco, alcohol, gambling, or nuclear power. Companies that pass Calvert's
screenings process are represented in the index on a market
capitalization-weighted basis.
For further information about the Calvert Social Index, please visit Calvert's
web site, at www.calvert.com or contact Calvert at 1-800-368-2745.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
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 Standard & Poor's 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 invest-
<PAGE>
6
ment 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 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.
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
LARGE-CAP, MID-CAP, AND SMALL-CAP STOCKS
Stocks of publicly traded companies--and mutual funds that hold these
stocks--can be classified by the companies' market value, or capitalization.
Market capitalization changes over time, and there is no "official" definition
of the boundaries of large-, mid-, and small-cap stocks. Vanguard generally
defines large-capitalization (large-cap) funds as those holding stocks of
companies whose outstanding shares have a market value exceeding $12 billion;
mid-cap funds as those holding stocks of companies with a market value between
$1 billion and $12 billion; and small-cap funds as those typically holding
stocks of companies with a market value of less than $1 billion. Vanguard
periodically reassesses these classifications.
- --------------------------------------------------------------------------------
[FLAG] THE FUND IS ALSO SUBJECT TO INVESTMENT STYLE RISK, WHICH IS THE CHANCE
THAT RETURNS FROM LARGE- AND MID-CAPITALIZATION STOCKS WILL TRAIL RETURNS
FROM OTHER ASSET CLASSES OR THE OVERALL STOCK MARKET. EACH TYPE OF STOCK
TENDS TO GO THROUGH CYCLES OF DOING BETTER--OR WORSE--THAN COMMON STOCKS IN
GENERAL. THESE PERIODS HAVE, IN THE PAST, LASTED FOR AS LONG AS SEVERAL
YEARS.
RISK OF NONDIVERSIFICATION
[FLAG]As an index fund, the Fund will hold the largest stocks in its target
index in approximately the same percentages as those stocks are represented in
the index. If the target index should become less diversified in the future, the
Fund similarly would become less diversified. In the unlikely event that the
target index becomes dominated by just a few companies, shareholders would be
subject to the risk that the Fund's performance could be hurt disproportionately
by a decline in the price of just a few stocks.
SECURITY SELECTION
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.
<PAGE>
7
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.
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, includes more than 7,000 stocks), funds tracking these
larger indexes sometimes 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 key risk factors include
industry weightings, country weightings, market capitalization, and other
financial characteristices of stocks.
Vanguard Calvert Social Index Fund uses the replication method of indexing
to invest in stocks.
TURNOVER RATE
Generally, a passively managed fund sells securities only to respond to
redemption requests or to adjust the number of shares held to reflect a change
in the fund's target index.
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
TURNOVER RATE
Before investing in a mutual fund, you should review its turnover rate. This
gives an indication of how transaction costs could affect the fund's future
returns. In general, the greater the volume of buying and selling by the fund,
the greater the impact that brokerage commissions and other transaction costs
will have on its return. Also, funds with high turnover rates may be more likely
to generate capital gains that must be distributed to shareholders as income
subject to taxes. The average turnover rate for all passively managed domestic
equity index funds investing in common stocks is roughly .%; for all domestic
stock funds, the average turnover rate is approximately ., according to
Morningstar, Inc.
- --------------------------------------------------------------------------------
OTHER INVESTMENT POLICIES AND RISKS
The Fund reserves the right to substitute a different index for the Calvert
Social Index if the Calvert Social Index is discontinued or for any other reason
determined in good faith by the Fund's Board of Trustees. In such instance, the
substitute index will 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.
<PAGE>
8
To match its target index as closely as possible, the Fund attempts to
remain fully invested in stocks. 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).
For this reason, 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 to purchase securities 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 generally is managed without regard to tax ramifications.
- --------------------------------------------------------------------------------
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). Futures and
options are derivatives that have been trading on regulated exchanges for more
than two decades. These "traditional" derivatives are standardized contracts
that can easily be bought and sold, and whose market values are determined and
published daily. It is these characteristics that differentiate futures and
options from the relatively new types of derivatives. If used for speculation or
as leveraged investments, derivatives can carry considerable risks.
- --------------------------------------------------------------------------------
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 $. 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
The Vanguard Group (Vanguard), P.O. Box 2600, Valley Forge, PA 19482, founded in
1974, serves as the Fund's adviser through its Core Management Group. As of
October 31, 1999, Vanguard served as adviser for about $346 billion in assets.
Vanguard manages the fund on an at-cost basis, subject to the control of the
Trustees and officers of the Fund.
The Fund has authorized the adviser to choose brokers or dealers to handle
the purchase and sale of securities for the Fund, and to get the best available
price and most favorable execution from these brokers with respect to 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.
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
THE FUND'S ADVISER
The individual primarily responsible for overseeing the Fund's investments is:
GEORGE U. SAUTER, Managing Director of Vanguard, and head of Vanguard's Core
Management Group; has worked in investment management since 1985; primary
responsibility for Vanguard's stock indexing policy and strategy since joining
the company in 1987; has served as the Fund's portfolio manager since inception;
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. In addition,
the Fund may occasionally be required to make supplemental dividend or capital
gains distributions at some other time during the year.
Your dividend and capital gains distributions will be reinvested in
additional Fund shares and accumulate on a tax-deferred basis if you are
investing through an employer-sponsored retirement or savings plan. You will not
owe taxes on these distributions until you begin withdrawals from the plan. You
should consult your plan administrator, your plan's Summary Plan Description, or
your tax adviser about the tax consequences of plan withdrawals.
<PAGE>
10
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
DISTRIBUTIONS
As a shareholder, you are entitled to your share of the fund's income from
interest and dividends, and gains from the sale of investments. You receive such
earnings as either an income dividend or a capital gains distribution. Income
dividends come from both the dividends that the fund earns from its holdings and
the interest it receives from its money market and bond investments. Capital
gains are realized whenever the fund sells securities for higher prices than it
paid for them. These capital gains are either short-term or long-term, depending
on whether the fund held the securities for one year or less, or more than one
year.
- --------------------------------------------------------------------------------
SHARE PRICE
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 adding up the total value of
the Fund's investments and other assets, subtracting any of its liabilities
(debts), and then dividing the net assets attributable to each class by the
number of Fund shares outstanding for each class.
NET ASSET VALUE = TOTAL ASSETS - LIABILITIES
-------------------------------
NUMBER OF 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 Index Funds." Different
newspapers use different abbreviations of the Fund's name, but the most common
is ..
"Standard & Poor's(R)," "S&P(R)," "S&P 500(R)," "Standard & Poor's 500," and
"500" are trademarks of The McGraw-Hill Companies, Inc.
<PAGE>
11
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 Services Center, toll-free, at 1-800-523-1188.
- - If you have questions about your account, contact your plan administrator
or the organization that provides recordkeeping services for your plan.
INVESTMENT OPTIONS AND ALLOCATIONS
Your plan's specific provisions may allow you to change your investment
selections, the amount of your contributions, or how your contributions are
allocated among the investment choices available to you. Contact your plan
administrator or employee benefits office for more details.
TRANSACTIONS
Contributions, exchanges, or redemptions of the 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:
- - 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 Participant Services,
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>
12
ACCESSING FUND INFORMATION BY COMPUTER
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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.
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<PAGE>
GLOSSARY OF INVESTMENT TERMS
ACTIVE MANAGEMENT
An investment approach that seeks to exceed the average returns of the financial
markets. Active managers rely on research, market forecasts, and their own
judgment and experience in selecting securities to buy and sell.
CAPITAL GAINS DISTRIBUTION
Payment to mutual fund shareholders of gains realized on securities that a fund
has sold at a profit, minus any realized losses.
CASH RESERVES
Cash deposits, short-term bank deposits, and money market instruments which
include U.S. Treasury bills, bank certificates of deposit (CDs), repurchase
agreements, commercial paper, and banker's acceptances.
COMMON STOCK
A security representing ownership rights in a corporation. A stockholder is
entitled to share in the company's profits, some of which may be paid out as
dividends.
DIVIDEND INCOME
Payment to shareholders of income from interest or dividends generated by a
fund's investments.
EXPENSE RATIO
The percentage of a fund's average net assets used to pay its expenses. The
expense ratio includes management fees, administrative fees, and any 12b-1
distribution fees.
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 your own 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, with the ending net asset value adjusted to account for the reinvestment
of all distributions of dividends and capital gains.
VOLATILITY
The fluctuations in value of a mutual fund or other security. The greater a
fund's volatility, the wider the fluctuations between its high and low prices.
YIELD
Income (interest or dividends) earned by an investment, expressed as a
percentage of the investment's price.
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[SHIP]
[THE VANGUARD GROUP LOGO]
Institutional Division
Post Office Box 2900
Valley Forge, PA 19482-2900
FOR MORE INFORMATION
If you'd like more information about
Vanguard 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.
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 SERVICES 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 1-800-SEC-0330. 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 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.
.-04/28/2000
<PAGE>
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS
DATED FEBRUARY 23, 2000
VANGUARD(R)
CALVERT SOCIAL INDEX
FUND
INSTITUTIONAL SHARES
Prospectus
April 28, 2000
This is the Fund's initial
prospectus, so it contains
no performance data.
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE U.S.
SECURITIES AND EXCHANGE COMMISSION BUT HAS NOT YET BECOME EFFECTIVE. SHARES OF
VANGUARD CALVERT SOCIAL INDEX FUND MAY NOT BE SOLD, NOR MAY OFFERS TO BUY BE
ACCEPTED, PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS
COMMUNICATION SHALL NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY, NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN A STATE IN
WHICH SUCH OFFER, SOLICITATION, OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION
OR QUALIFICATION UNDER THE SECURITIES LAW OF THE STATE.
[A MEMBER OF
THE VANGUARD GROUP LOGO]
<PAGE>
VANGUARD CALVERT SOCIAL INDEX FUND
Prospectus
April 28, 2000
A Stock Index Mutual Fund
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CONTENTS
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. FUND PROFILE . SHARE PRICE
. ADDITIONAL INFORMATION . INVESTING WITH VANGUARD
. AN INTRODUCTION TO INDEX FUNDS . SERVICES AND ACCOUNT FEATURES
. A WORD ABOUT RISK . TYPES OF ACCOUNTS
. WHO SHOULD INVEST . BUYING SHARES
. PRIMARY INVESTMENT STRATEGIES . REDEEMING SHARES
. THE FUND AND VANGUARD . TRANSFERRING REGISTRATION
. INVESTMENT ADVISER . FUND AND ACCOUNT UPDATES
. DIVIDENDS, CAPITAL GAINS, AND TAXES GLOSSARY (inside back cover)
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WHY READING THIS PROSPECTUS IS IMPORTANT
This prospectus explains the objective, risks, and strategies of Vanguard
Calvert Social Index Fund Institutional Shares. To highlight terms and concepts
important to mutual fund investors, we have provided "Plain Talk/(R)/"
explanations along the way. Reading the prospectus will help you to decide
whether the Fund is the right investment for you. We suggest that you keep it
for future reference.
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IMPORTANT NOTE
Vanguard Calvert Social Index Fund offers two separate classes of shares:
Investor and Institutional. This prospectus offers the Fund's Institutional
Shares, which have an investment minimum of $10 million and are intended for
investors who generally do not require special employee benefit services. The
Fund's Investor Shares have an investment minimium of $3,000 ($1,000 for IRAs),
and are available through separate prospectuses (one for individual investors
and one for participants in employer-sponsored retirement or savings plans).
Note that the Fund's separate share classes have different expenses; as a
result, their investment performances will vary.
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NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE>
1
FUND PROFILE
The following profile summarizes key features of Vanguard Calvert Social Index
Fund Institutional Shares.
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 invests in the stocks
that comprise the Index.
PRIMARY RISKS
THE FUND'S TOTAL RETURN, LIKE STOCK PRICES GENERALLY, WILL FLUCTUATE WITHIN A
WIDE RANGE, SO AN INVESTOR COULD LOSE MONEY OVER SHORT OR EVEN LONG PERIODS.
Stock markets tend to move in cycles, with periods of rising prices and periods
of falling prices. The Fund is also subject to:
- - Investment style risk, which is the chance that returns from large- 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.
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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 Vanguard Calvert Social Index Fund's Institutional Shares
expense ratio for the current fiscal year to be .%, or $. per $1,000 of average
net assets. The average multi-cap mutual fund had expenses in 1999 of .%, or $.
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.
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FEES AND EXPENSES
The following table describes the fees and expenses you would 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 Fund has no operating history, and actual operating expenses could be
different.
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2
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: .%
12b-1 Distribution Fee: None
Other Expenses: .%
TOTAL ANNUAL FUND OPERATING EXPENSES: 0.15%
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 one-year and three-year 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 each period.
------------------------
1 YEAR 3 YEARS
------------------------
$. $.
------------------------
THIS EXAMPLE SHOULD NOT BE CONSIDERED TO REPRESENT ACTUAL EXPENSES OR
PERFORMANCE FROM THE PAST OR FOR THE FUTURE. ACTUAL FUTURE EXPENSES MAY BE
HIGHER OR LOWER THAN THOSE SHOWN.
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ADDITIONAL INFORMATION
DIVIDENDS AND CAPITAL GAINS NEWSPAPER ABBREVIATION
Distributed annually in December .
INVESTMENT ADVISERS VANGUARD FUND NUMBER
The Vanguard Group, Valley Forge, Pa., .
since inception
CUSIP NUMBER
INCEPTION DATE .
May 8, 2000
TICKER SYMBOL
SUITABLE FOR IRAS .
Yes
MINIMUM INITIAL INVESTMENT
$10 million
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AN INTRODUCTION TO INDEX FUNDS
WHAT IS INDEXING?
An index is an unmanaged group of securities whose overall performance is used
as a standard to measure the investment performance of a particular market. An
index (or "passively managed") fund tries to track, as closely as possible, the
performance of an established target index. The fund does this by holding all,
or a representative sample, of the securities that comprise the index.
3
Stock index funds may seek to track indexes that hold a certain type of
stock--such as growth or value, small-cap or large-cap, or those from just one
industry--or they may seek to track indexes that consist of a broader range of
stocks--for example the entire U.S. stock market.
Index funds do not have active managers, who buy and sell securities based
on research and analysis in an attempt to outperform a particular benchmark or
the market as a whole. Rather, index funds simply attempt to mirror what the
target index does, for better or worse.
WHY INVEST IN INDEX FUNDS?
Index funds appeal to many investors for a number of reasons:
- - Variety of investments. Vanguard index funds generally invest in a wide
variety of companies and industries.
- - Relative consistency. Because they seek to track market benchmarks, index
funds by definition will not perform dramatically better or worse than
their target indexes.
- - Low cost. Index funds do not have many of the expenses of an actively
managed fund, in addition, they keep trading activity--and thus brokerage
commissions--to a minimum.
- - Low realization of capital gains. Because an index fund typically sells
securities only to respond to redemption requests or to adjust its holdings
to reflect a change in its target index, the fund's turnover rate--and thus
its realization of taxable capital gains--is usually much lower than the
average mutual fund.
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PLAIN TALK ABOUT
THE COSTS OF INVESTING
Costs are an important consideration in choosing a mutual fund. That's because
you, as a shareholder, pay the costs of operating a fund, plus any transaction
costs associated with the fund's buying and selling of securities. These costs
can erode a substantial portion of the gross income or capital appreciation a
fund achieves. Even seemingly small differences in expenses can, over time, have
a dramatic effect on a fund's performance.
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KEEP IN MIND THAT AN INDEX FUND HAS OPERATING EXPENSES AND TRANSACTION
COSTS; A MARKET INDEX DOES NOT. THEREFORE, AN INDEX FUND--WHILE EXPECTED TO
TRACK ITS TARGET INDEX AS CLOSELY AS POSSIBLE--WILL TYPICALLY BE UNABLE TO MATCH
THE PERFORMANCE OF THE INDEX EXACTLY.
<PAGE>
4
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A WORD ABOUT RISK
This prospectus describes risks you would face as an investor in Vanguard
Calvert Social Index Fund. It is important to keep in mind one of the main
axioms of investing: The higher the risk of losing money, the higher the
potential reward. The reverse, also, is generally true: The lower the risk, the
lower the potential reward. As you consider an investment in the Fund, you
should also take into account your personal tolerance for the daily fluctuations
of the stock market.
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
shareholder of the Fund.
================================================================================
WHO SHOULD INVEST
The Fund may be a suitable investment for you if:
- - You wish to add a fund that invests in large- and mid-capitalization stocks
to your existing holdings, which could include other stock investments as
well as bond, money market, and tax-exempt investments.
- - You seek growth of capital over the long-term--at least five years.
- - You want a fund that considers social and environmental issues as part of
its investment program.
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:
- - Each Vanguard fund reserves the right to reject any purchase
request--including exchanges from other Vangaurd funds--that it regards as
disruptive to efficient portfolio management. The fund may reject a
purchase request 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's 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.
<PAGE>
5
PRIMARY INVESTMENT STRATEGIES
This section explains the strategies that the investment adviser uses in pursuit
of the Fund's investment objective. It also explains how the adviser implements
these strategies. In addition, this section discusses important risks faced by
investors in the Fund. The Board of Trustees oversees the management of the
Fund, and may change the investment strategies in the interest of shareholders.
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PLAIN TALK ABOUT
CALVERT SOCIAL INDEX
The Calvert Social Index is maintained by Calvert Group of Bethesda, Maryland, a
leading organization in the world of social investing. Calvert screens stocks
from approximately 1,000 of the largest companies in the United States by
analyzing each company's record and policies on: environmental issues; workplace
issues; product safety and impact; international operations and human rights;
and weapons contracting.
Calvert excludes from the index any companies that, in Calvert's opinion,
violate fair labor or equal opportunity standards as well as those companies
involved with tobacco, alcohol, gambling, or nuclear power. Companies that pass
Calvert's screenings process are represented in the index on a market
capitalization-weighted basis.
For further information about the Calvert Social Index, please visit Calvert's
web site, at www.calvert.com or contact Calvert at 1-800-368-2745.
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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.
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<PAGE>
6
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 Standard & Poor's 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.
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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
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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 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.
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PLAIN TALK ABOUT
LARGE-CAP, MID-CAP, AND SMALL-CAP STOCKS
Stocks of publicly traded companies--and mutual funds that hold these
stocks--can be classified by the companies' market value, or capitalization.
Market capitalization changes over time, and there is no "official" definition
of the boundaries of large-, mid-, and small-cap stocks. Vanguard generally
defines large-capitalization (large-cap) funds as those holding stocks of
companies whose outstanding shares have a market value exceeding $12 billion;
mid-cap funds as those holding stocks of companies with a market value between
$1 billion and $12 billion; and small-cap funds as those typically holding
stocks of companies with a market value of less than $1 billion. Vanguard
periodically reassesses these classifications.
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[FLAG] THE FUND IS ALSO SUBJECT TO INVESTMENT STYLE RISK, WHICH IS THE CHANCE
THAT RETURNS FROM LARGE- AND MID-CAPITALIZATION STOCKS WILL TRAIL RETURNS
FROM OTHER ASSET CLASSES OR THE OVERALL STOCK MARKET. EACH TYPE OF STOCK
TENDS TO GO THROUGH CYCLES OF DOING BETTER--OR WORSE--THAN COMMON STOCKS IN
GENERAL. THESE PERIODS HAVE, IN THE PAST, LASTED FOR AS LONG AS SEVERAL
YEARS.
<PAGE>
7
RISK OF NONDIVERSIFICATION
[FLAG] As an index fund, the Fund will hold the largest stocks in its target
index in approximately the same percentages as those stocks are represented in
the index. If the target index should become less diversified in the future, the
Fund similarly would become less diversified. In the unlikely event that the
target index becomes dominated by just a few companies, shareholders would be
subject to the risk that the Fund's performance could be hurt disproportionately
by a decline in the price of just a few stocks.
SECURITY SELECTION
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.
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, includes more than 7,000 stocks), funds tracking these
larger indexes sometimes 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 key risk factors include
industry weightings, country weightings, market capitalization, and other
financial characteristices of stocks.
Vanguard Calvert Social Index Fund uses the replication method of indexing
to invest in stocks.
TURNOVER RATE
Generally, a passively managed fund sells securities only to respond to
redemption requests or to adjust the number of shares held to reflect a change
in the fund's target index.
<PAGE>
8
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PLAIN TALK ABOUT
TURNOVER RATE
Before investing in a mutual fund, you should review its turnover rate. This
gives an indication of how transaction costs could affect the fund's future
returns. In general, the greater the volume of buying and selling by the fund,
the greater the impact that brokerage commissions and other transaction costs
will have on its return. Also, funds with high turnover rates may be more likely
to generate capital gains that must be distributed to shareholders as income
subject to taxes. The average turnover rate for all passively managed domestic
equity index funds investing in common stocks is roughly .%; for all domestic
stock funds, the average turnover rate is approximately ., according to
Morningstar, Inc.
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OTHER INVESTMENT POLICIES AND RISKS
The Fund reserves the right to substitute a different index for the Calvert
Social Index if the Calvert Social Index is discontinued or for any other reason
determined in good faith by the Fund's Board of Trustees. In such instance, the
substitute index will 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 match its target index as closely as possible, the Fund attempts to
remain fully invested in stocks. 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).
For this reason, 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 to purchase securities 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 generally is managed without regard to tax ramifications.
<PAGE>
9
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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). Futures and
options are derivatives that have been trading on regulated exchanges for more
than two decades. These "traditional" derivatives are standardized contracts
that can easily be bought and sold, and whose market values are determined and
published daily. It is these characteristics that differentiate futures and
options from the relatively new types of derivatives. If used for speculation or
as leveraged investments, derivatives can carry considerable risks.
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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 $. 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.
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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.
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INVESTMENT ADVISER
The Vanguard Group (Vanguard), P.O. Box 2600, Valley Forge, PA 19482, founded in
1974, serves as the Fund's adviser through its Core Management Group. As of
October 31, 1999, Vanguard served as adviser for about $346 billion in assets.
Vanguard manages the fund on an at-cost basis, subject to the control of the
Trustees and officers of the Fund.
The Fund has authorized the adviser to choose brokers or dealers to handle
the purchase and sale of securities for the Fund, and to get the best available
price and most favorable execution from these brokers with respect to 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>
10
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PLAIN TALK ABOUT
THE FUND'S ADVISER
The individual primarily responsible for overseeing the Fund's investments is:
GEORGE U. SAUTER, Managing Director of Vanguard, and head of Vanguard's Core
Management Group; has worked in investment management since 1985; primary
responsibility for Vanguard's stock indexing policy and strategy since joining
the company in 1987; has served as the Fund's portfolio manager since inception;
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. In addition,
the Fund may occasionally be required to make supplemental dividend or capital
gains distributions at some other time during the year. You can receive
distributions of income dividends or capital gains in cash, or you can have them
automatically reinvested in more shares of the Fund.
BASIC TAX POINTS
Vanguard will send you a statement each year showing the tax status of all your
distributions. In addition, taxable investors should be aware of the following
basic tax points:
- - Distributions are taxable to you 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 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.
- - State and local income taxes may apply to any dividend or capital gains
distributions that you receive, as well as to your gains or losses from any
sale or exchange of Fund shares.
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 and certify that it is correct.
Similarly, Vanguard must withhold from your account if the IRS instructs us to
do so.
FOREIGN INVESTORS. The Vanguard funds generally do not offer their shares for
sale outside of the United States. Foreign investors should be aware that U.S.
withholding and estate taxes may apply to any investments in Vanguard funds.
<PAGE>
11
INVALID ADDRESSES. If a dividend or capital gains distribution check mailed to
your address of record is returned as undeliverable, Vanguard will automatically
reinvest all future distributions until you provide us with a valid mailing
address.
TAX CONSEQUENCES. This prospectus provides general tax information only. If you
are investing through a tax-deferred retirement account, such as an IRA, special
tax rules apply. Please consult your tax adviser for detailed information about
a fund's tax consequences for you.
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
DISTRIBUTIONS
As a shareholder, you are entitled to your share of the fund's income from
interest and dividends, and gains from the sale of investments. You receive such
earnings as either an income dividend or a capital gains distribution. Income
dividends come from both the dividends that the fund earns from its holdings and
the interest it receives from its money market and bond investments. Capital
gains are realized whenever the fund sells securities for higher prices than it
paid for them. These capital gains are either short-term or long-term, depending
on whether the fund held the securities for one year or less, or more than one
year.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
"BUYING A DIVIDEND"
Unless you are investing through a tax-deferred retirement account (such as an
IRA), it is not to your advantage to buy shares of a fund shortly before it
makes a distribution, because doing so can cost you money in taxes. This is
known as "buying a dividend." For example: on December 15, you invest $5,000,
buying 250 shares for $20 each. If the fund pays a distribution of $1 per share
on December 16, its share price would drop to $19 (not counting market change).
You still have only $5,000 (250 shares x $19 = $4,750 in share value, plus 250
shares x $1 = $250 in distributions), but you owe tax on the $250 distribution
you received--even if you reinvest it in more shares. To avoid "buying a
dividend," check a fund's distribution schedule before you invest.
- --------------------------------------------------------------------------------
SHARE PRICE
The Fund's share price, called its net asset value, or NAV, is calculated each
business day after the close of 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 adding up the total value of the Fund's
investments and other assets, subtracting any of its liabilities (debts), and
then dividing the net assets attributable to each class by the number of Fund
shares outstanding for each class.
NET ASSET VALUE = TOTAL ASSETS - LIABILITIES
-------------------------------
NUMBER OF 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>
12
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." Different
newspapers use different abbreviations of the Fund's name, but the most common
is ..
"Standard & Poor's(R)," "S&P(R)," "S&P 500(R)," "Standard & Poor's 500," and
"500" are trademarks of The McGraw-Hill Companies, Inc.
<PAGE>
13
- --------------------------------------------------------------------------------
INVESTING WITH VANGUARD
Are you looking for the most convenient way to open or add money to a Vanguard
account? Obtain instant access to fund information?
Vanguard can help. Our goal is to make it easy and pleasant for you to do
business with us.
The following sections of the prospectus briefly explain the many services
we offer. Booklets providing detailed information are available on the services
marked with a [BOOKLET]. Please call us to request copies.
- --------------------------------------------------------------------------------
SERVICES AND ACCOUNT FEATURES
Vanguard offers many services that make it convenient to buy, sell or exchange
shares, or to obtain fund or account information.
- --------------------------------------------------------------------------------
TELEPHONE REDEMPTIONS (SALES AND EXCHANGES)
Automatically set up for this Fund unless you notify us otherwise.
- --------------------------------------------------------------------------------
VANGUARD(R) AUTOMATIC EXCHANGE SERVICE [BOOKLET]
Automatic method for moving a fixed amount of money from one Vanguard fund
account to another.
- --------------------------------------------------------------------------------
VANGUARD TELE-ACCOUNT(R) 1-800-662-6273 (ON-BOARD)[BOOKLET]
Toll-free 24-hour access to Vanguard fund and account information--as well as
some transactions--by using any touch-tone phone. Tele-Account provides total
return, share price, price change, and yield quotations for all Vanguard funds;
gives your account balances and history (e.g., last transaction, latest dividend
distribution); and allows you to sell or exchange shares to and from most
Vanguard funds.
- --------------------------------------------------------------------------------
ACCESS VANGUARD(TM) www.vanguard.com [COMPUTER]
You can use your personal computer to perform certain transactions for most
Vanguard funds by accessing our website. To establish this service, you must
register through our website. We will then mail you an account access password
that allows you to process the following financial and administrative
transactions online:
- - Open a new account.*
- - Buy, sell, or exchange shares of most funds.
- - Change your name/address.
- - Add/change fund options (including dividend options, bank instructions,
checkwriting, and Vanguard Automatic Exchange Service). (Some restrictions
may apply.) Please call our Client Services Department for assistance.
*Only current Vanguard shareholders can open a new account online, by exchanging
shares from other existing Vanguard accounts.
- --------------------------------------------------------------------------------
SERVICES FOR CLIENTS OF VANGUARD'S INSTITUTIONAL DIVISION: 1-888-809-8102
Vanguard's Institutional Division offers a variety of specialized services for
large institutional investors, including the ability to effect account
transactions through private electronic networks and third-party recordkeepers.
- --------------------------------------------------------------------------------
<PAGE>
14
TYPES OF ACCOUNTS
Individuals and institutions can establish a variety of accounts with Vanguard.
- --------------------------------------------------------------------------------
FOR ONE OR MORE PEOPLE
Open an account in the name of one (individual) or more (joint tenants) people.
- --------------------------------------------------------------------------------
FOR HOLDING PERSONAL TRUST ASSETS [BOOKLET]
Invest assets held in an existing personal trust.
- --------------------------------------------------------------------------------
FOR AN ORGANIZATION [BOOKLET]
Open an account as a corporation, partnership, endowment, foundation, or other
entity.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
A NOTE ON INVESTING WITH VANGUARD THROUGH OTHER FIRMS
You may purchase or sell Fund shares through a financial intermediary such as a
bank, broker, or investment adviser. If you invest with Vanguard through an
intermediary, please read that firm's program materials carefully to learn of
any special rules that may apply. For example, special terms may apply to
additional service features, fees, or other policies. Consult your intermediary
to determine when your order will be priced.
- --------------------------------------------------------------------------------
BUYING SHARES
You buy your shares at the Fund's next-determined net asset value after Vanguard
receives your request. As long as your request is received before the close of
trading on the New York Stock Exchange, generally 4 p.m. Eastern time, you will
buy your shares at that day's net asset value. You may convert Investor Shares
of the Fund into Institutional Shares provided that you meet the minimum initial
investment requirements for Institutional Shares.
- --------------------------------------------------------------------------------
MINIMUM INVESTMENT TO . . .
open a new account
$10 million
add to an existing account
$100 by mail or exchange; $1,000 by wire.
- --------------------------------------------------------------------------------
BY WIRE TO OPEN A NEW ACCOUNT OR ADD TO AN EXISTING ACCOUNT [WIRE]
Call your assigned Service Assoicate to arrange your wire transaction.
Wire to:
FRB ABA 021001088
HSBC Bank USA
For credit to:
Account: 000112046
Vanguard Incoming Wire Account
In favor of:
Vanguard Calvert Social Index Fund-.
[Account number, or temporary number for a new account]
[Registered account owner(s)]
[Registered address]
<PAGE>
15
- --------------------------------------------------------------------------------
BY MAIL TO . . .[ENVELOPE]
open a new account
Complete and sign the account registration form and enclose your check.
add to an existing account
Mail your check with an Invest-By-Mail form detached from your confirmation
statement to the address listed on the form. Please do not alter Invest-By-Mail
forms, since they are fund- and account-specific.
Make your check payable to: The Vanguard Group-.
All purchases must be made in U.S. dollars, and checks must be drawn on U.S.
banks.
First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 2900 100 Vanguard Boulevard
Valley Forge, PA 19482-2900 Malvern, PA 19355
- --------------------------------------------------------------------------------
IMPORTANT NOTE: To prevent check fraud, Vanguard will not accept checks made
payable to third parties.
- --------------------------------------------------------------------------------
BY TELEPHONE TO . . .[TELEPHONE]
open a new account
Call Vanguard Tele-Account* 24 hours a day--or your assigned Service Associate
during business hours--to exchange from another Vanguard fund account with the
same registration (name, address, taxpayer identification number, and account
type). (Note that some restrictions apply to index fund accounts.)
add to an existing account
Call Vanguard Tele-Account* 24 hours a day--or your assigned Service Associate
during business hours--to exchange from another Vanguard fund account with the
same registration (name, address, taxpayer identification number, and account
type). (Note that some restrictions apply to index fund accounts.)
Vanguard Tele-Account
1-800-662-6273
*You must obtain a Personal Identification Number (PIN) through Tele-Account at
least seven days before you request your first exchange.
- --------------------------------------------------------------------------------
IMPORTANT NOTE: Once you have initiated a telephone transaction and a
confirmation number has been assigned, the transaction cannot be revoked. We
reserve the right to refuse any purchase request.
- --------------------------------------------------------------------------------
You can redeem (that is, sell or exchange) shares purchased by check at any
time. However, while your redemption request will be processed at the
next-determined net asset value after it is received, your redemption proceeds
will not be available until payment for your purchase is collected, which may
take up to ten calendar days.
- --------------------------------------------------------------------------------
A NOTE ON LARGE PURCHASES
It is important that you call Vanguard before you invest a large dollar amount.
It is our responsibility to consider the interests of all Fund shareholders, and
so we reserve the right to refuse any purchase that may disrupt the Fund's
operation or performance.
- --------------------------------------------------------------------------------
<PAGE>
16
REDEEMING SHARES
This section describes how you can redeem--that is, sell or exchange--the Fund's
shares.
When Selling Shares:
- - Vanguard sends the redemption proceeds to you or a designated third party.*
- - You can sell all or part of your Fund shares at any time.
*May require a signature guarantee; see footnote on page 18.
When Exchanging Shares:
- - The redemption proceeds are used to purchase shares of a different Vanguard
fund.
- - You must meet the receiving fund's minimum investment requirements.
- - Vanguard reserves the right to revise or terminate the exchange privilege,
limit the amount of an exchange, or reject an exchange at any time, without
notice.
- - In order to exchange into an acount with a different registration
(including a different name, address, or taxpayer identification number),
you must include the guaranteed signatures of all current account owners on
your written instructions.
In both cases, your transaction will be based on the Fund's next-determined
share price, subject to any special rules discussed in this prospectus.
- --------------------------------------------------------------------------------
NOTE: Once a redemption is initiated and a confirmation number given, the
transaction CANNOT be canceled.
- --------------------------------------------------------------------------------
HOW TO REQUEST A REDEMPTION
You can request a redemption from your Fund account in any one of two ways: by
telephone, or by mail.
The Vanguard funds whose shares you cannot exchange online or by telephone
are VANGUARD U.S. STOCK INDEX FUNDS, VANGUARD BALANCED INDEX FUND, VANGUARD
INTERNATIONAL STOCK INDEX FUNDS, VANGUARD REIT INDEX FUND, and VANGUARD GROWTH
AND INCOME FUND. These funds do, however, permit telephone exchanges within IRAs
and some other retirement accounts.
- --------------------------------------------------------------------------------
TELEPHONE REQUESTS [TELEPHONE]
Call Vanguard Tele-Account 24 hours a day--or your assigned Service Associate
during business hours--to sell or exchange shares. You can exchange shares from
this Fund to open an account in another Vanguard fund or to add to an existing
Vanguard fund account with an identical registration.
- --------------------------------------------------------------------------------
SPECIAL INFORMATION: We will automatically establish the telephone redemption
option for your account, unless you instruct us otherwise in writing. While
telephone redemption is easy and convenient, this account feature involves a
risk of loss from unauthorized or fraudulent transactions. Vanguard will take
reasonable precautions to protect your account from fraud. You should do the
same by keeping your account information private and immediately reviewing any
account statements that we send to you. Make sure to contact Vanguard
immediately about any transaction you believe to be unauthorized.
- --------------------------------------------------------------------------------
We reserve the right to refuse a telephone redemption if the caller is unable to
provide:
- - The ten-digit account number.
- - The name and address exactly as registered on the account.
<PAGE>
17
- - The primary Social Security or employer identification number as registered
on the account.
- - The Personal Identification Number (PIN), if applicable (for instance,
Tele-Account).
Please note that Vanguard will not be responsible for any account losses
due to telephone fraud, so long as we have taken reasonable steps to verify the
caller's identity. If you wish to remove the telephone redemption feature from
your account, please notify us in writing.
- --------------------------------------------------------------------------------
A NOTE ON UNUSUAL CIRCUMSTANCES
Vanguard reserves the right to revise or terminate the telephone redemption
privilege at any time, without notice. In addition, Vanguard can stop selling
shares or postpone payment at times when the New York Stock Exchange is closed
or under any emergency circumstances as determined by the U.S. Securities and
Exchange Commission. If you experience difficulty making a telephone redemption
during periods of drastic economic or market change, you can send us your
request by regular or express mail. Follow the instructions on selling or
exchanging shares by mail in this section.
- --------------------------------------------------------------------------------
MAIL REQUESTS [ENVELOPE]
Send a letter of instruction signed by all registered account holders. Include
the fund name and account number and (if you are selling) a dollar amount or
number of shares OR (if you are exchanging) the name of the fund you want to
exchange into and a dollar amount or number of shares. To exchange into an
account with a different registration (including a different name, address,
taxpayer identification number, or account type), you must provide Vanguard with
written instructions that include the guaranteed signatures of all current
owners of the fund from which you wish to redeem.
First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 2900 100 Vanguard Boulevard
Valley Forge, PA 19482-2900 Malvern, PA19355
- --------------------------------------------------------------------------------
A NOTE ON LARGE REDEMPTIONS
It is important that you call Vanguard before you redeem a large dollar amount.
It is our responsibility to consider the interests of all fund shareholders, and
so we reserve the right to delay delivery of your redemption proceeds--up to
seven days--if the amount may disrupt the Fund's operation or performance.
If you redeem more than $250,000 worth of Fund shares within any 90-day
period, the Fund reserves the right to pay part or all of the redemption
proceeds above $250,000 in-kind, i.e., in securities, rather than in cash. If
payment is made in-kind, you may incur brokerage commissions if you elect to
sell the securities for cash.
- --------------------------------------------------------------------------------
OPTIONS FOR REDEMPTION PROCEEDS
You may receive your redemption proceeds in one of two ways: check, or exchange
to another Vanguard fund.
- --------------------------------------------------------------------------------
CHECK REDEMPTIONS
Normally, Vanguard will mail your check within two business days of a
redemption.
- --------------------------------------------------------------------------------
<PAGE>
18
- --------------------------------------------------------------------------------
EXCHANGE REDEMPTIONS
As described above, an exchange involves using the proceeds of your redemption
to purchase shares of another Vanguard fund.
- --------------------------------------------------------------------------------
FOR OUR MUTUAL PROTECTION
For your best interests and ours, Vanguard applies these additional requirements
to redemptions:
REQUEST IN "GOOD ORDER"
All redemption requests must be received by Vanguard in "good order." This means
that your request must include:
- - The Fund name and account number.
- - The amount of the transaction (in dollars or shares).
- - Signatures of all owners exactly as registered on the account (for mail
requests).
- - Signature guarantees (if required).*
- - Any supporting legal documentation that may be required.
- - Any outstanding certificates representing shares to be redeemed.
*For instance, a signature guarantee must be provided by all registered account
shareholders when redemption proceeds are to be sent to a different person or
address. A signature guarantee may be obtained from most commercial and savings
banks, credit unions, trust companies, or member firms of a U.S. stock exchange.
TRANSACTIONS ARE PROCESSED AT THE NEXT-DETERMINED SHARE PRICE AFTER VANGUARD HAS
RECEIVED ALL REQUIRED INFORMATION.
- --------------------------------------------------------------------------------
LIMITS ON ACCOUNT ACTIVITY
Because excessive account transactions can disrupt the management of the Fund
and increase the Fund's costs for all shareholders, Vanguard limits account
activity as follows:
- - You may make no more than TWO SUBSTANTIVE "ROUND TRIPS" THROUGH THE FUND
during any 12-month period.
- - Your round trips through the Fund must be at least 30 days apart.
- - The Fund may refuse a share purchase at any time, for any reason.
- - Vanguard may revoke an investor's telephone exchange privilege at any time,
for any reason.
A "round trip" is a redemption from the Fund followed by a purchase back into
the Fund. Also a "round trip" covers transactions accomplished by any
combination of methods, including transactions conducted by check, wire, or
exchange to/from another Vanguard fund. "Substantive" means a dollar amount that
Vanguard determines, in its sole discretion, could adversely affect the
management of the Fund.
- --------------------------------------------------------------------------------
ALL TRADES ARE FINAL
Vanguard will not cancel any transaction request (including any purchase or
redemption) that we believe to be authentic once the request has been initiated
and a confirmation number assigned.
- --------------------------------------------------------------------------------
UNCASHED CHECKS
Please cash your distribution or redemption checks promptly. Vanguard will not
pay interest on uncashed checks.
- --------------------------------------------------------------------------------
<PAGE>
19
TRANSFERRING REGISTRATION
You can transfer the registration of your Fund shares to another owner by
completing a transfer form and sending it to Vanguard.
First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 2900 100 Vanguard Boulevard
Valley Forge, PA 19482-2900 Malvern, PA19355
- --------------------------------------------------------------------------------
FUND AND ACCOUNT UPDATES
STATEMENTS AND REPORTS
We will send you account and tax statements to help you keep track of your Fund
account throughout the year as well as when you are preparing your income tax
returns.
In addition, you will receive financial reports about the Fund twice a
year. These comprehensive reports include an assessment of the Fund's
performance (and a comparison to its industry benchmark), an overview of the
financial markets, a report from the advisers, 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 two or more Fund
shareholders have the same last name and address, we send just one Fund report
to that address--instead of mailing separate reports to each shareholder. If you
want us to send separate reports, you may notify our Institutional Division at
1-800-809-8102.
- --------------------------------------------------------------------------------
CONFIRMATION STATEMENT
Sent each time you buy, sell, or exchange shares; confirms the trade date and
the amount of your transaction.
- --------------------------------------------------------------------------------
PORTFOLIO SUMMARY [BOOKLET]
Mailed quarterly for most accounts; shows the market value of your account at
the close of the statement period, as well as distributions, purchases, sales,
and exchanges for the current calendar year.
- --------------------------------------------------------------------------------
FUND FINANCIAL REPORTS
Mailed in October and April for this Fund.
- --------------------------------------------------------------------------------
TAX STATEMENTS
Generally mailed in January; report previous year's dividend and capital gains
distributions, and proceeds from the sale of shares.
- --------------------------------------------------------------------------------
MANDATORY CONVERSION TO INVESTOR SHARES
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 $10
million. Any such conversion will be preceded by written notice to the investor.
No transaction fee will be imposed on share-class conversions.
<PAGE>
GLOSSARY OF INVESTMENT TERMS
ACTIVE MANAGEMENT
An investment approach that seeks to exceed the average returns of the financial
markets. Active managers rely on research, market forecasts, and their own
judgment and experience in selecting securities to buy and sell.
CAPITAL GAINS DISTRIBUTION
Payment to mutual fund shareholders of gains realized on securities that a fund
has sold at a profit, minus any realized losses.
CASH RESERVES
Cash deposits, short-term bank deposits, and money market instruments which
include U.S. Treasury bills, bank certificates of deposit (CDs), repurchase
agreements, commercial paper, and banker's acceptances.
COMMON STOCK
A security representing ownership rights in a corporation. A stockholder is
entitled to share in the company's profits, some of which may be paid out as
dividends.
DIVIDEND INCOME
Payment to shareholders of income from interest or dividends generated by a
fund's investments.
EXPENSE RATIO
The percentage of a fund's average net assets used to pay its expenses. The
expense ratio includes management fees, administrative fees, and any 12b-1
distribution fees.
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 your own 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, with the ending net asset value adjusted to account for the reinvestment
of all distributions of dividends and capital gains.
VOLATILITY
The fluctuations in value of a mutual fund or other security. The greater a
fund's volatility, the wider the fluctuations between its high and low prices.
YIELD
Income (interest or dividends) earned by an investment, expressed as a
percentage of the investment's price.
<PAGE>
[SHIP]
[THE VANGUARD GROUP LOGO]
Institutional Division
Post Office Box 2900
Valley Forge, PA 19482-2900
FOR MORE INFORMATION
If you'd like more information about
Vanguard Calvert Social Index Fund,
the following documents are
available free upon request:
ANNUAL/SEMIANNUAL REPORT TO SHAREHOLDERS
Additional information about the
Fund's investments is available in
the Fund'sannual 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.
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, pleasecontact us
as follows:
If you are an Individual Investor:
THE VANGUARD GROUP
INVESTOR INFORMATION
DEPARTMENT
P.O. BOX 2900
VALLEY FORGE, PA
19482-2900
TELEPHONE: 1-800-662-7447 (SHIP)
TEXT TELEPHONE: 1-800-952-3335
If you are a client of Vanguard's
Institutional Division:
THE VANGUARD GROUP
INSTITUTIONAL
INVESTOR INFORMATION
P.O. BOX 2900
VALLEY FORGE, PA 19482-2900
TELEPHONE:
1-888-809-8102
WORLD WIDE WEB:
WWW.VANGUARD.COM
If you are a current Fund shareholder
and would like information about
your account, account transactions,
and/or account statements, please call:
CLIENT SERVICES DEPARTMENT
TELEPHONE:
1-800-662-2739 (CREW)
TEXT TELEPHONE:
1-800-749-7273
INFORMATION PROVIDED BY THE
SECURITIES AND EXCHANGE
COMMISSION (SEC)
You can review and copy
information about the 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 1-800-SEC-0330. 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 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.
.-04/28/2000
<PAGE>
The Vanguard U.S. Growth and Vanguard International Growth Prospectuses from PEA
# 76 are incorporated by reference.
<PAGE>
PART B
VANGUARD(R) WORLD FUNDS
(THE TRUST)
STATEMENT OF ADDITIONAL INFORMATION
DECEMBER 17, 1999;
REVISED APRIL 28, 2000
This Statement is not a prospectus but should be read in conjunction with the
Trust's current Prospectuses (dated December 17, 1999, and April 28, 2000). To
obtain the Prospectuses or an additional 1999 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
YIELD AND TOTAL RETURN...........................................B-9
SHARE PRICE......................................................B-10
PURCHASE OF SHARES...............................................B-11
REDEMPTION OF SHARES.............................................B-12
FUNDAMENTAL INVESTMENT LIMITATIONS...............................B-12
MANAGEMENT OF THE FUNDS..........................................B-14
INVESTMENT ADVISORY SERVICES.....................................B-17
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. Vanguard Calvert Social Index Fund offers two classes of shares, Investor
Shares and Institutional Shares. Institutional Shares of the Fund are avaialbe
only to those investing at least $10 million in the Fund. The Trust currently
offers the following funds:
Vanguard U.S. Growth Fund
Vanguard International Growth Fund
Vanguard Calvert 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.
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Vanguard Calvert Social Index Fund is registered with the Commission as an
open-end nondiversified management investment company.
SERVICE PROVIDERS
CUSTODIAN. State Street Bank and Trust Company, 225 Franklin Street,
Boston, Massachusetts 02110 (for Vanguard U.S. Growth Fund), The Chase Manhattan
Bank, N.A., 4 Chase MetroTech Center, Brooklyn, New York 11245 (for Vanguard
International Growth Fund), and . (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.
INDEPENDENT ACCOUNTANTS. PricewaterhouseCoopers LLP, 30 South 17th Street,
Philadelphia, Pennsylvania 19103, serves as the Funds' independent accountants.
The accountants audit each Fund's financial statements and provide other related
services.
TRANSFER AND DIVIDEND-PAYING AGENT. The Funds' transfer agent and
dividend-paying agent is The Vanguard Group, Inc., 100 Vanguard Boulevard,
Malvern, Pennsylvania 19355.
CHARACTERISTICS OF THE FUNDS SHARES
RESTRICTIONS ON HOLDING OR DISPOSING OF SHARES. There are no restrictions
on the right of shareholders to retain or dispose of 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. 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 applicable Fund's net assets.
PREEMPTIVE RIGHTS. There are no preemptive rights associated with shares of
each Fund.
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CONVERSION RIGHTS. Shareholders of a Fund may convert their shares into
another class of shares of the same Fund upon the satisfaction of any then
applicable eligibility requirements.
REDEMPTION PROVISIONS. Each Fund's redemption provisions are described in
its 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.
TAX STATUS OF THE FUNDS
Each Fund intends 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 initial 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
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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 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
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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.
FEDERAL TAX TREATMENT OF FUTURES CONTRACTS. Except for transactions each
Fund has identified as hedging transactions, 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 held as of the end of the year
as well as those actually realized during the year. In most cases, any gain or
loss recognized with respect to a futures contract is considered to be 60%
long-term capital gain or loss and 40% short-term capital gain or loss, without
regard to the holding period of the contract. (Different rules may apply to
foreign futures contracts.) Furthermore, 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, and gains from the sale of
securities or foreign currencies, or other income derived with respect to its
business of investing in such stock, securities, or currencies. It is
anticipated that any net gain realized from the closing out of futures contracts
will be considered qualifying income for purposes of the 90% requirement.
Each Fund will distribute to shareholders annually any net capital gains
which have been recognized for federal income tax purposes (including unrealized
gains at the end of the Fund's fiscal year) on futures transactions. Such
distributions will be combined with distributions of capital gains realized on
the Fund's other investments and shareholders will be advised on the nature of
the payments.
FOREIGN INVESTMENTS. Vanguard International Growth Fund seeks to diversify
its assets among various foreign stock markets and, with respect to 65% of its
gross 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.
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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.
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 U.S. taxpayer is also treated as a
transaction subject to the special currency rules. However, foreign
currency-related regulated futures contracts and nonequity options are generally
not subject to the special currency rules if they are or would be treated as
sold for their fair market value at year-end under the marking-to-market rules
applicable to other futures contracts unless an election is made to have such
currency rules apply. With respect to transactions covered by the special rules,
foreign currency gain or loss is calculated separately from any gain or loss on
the underlying transaction and is normally taxable as ordinary gain or loss. A
taxpayer may elect to treat as capital gain or loss foreign currency gain or
loss arising from certain identified forward contracts, futures contracts and
options that are capital assets in the hands of the taxpayer and which are not
part of a straddle. The Treasury Department issued regulations under which
certain transactions subject to the special currency rules that are part of a
"section 988 hedging transaction" (as defined in the Internal Revenue Code of
1986, as amended, and the Treasury regulations) will be integrated and treated
as a single transaction or otherwise treated consistently for purposes of the
Code. Any gain or loss attributable to the foreign currency component of a
transaction engaged in by a Fund which is not subject to the special currency
rules (such as foreign equity investments other than certain preferred stocks)
will be treated as capital gain or loss and will not be segregated from the gain
or loss on the underlying transaction. It is anticipated that some of the
non-U.S. dollar-denominated investments and foreign currency contracts a Fund
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.
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COUNTRY RISK. As foreign companies are not generally subject to uniform
accounting, auditing and financial reporting standards and practices comparable
to those applicable to domestic companies, there may be less publicly available
information about certain foreign companies than about domestic companies.
Securities of some foreign companies are generally less liquid and more volatile
than securities of comparable domestic companies. There is generally less
government supervision and regulation of stock exchanges, brokers and listed
companies than in the U.S. In addition, with respect to certain foreign
countries, there is the possibility of expropriation 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, fixed commissions on many foreign stock
exchanges are generally higher than negotiated commissions on U.S. exchanges. In
addition, it is expected that the expenses for custodian arrangements of the
Funds' foreign securities will be somewhat greater than the expenses for the
custodian arrangements for handling U.S. securities of equal value.
Certain foreign governments levy withholding taxes against dividend and
interest income. Although in some countries a portion of these taxes is
recoverable, the non-recovered portion of foreign withholding taxes will reduce
the income received from foreign companies held by the Funds. However, these
foreign withholding taxes are not expected to have a significant impact on the
Funds, since each Fund seeks long-term capital appreciation and any income
should be considered incidental.
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
the Commission's rules, may be sold only to qualified institutional buyers.
Because these securities can be resold only to qualified institutional buyers,
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 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
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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 Trust's 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 Code or other laws, a court may determine
that the underlying security is collateral for a loan by the Fund not within the
control of the Fund and therefore the 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 Fund's
management acknowledges these risks, it is expected that they can 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 and Regulations
or interpretations of the Commission thereunder. These provisions limit the
amount of securities a Fund may lend to 33 1/3% of the Fund's total assets, and
require that (a) the borrower pledge and maintain with the Fund collateral
consisting of cash, 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 Trust's Board of Trustees.
At the present time, the Staff of the Commission does not object if an
investment company pays reasonable negotiated fees in connection with loaned
securities, so long as such fees are set forth in a written contract and
approved by the investment company's Trustees. In addition, voting rights pass
with the loaned securities, but if a material event will occur affecting an
investment on loan, the loan must be called and the securities voted.
VANGUARD INTERFUND LENDING PROGRAM. The Commission has issued an exemptive
order permitting the Funds to participate in Vanguard's interfund lending
program. This program allows the Vanguard funds to borrow money from and loan
money to each other for temporary or emergency purposes. The program is subject
to a number of conditions, including the requirement that no fund may borrow or
lend money through the program unless it receives a more favorable interest rate
than is available from a typical bank for a comparable transaction. In addition,
a fund may participate in the program only if and to the extent that such
participation is consistent with the
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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 defensive 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.
YIELD AND TOTAL RETURN
The yield of Vanguard U.S. Growth Fund for the 30-day period ended August 31,
1999, was 0.32%.
The average annual total return of each Fund for certain periods ended
August 31, 1999, is set forth below:
1 YEAR 5 YEARS 10 YEARS
ENDED ENDED ENDED
8/31/1999 8/31/1999 8/31/1999
---------- ----------- -----------
Vanguard U.S. Growth Fund +37.38% +26.12% +18.21%
Vanguard International Growth Fund +21.70% +9.85% +8.98%
Vanguard Calvert Social Index Fund N/A N/A N/A
AVERAGE ANNUAL TOTAL RETURN
Average annual total return is the average annual compounded rate of return for
the periods of one year, five years, ten years or the life of the Fund, all
ended on the last day of a recent month. Average annual total return quotations
will reflect changes in the price of the Fund's shares and assume that all
dividends and capital gains distributions during the respective periods were
reinvested in Fund shares. Average annual total return is calculated by finding
the average annual compounded rates of return of a hypothetical investment over
such periods according to the following formula (average annual total return is
then expressed as a percentage):
T = (ERV/P)1/N-1
Where:
T =average annual total return
P =a hypothetical initial investment of $1,000
n =number of years
ERV =ending redeemable value: ERV is the value, at the end
of the applicable period, of a hypothetical $1,000
investment made at the beginning of the applicable
period.
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AVERAGE ANNUAL AFTER-TAX TOTAL RETURN QUOTATION
We calculate the Fund's average annual after-tax total return by finding the
average annual compounded rate of return over the 1-, 5-, and 10-year periods
(or for periods of the Fund's operations) that would equate the initial amount
invested to the after-tax value, according to the following formulas:
After-tax return:
P (1+T)N=ATV
Where:
P =a hypothetical initial payment of $1,000
T =average annual after-tax total return
n =number of years
ATV =after-tax value at the end of the 1-,5-, or 10-year
periods of a hypothetical $1,000 payment made at the
beginning of the time period, assuming no liquidation
of the investment at the end of the measurement
periods.
Instructions:
1. Assume all distributions by the Fund are reinvested--less the taxes due on
such distributions--at the price on the reinvestment dates during the
period. Adjustments may be made for subsequent re-characterizations of
distributions.
2. Calculate the taxes due on distributions by the Fund by applying the
highest federal marginal tax rates to each component of the distributions
on the reinvestment date (e.g., ordinary income, short-term capital gain,
long-term capital gain, etc.). For periods after December 31, 1997, the
federal marginal tax rates used for the calculations are 39.6% for ordinary
income and short-term capital gains and 20% for long-term capital gains.
Note that the applicable tax rates may vary over the measurement period.
Assume no taxes are due on the portions of any distributions classified as
exempt interest or non-taxable (i.e. return of capital). Ignore any
potential tax liabilities other than federal tax liabilities (e.g., state
and local taxes).
3. Include all recurring fees that are charged to all shareholder accounts.
For any account fees that vary with the size of the account, assume an
account size equal to the Fund's mean (or median) account size. Assume that
no additional taxes or tax credits result from any redemption of shares
required to pay such fees.
4. State the total return quotation to the nearest hundreth of one percent.
CUMULATIVE TOTAL RETURN
Cumulative total return is the cumulative rate of return on a hypothetical
initial investment of $1,000 for a specified period. Cumulative total return
quotations reflect changes in the price of the Fund's shares and assume that all
dividends and capital gains distributions during the period were reinvested in
Fund shares. Cumulative total return is calculated by finding the cumulative
rates of a return of a hypothetical investment over such periods, according to
the following formula (cumulative total return is then expressed as a
percentage):
C = (ERV/P)-1
Where:
C =cumulative total return
P =a hypothetical initial investment of $1,000
ERV =ending redeemable value: ERV is the value, at the end
of the applicable period, of a hypothetical $1,000
investment made at the beginning of the applicable
period.
B-10
<PAGE>
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 close of the New York Stock Exchange (the Exchange)
generally 4:00 p.m. Eastern time on each day the Exchange is open for trading.
Portfolio securities for which market quotations are readily available
(includes those securities listed on national securities exchanges, as well as
those quoted on the NASDAQ Stock Market) will be valued at the last quoted sales
price on the day the valuation is made. Such securities which are not traded on
the valuation date are valued at the mean of the bid and ask prices. Price
information on exchange-listed securities is taken from the exchange where the
security is primarily traded. Securities may be valued on the basis of prices
provided by a pricing service when such prices are believed to reflect the fair
market value of such securities.
Short-term instruments (those acquired with remaining maturities of 60 days
or less) may be valued at cost, plus or minus any amortized discount or premium,
which approximates market value.
Bonds and other fixed income securities may be valued on the basis of
prices provided by a pricing service when such prices are believed to reflect
the fair market value of such securities. The prices provided by a pricing
service may be determined without regard to bid or last sale prices of each
security, but take into account institutional-size transactions in similar
groups of securities as well as any developments related to specific securities.
Foreign securities are valued at the last quoted sales price, or the most
recently determined closing price calculated according to local market
convention, available at the time a Fund is valued. Prices are obtained from the
broadest and most representative market on which the securities trade. If events
which materially affect the value of 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.
EXCHANGE OF SECURITIES FOR SHARES OF VANGUARD CALVERT SOCIAL INDEX FUND. In
certain circumstances, shares of Vanguard Calvert Social Index Fund may be
purchased "in kind," i.e., in exchange for securities, rather than for cash. The
securities tendered as part of an in-kind purchase must be included in the Index
tracked by the Fund and must have a total market value of $1 million or more. In
addition, each position must have a market value of $10,000 or more. Such
securities also must be liquid securities which are not restricted as to
transfer and have a value that is readily ascertainable as evidenced by a
listing on the American Stock Exchange, the New York Stock Exchange or NASDAQ.
Securities accepted by the Fund will be valued as set forth under "Share Price"
in the Fund's prospectus as of the time of the next determination of net asset
value after such acceptance. Shares of the Fund are issued at net asset value
determined as of the same time. All dividend, subscription, or other rights that
are reflected in the market price of accepted securities at the time of
valuation become the property of the Fund and must be delivered to the Fund by
the investor upon receipt from the issuer. A gain or loss for Federal income tax
purposes would be realized by the investor upon the exchange depending upon the
cost of the securities tendered.
Vanguard Calvert Social Index Fund will not accept securities in exchange
for its shares unless: (1) such securities are, at the time of the exchange,
eligible to be held by the Fund; (2) the transaction will not cause the Fund's
weightings to become imbalanced with respect to the weightings of the stocks
included in the corresponding Index; (3) the investor represents and agrees that
all securities offered to the Fund are not subject to any restrictions upon
their sale by the Fund under the Securities Act of 1933, or otherwise; (4) such
securities are traded in an unrelated transaction with a quoted sales price on
the same day the exchange valuation is made; (5) the quoted sales price used as
a basis of valuation is representative (e.g., one that does not involve a trade
of substantial size that artificially influences the price of the security); and
(6) the value of any such security being exchanged will not exceed 5% of the
Fund's net assets immediately prior to the transaction.
Investors interested in purchasing Fund shares with securities should
contact Vanguard.
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
B-12
<PAGE>
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 rules of 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.
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.
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.
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 shares representing more than 50% of the
Fund's net asset value are present or represented by proxy; or (ii) more than
50% of the Fund's net asset value.
B-13
<PAGE>
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.
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
B-14
<PAGE>
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.
MANAGEMENT OF THE FUNDS
OFFICERS AND TRUSTEES
The officers of the Funds manage its 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 103 funds
administered by Vanguard (102 in the case of Mr. Malkiel and 93 in the case of
Mr. MacLaury). The mailing address of the Trustees and officers of the Trust is
Post Office Box 876, Valley Forge, PA 19482.
JOHN J. BRENNAN, (DOB: 7/29/1954) Chairman, Chief Executive Officer &
Trustee*
Chairman, Chief Executive Officer and Director of The Vanguard Group, Inc., and
Trustee of each of the investment companies in The Vanguard Group.
JOANN HEFFERNAN HEISEN, (DOB: 1/25/1950) Trustee
Vice President, Chief Information Officer, and member of the Executive Committee
of Johnson & Johnson (Pharmaceuticals/Consumer Products), Director of Johnson &
Johnson*MERCK Consumer Pharmaceuticals Co., The Medical Center at Princeton, and
Women's Research and Education Institute.
BRUCE K. MACLAURY, (DOB: 5/7/1931) Trustee
President Emeritus of The Brookings Institution (Independent Non-Partisan
Research Organization); Director of American Express Bank, Ltd., The St. Paul
Companies, Inc. (Insurance and Financial Services), and National Steel Corp.
BURTON G. MALKIEL, (DOB: 8/28/1932) Trustee
Chemical Bank Chairman's Professor of Economics, Princeton University; Director
of Prudential Insurance Co. of America, Banco Bilbao Gestinova, Baker Fentress &
Co. (Investment Management), The Jeffrey Co. (Holding Company), and Select
Sector SPDR Trust (Exchange-Traded Mutual Fund).
ALFRED M. RANKIN, JR., (DOB: 10/8/1941) Trustee
Chairman, President, Chief Executive Officer, and Director of NACCO Industries
(Machinery/Coal/ Appliances); and Director of The BFGoodrich Co. (Aircraft
Systems/Manufacturing/Chemicals).
JOHN C. SAWHILL, (DOB: 6/12/1936) Trustee
President and Chief Executive Officer of The Nature Conservancy (Non-Profit
Conservation Group); Director of Pacific Gas and Electric Co., Procter & Gamble
Co., NACCO Industries (Machinery/Coal/ Appliances), and Newfield Exploration Co.
(Energy); formerly, Director and Senior Partner of McKinsey & Co., and President
of New York University.
JAMES O. WELCH, JR., (DOB: 5/13/1931) Trustee
Retired Chairman of Nabisco Brands, Inc. (Food Products); retired Vice Chairman
and Director of RJR Nabisco (Food and Tobacco Products); Director of TECO
Energy, Inc., and Kmart Corp.
B-15
<PAGE>
J. LAWRENCE WILSON, (DOB: 3/2/1936) Trustee
Retired Chairman of Rohm & Haas Co. (Chemicals); Director of Cummins Engine Co.
(Diesel Engine Company), and The Mead Corp. (Paper Products); and Trustee of
Vanderbilt University.
RAYMOND J. KLAPINSKY, (DOB: 12/7/1938) Secretary*
Managing Director of The Vanguard Group, Inc.; Secretary of The Vanguard Group,
Inc. and of each of the investment companies in The Vanguard Group.
THOMAS J. HIGGINS, (DOB: 5/21/1957) Treasurer*
Principal of The Vanguard Group, Inc.; Treasurer of each of the investment
companies in The Vanguard Group.
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 Trust are "interested persons" as defined in the 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 adheres to a Code of Ethics established pursuant to Rule 17j-l under
the 1940 Act. The Code is designed to prevent unlawful practices in connection
with the purchase or sale of securities by persons associated with Vanguard.
Under Vanguard's Code of Ethics certain officers and employees of Vanguard who
are considered access persons are permitted to engage in personal securities
transactions. However, such transactions are subject to procedures and
guidelines similar to, and in many cases more restrictive than, those
recommended by a blue ribbon panel of mutual fund industry executives.
Vanguard was established and operates under an Amended and Restated Funds'
Service Agreement which was approved by the shareholders of each of the 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, 1999, each
fund had contributed capital to Vanguard representing 0.02% of each Fund's net
assets. The total amount contributed by the Funds was $5,111,000, which
represented 5.1% 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.
B-16
<PAGE>
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 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 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 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>
FUND FISCAL YEAR ENDED FISCAL YEAR ENDED FISCAL YEAR ENDED
8/31/1997 8/31/ 1998 8/31/1999
- ----------------------------------------------------------------------------------------------------------
U.S. Growth Fund $16,574,000 $24,303,000 $36,880,000
International Growth Fund 19,620,000 25,651,000 29,133,000
Calvert Social Index Fund N/A N/A N/A
- ----------------------------------------------------------------------------------------------------------
</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-17), and each fund
pays a proportionate share of the Trustees' compensation. The funds employ their
officers on a shared basis, as well. However, officers are compensated by The
Vanguard Group, Inc., not the funds.
INDEPENDENT TRUSTEES. The funds compensate their independent Trustees--that
is, the ones who are not also officers of the funds--in three ways:
. The independent Trustees receive an annual fee for their service to the funds,
which is subject to reduction based on absences from scheduled Board meetings.
. The independent Trustees are reimbursed for the travel and other expenses that
they incur in attending Board meetings.
. Upon retirement, the independent Trustees receive an aggregate annual fee of
$1,000 for each year served on the Board, up to fifteen years of service. This
annual fee is paid for ten years following retirement, or until each Trustee's
death.
"INTERESTED" TRUSTEES. The funds' interested Trustees--Messrs. Bogle and
Brennan--receive no compensation for their service in that capacity. However,
they are paid in their role as officers of The Vanguard Group, Inc.
COMPENSATION TABLE. The following table provides compensation details for
each of the Trustees. We list the amounts paid as compensation and accrued as
retirement benefits by 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
B-17
<PAGE>
paid to each Trustee by all Vanguard funds. All information shown is for the
fiscal year ended August 31, 1999.
<TABLE>
<CAPTION>
TRUSTEES COMPENSATION TABLE
<S> <C> <C> <C> <C>
PENSION OR
RETIREMENT TOTAL
BENEFITS COMPENSATION
AGGREGATE ACCRUED AS ESTIMATED FROM ALL
COMPENSATION PART OF THESE ANNUAL VANGUARD
FROM THESE FUNDS' BENEFITS UPON FUNDS PAID TO
NAMES OF TRUSTEES FUNDS(1) EXPENSES(1) RETIREMENT TRUSTEES(2)
- ---------------------------------------------------------------------------------------------------------------
John C. Bogle (3). . . . None None None None
John J. Brennan . . . None None None None
Barbara Barnes Hauptfuhrer(4). . . $1,477 $187 $15,000 $0
JoAnn Heffernan Heisen $4,430 $244 $15,000 $80,000
Bruce K. MacLaury . . $4,590 $413 $12,000 $75,000
Burton G. Malkiel . . $4,462 $404 $15,000 $80,000
Alfred M. Rankin, Jr. $4,430 $295 $15,000 $80,000
John C. Sawhill . . . $4,430 $374 $15,000 $80,000
James O. Welch, Jr. . $4,430 $432 $15,000 $80,000
J. Lawrence Wilson. . $4,430 $312 $15,000 $80,000
</TABLE>
(1) The amounts shown in this column are based on the Funds' fiscal year ended
October 31, 1999.
(2) The amounts reported in this column reflect the total compensation paid to
each Trustee for his or her service as Trustee of 103 Vanguard funds (102
in the case of Mr. Malkiel; 93 in the case of Mr. MacLaury) for the 1999
calendar year.
(3) Mr. Bogle has retired from the Funds' Board, effective December 31, 1999.
(4) Mrs. Hauptfuhrer has retired from the Funds' Board, effective December 31,
1998.
INVESTMENT ADVISORY SERVICES
VANGUARD U.S. GROWTH FUND INVESTMENT ADVISORY AGREEMENT
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 an advisory fee at the end of
each fiscal quarter, 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%
B-18
<PAGE>
For the fiscal years ended August 31, 1997, 1998, and 1999, the Fund
incurred advisory fees of $8,475,000, $11,377,000, and $16,307,000 respectively.
DESCRIPTION OF LINCOLN
Lincoln is an Illinois corporation in which a controlling interest is held by
the following persons: Timothy H. Ubben, Chairman; J. Parker Hall III, Chief
Executive Officer; Kenneth R. Meyer, President; Ray B. Zemon, Executive Vice
President; David M. Fowler, Executive Vice President; Richard W. Knee, Executive
Vice President; and Jay H. Freedman, Executive Vice President.
The agreement with Lincoln is renewable for successive one-year periods,
only if each renewal is specifically approved by a vote of the Fund's 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. The 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 Lincoln, or
(2) by Lincoln upon ninety (90) days' written notice to the Fund.
The Trustees may make any of these changes without the approval of
shareholders, however, any such change will be communicated to shareholders in
writing.
VANGUARD INTERNATIONAL GROWTH FUND INVESTMENT ADVISORY AGREEMENT
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 Trust.
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 ANNUAL INCENTIVE (+)/
EAFE INDEX PENALTY (-) FEE RATE
- --------------------------------------------------------------------------------
B-19
<PAGE>
+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 ANNUAL INCENTIVE (+)/
EAFE INDEX PENALTY (-) FEE 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%
The incentive/penalty 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 incentive/penalty fee on assets in excess of $1
billion was not operable. For quarters ending after this period, the
incentive/penalty 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 MSCI EAFE
B-20
<PAGE>
Index is the only index available which covers the major international markets
outside North America. 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.
The agreement with Schroder is renewable for successive one-year periods,
only if each renewal is specifically approved by a vote of the Fund's 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. The 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 Schroder, or
(2) by Schroder upon ninety (90) days' written notice to the Fund.
During the three fiscal years ending August 31, 1997, 1998, and 1999,
respectively, the Fund paid Schroder the following advisory fees:
1997 1998 1999
---- ---- ----
Basic Fee $8,245,000 $9,793,000 $10,068,000
Increase/(Decrease) for Performance
Adjustment 1,980,000 2,526,000 418,000
Total $10,225,000 $12,319,000 $10,486,000
=========== =========== ===========
DESCRIPTION OF SCHRODER CAPITAL
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 $200 billion.
Vanguard Calvert Social Index Fund receives advisory services from
Vanguard's Core Management Group on an at-cost basis.
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 Trust 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 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
B-21
<PAGE>
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 ending August 31, 1997, 1998, and 1999, the Funds
paid the following amounts in brokerage commissions:
FUND 1997 1998 1999
--- ---- ---- ----
U.S. Growth Fund $4,076,812 $6,538,324 $11,950,441
International Growth Fund $7,912,581 $10,369,101 $10,770,933
Calvert Social Index Fund N/A N/A N/A
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 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 Financial Statements of Vanguard U.S. Growth Fund and Vanguard International
Growth Fund as of and for the year ended August 31, 1999, including the
financial highlights for each of the five years in the period ended August 31,
1999, appearing in the Funds' respective 1999 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 Fund, 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.
B-22
<PAGE>
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 VALUE INDEX--consists of the stocks in the Russell 1000 Index
(comprising the 1,000 largest U.S.-based companies measured by total market
capitalization) with the lowest price-to-book ratios, comprising 50% of the
market capitalization of the Russell 1000.
WILSHIRE 5000 EQUITY INDEX--consists of more than 7,000 common equity
securities, covering all stocks in the U.S. for which daily pricing is
available.
WILSHIRE 4500 EQUITY INDEX--consists of all stocks in the Wilshire 5000 except
for the 500 stocks in the Standard & Poor's 500 Index.
RUSSELL 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, Australasia 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.
LEHMAN 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--consists of over 4,500 U.S. Treasury,
Agency and investment grade corporate bonds.
LEHMAN CORPORATE (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-TERM CORPORATE BOND INDEX--is a subset of the Lehman
Corporate Bond Index covering all corporate, publicly issued, fixed-rate,
nonconvertible U.S. debt issues rated at least Baa, with at least $100 million
principal outstanding and maturity greater than 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.
COMPOSITE INDEX--70% Standard & Poor's 500 Index and 30% NASDAQ Industrial
Index.
COMPOSITE INDEX--65% Standard & Poor's 500 Index and 35% Lehman Long-Term
Corporate AA or Better Bond Index.
B-23
<PAGE>
COMPOSITE INDEX--65% Lehman Long-Term Corporate AA or Better Bond Index and a
35% weighting in a blended equity composite (75% Standard & Poor's/BARRA Value
Index, 12.5% Standard & Poor's Utilities Index and 12.5% Standard & Poor's
Telephone Index).
LEHMAN LONG-TERM CORPORATE AA OR BETTER BOND INDEX--consists of all publicly
issued, fixed rate, nonconvertible investment grade, dollar-denominated,
SEC-registered corporate debt rated AA or AAA.
LEHMAN BROTHERS AGGREGATE BOND INDEX--is a market weighted index that contains
individually priced U.S. Treasury, agency, corporate, and mortgage pass-through
securities corporate rated Baa-or better. The Index has a market value of over
$5 trillion.
LEHMAN BROTHERS MUTUAL FUND SHORT (1-5) GOVERNMENT/CORPORATE INDEX--is a market
weighted index that contains individually priced U.S. Treasury, agency, and
corporate investment grade bonds rated BBB-or better with maturities between 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 SMALL COMPANY GROWTH FUND AVERAGE--the average performance of 25 largest
small company growth funds as defined by Lipper Inc. Lipper defines a small
company growth fund as a fund that by prospectus or portfolio practice, limits
its investments to companies on the basis of the size of the company. From time
to time, Vanguard may advertise using the average performance and/or the average
expense ratio of the small company growth funds. (This fund category was first
established in 1982. For years prior to 1982, the results of the Lipper Small
Company Growth category were estimated using the returns of the Funds that
constituted the Group at its inception.)
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.
SAI023-12/17/ 1999
B-25
<PAGE>
PART C
VANGUARD WORLD FUNDS
OTHER INFORMATION
ITEM 23. EXHIBITS
EXHIBITS DESCRIPTION
- -------- -----------
(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 Contracts*
(e) Not applicable
(f) Reference is made to the section entitled "Management of the Trust" 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) Not Applicable
*Filed Previously
**Filed Herewith
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 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).
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<PAGE>
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, Pennsylvania 19355; and the Registrant's
custodians, State Street Bank and Trust Company, Boston, Massachusetts, and The
Chase Manhattan Bank, N.A., New York, New York, and ..
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 hereby certifies that it 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 23rd day of February, 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 February 23, 2000
---------------------------Executive Officer, and Trustee
(Heidi Stam)
John J. Brennan*
By:/S/ JOANN HEFFERNAN HEISEN Trustee February 23, 2000
---------------------------
(Heidi Stam)
JoAnn Heffernan Heisen*
By:/S/ BRUCE K. MACLAURY Trustee February 23, 2000
---------------------------
(Heidi Stam)
Bruce K. MacLaury*
By:/S/ BURTON G. MALKIEL Trustee February 23, 2000
---------------------------
(Heidi Stam)
Burton G. Malkiel*
By:/S/ ALFRED M. RANKIN, JR. Trustee February 23, 2000
---------------------------
(Heidi Stam)
Alfred M. Rankin, Jr.*
By:/S/ JOHN C. SAWHILL Trustee February 23, 2000
---------------------------
(Heidi Stam)
John C. Sawhill*
By:/S/ JAMES O. WELCH, JR. Trustee February 23, 2000
---------------------------
(Heidi Stam)
James O. Welch, Jr.*
By:/S/ J. LAWRENCE WILSON Trustee February 23, 2000
---------------------------
(Heidi Stam)
J. Lawrence Wilson*
By:/S/ THOMAS J. HIGGINS Treasurer and Principal February 23, 2000
---------------------------
(Heidi Stam) Financial Officer and Principal
Thomas J. Higgins* Accounting Officer
*By Power of Attorney. See File Number 33-4424, filed on January 25, 1999.
Incorporated by Reference.
