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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT (NO. 2-88373) UNDER THE SECURITIES ACT OF 1933
PRE-EFFECTIVE AMENDMENT NO.
POST-EFFECTIVE AMENDMENT NO. 29
AND
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 31
VANGUARD STAR FUNDS
(EXACT NAME OF REGISTRANT AS SPECIFIED IN DECLARATION OF TRUST)
P.O. BOX 2600, VALLEY FORGE, PA 19482
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)
REGISTRANT'S TELEPHONE NUMBER (610) 669-1000
R. GREGORY BARTON, ESQUIRE
P.O. BOX 876
VALLEY FORGE, PA 19482
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
IT IS PROPOSED THAT THIS AMENDMENT BECOME EFFECTIVE ON APRIL 28, 2000, PURSUANT
TO PARAGRAPH (B) OF RULE 485.
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<PAGE>
VANGUARD
STAR(TM) FUND
Prospectus
April 28, 2000
This prospectus contains
financial data for the
Fund through the
fiscal year ended
December 31, 1999.
[THE VANGUARD GROUP(R) LOGO]
<PAGE>
VANGUARD(R) STAR(TM) FUND
Prospectus
April 28, 2000
A Balanced Mutual Fund
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CONTENTS
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1 FUND PROFILE 15 FINANCIAL HIGHLIGHTS
3 ADDITIONAL INFORMATION 17 INVESTING WITH VANGUARD
4 A WORD ABOUT RISK 17 Services and Account Features
4 WHO SHOULD INVEST 18 Types of Accounts
5 PRIMARY INVESTMENT STRATEGIES 19 Buying Shares
11 THE FUND AND VANGUARD 21 Redeeming Shares
12 INVESTMENT ADVISER 24 Transferring Registration
13 DIVIDENDS, CAPITAL GAINS, AND TAXES 25 Fund and Account Updates
15 SHARE PRICE GLOSSARY (inside back cover)
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WHY READING THIS PROSPECTUS IS IMPORTANT
This prospectus explains the objective, risks, and strategies of Vanguard STAR
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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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 STAR Fund.
INVESTMENT OBJECTIVE
The Fund seeks to provide long-term capital growth and income.
INVESTMENT STRATEGIES
As a "fund of funds," STAR Fund invests in a diversified group of other Vanguard
mutual funds, rather than in individual securities. The Fund follows a balanced
investment approach by placing 60% to 70% of its assets in common stocks through
six stock funds; 20% to 30% of its assets in bonds through two bond funds; and
10% to 20% of its assets in short-term reserves through a short-term bond fund
and a money market fund. Through the underlying funds, STAR Fund owns a
diversified mix of stocks (with emphasis on large-cap value stocks) and bonds
(primarily short- and long-term investment-grade corporate bonds and
intermediate-term GNMA mortgage-backed bonds).
PRIMARY RISKS
The Fund is subject to several stock and bond market risks, any of which could
cause an investor to lose money. However, because stock and bond prices can move
in different directions or in different amounts, the Fund's bond and short-term
reserve holdings may counteract some of the volatility experienced by the Fund's
stock holdings. The Fund's balanced portfolio, in the long run, should result in
less investment risk--but a lower investment return--than that of a fund
investing exclusively in common stocks.
- - Stock risks include: stock market risk, which is the chance that stock
prices in general will decline over short or even long periods; and
investment style risk, which is the chance that returns from the stock
market segments in which the Fund is most heavily weighted
(large-capitalization and value stocks) may underperform other asset
classes or the overall stock market.
- - Bond risks include: interest rate risk, which is the chance that bond
prices overall will decline over short or even long periods due to rising
interest rates; credit risk, which is the chance that a bond issuer will
fail to pay interest and principal in a timely manner; and call/prepayment
risk, which is the chance that during periods of falling interest rates, a
bond issuer will repay a higher-yielding bond before its maturity date,
forcing the Fund to reinvest the unanticipated proceeds at lower interest
rates.
- - The Fund is also subject to manager risk, which is the chance that poor
security selection by the investment advisers of the underlying funds will
cause the Fund to underperform other funds with similar investment
objectives. For additional information on investment risks, see PRIMARY
INVESTMENT STRATEGIES.
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2
PERFORMANCE/RISK INFORMATION
The bar chart and table below provide an indication of the risk of investing in
the Fund. The bar chart shows the Fund's performance in each calendar year over
a ten-year period. The table shows how the Fund's average annual total returns
for one, five, and ten calendar years compare with those of broad-based stock
and bond market indexes and a composite stock/bond index weighted to match the
Fund's target allocation. Keep in mind that the Fund's past performance does not
indicate how it will perform in the future.
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ANNUAL TOTAL RETURNS
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1990 -3.62%
1991 24.18%
1992 10.51%
1993 10.88%
1994 -0.21%
1995 28.64%
1996 16.11%
1997 21.15%
1998 12.38%
1999 7.13%
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During the period shown in the bar chart, the highest return for a calendar
quarter was 12.30% (quarter ended March 31, 1991) and the lowest return for a
quarter was -10.71% (quarter ended September 30, 1990).
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AVERAGE ANNUAL TOTAL RETURNS FOR YEARS ENDED DECEMBER 31, 1999
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1 YEAR 5 YEARS 10 YEARS
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Vanguard STAR Fund 7.13% 16.85% 12.29%
Wilshire 5000 Total Market Index 23.77 27.11 17.61
Lehman Brothers Aggregate
Bond Index -0.82 7.73 7.70
STAR Lipper Composite* 15.82 16.33 12.12
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*Weighted 62.5% Lipper General Equity, 25% Lipper Fixed Income, and
12.5% Lipper Money Market.
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FEES AND EXPENSES
The following table describes the fees and expenses you may pay if you buy and
hold shares of the Fund. The expenses shown under Annual Fund Operating Expenses
are based upon those incurred in the fiscal year ended December 31, 1999.
SHAREHOLDER FEES (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fee: None
Exchange Fee: None
ANNUAL FUND OPERATING EXPENSES (expenses deducted from the underlying
funds' assets)
Indirect Operating Expenses: +
+Although STAR Fund is not expected to incur any net expenses directly, the
Fund's shareholders indirectly bear the expenses of the underlying Vanguard
funds in which the Fund invests. See THE FUND AND VANGUARD. The Fund's
indirect expense ratio, based on its investments in the underlying Vanguard
funds, was 0.36% as of December 31, 1999.
<PAGE>
3
The following example is intended to help you compare the cost of investing
in the Fund with the cost of investing in other mutual funds. It illustrates the
hypothetical expenses that you would incur over various periods if you invest
$10,000 in the Fund. This example assumes that the Fund provides a return of 5%
a year, and that operating expenses of the Fund and its underlying funds remain
the same. The results apply whether or not you redeem your investment at the end
of each period.
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1 YEAR 3 YEARS 5 YEARS 10 YEARS
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$37 $116 $203 $457
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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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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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ADDITIONAL INFORMATION
DIVIDENDS AND CAPITAL GAINS SUITABLE FOR IRAS
Dividends are distributed in June Yes
and December; capital gains, if any,
are distributed annually in December MINIMUM INITIAL INVESTMENT
$1,000
INVESTMENT ADVISER
The Fund does not employ an investment NEWSPAPER ABBREVIATION
adviser, but benefits from the STAR
investment advisory services provided
to the underlying Vanguard funds in VANGUARD FUND NUMBER
which it invests 056
INCEPTION DATE CUSIP NUMBER
March 29, 1985 921909107
NET ASSETS AS OF DECEMBER 31, 1999 TICKER SYMBOL
$8.1 billion VGSTX
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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 STAR
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 and bond markets.
Look for this [FLAG] symbol throughout the prospectus. It is used to mark
detailed information about each type of risk that you would confront as a
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 balanced fund to your existing holdings, which could
include other stock and bond--as well as money market and
tax-exempt--investments.
- - You are seeking growth of your capital over the long term--at least five
years--without taking undue risk.
- - You are seeking moderate current income.
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PLAIN TALK ABOUT
COSTS AND MARKET-TIMING
Some investors try to profit from market-timing--switching money into
investments when they expect prices to rise, and taking money out when they
expect the market to fall. As money is shifted in and out, a fund incurs
expenses for buying and selling securities. These costs are borne by all fund
shareholders, including the long-term investors who do not generate the costs.
Therefore, the Fund discourages short-term trading by, among other things,
limiting the number of exchanges it permits.
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THE VANGUARD FUNDS DO NOT PERMIT MARKET-TIMING. DO NOT INVEST IN THIS FUND
IF YOU ARE A MARKET-TIMER.
The Fund has adopted the following policies, among others, to discourage
short-term trading:
- - The Fund reserves the right to reject any purchase request--including
exchanges from other Vanguard funds--that it regards as disruptive to the
efficient management of the Fund. A purchase request could be rejected
because of the timing of the request or because of a history of excessive
trading by the investor.
- - There is a limit on the number of times you can exchange into and out of
the Fund (see "Redeeming Shares" in the INVESTING WITH VANGUARD section).
- - The Fund reserves the right to stop offering shares at any time.
<PAGE>
5
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PLAIN TALK ABOUT
BALANCED FUNDS
Balanced funds are generally "middle of the road" investments that seek to
provide some combination of growth, income, and conservation of capital by
investing in a mix of stocks, bonds, and/or money market instruments. Because
the prices of stocks and bonds often move in different directions, balanced
funds are able to use rewards from one type of investment to help offset the
risks from another.
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PRIMARY INVESTMENT STRATEGIES
This section explains how the Fund pursues its objective, long-term growth of
capital and income. The Fund's Board of Trustees oversees the management of the
Fund, and may change the investment strategies in the interest of shareholders.
In addition, this section discusses several important risks faced by investors
in the Fund.
MARKET EXPOSURE
STOCKS
Through six underlying Vanguard funds, STAR Fund invests 60% to 70% of its
assets in common stocks. The Fund's indirect investment in stocks is designed to
provide long-term capital growth and some income. The underlying stock funds are
described on page 9.
[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 stock market activity. (Total returns consist of dividend income plus change
in market price.) Note that the returns shown do not include the costs of buying
and selling stocks or other expenses that a real-world investment portfolio
would incur. Note, also, that the gap between best and worst tends to narrow
over the long term.
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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 common
stocks for all of the 5-year periods was 11.0%, returns for individual 5-year
periods ranged from a -12.4% average (from 1928 through 1932) to 28.6% (from
1995 through 1999). These average returns reflect past performance on common
stocks; you should not regard them as an indication of future returns from
either the stock market as a whole or this Fund in particular.
<PAGE>
6
Because stock and bond prices can move in different directions or in
different amounts, the Fund's bond and money market fund holdings may help to
dampen--but will not eliminate--the volatility experienced by the Fund as a
result of its stock fund holdings. The Fund's balanced portfolio, in the long
run, should result in less investment risk--and a lower investment return--than
a fund investing exclusively in common stocks.
[FLAG]THE FUND IS SUBJECT TO INVESTMENT-STYLE RISK, WHICH IS THE CHANCE THAT
RETURNS FROM THE STOCK MARKET SEGMENTS IN WHICH THE FUND IS MOST HEAVILY
WEIGHTED MAY UNDERPERFORM OTHER ASSET CLASSES OR THE OVERALL STOCK MARKET.
Through its share ownership of the underlying stock funds, STAR Fund indirectly
owns a diversified mixture of common stocks. Although its indirect stock
holdings are predominantly large-cap, the Fund has significant exposure to
mid-cap stocks and some exposure to small-cap stocks. Mid-cap and small-cap
stocks tend to be more volatile than large-cap stocks. The Fund's indirect stock
holdings are predominantly value-oriented, although the Fund has significant
exposure to growth stocks.
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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 typically 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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BONDS
Through two underlying Vanguard funds, STAR Fund invests roughly 20% to 30% of
its assets in bonds, predominantly intermediate- and long-term bonds. The Fund's
indirect investment in bonds is designed to provide a high level of current
income with less price volatility than would be expected from the stock portion
of its holdings. The underlying bond funds are described on pages 9 and 10.
[FLAG]THE FUND IS SUBJECT TO INTEREST RATE RISK, WHICH IS THE CHANCE THAT BOND
PRICES OVERALL WILL DECLINE OVER SHORT OR EVEN LONG PERIODS DUE TO RISING
INTEREST RATES. INTEREST RATE RISK IS MODEST FOR SHORTER-TERM BOND FUNDS
AND HIGHER FOR LONGER-TERM BOND FUNDS.
Although bonds are often thought to be less risky than stocks, there have
been periods when bond prices have fallen significantly due to rising interest
rates. For instance, prices of long-term bonds fell by almost 48% between
December 1976 and September 1981.
To illustrate the relationship between bond prices and interest rates, the
following table shows the effect of a 1% and a 2% change (both up and down) in
interest rates on three bonds of different maturities, each with a face value of
$1,000.
<PAGE>
7
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HOW INTEREST RATE CHANGES AFFECT THE
VALUE OF A $1,000 BOND*
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AFTER A 1% AFTER A 1% AFTER A 2% AFTER A 2%
TYPE OF BOND (MATURITY) INCREASE DECREASE INCREASE DECREASE
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Short-Term (2.5 years) $978 $1,023 $956 $1,046
Intermediate-Term (10 years) 932 1,074 870 1,156
Long-Term (20 years) 901 1,116 816 1,251
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These figures are intended only to illustrate interest rate risk; they
should not be regarded as an indication of future returns from the bond market
as a whole, or STAR Fund in particular. Also, changes in interest rates may not
have as dramatic an effect on the Fund as they would on a fund made up entirely
of bonds.
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PLAIN TALK ABOUT
BONDS AND INTEREST RATES
As a rule, when interest rates rise, bond prices fall. The opposite is also
true: Bond prices go up when interest rates fall. Why do bond prices and
interest rates move in opposite directions? Let's assume that you hold a bond
offering a 5% yield. A year later, interest rates are on the rise and bonds are
offered with a 6% yield. With higher-yielding bonds available, you would have
trouble selling your 5% bond for the price you paid--causing you to lower your
asking price. On the other hand, if interest rates were falling and 4% bonds
were being offered, you should be able to sell your 5% bond for more than you
paid.
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PLAIN TALK ABOUT
BOND MATURITIES
A bond is issued with a specific maturity date--the date when the bond's issuer,
or seller, must pay back the bond's initial value (known as its "face value").
Bond maturities generally range from less than one year (short-term) to 30 years
(long-term). The longer a bond's maturity, the more risk you, as a bond
investor, face as interest rates rise--but also the more interest you could
receive. Long-term bonds are more suitable for investors willing to take greater
risks in hope of higher yields; short-term bond investors should be willing to
accept lower yields in return for less fluctuation in the value of their
investment.
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[FLAG]THE FUND IS SUBJECT TO CREDIT RISK, WHICH IS THE CHANCE THAT A BOND ISSUER
WILL FAIL TO PAY INTEREST AND PRINCIPAL IN A TIMELY MANNER.
Since the underlying Vanguard bond funds invest primarily in high-quality
obligations, credit risk is relatively low.
<PAGE>
8
[FLAG]THE FUND IS ALSO SUBJECT TO CALL RISK (IN THE CASE OF CORPORATE BONDS) AND
PREPAYMENT RISK (IN THE CASE OF MORTGAGE-BACKED BONDS). THERE IS THE CHANCE
THAT DURING PERIODS OF FALLING INTEREST RATES A BOND ISSUER WILL REPAY A
HIGHER-YIELDING BOND BEFORE ITS MATURITY DATE. FORCED TO REINVEST THE
UNANTICIPATED PROCEEDS AT LOWER INTEREST RATES, THE FUND WOULD EXPERIENCE A
DECLINE IN INCOME AND LOSE THE OPPORTUNITY FOR ADDITIONAL PRICE
APPRECIATION ASSOCIATED WITH FALLING RATES.
SHORT-TERM RESERVES
Through two underlying Vanguard funds, STAR Fund invests roughly 10% to 20% of
its assets in short-term reserves. These reserves consist of investment-grade
short-term bonds and high quality money market instruments, including commercial
paper and repurchase agreements. From this investment, the Fund seeks to obtain
current income and to moderate the overall volatility of the Fund.
The Fund's short-term reserves are subject to a high level of income risk,
which is the chance that dividends will decline if short-term interest rates
fall, and a low level of credit risk, which is the chance that an issuer of a
money market instrument or short-term bond will fail to pay interest or
principal in a timely manner. Because the Fund does not invest heavily in
short-term reserves, however, both income risk and credit risk to STAR Fund will
be low.
SECURITY SELECTION
Vanguard STAR Fund is a "fund of funds," which means that it achieves its
objective by investing in a combination of other mutual funds rather than in
individual securities.
Decisions about how to allocate STAR Fund's assets among the three asset
classes (stocks, bonds, and short-term reserves) and among the underlying funds
are made by the Trustees of the Fund. Generally, the Fund invests 60% to 70% of
its assets in stock funds, 20% to 30% in bond funds, and 10% to 20% in a
short-term bond fund and a money market fund. While these allocations may shift
from time to time, stocks can be expected to represent at least 60% of the
Fund's holdings at any given time. Within any given asset class, Vanguard may
increase or decrease the percentage of assets invested in any particular fund
without advance notice to shareholders.
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PLAIN TALK ABOUT
"FUND OF FUNDS"
The term "fund of funds" is used to describe a mutual fund that pursues its
objective by investing in other mutual funds rather than in individual stocks or
bonds. A fund of funds may charge for its own direct expenses, in addition to
bearing a proportionate share of the expenses charged by the underlying funds in
which it invests. Funds of funds are best suited for long-term investors.
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[FLAG]THE FUND IS SUBJECT TO MANAGER RISK, WHICH IS THE CHANCE THAT THE
INVESTMENT ADVISERS OF THE UNDERLYING FUNDS WILL DO A POOR JOB OF SELECTING
SECURITIES.
The underlying Vanguard funds are run by their investment advisers
according to traditional methods of active investment management. This means
that securities are
<PAGE>
9
bought and sold according to the advisers' judgments about companies and their
financial prospects, about issuers of bonds and money market instruments, and
about the general level of interest rates.
The Fund is generally managed without regard to tax ramifications.
STOCKS
STAR Fund invests in the following stock funds, in approximately the percentages
indicated:
1. Vanguard Windsor II Fund (23%)
2. Vanguard Windsor Fund (16%)
3. Vanguard Explorer Fund (7%)
4. Vanguard PRIMECAP Fund (7%)
5. Vanguard Morgan Growth Fund (5%)
6. Vanguard U.S. Growth Fund (5%)
Vanguard Windsor Fund and Vanguard Windsor II Fund are value-oriented stock
funds, chosen primarily for their potential for long-term capital growth, as
well as for their current income-producing capabilities. They work toward these
goals by investing in large- and medium-size companies believed by the advisers
to be undervalued when purchased. These stocks typically--but not always--have
lower-than-average price/earnings ratios and higher-than-average dividend
yields.
Vanguard Explorer Fund is an aggressive growth fund and Vanguard PRIMECAP
Fund, Vanguard Morgan Growth Fund, and Vanguard U.S. Growth Fund are growth
funds. These funds are held by STAR Fund primarily to provide long-term capital
growth. They work in different ways to achieve this goal.
- - Vanguard Explorer Fund invests in common stocks of small U.S. companies
which, in the advisers' opinion, have above-average prospects for growth.
- - Vanguard PRIMECAP Fund invests in common stocks that the adviser believes
have above-average prospects for continued growth. The fund's portfolio
consists predominately of large-cap and mid-cap stocks.
- - Vanguard Morgan Growth Fund invests mainly in the common stocks of large-
and medium-size domestic companies whose revenues and/or earnings are
expected to grow faster than those of the average company in the market.
The fund also invests in common stocks of smaller companies with similar
characteristics.
- - Vanguard U.S. Growth Fund invests in common stocks of large, seasoned U.S.
companies that have past records of growth and, in the adviser's opinion,
above-average prospects for continued growth.
Although there are no present plans to do so, the Fund also is authorized
to invest in Vanguard 500 Index Fund, which tracks the performance of the S&P
500 Index.
BONDS
STAR Fund invests in two bond funds, in approximately the percentages indicated:
1. Vanguard GNMA Fund (13%)
2. Vanguard Long-Term Corporate Fund (12%)
Both bond funds seek to provide a high and stable level of income. They
work toward this goal, however, in different ways:
- - Vanguard GNMA Fund invests at least 80% of its total assets in
mortgage-backed bonds issued by the Government National Mortgage
Association. The bonds offer a U.S. government guarantee of timely
principal and interest payments, along with income that
<PAGE>
10
usually exceeds that of comparable U.S. Treasury securities. The fund's
effective dollar-weighted average maturity depends on homeowner prepayments
of the underlying mortgages, but normally falls within an intermediate-term
range (5 to 10 years).
- - Vanguard Long-Term Corporate Fund invests in a diversified group of
investment-grade corporate bonds--that is, bonds issued by corporations
that are rated at least Baa by Moody's Investors Service, Inc., or BBB by
Standard & Poor's Corporation. The fund maintains a dollar-weighted average
maturity of 15 to 25 years.
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PLAIN TALK ABOUT
TYPES OF BONDS
Bonds are issued (sold) by many sources: Corporations issue corporate bonds; the
federal government issues U.S. Treasury bonds; agencies of the federal
government issue agency bonds; and mortgage holders issue "mortgage-backed"
pass-through certificates such as those issued by the Government National
Mortgage Association (GNMAs). Each issuer is responsible for paying back the
bond's initial value as well as making periodic interest payments.
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PLAIN TALK ABOUT
CREDIT QUALITY
A bond's credit quality depends on the issuer's ability to pay interest on the
bond and, ultimately, to repay the debt. The lower the rating by one of the
independent bond-rating agencies (for example, Moody's or Standard & Poor's),
the greater the chance (in the rating agency's opinion) that the bond issuer
will default, or fail to meet its payment obligations. All things being equal,
the lower a bond's credit rating, the higher its yield should be to compensate
investors for assuming additional risk. Bonds rated in one of the four highest
rating categories are considered "investment grade." The Fund's Statement of
Additional Information includes a detailed description of the credit-rating
scales used by major, independent bond-rating agencies.
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SHORT-TERM RESERVES
To satisfy its policy of allocating 10% to 20% of assets to short-term reserves,
STAR Fund invests in the following two funds in approximately the percentages
indicated:
1. Vanguard Short-Term Corporate Fund (11%)
2. Vanguard Prime Money Market Fund (1%)
- - Vanguard Short-Term Corporate Fund invests in a diversified group of
investment-grade corporate bonds. The Fund maintains a dollar-weighted
average maturity of between one and three years.
- - Vanguard Prime Money Market Fund invests in high quality short-term money
market instruments rated in one of the two highest credit quality
categories.
OTHER INVESTMENT POLICIES AND RISKS
The Fund's underlying funds may invest, to a limited extent, in foreign
securities.
The Fund's underlying funds may temporarily depart from their normal
investment policies--for instance, by investing substantially in cash
reserves--in response to extraordinary market, economic, political, or other
conditions. In doing so, the STAR Fund may succeed in avoiding losses but
otherwise fail to achieve its investment objective.
<PAGE>
11
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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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THE FUND AND VANGUARD
STAR Fund has entered into an agreement with Vanguard under which Vanguard
provides all management, administrative, and distribution services to the Fund
at cost. The Fund owes Vanguard a sum sufficient to cover Vanguard's
out-of-pocket costs. The Fund also bears the expenses of services provided by
other parties (such as auditors, legal counsel, and the Fund's custodian), as
well as taxes and other direct expenses of the Fund. However, the agreement
provides that the Fund's expenses will be offset by reimbursements from Vanguard
for (a) contributions made by the Fund to the cost of operating the underlying
Vanguard funds in which STAR Fund invests, and (b) certain savings in
administrative and marketing costs that Vanguard is expected to derive from the
operation of the Fund.
The Fund's Trustees believe that the reimbursements should be sufficient to
offset most, if not all, of the expenses incurred by the Fund. Therefore, the
Fund is expected to operate at a very low or zero expense ratio. Since its
inception in 1985, the Fund in fact has had no direct net expenses.
Of course, shareholders of STAR Fund will still bear, indirectly, their
proportionate share of the costs of operating the underlying Vanguard funds. The
following chart provides the expense ratio for each of the underlying funds
during STAR Fund's 1999 fiscal year, as well as the percentage of STAR Fund's
net assets invested in each fund as of December 31, 1999:
- -----------------------------------------------------------------------
PERCENTAGE OF STAR FUND'S
UNDERLYING FUND EXPENSE RATIO NET ASSETS
- -----------------------------------------------------------------------
Windsor II Fund 0.37% 23.4%
Windsor Fund 0.28 16.2
Explorer Fund 0.74 6.5
PRIMECAP Fund 0.52 6.4
Morgan Growth Fund 0.42 5.2
U.S. Growth Fund 0.39 5.2
GNMA Fund 0.27 12.6
Long-Term Corporate Fund 0.30 12.3
Short-Term Corporate Fund 0.25 11.2
Prime Money Market Fund 0.33 1.0
- -----------------------------------------------------------------------
100.0%
- -----------------------------------------------------------------------
Based on these figures, the indirect expense ratio for STAR Fund's
underlying investments on December 31, 1999 was 0.36%. Vanguard expects the
Fund's indirect expense ratio in 2000 to remain at or about 0.36%.
<PAGE>
12
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
FUND EXPENSES
All mutual funds have operating expenses. These expenses, which are deducted
from a fund's gross income, are expressed as a percentage of the net assets of
the fund. Vanguard STAR Fund's indirect expense ratio in fiscal year 1999 was
0.36%, or $3.60 per $1,000 of average net assets. The average balanced mutual
fund had expenses in 1999 of 1.33%, or $13.30 per $1,000 of average net assets
(derived from data provided by Lipper Inc., which reports on the mutual fund
industry). Management expenses, which comprise 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.
- --------------------------------------------------------------------------------
INVESTMENT ADVISER
The Fund does not employ an investment adviser. Rather, the Fund's Board of
Trustees decides how to allocate its assets among the underlying funds. The
chart below lists the investment adviser employed by each underlying fund:
- --------------------------------------------------------------------------------
UNDERLYING FUND INVESTMENT ADVISER
- --------------------------------------------------------------------------------
Vanguard Windsor Fund Wellington Management Company, LLP
Sanford C. Bernstein & Company, Inc.
The Vanguard Group
- --------------------------------------------------------------------------------
Vanguard Windsor II Fund Barrow, Hanley, Mewhinney & Strauss, Inc.
Equinox Capital Management LLC
Tukman Capital Management, Inc.
The Vanguard Group
- --------------------------------------------------------------------------------
Vanguard Morgan Growth Fund Franklin Portfolio Associates, LLC
The Vanguard Group
Wellington Management Company, LLP
- --------------------------------------------------------------------------------
Vanguard U.S. Growth Fund Lincoln Capital Management Company
- --------------------------------------------------------------------------------
Vanguard PRIMECAP Fund PRIMECAP Management Company
- --------------------------------------------------------------------------------
Vanguard Explorer Fund Granahan Investment Management, Inc.
Wellington Management Company, LLP
Chartwell Investment Partners
The Vanguard Group
Grantham, Mayo, Van Otterloo & Co. LLC
- --------------------------------------------------------------------------------
Vanguard GNMA Fund Wellington Management Company, LLP
- --------------------------------------------------------------------------------
Vanguard Long-Term Corporate Fund Wellington Management Company, LLP
- --------------------------------------------------------------------------------
Vanguard Short-Term Corporate Fund The Vanguard Group
- --------------------------------------------------------------------------------
Vanguard Prime Money Market Fund The Vanguard Group
- --------------------------------------------------------------------------------
<PAGE>
13
The chart below briefly describes each investment advisory firm:
- --------------------------------------------------------------------------------
FIRM BACKGROUND
- --------------------------------------------------------------------------------
Wellington Management Company, LLP - Based in Boston, Massachusetts
- Founded in 1928
- Manages about $235 billion in assets
- --------------------------------------------------------------------------------
Sanford C. Bernstein & Company, Inc. - Based in New York, New York
- Founded in 1968
- Manages about $87 billion in assets
- --------------------------------------------------------------------------------
Barrow, Hanley, Mewhinney & Strauss, - Based in Dallas, Texas
Inc. - Founded in 1979
- Manages about $29 billion in assets
- --------------------------------------------------------------------------------
Equinox Capital Management LLC - Based in New York, New York
- Founded in 1989
- Manages about $14 billion in assets
- --------------------------------------------------------------------------------
Tukman Capital Management, Inc. - Based in Larkspur, California
- Founded in 1980
- Manages about $8 billion in assets
- --------------------------------------------------------------------------------
Franklin Portfolio Associates, LLC - Based in Boston, Massachusetts
- Founded in 1982
- Manages about $21 billion in assets
- --------------------------------------------------------------------------------
Lincoln Capital Management Company - Based in Chicago, Illinois
- Founded in 1967
- Manages about $68 billion in assets
- --------------------------------------------------------------------------------
PRIMECAP Management Company - Based in Pasadena, California
- Founded in 1983
- Manages about $25 billion in assets
- --------------------------------------------------------------------------------
Granahan Investment Management, Inc. - Based in Waltham, Massachusetts
- Founded in 1985
- Manages about $2 billion in assets
- --------------------------------------------------------------------------------
Chartwell Investment Partners - Based in Berwyn, Pennsylvania
- Founded in 1997
- Manages about $4 billion in assets
- --------------------------------------------------------------------------------
The Vanguard Group - Based in Valley Forge, Pennsylvania
- Founded in 1975
- Manages about $371 billion in assets
- --------------------------------------------------------------------------------
Grantham, Mayo, Van Otterloo & Co. LLC - Based in Boston, Massachusetts
- Founded in 1977
- Manages about $26 billion in assets
- --------------------------------------------------------------------------------
DIVIDENDS, CAPITAL GAINS, AND TAXES
FUND DISTRIBUTIONS
The Fund distributes to shareholders virtually all of its net income (interest
and dividends paid by the underlying funds), as well as any capital gains
realized from the sale of its holdings or received as capital gains
distributions from the underlying funds. Income dividends generally are
distributed in June and December; capital gains 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.
<PAGE>
14
BASIC TAX POINTS
Vanguard will send you a statement each year showing the tax status of all your
distributions. In addition, taxable investors should be aware of the following
basic tax points:
- - Distributions are taxable to you for federal income tax purposes whether or
not you reinvest these amounts in additional Fund shares.
- - Distributions declared in December--if paid to you by the end of
January--are taxable for federal income tax purposes as if received in
December.
- - Any dividends and short-term capital gains that you receive are taxable to
you as ordinary income for federal income tax purposes.
- - Any distributions of net long-term capital gains are taxable to you as
long-term capital gains for federal income tax purposes, no matter how long
you've owned shares in the Fund.
- - Capital gains distributions may vary considerably from year to year as a
result of the Fund's normal investment activities and cash flows.
- - A sale or exchange of Fund shares is a taxable event. This means that you
may have a capital gain to report as income, or a capital loss to report as
a deduction, when you complete your federal income tax return.
- - Dividend and capital gains distributions that you receive, as well as your
gains or losses from any sale or exchange of Fund shares, may be subject to
state and local income taxes.
GENERAL INFORMATION
BACKUP WITHHOLDING. By law, Vanguard must withhold 31% of any taxable
distributions or redemptions from your account if you do not:
- - provide us with your correct taxpayer identification number;
- - certify that the taxpayer identification number is correct; and
- - confirm that you are not subject to backup withholding.
Similarly, Vanguard must withhold from your account if the IRS instructs us to
do so.
FOREIGN INVESTORS. The Vanguard funds generally do not offer their shares for
sale outside of the United States. Foreign investors should be aware that U.S.
withholding and estate taxes may apply to any investments in Vanguard funds.
INVALID ADDRESSES. If a dividend or capital gains distribution check mailed to
your address of record is returned as undeliverable, Vanguard will automatically
reinvest all future distributions until you provide us with a valid mailing
address.
TAX CONSEQUENCES. This prospectus provides general tax information only. If you
are investing through a tax-deferred retirement account, such as an IRA, special
tax rules apply. Please consult your tax adviser for detailed information about
a fund's tax consequences for you.
<PAGE>
15
- --------------------------------------------------------------------------------
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 (i.e., shares of the underlying Vanguard funds) and other
assets, subtracting any of its liabilities (debts), and then dividing by the
number of Fund shares outstanding:
TOTAL ASSETS - LIABILITIES
NET ASSET VALUE = --------------------------------
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.
The Fund's share price can be found daily in the mutual fund listings of
most major newspapers under the heading "Vanguard Funds." Different newspapers
use different abbreviations of the Fund's name, but the most common is STAR.
FINANCIAL HIGHLIGHTS
The following financial highlights table is intended to help you understand the
Fund's financial performance for the past five years, and certain information
reflects financial results for a single Fund share. The total returns in the
table represent the rate that an investor would have earned or lost each year on
an investment in the Fund (assuming reinvestment of all dividend and capital
gains distributions). This information has been derived from the financial
statements audited by PricewaterhouseCoopers LLP, independent accountants, whose
report--along with the Fund's financial statements--is included in the Fund's
most recent annual report to shareholders. You may have the annual report sent
to you without charge by contacting Vanguard.
<PAGE>
16
FINANCIAL HIGHLIGHTS (CONTINUED)
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
HOW TO READ THE FINANCIAL HIGHLIGHTS TABLE
The Fund began fiscal 1999 with a net asset value (price) of $17.96 per share.
During the year, the Fund earned $0.60 per share from investment income and
$1.13 per share in capital gains distributions. There was a decline of $0.47 per
share from investments that had depreciated in value or that were sold for lower
prices than the Fund paid for them.
Shareholders received $1.01 per share in the form of dividend and capital gains
distributions. A portion of each year's distributions may come from the prior
year's income or capital gains.
The earnings ($1.26 per share) minus the distributions ($1.01 per share)
resulted in a share price of $18.21 at the end of the year. This was an increase
of $0.25 per share (from $17.96 at the beginning of the year to $18.21 at the
end of the year). For a shareholder who reinvested the distributions in the
purchase of more shares, the total return from the Fund was 7.13% for the year.
As of December 31, 1999, the Fund had $8.1 billion in net assets. For the year,
its net investment income amounted to 3.21% of its average net assets; and it
sold and replaced securities valued at 10% of its net assets.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
VANGUARD STAR FUND
YEAR ENDED DECEMBER 31,
-------------------------------------------------------
1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------
NET ASSET VALUE,
BEGINNING OF YEAR $17.96 $17.38 $15.86 $15.03 $12.61
- --------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .60 .58 .60 .58 .590
Capital Gains Distributions
Received 1.13 .86 1.06 .63 .435
Net Realized and
Unrealized Gain (Loss)
on Investments (.47) .70 1.65 1.19 2.550
------------------------------------------------------
Total from Investment
Operations 1.26 2.14 3.31 2.40 3.575
------------------------------------------------------
DISTRIBUTIONS
Dividends from Net
Investment Income (.61) (.58) (.59) (.59) (.590)
Distributions from
Realized Capital Gains (.40) (.98) (1.20) (.98) (.565)
-------------------------------------------------------
Total Distributions (1.01) (1.56) (1.79) (1.57) (1.155)
- --------------------------------------------------------------------------------
NET ASSET VALUE, END
OF YEAR $18.21 $17.96 $17.38 $15.86 $15.03
================================================================================
TOTAL RETURN 7.13% 12.38% 21.15% 16.11% 28.64%
================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of
Year (Millions) $8,087 $8,083 $7,355 $5,863 $4,842
Ratio of Total
Expenses to Average
Net Assets 0% 0% 0% 0% 0%
Ratio of Net
Investment Income to
Average Net Assets 3.21% 3.18% 3.46% 3.71% 4.12%
Turnover Rate 10% 16% 15% 18% 13%
================================================================================
"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>
17
- --------------------------------------------------------------------------------
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 [BOOK]. 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 [BOOK]
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 [BOOK]
Automatic method for moving a fixed amount of money from one Vanguard fund
account to another.
- --------------------------------------------------------------------------------
VANGUARD FUND EXPRESS(R) [BOOK]
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(R) [BOOK]
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) [BOOK]
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>
18
- - 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 [BOOK]
Invest assets held in an existing personal trust.
- --------------------------------------------------------------------------------
FOR INDIVIDUAL RETIREMENT ACCOUNTS [BOOK]
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 [BOOK]
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>
19
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
regular 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
$1,000.
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 fund account whose
balance falls below the minimum initial investment. The Fund will deduct a $10
annual fee in June if your nonretirement account balance at that time is below
$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-56
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 . . . [PHONE]
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>
20
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 STAR Fund-56
[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>
21
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 23.
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 described in this "Redeeming Shares"
section of the 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 other retirement accounts. If you sell shares of these funds
online, a redemption check will be sent to your address of record.
- --------------------------------------------------------------------------------
ONLINE REQUESTS [COMPUTER]
ACCESS VANGUARD at www.vanguard.com
You can use your personal computer to sell or exchange shares of most Vanguard
funds by accessing our website. To establish this service, you must register
through our website. We will then mail you an account access password that will
enable you to sell or exchange shares online (as well as perform other
transactions).
- --------------------------------------------------------------------------------
TELEPHONE REQUESTS [PHONE]
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.
Retirement Accounts:
You can exchange--but not sell--shares by calling Tele-Account or Client
Services.
<PAGE>
22
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>
23
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(R) REDEMPTIONS
Vanguard will electronically transfer funds to your pre-linked checking or
savings account.
- --------------------------------------------------------------------------------
FOR OUR MUTUAL PROTECTION
For your best interests and ours, Vanguard applies these additional requirements
to redemptions:
REQUEST IN "GOOD ORDER"
All redemption requests must be received by Vanguard in "good order." This means
that your request must include:
- - The Fund name and account number.
- - The amount of the transaction (in dollars or shares).
- - Signatures of all owners exactly as registered on the account (for mail
requests).
- - Signature guarantees (if required).*
- - Any supporting legal documentation that may be required.
- - Any outstanding certificates representing shares to be redeemed.
*For instance, a signature guarantee must be provided by all registered account
shareholders when redemption proceeds are to be sent to a different person or
address. A signature guarantee can be obtained from most commercial and savings
banks, credit unions, trust companies, or member firms of a U.S. stock
exchange.
<PAGE>
24
TRANSACTIONS ARE PROCESSED AT THE NEXT-DETERMINED SHARE PRICE AFTER VANGUARD HAS
RECEIVED ALL REQUIRED INFORMATION.
- --------------------------------------------------------------------------------
LIMITS ON ACCOUNT ACTIVITY
Because excessive account transactions can disrupt management of the Fund and
increase the Fund's costs for all shareholders, Vanguard limits account activity
as follows:
- - You may make no more than TWO SUBSTANTIVE "ROUND TRIPS" THROUGH THE FUND
during any 12-month period.
- - Your round trips through the Fund must be at least 30 days apart.
- - The Fund may refuse a share purchase at any time, for any reason.
- - Vanguard may revoke an investor's telephone exchange privilege at any time,
for any reason.
A "round trip" is a redemption from the Fund followed by a purchase back
into the Fund. Also, a "round trip" covers transactions accomplished by any
combination of methods, including transactions conducted by check, wire, or
exchange to/from another Vanguard fund. "Substantive" means a dollar amount that
Vanguard determines, in its sole discretion, could adversely affect the
management of the Fund.
- --------------------------------------------------------------------------------
RETURN YOUR SHARE CERTIFICATES
Any portion of your account represented by share certificates cannot be redeemed
until you return the certificates to Vanguard. Certificates must be returned
(unsigned), along with a letter requesting the sale or exchange you wish to
process, via certified mail to:
The Vanguard Group
455 Devon Park Drive
Wayne, PA 19087-1815
- --------------------------------------------------------------------------------
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>
25
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, 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 [BOOK]
Mailed quarterly for most accounts; shows the market value of your account at
the close of the statement period, as well as distributions, purchases, sales,
and exchanges for the current calendar year.
- --------------------------------------------------------------------------------
FUND FINANCIAL REPORTS
Mailed in February and August for 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 [BOOK]
Issued quarterly for most taxable accounts (accompanies your Portfolio Summary);
shows the average cost of shares that you redeemed during the calendar year,
using only the average cost single category method.
- --------------------------------------------------------------------------------
<PAGE>
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<PAGE>
(THIS PAGE INTENTIONALLY LEFT BLANK.)
<PAGE>
(THIS PAGE INTENTIONALLY LEFT BLANK.)
<PAGE>
GLOSSARY OF INVESTMENT TERMS
BALANCED FUND
A mutual fund that seeks to provide some combination of income, capital growth,
and conservation of capital by investing in stocks, bonds, and/or money market
instruments.
BOND
A debt security (IOU) issued by a corporation, government, or government agency
in exchange for the money you lend it. In most instances, the issuer agrees to
pay back the loan by a specific date and to make regular interest payments until
that date.
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.
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.
CREDIT QUALITY
A measure of a bond issuer's ability to pay interest and principal in a timely
manner.
DIVIDEND INCOME
Payment to shareholders of income from interest or dividends generated by a
fund's investments.
DURATION
A measure of the sensitivity of bond--and bond fund--prices to interest rate
movements. For example, if a bond has a duration of two years, its price would
fall by about 2% when interest rates rose one percentage point. On the other
hand, the bond's price would rise by about 2% when interest rates fell by one
percentage point.
EXPENSE RATIO
The percentage of a fund's average net assets used to pay its expenses. The
expense ratio includes management fees, administrative fees, and any 12b-1
distribution fees.
FUND DIVERSIFICATION
Holding a variety of securities so that a fund's return is not badly hurt by the
poor performance of a single security, industry, or country.
FUND OF FUNDS
A mutual fund that pursues its objective by investing in other mutual funds
rather than in individual stocks or bonds.
INVESTMENT ADVISER
An organization that makes the day-to-day decisions regarding a fund's
investments.
INVESTMENT GRADE
Bonds whose credit quality is considered to be among the highest by independent
bond- rating agencies. Bonds rated in one of the four highest rating categories
are considered "investment grade."
NET ASSET VALUE (NAV)
The market value of a mutual fund's total assets, minus liabilities, divided by
the number of shares outstanding. The value of a single share is called its
share value or share price.
PRICE/EARNINGS (P/E) RATIO
The current share price of a stock, divided by its per-share earnings (profits)
from the past year. A stock selling for $20, with earnings of $2 per share, has
a price/earnings ratio of 10.
TOTAL RETURN
A percentage change, over a specified time period, in a mutual fund's net asset
value, with the ending net asset value adjusted to account for the reinvestment
of all distributions of dividends and capital gains.
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(R) LOGO]
[THE VANGUARD GROUP(R) LOGO]
Post Office Box 2600
Valley Forge, PA 19482-2600
FOR MORE INFORMATION
If you'd like more information about
Vanguard STAR 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 1-202-942-8090. Reports and
other information about the Fund are
also available on the SEC's website
(www.sec.gov), or you can receive
copies of this information, for a
fee, by electronic request at the
following e-mail address:
[email protected], or by writing
the Public Reference Section,
Securities and Exchange
Commission, Washington, DC
20549-0102.
Fund's Investment Company Act file
number: 811-3919
(C) 2000 The Vanguard Group, Inc.
All rights reserved.
Vanguard Marketing Corporation,
Distributor.
P056N-04/28/2000
<PAGE>
VANGUARD
STAR(TM) FUND
Participant Prospectus
April 28, 2000
This prospectus contains
financial data for the
Fund through the
fiscal year ended
December 31, 1999.
[THE VANGUARD GROUP(R) LOGO]
<PAGE>
VANGUARD(R) STAR(TM) FUND
Participant Prospectus
April 28, 2000
A Balanced Mutual Fund
- --------------------------------------------------------------------------------
CONTENTS
- --------------------------------------------------------------------------------
1 FUND PROFILE 13 DIVIDENDS, CAPITAL GAINS, AND TAXES
3 ADDITIONAL INFORMATION 14 SHARE PRICE
4 A WORD ABOUT RISK 14 FINANCIAL HIGHLIGHTS
4 WHO SHOULD INVEST 16 INVESTING WITH VANGUARD
5 PRIMARY INVESTMENT STRATEGIES 17 ACCESSING FUND INFORMATION BY
COMPUTER
11 THE FUND AND VANGUARD
GLOSSARY (inside back cover)
12 INVESTMENT ADVISER
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
WHY READING THIS PROSPECTUS IS IMPORTANT
This prospectus explains the objective, risks, and strategies of Vanguard STAR
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
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.
- --------------------------------------------------------------------------------
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 STAR Fund.
INVESTMENT OBJECTIVE
The Fund seeks to provide long-term capital growth and income.
INVESTMENT STRATEGIES
As a "fund of funds," STAR Fund invests in a diversified group of other Vanguard
mutual funds, rather than in individual securities. The Fund follows a balanced
investment approach by placing 60% to 70% of its assets in common stocks through
six stock funds; 20% to 30% of its assets in bonds through two bond funds; and
10% to 20% of its assets in short-term reserves through a short-term bond fund
and a money market fund. Through the underlying funds, STAR Fund owns a
diversified mix of stocks (with emphasis on large-cap value stocks) and bonds
(primarily short- and long-term investment-grade corporate bonds and
intermediate-term GNMA mortgage-backed bonds).
PRIMARY RISKS
The Fund is subject to several stock and bond market risks, any of which could
cause an investor to lose money. However, because stock and bond prices can move
in different directions or in different amounts, the Fund's bond and short-term
reserve holdings may counteract some of the volatility experienced by the Fund's
stock holdings. The Fund's balanced portfolio, in the long run, should result in
less investment risk--but a lower investment return--than that of a fund
investing exclusively in common stocks.
- - Stock risks include: stock market risk, which is the chance that stock
prices in general will decline over short or even long periods; and
investment style risk, which is the chance that returns from the stock
market segments in which the Fund is most heavily weighted
(large-capitalization and value stocks) may underperform other asset
classes or the overall stock market.
- - Bond risks include: interest rate risk, which is the chance that bond
prices overall will decline over short or even long periods due to rising
interest rates; credit risk, which is the chance that a bond issuer will
fail to pay interest and principal in a timely manner; and call/prepayment
risk, which is the chance that during periods of falling interest rates, a
bond issuer will repay a higher-yielding bond before its maturity date,
forcing the Fund to reinvest the unanticipated proceeds at lower interest
rates.
- - The Fund is also subject to manager risk, which is the chance that poor
security selection by the investment advisers of the underlying funds will
cause the Fund to underperform other funds with similar investment
objectives. For additional information on investment risks, see PRIMARY
INVESTMENT STRATEGIES.
<PAGE>
2
PERFORMANCE/RISK INFORMATION
The bar chart and table below provide an indication of the risk of investing in
the Fund. The bar chart shows the Fund's performance in each calendar year over
a ten-year period. The table shows how the Fund's average annual total returns
for one, five, and ten calendar years compare with those of broad-based stock
and bond market indexes and a composite stock/bond index weighted to match the
Fund's target allocation. Keep in mind that the Fund's past performance does not
indicate how it will perform in the future.
----------------------------------------------------
ANNUAL TOTAL RETURNS
----------------------------------------------------
1990 -3.62%
1991 24.18%
1992 10.51%
1993 10.88%
1994 -0.21%
1995 28.64%
1996 16.11%
1997 21.15%
1998 12.38%
1999 7.13%
----------------------------------------------------
During the period shown in the bar chart, the highest return for a calendar
quarter was 12.30% (quarter ended March 31, 1991) and the lowest return for a
quarter was -10.71% (quarter ended September 30, 1990).
-------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS FOR YEARS ENDED DECEMBER 31, 1999
-------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS
-------------------------------------------------------------------------
Vanguard STAR Fund 7.13% 16.85% 12.29%
Wilshire 5000 Total Market Index 23.77 27.11 17.61
Lehman Brothers Aggregate
Bond Index -0.82 7.73 7.70
STAR Lipper Composite* 15.82 16.33 12.12
-------------------------------------------------------------------------
*Weighted 62.5% Lipper General Equity, 25% Lipper Fixed Income, and
12.5% Lipper Money Market.
-------------------------------------------------------------------------
FEES AND EXPENSES
The following table describes the fees and expenses you may pay if you buy and
hold shares of the Fund. The expenses shown under Annual Fund Operating Expenses
are based upon those incurred in the fiscal year ended December 31, 1999.
SHAREHOLDER FEES (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fee: None
Exchange Fee: None
ANNUAL FUND OPERATING EXPENSES (expenses deducted from the underlying
funds' assets)
Indirect Operating Expenses: +
+Although STAR Fund is not expected to incur any net expenses directly, the
Fund's shareholders indirectly bear the expenses of the underlying Vanguard
funds in which the Fund invests. See THE FUND AND VANGUARD. The Fund's
indirect expense ratio, based on its investments in the underlying Vanguard
funds, was 0.36% as of December 31, 1999.
<PAGE>
3
The following example is intended to help you compare the cost of investing
in the Fund with the cost of investing in other mutual funds. It illustrates the
hypothetical expenses that you would incur over various periods if you invest
$10,000 in the Fund. This example assumes that the Fund provides a return of 5%
a year, and that operating expenses of the Fund and its underlying funds remain
the same. The results apply whether or not you redeem your investment at the end
of each period.
- -------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- -------------------------------------------------
$37 $116 $203 $457
- -------------------------------------------------
THIS EXAMPLE SHOULD NOT BE CONSIDERED TO REPRESENT ACTUAL EXPENSES OR
PERFORMANCE FROM THE PAST OR FOR THE FUTURE. ACTUAL FUTURE EXPENSES MAY BE
HIGHER OR LOWER THAN THOSE SHOWN.
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION
DIVIDENDS AND CAPITAL GAINS NET ASSETS AS OF DECEMBER 31, 1999
Dividends are distributed in June $8.1 billion
and December; capital gains, if any,
are distributed annually in December NEWSPAPER ABBREVIATION
STAR
INVESTMENT ADVISER
The Fund does not employ an investment VANGUARD FUND NUMBER
adviser, but benefits from the 056
investment advisory services provided
to the underlying Vanguard funds in CUSIP NUMBER
which it invests 921909107
INCEPTION DATE TICKER SYMBOL
March 29, 1985 VGSTX
- --------------------------------------------------------------------------------
<PAGE>
4
- --------------------------------------------------------------------------------
A WORD ABOUT RISK
This prospectus describes risks you would face as an investor in Vanguard STAR
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 and bond markets.
Look for this [FLAG] symbol throughout the prospectus. It is used to mark
detailed information about each type of risk that you would confront as a
shareholder of the Fund.
- --------------------------------------------------------------------------------
WHO SHOULD INVEST
The Fund may be a suitable investment for you if:
- - You wish to add a balanced fund to your existing holdings, which could
include other stock and bond--as well as money market and
tax-exempt--investments.
- - You are seeking growth of your capital over the long term--at least five
years--without taking undue risk.
- - You are seeking moderate current income.
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
COSTS AND MARKET-TIMING
Some investors try to profit from market-timing--switching money into
investments when they expect prices to rise, and taking money out when they
expect the market to fall. As money is shifted in and out, a fund incurs
expenses for buying and selling securities. These costs are borne by all fund
shareholders, including the long-term investors who do not generate the costs.
Therefore, the Fund discourages short-term trading by, among other things,
limiting the number of exchanges it permits.
- --------------------------------------------------------------------------------
THE VANGUARD FUNDS DO NOT PERMIT MARKET-TIMING. DO NOT INVEST IN THIS FUND
IF YOU ARE A MARKET-TIMER.
The Fund has adopted the following policies, among others, to discourage
short-term trading:
- - The Fund reserves the right to reject any purchase request--including
exchanges from other Vanguard funds--that it regards as disruptive to the
efficient management of the Fund. A purchase request could be rejected
because of the timing of the request or because of a history of excessive
trading by the investor.
- - There is a limit on the number of times you can exchange into and out of
the Fund (see "Exchanges" in the INVESTING WITH VANGUARD section).
- - The Fund reserves the right to stop offering shares at any time.
<PAGE>
5
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
BALANCED FUNDS
Balanced funds are generally "middle of the road" investments that seek to
provide some combination of growth, income, and conservation of capital by
investing in a mix of stocks, bonds, and/or money market instruments. Because
the prices of stocks and bonds often move in different directions, balanced
funds are able to use rewards from one type of investment to help offset the
risks from another.
- --------------------------------------------------------------------------------
PRIMARY INVESTMENT STRATEGIES
This section explains how the Fund pursues its objective, long-term growth of
capital and income. The Fund's Board of Trustees oversees the management of the
Fund, and may change the investment strategies in the interest of shareholders.
In addition, this section discusses several important risks faced by investors
in the Fund.
MARKET EXPOSURE
STOCKS
Through six underlying Vanguard funds, STAR Fund invests 60% to 70% of its
assets in common stocks. The Fund's indirect investment in stocks is designed to
provide long-term capital growth and some income. The underlying stock funds are
described on page 9.
[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 stock market activity. (Total returns consist of dividend income plus change
in market price.) Note that the returns shown do not include the costs of buying
and selling stocks or other expenses that a real-world investment portfolio
would incur. Note, also, that the gap between best and worst tends to narrow
over the long term.
- ------------------------------------------------------
U.S. STOCK MARKET RETURNS (1926-1999)
- ------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS 20 YEARS
- ------------------------------------------------------
Best 54.2% 28.6% 19.9% 17.9%
Worst -43.1 -12.4 -0.9 3.1
Average 13.2 11.0 11.1 11.1
- ------------------------------------------------------
The table covers all of the 1-, 5-, 10-, and 20-year periods from 1926
through 1999. You can see, for example, that while the average return on common
stocks for all of the 5-year periods was 11.0%, returns for individual 5-year
periods ranged from a -12.4% average (from 1928 through 1932) to 28.6% (from
1995 through 1999). These average returns reflect past performance on common
stocks; you should not regard them as an indication of future returns from
either the stock market as a whole or this Fund in particular.
<PAGE>
6
Because stock and bond prices can move in different directions or in
different amounts, the Fund's bond and money market fund holdings may help to
dampen--but will not eliminate--the volatility experienced by the Fund as a
result of its stock fund holdings. The Fund's balanced portfolio, in the long
run, should result in less investment risk--and a lower investment return--than
a fund investing exclusively in common stocks.
[FLAG]THE FUND IS SUBJECT TO INVESTMENT-STYLE RISK, WHICH IS THE CHANCE THAT
RETURNS FROM THE STOCK MARKET SEGMENTS IN WHICH THE FUND IS MOST HEAVILY
WEIGHTED MAY UNDERPERFORM OTHER ASSET CLASSES OR THE OVERALL STOCK MARKET.
Through its share ownership of the underlying stock funds, STAR Fund indirectly
owns a diversified mixture of common stocks. Although its indirect stock
holdings are predominantly large-cap, the Fund has significant exposure to
mid-cap stocks and some exposure to small-cap stocks. Mid-cap and small-cap
stocks tend to be more volatile than large-cap stocks. The Fund's indirect stock
holdings are predominantly value-oriented, although the Fund has significant
exposure to growth stocks.
- --------------------------------------------------------------------------------
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 typically 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.
- --------------------------------------------------------------------------------
BONDS
Through two underlying Vanguard funds, STAR Fund invests roughly 20% to 30% of
its assets in bonds, predominantly intermediate- and long-term bonds. The Fund's
indirect investment in bonds is designed to provide a high level of current
income with less price volatility than would be expected from the stock portion
of its holdings. The underlying bond funds are described on pages 9 and 10.
[FLAG]THE FUND IS SUBJECT TO INTEREST RATE RISK, WHICH IS THE CHANCE THAT BOND
PRICES OVERALL WILL DECLINE OVER SHORT OR EVEN LONG PERIODS DUE TO RISING
INTEREST RATES. INTEREST RATE RISK IS MODEST FOR SHORTER-TERM BOND FUNDS
AND HIGHER FOR LONGER-TERM BOND FUNDS.
Although bonds are often thought to be less risky than stocks, there have
been periods when bond prices have fallen significantly due to rising interest
rates. For instance, prices of long-term bonds fell by almost 48% between
December 1976 and September 1981.
To illustrate the relationship between bond prices and interest rates, the
following table shows the effect of a 1% and a 2% change (both up and down) in
interest rates on three bonds of different maturities, each with a face value of
$1,000.
<PAGE>
7
- --------------------------------------------------------------------------------
HOW INTEREST RATE CHANGES AFFECT THE
VALUE OF A $1,000 BOND*
- -------------------------------------------------------------------------------
AFTER A 1% AFTER A 1% AFTER A 2% AFTER A 2%
TYPE OF BOND (MATURITY) INCREASE DECREASE INCREASE DECREASE
- -------------------------------------------------------------------------------
Short-Term (2.5 years) $978 $1,023 $956 $1,046
Intermediate-Term (10 years) 932 1,074 870 1,156
Long-Term (20 years) 901 1,116 816 1,251
- -------------------------------------------------------------------------------
These figures are intended only to illustrate interest rate risk; they
should not be regarded as an indication of future returns from the bond market
as a whole, or STAR Fund in particular. Also, changes in interest rates may not
have as dramatic an effect on the Fund as they would on a fund made up entirely
of bonds.
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
BONDS AND INTEREST RATES
As a rule, when interest rates rise, bond prices fall. The opposite is also
true: Bond prices go up when interest rates fall. Why do bond prices and
interest rates move in opposite directions? Let's assume that you hold a bond
offering a 5% yield. A year later, interest rates are on the rise and bonds are
offered with a 6% yield. With higher-yielding bonds available, you would have
trouble selling your 5% bond for the price you paid--causing you to lower your
asking price. On the other hand, if interest rates were falling and 4% bonds
were being offered, you should be able to sell your 5% bond for more than you
paid.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
BOND MATURITIES
A bond is issued with a specific maturity date--the date when the bond's issuer,
or seller, must pay back the bond's initial value (known as its "face value").
Bond maturities generally range from less than one year (short-term) to 30 years
(long-term). The longer a bond's maturity, the more risk you, as a bond
investor, face as interest rates rise--but also the more interest you could
receive. Long-term bonds are more suitable for investors willing to take greater
risks in hope of higher yields; short-term bond investors should be willing to
accept lower yields in return for less fluctuation in the value of their
investment.
- --------------------------------------------------------------------------------
[FLAG]THE FUND IS SUBJECT TO CREDIT RISK, WHICH IS THE CHANCE THAT A BOND ISSUER
WILL FAIL TO PAY INTEREST AND PRINCIPAL IN A TIMELY MANNER.
Since the underlying Vanguard bond funds invest primarily in high-quality
obligations, credit risk is relatively low.
<PAGE>
8
[FLAG]THE FUND IS ALSO SUBJECT TO CALL RISK (IN THE CASE OF CORPORATE BONDS) AND
PREPAYMENT RISK (IN THE CASE OF MORTGAGE-BACKED BONDS). THERE IS THE CHANCE
THAT DURING PERIODS OF FALLING INTEREST RATES A BOND ISSUER WILL REPAY A
HIGHER-YIELDING BOND BEFORE ITS MATURITY DATE. FORCED TO REINVEST THE
UNANTICIPATED PROCEEDS AT LOWER INTEREST RATES, THE FUND WOULD EXPERIENCE A
DECLINE IN INCOME AND LOSE THE OPPORTUNITY FOR ADDITIONAL PRICE
APPRECIATION ASSOCIATED WITH FALLING RATES.
SHORT-TERM RESERVES
Through two underlying Vanguard funds, STAR Fund invests roughly 10% to 20% of
its assets in short-term reserves. These reserves consist of investment-grade
short-term bonds and high quality money market instruments, including commercial
paper and repurchase agreements. From this investment, the Fund seeks to obtain
current income and to moderate the overall volatility of the Fund.
The Fund's short-term reserves are subject to a high level of income risk,
which is the chance that dividends will decline if short-term interest rates
fall, and a low level of credit risk, which is the chance that an issuer of a
money market instrument or short-term bond will fail to pay interest or
principal in a timely manner. Because the Fund does not invest heavily in
short-term reserves, however, both income risk and credit risk to STAR Fund will
be low.
SECURITY SELECTION
Vanguard STAR Fund is a "fund of funds," which means that it achieves its
objective by investing in a combination of other mutual funds rather than in
individual securities.
Decisions about how to allocate STAR Fund's assets among the three asset
classes (stocks, bonds, and short-term reserves) and among the underlying funds
are made by the Trustees of the Fund. Generally, the Fund invests 60% to 70% of
its assets in stock funds, 20% to 30% in bond funds, and 10% to 20% in a
short-term bond fund and a money market fund. While these allocations may shift
from time to time, stocks can be expected to represent at least 60% of the
Fund's holdings at any given time. Within any given asset class, Vanguard may
increase or decrease the percentage of assets invested in any particular fund
without advance notice to shareholders.
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
"FUND OF FUNDS"
The term "fund of funds" is used to describe a mutual fund that pursues its
objective by investing in other mutual funds rather than in individual stocks or
bonds. A fund of funds may charge for its own direct expenses, in addition to
bearing a proportionate share of the expenses charged by the underlying funds in
which it invests. Funds of funds are best suited for long-term investors.
- --------------------------------------------------------------------------------
[FLAG]THE FUND IS SUBJECT TO MANAGER RISK, WHICH IS THE CHANCE THAT THE
INVESTMENT ADVISERS OF THE UNDERLYING FUNDS WILL DO A POOR JOB OF SELECTING
SECURITIES.
The underlying Vanguard funds are run by their investment advisers
according to traditional methods of active investment management. This means
that securities are
<PAGE>
9
bought and sold according to the advisers' judgments about companies and their
financial prospects, about issuers of bonds and money market instruments, and
about the general level of interest rates.
The Fund is generally managed without regard to tax ramifications.
STOCKS
STAR Fund invests in the following stock funds, in approximately the percentages
indicated:
1. Vanguard Windsor II Fund (23%)
2. Vanguard Windsor Fund (16%)
3. Vanguard Explorer Fund (7%)
4. Vanguard PRIMECAP Fund (7%)
5. Vanguard Morgan Growth Fund (5%)
6. Vanguard U.S. Growth Fund (5%)
Vanguard Windsor Fund and Vanguard Windsor II Fund are value-oriented stock
funds, chosen primarily for their potential for long-term capital growth, as
well as for their current income-producing capabilities. They work toward these
goals by investing in large- and medium-size companies believed by the advisers
to be undervalued when purchased. These stocks typically--but not always--have
lower-than-average price/earnings ratios and higher-than-average dividend
yields.
Vanguard Explorer Fund is an aggressive growth fund and Vanguard PRIMECAP
Fund, Vanguard Morgan Growth Fund, and Vanguard U.S. Growth Fund are growth
funds. These funds are held by STAR Fund primarily to provide long-term capital
growth. They work in different ways to achieve this goal.
- - Vanguard Explorer Fund invests in common stocks of small U.S. companies
which, in the advisers' opinion, have above-average prospects for growth.
- - Vanguard PRIMECAP Fund invests in common stocks that the adviser believes
have above-average prospects for continued growth. The fund's portfolio
consists predominately of large-cap and mid-cap stocks.
- - Vanguard Morgan Growth Fund invests mainly in the common stocks of large-
and medium-size domestic companies whose revenues and/or earnings are
expected to grow faster than those of the average company in the market.
The fund also invests in common stocks of smaller companies with similar
characteristics.
- - Vanguard U.S. Growth Fund invests in common stocks of large, seasoned U.S.
companies that have past records of growth and, in the adviser's opinion,
above-average prospects for continued growth.
Although there are no present plans to do so, the Fund also is authorized
to invest in Vanguard 500 Index Fund, which tracks the performance of the S&P
500 Index.
BONDS
STAR Fund invests in two bond funds, in approximately the percentages indicated:
1. Vanguard GNMA Fund (13%)
2. Vanguard Long-Term Corporate Fund (12%)
Both bond funds seek to provide a high and stable level of income. They
work toward this goal, however, in different ways:
- - Vanguard GNMA Fund invests at least 80% of its total assets in
mortgage-backed bonds issued by the Government National Mortgage
Association. The bonds offer a U.S. government guarantee of timely
principal and interest payments, along with income that
<PAGE>
10
usually exceeds that of comparable U.S. Treasury securities. The fund's
effective dollar-weighted average maturity depends on homeowner prepayments
of the underlying mortgages, but normally falls within an intermediate-term
range (5 to 10 years).
- - Vanguard Long-Term Corporate Fund invests in a diversified group of
investment-grade corporate bonds--that is, bonds issued by corporations
that are rated at least Baa by Moody's Investors Service, Inc., or BBB by
Standard & Poor's Corporation. The fund maintains a dollar-weighted average
maturity of 15 to 25 years.
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
TYPES OF BONDS
Bonds are issued (sold) by many sources: Corporations issue corporate bonds; the
federal government issues U.S. Treasury bonds; agencies of the federal
government issue agency bonds; and mortgage holders issue "mortgage-backed"
pass-through certificates such as those issued by the Government National
Mortgage Association (GNMAs). Each issuer is responsible for paying back the
bond's initial value as well as making periodic interest payments.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
CREDIT QUALITY
A bond's credit quality depends on the issuer's ability to pay interest on the
bond and, ultimately, to repay the debt. The lower the rating by one of the
independent bond-rating agencies (for example, Moody's or Standard & Poor's),
the greater the chance (in the rating agency's opinion) that the bond issuer
will default, or fail to meet its payment obligations. All things being equal,
the lower a bond's credit rating, the higher its yield should be to compensate
investors for assuming additional risk. Bonds rated in one of the four highest
rating categories are considered "investment grade." The Fund's Statement of
Additional Information includes a detailed description of the credit-rating
scales used by major, independent bond-rating agencies.
- --------------------------------------------------------------------------------
SHORT-TERM RESERVES
To satisfy its policy of allocating 10% to 20% of assets to short-term reserves,
STAR Fund invests in the following two funds in approximately the percentages
indicated:
1. Vanguard Short-Term Corporate Fund (11%)
2. Vanguard Prime Money Market Fund (1%)
- - Vanguard Short-Term Corporate Fund invests in a diversified group of
investment-grade corporate bonds. The Fund maintains a dollar-weighted
average maturity of between one and three years.
- - Vanguard Prime Money Market Fund invests in high quality short-term money
market instruments rated in one of the two highest credit quality
categories.
OTHER INVESTMENT POLICIES AND RISKS
The Fund's underlying funds may invest, to a limited extent, in foreign
securities.
The Fund's underlying funds may temporarily depart from their normal
investment policies--for instance, by investing substantially in cash
reserves--in response to extraordinary market, economic, political, or other
conditions. In doing so, the STAR Fund may succeed in avoiding losses but
otherwise fail to achieve its investment objective.
<PAGE>
11
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
THE FUND AND VANGUARD
STAR Fund has entered into an agreement with Vanguard under which Vanguard
provides all management, administrative, and distribution services to the Fund
at cost. The Fund owes Vanguard a sum sufficient to cover Vanguard's
out-of-pocket costs. The Fund also bears the expenses of services provided by
other parties (such as auditors, legal counsel, and the Fund's custodian), as
well as taxes and other direct expenses of the Fund. However, the agreement
provides that the Fund's expenses will be offset by reimbursements from Vanguard
for (a) contributions made by the Fund to the cost of operating the underlying
Vanguard funds in which STAR Fund invests, and (b) certain savings in
administrative and marketing costs that Vanguard is expected to derive from the
operation of the Fund.
The Fund's Trustees believe that the reimbursements should be sufficient to
offset most, if not all, of the expenses incurred by the Fund. Therefore, the
Fund is expected to operate at a very low or zero expense ratio. Since its
inception in 1985, the Fund in fact has had no direct net expenses.
Of course, shareholders of STAR Fund will still bear, indirectly, their
proportionate share of the costs of operating the underlying Vanguard funds. The
following chart provides the expense ratio for each of the underlying funds
during STAR Fund's 1999 fiscal year, as well as the percentage of STAR Fund's
net assets invested in each fund as of December 31, 1999:
- -----------------------------------------------------------------------
PERCENTAGE OF STAR FUND'S
UNDERLYING FUND EXPENSE RATIO NET ASSETS
- -----------------------------------------------------------------------
Windsor II Fund 0.37% 23.4%
Windsor Fund 0.28 16.2
Explorer Fund 0.74 6.5
PRIMECAP Fund 0.52 6.4
Morgan Growth Fund 0.42 5.2
U.S. Growth Fund 0.39 5.2
GNMA Fund 0.27 12.6
Long-Term Corporate Fund 0.30 12.3
Short-Term Corporate Fund 0.25 11.2
Prime Money Market Fund 0.33 1.0
- -----------------------------------------------------------------------
100.0%
- -----------------------------------------------------------------------
Based on these figures, the indirect expense ratio for STAR Fund's
underlying investments on December 31, 1999 was 0.36%. Vanguard expects the
Fund's indirect expense ratio in 2000 to remain at or about 0.36%.
<PAGE>
12
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
FUND EXPENSES
All mutual funds have operating expenses. These expenses, which are deducted
from a fund's gross income, are expressed as a percentage of the net assets of
the fund. Vanguard STAR Fund's indirect expense ratio in fiscal year 1999 was
0.36%, or $3.60 per $1,000 of average net assets. The average balanced mutual
fund had expenses in 1999 of 1.33%, or $13.30 per $1,000 of average net assets
(derived from data provided by Lipper Inc., which reports on the mutual fund
industry). Management expenses, which comprise 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.
- --------------------------------------------------------------------------------
INVESTMENT ADVISER
The Fund does not employ an investment adviser. Rather, the Fund's Board of
Trustees decides how to allocate its assets among the underlying funds. The
chart below lists the investment adviser employed by each underlying fund:
- --------------------------------------------------------------------------------
UNDERLYING FUND INVESTMENT ADVISER
- --------------------------------------------------------------------------------
Vanguard Windsor Fund Wellington Management Company, LLP
Sanford C. Bernstein & Company, Inc.
The Vanguard Group
- --------------------------------------------------------------------------------
Vanguard Windsor II Fund Barrow, Hanley, Mewhinney & Strauss, Inc.
Equinox Capital Management LLC
Tukman Capital Management, Inc.
The Vanguard Group
- --------------------------------------------------------------------------------
Vanguard Morgan Growth Fund Franklin Portfolio Associates, LLC
The Vanguard Group
Wellington Management Company, LLP
- --------------------------------------------------------------------------------
Vanguard U.S. Growth Fund Lincoln Capital Management Company
- --------------------------------------------------------------------------------
Vanguard PRIMECAP Fund PRIMECAP Management Company
- --------------------------------------------------------------------------------
Vanguard Explorer Fund Granahan Investment Management, Inc.
Wellington Management Company, LLP
Chartwell Investment Partners
The Vanguard Group
Grantham, Mayo, Van Otterloo & Co. LLC
- --------------------------------------------------------------------------------
Vanguard GNMA Fund Wellington Management Company, LLP
- --------------------------------------------------------------------------------
Vanguard Long-Term Corporate Fund Wellington Management Company, LLP
- --------------------------------------------------------------------------------
Vanguard Short-Term Corporate Fund The Vanguard Group
- --------------------------------------------------------------------------------
Vanguard Prime Money Market Fund The Vanguard Group
- --------------------------------------------------------------------------------
<PAGE>
13
The chart below briefly describes each investment advisory firm:
- --------------------------------------------------------------------------------
FIRM BACKGROUND
- --------------------------------------------------------------------------------
Wellington Management Company, LLP - Based in Boston, Massachusetts
- Founded in 1928
- Manages about $235 billion in assets
- --------------------------------------------------------------------------------
Sanford C. Bernstein & Company, Inc. - Based in New York, New York
- Founded in 1968
- Manages about $87 billion in assets
- --------------------------------------------------------------------------------
Barrow, Hanley, Mewhinney & Strauss, - Based in Dallas, Texas
Inc. - Founded in 1979
- Manages about $29 billion in assets
- --------------------------------------------------------------------------------
Equinox Capital Management LLC - Based in New York, New York
- Founded in 1989
- Manages about $14 billion in assets
- --------------------------------------------------------------------------------
Tukman Capital Management, Inc. - Based in Larkspur, California
- Founded in 1980
- Manages about $8 billion in assets
- --------------------------------------------------------------------------------
Franklin Portfolio Associates, LLC - Based in Boston, Massachusetts
- Founded in 1982
- Manages about $21 billion in assets
- --------------------------------------------------------------------------------
Lincoln Capital Management Company - Based in Chicago, Illinois
- Founded in 1967
- Manages about $68 billion in assets
- --------------------------------------------------------------------------------
PRIMECAP Management Company - Based in Pasadena, California
- Founded in 1983
- Manages about $25 billion in assets
- --------------------------------------------------------------------------------
Granahan Investment Management, Inc. - Based in Waltham, Massachusetts
- Founded in 1985
- Manages about $2 billion in assets
- --------------------------------------------------------------------------------
Chartwell Investment Partners - Based in Berwyn, Pennsylvania
- Founded in 1997
- Manages about $4 billion in assets
- --------------------------------------------------------------------------------
The Vanguard Group - Based in Valley Forge, Pennsylvania
- Founded in 1975
- Manages about $371 billion in assets
- --------------------------------------------------------------------------------
Grantham, Mayo, Van Otterloo & Co. LLC - Based in Boston, Massachusetts
- Founded in 1977
- Manages about $26 billion in assets
- --------------------------------------------------------------------------------
DIVIDENDS, CAPITAL GAINS, AND TAXES
The Fund distributes to shareholders virtually all of its net income (interest
and dividends paid by the underlying funds), as well as any capital gains
realized from the sale of its holdings or received as capital gains
distributions from the underlying funds. Income dividends generally are
distributed in June and December; capital gains 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
<PAGE>
14
withdrawals from the plan. You should consult your plan administrator, your
plan's Summary Plan Description, or your tax adviser about the tax consequences
of plan withdrawals.
SHARE PRICE
The Fund's share price, called its net asset value, or NAV, is calculated each
business day after the close of regular trading on the New York Stock Exchange
(the NAV is not calculated on holidays or other days when the Exchange is
closed). Net asset value per share is computed by adding up the total value of
the Fund's investments (i.e., shares of the underlying Vanguard funds) and other
assets, subtracting any of its liabilities (debts), and then dividing by the
number of Fund shares outstanding:
TOTAL ASSETS - LIABILITIES
NET ASSET VALUE = --------------------------------
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.
The Fund's share price can be found daily in the mutual fund listings of
most major newspapers under the heading "Vanguard Funds." Different newspapers
use different abbreviations of the Fund's name, but the most common is STAR.
FINANCIAL HIGHLIGHTS
The following financial highlights table is intended to help you understand the
Fund's financial performance for the past five years, and certain information
reflects financial results for a single Fund share. The total returns in the
table represent the rate that an investor would have earned or lost each year on
an investment in the Fund (assuming reinvestment of all dividend and capital
gains distributions). This information has been derived from the financial
statements audited by PricewaterhouseCoopers LLP, independent accountants, whose
report--along with the Fund's financial statements--is included in the Fund's
most recent annual report to shareholders. You may have the annual report sent
to you without charge by contacting Vanguard.
<PAGE>
15
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
HOW TO READ THE FINANCIAL HIGHLIGHTS TABLE
The Fund began fiscal 1999 with a net asset value (price) of $17.96 per share.
During the year, the Fund earned $0.60 per share from investment income and
$1.13 per share in capital gains distributions. There was a decline of $0.47 per
share from investments that had depreciated in value or that were sold for lower
prices than the Fund paid for them.
Shareholders received $1.01 per share in the form of dividend and capital gains
distributions. A portion of each year's distributions may come from the prior
year's income or capital gains.
The earnings ($1.26 per share) minus the distributions ($1.01 per share)
resulted in a share price of $18.21 at the end of the year. This was an increase
of $0.25 per share (from $17.96 at the beginning of the year to $18.21 at the
end of the year). For a shareholder who reinvested the distributions in the
purchase of more shares, the total return from the Fund was 7.13% for the year.
As of December 31, 1999, the Fund had $8.1 billion in net assets. For the year,
its net investment income amounted to 3.21% of its average net assets; and it
sold and replaced securities valued at 10% of its net assets.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
VANGUARD STAR FUND
YEAR ENDED DECEMBER 31,
-------------------------------------------------------
1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------
NET ASSET VALUE,
BEGINNING OF YEAR $17.96 $17.38 $15.86 $15.03 $12.61
- --------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .60 .58 .60 .58 .590
Capital Gains Distributions
Received 1.13 .86 1.06 .63 .435
Net Realized and
Unrealized Gain (Loss)
on Investments (.47) .70 1.65 1.19 2.550
------------------------------------------------------
Total from Investment
Operations 1.26 2.14 3.31 2.40 3.575
------------------------------------------------------
DISTRIBUTIONS
Dividends from Net
Investment Income (.61) (.58) (.59) (.59) (.590)
Distributions from
Realized Capital Gains (.40) (.98) (1.20) (.98) (.565)
-------------------------------------------------------
Total Distributions (1.01) (1.56) (1.79) (1.57) (1.155)
- --------------------------------------------------------------------------------
NET ASSET VALUE, END
OF YEAR $18.21 $17.96 $17.38 $15.86 $15.03
================================================================================
TOTAL RETURN 7.13% 12.38% 21.15% 16.11% 28.64%
================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of
Year (Millions) $8,087 $8,083 $7,355 $5,863 $4,842
Ratio of Total
Expenses to Average
Net Assets 0% 0% 0% 0% 0%
Ratio of Net
Investment Income to
Average Net Assets 3.21% 3.18% 3.46% 3.71% 4.12%
Turnover Rate 10% 16% 15% 18% 13%
================================================================================
"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>
16
INVESTING WITH VANGUARD
The Fund is an investment option in your retirement or savings plan. Your plan
administrator or your employee benefits office can provide you with detailed
information on how to participate in your plan and how to elect the Fund as an
investment option.
- - If you have any questions about the Fund or Vanguard, including those about
the Fund's investment objective, strategies, or risks, contact Vanguard's
Participant Access Center, toll-free, at 1-800-523-1188.
- - If you have questions about your account, contact your plan administrator
or the organization that provides recordkeeping services for your plan.
INVESTMENT OPTIONS AND ALLOCATIONS
Your plan's specific provisions may allow you to change your investment
selections, the amount of your contributions, or how your contributions are
allocated among the investment choices available to you. Contact your plan
administrator or employee benefits office for more details.
TRANSACTIONS
Contributions, exchanges, or redemptions of the Fund's shares are processed as
soon as they have been received by Vanguard in good order. Good order means that
your request includes complete information on your contribution, exchange, or
redemption, and that Vanguard has received the appropriate assets.
In all cases, your transaction will be based on the Fund's next-determined
net asset value after Vanguard receives your request (or, in the case of new
contributions, the next-determined net asset value after Vanguard receives the
order from your plan administrator). As long as this request is received before
the close of regular 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 Vanguard's Participant
Access Center, toll-free, at 1-800-523-1188 for a copy.
- - Vanguard can accept exchanges only as permitted by your plan. Contact your
plan administrator for details on the exchange policies that apply to your
plan.
<PAGE>
17
ACCESSING FUND INFORMATION BY COMPUTER
- --------------------------------------------------------------------------------
VANGUARD ON THE WORLD WIDE WEB WWW.VANGUARD.COM
Use your personal computer to visit Vanguard's education-oriented website, which
provides timely news and information about Vanguard funds and services; an
online "university" that offers a variety of mutual fund classes; and
easy-to-use, interactive tools to help you create your own investment and
retirement strategies.
- --------------------------------------------------------------------------------
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GLOSSARY OF INVESTMENT TERMS
BALANCED FUND
A mutual fund that seeks to provide some combination of income, capital growth,
and conservation of capital by investing in stocks, bonds, and/or money market
instruments.
BOND
A debt security (IOU) issued by a corporation, government, or government agency
in exchange for the money you lend it. In most instances, the issuer agrees to
pay back the loan by a specific date and to make regular interest payments until
that date.
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.
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.
CREDIT QUALITY
A measure of a bond issuer's ability to pay interest and principal in a timely
manner.
DIVIDEND INCOME
Payment to shareholders of income from interest or dividends generated by a
fund's investments.
DURATION
A measure of the sensitivity of bond--and bond fund--prices to interest rate
movements. For example, if a bond has a duration of two years, its price would
fall by about 2% when interest rates rose one percentage point. On the other
hand, the bond's price would rise by about 2% when interest rates fell by one
percentage point.
EXPENSE RATIO
The percentage of a fund's average net assets used to pay its expenses. The
expense ratio includes management fees, administrative fees, and any 12b-1
distribution fees.
FUND DIVERSIFICATION
Holding a variety of securities so that a fund's return is not badly hurt by the
poor performance of a single security, industry, or country.
FUND OF FUNDS
A mutual fund that pursues its objective by investing in other mutual funds
rather than in individual stocks or bonds.
INVESTMENT ADVISER
An organization that makes the day-to-day decisions regarding a fund's
investments.
INVESTMENT GRADE
Bonds whose credit quality is considered to be among the highest by independent
bond- rating agencies. Bonds rated in one of the four highest rating categories
are considered "investment grade."
NET ASSET VALUE (NAV)
The market value of a mutual fund's total assets, minus liabilities, divided by
the number of shares outstanding. The value of a single share is called its
share value or share price.
PRICE/EARNINGS (P/E) RATIO
The current share price of a stock, divided by its per-share earnings (profits)
from the past year. A stock selling for $20, with earnings of $2 per share, has
a price/earnings ratio of 10.
TOTAL RETURN
A percentage change, over a specified time period, in a mutual fund's net asset
value, with the ending net asset value adjusted to account for the reinvestment
of all distributions of dividends and capital gains.
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(R) LOGO]
[THE VANGUARD GROUP(R) LOGO]
Institutional Division
Post Office Box 2900
Valley Forge, PA 19482-2900
FOR MORE INFORMATION
If you'd like more information about
Vanguard STAR 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 ACCESS CENTER
P.O. BOX 2900
VALLEY FORGE, PA 19482-2900
TELEPHONE:
1-800-523-1188
TEXT TELEPHONE:
1-800-523-8004
WORLD WIDE WEB:
WWW.VANGUARD.COM
INFORMATION PROVIDED BY THE
SECURITIES AND EXCHANGE
COMMISSION (SEC)
You can review and copy
information about the Fund
(including the SAI) at the SEC's
Public Reference Room in
Washington, DC. To find out more
about this public service, call the
SEC at 1-202-942-8090. Reports and
other information about the Fund are
also available on the SEC's website
(www.sec.gov), or you can receive
copies of this information, for a
fee, by electronic request at the
following e-mail address:
[email protected], or by writing
the Public Reference Section,
Securities and Exchange
Commission, Washington, DC
20549-0102.
Fund's Investment Company Act file
number: 811-3919
(C) 2000 The Vanguard Group, Inc.
All rights reserved.
Vanguard Marketing Corporation,
Distributor.
I056N-04/28/2000
<PAGE>
VANGUARD
LIFESTRATEGY(R)
FUNDS
Prospectus
April 28, 2000
This prospectus contains
financial data for the
Funds through the
fiscal year ended
December 31, 1999.
VANGUARD LIFESTRATEGY
INCOME FUND
VANGUARD LIFESTRATEGY
CONSERVATIVE GROWTH
FUND
VANGUARD LIFESTRATEGY
MODERATE GROWTH FUND
VANGUARD LIFESTRATEGY
GROWTH FUND
[THE VANGUARD GROUP(R) LOGO]
<PAGE>
VANGUARD(R) LIFESTRATEGY(R) FUNDS
Prospectus
April 28, 2000
- --------------------------------------------------------------------------------
CONTENTS
- --------------------------------------------------------------------------------
1 AN INTRODUCTION TO VANGUARD 22 DIVIDENDS, CAPITAL GAINS, AND TAXES
LIFESTRATEGY FUNDS
23 SHARE PRICE
1 FUND PROFILES
24 FINANCIAL HIGHLIGHTS
1 Vanguard LifeStrategy Income Fund
27 INVESTING WITH VANGUARD
5 Vanguard LifeStrategy Conservative
Growth Fund 27 Services and Account Features
8 Vanguard LifeStrategy Moderate 28 Types of Accounts
Growth Fund
29 Buying Shares
11 Vanguard LifeStrategy Growth Fund
31 Redeeming Shares
14 MORE ON THE FUNDS
34 Transferring Registration
20 THE FUNDS AND VANGUARD
35 Fund and Account Updates
21 INVESTMENT ADVISER
GLOSSARY (inside back cover)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
WHY READING THIS PROSPECTUS IS IMPORTANT
This prospectus explains the objective, risks, and strategies of each of the
Vanguard LifeStrategy Funds. To highlight terms and concepts important to mutual
fund investors, we have provided "Plain Talk(R)" explanations along the way.
Reading the prospectus will help you to decide which Fund, if any, is the right
investment for you. We suggest that you keep it for future reference.
- --------------------------------------------------------------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE>
1
AN INTRODUCTION TO VANGUARD LIFESTRATEGY FUNDS
This Prospectus provides information about the Vanguard LifeStrategy Funds, a
group of mutual funds that invest a fixed percentage of assets in up to five
other Vanguard stock and bond mutual funds. Because they invest in other funds,
rather than in individual securities, each Fund is considered a "fund of funds."
The LifeStrategy Funds offer four distinct choices for different investment
styles and life stages. Because an investor's risk tolerance, investment goals,
investment time horizon, and financial circumstances are subject to change over
time, the LifeStrategy Funds offer alternative strategies for attaining capital
growth and income. The allocation to stocks and bonds in each LifeStrategy Fund
reflects its greater or lesser emphasis on pursuing current income or growth of
capital.
The profiles that follow summarize each Fund's objective and other key
features. Following the profiles, there is important additional information
about the Funds.
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
"FUND OF FUNDS"
The term "fund of funds" is used to describe a mutual fund that pursues its
objective by investing in other mutual funds rather than in individual stocks or
bonds. A fund of funds may charge for its own direct expenses, in addition to
bearing a proportionate share of the expenses charged by the underlying funds in
which it invests. Funds of funds are best suited for long-term investors.
- --------------------------------------------------------------------------------
FUND PROFILE--VANGUARD(R) LIFESTRATEGY(R)
INCOME FUND
The following profile summarizes key features of Vanguard LifeStrategy Income
Fund.
INVESTMENT OBJECTIVE
The Fund seeks to provide current income and some growth of capital.
INVESTMENT STRATEGIES
The Fund invests in other Vanguard mutual funds according to a fixed formula
that typically results in an allocation of about 80% of assets to bonds and 20%
to common stocks. The Fund's assets are invested in the underlying funds as
follows:
- - Vanguard Total Bond Market Index Fund 50%
- - Vanguard Asset Allocation Fund 25%
- - Vanguard Short-Term Corporate Fund 20%
- - Vanguard Total Stock Market Index Fund 5%
The Fund's indirect bond holdings are a diversified mix of short-,
intermediate-, and long-term U.S. government, U.S. agency mortgage-backed, and
investment-grade corporate bonds. Its indirect stock holdings consist
substantially of large-cap U.S. stocks, and to a lesser extent mid- and
small-cap U.S. stocks.
<PAGE>
2
PRIMARY RISKS
The Fund is subject to several stock and bond market risks, any of which could
cause an investor to lose money. However, because bonds usually are less
volatile than stocks, and because the Fund invests most of its assets in bonds,
the Fund's overall level of risk should be relatively low.
- - With approximately 80% of its assets allocated to bonds, the Fund is
primarily subject to bond risks: interest rate risk, which is the chance
that bond prices overall will decline over short or even long periods due
to rising interest rates; income risk, which is the chance that falling
interest rates will cause the Fund's income to decline; credit risk, which
is the chance that a bond issuer will fail to pay interest and principal in
a timely manner, thus reducing the underlying fund's return; and prepayment
risk, which is the chance that during periods of falling interest rates, a
bond issuer will repay its higher-yielding bond earlier than expected,
forcing the underlying fund to reinvest the unanticipated proceeds at lower
interest rates.
- - With approximately 20% of its assets allocated to stocks, the Fund is
subject to stock market risk, which is the chance that stock prices in
general will decline over short or even long periods.
- - The Fund is also subject to manager risk, which is the chance that poor
security selection will cause one of the Fund's actively-managed underlying
funds--and, thus, the Fund itself--to underperform funds with similar
objectives. For additional information on investment risks, see MORE ON THE
FUNDS.
PERFORMANCE/RISK INFORMATION
The bar chart and table below provide an indication of the risk of investing in
the Fund. The bar chart shows the Fund's performance in each calendar year since
inception. The table shows how the Fund's average annual total returns for one
and five calendar years and since inception compare with those of a broad-based
bond market index and a composite stock/bond index weighted to match the Fund's
target allocation. Keep in mind that the Fund's past performance does not
indicate how it will perform in the future.
----------------------------------------------------
ANNUAL TOTAL RETURNS
----------------------------------------------------
1995 22.99%
1996 7.65%
1997 14.23%
1998 13.17%
1999 2.82%
----------------------------------------------------
During the period shown in the bar chart, the highest return for a calendar
quarter was 6.93% (quarter ended June 30, 1995) and the lowest return for a
quarter was -0.54% (quarter ended September 30, 1999).
<PAGE>
3
-------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS FOR YEARS ENDED DECEMBER 31, 1999
-------------------------------------------------------------------------
1 YEAR 5 YEARS SINCE INCEPTION*
-------------------------------------------------------------------------
Vanguard LifeStrategy
Income Fund 2.82% 11.97% 11.41%
Lehman Brothers
Aggregate Bond Index -0.82 7.73 7.43
Income Composite Index** 4.97 11.04 10.55
-------------------------------------------------------------------------
*September 30, 1994.
**Derived by applying the Fund's target allocation to the results of
the following benchmarks: for U.S. stocks, the Wilshire 5000 Total
Market Index; for bonds, the Lehman Brothers Aggregate Bond Index; and
for cash reserves, the Salomon Smith Barney 3-Month U.S. Treasury Bill
Index.
-------------------------------------------------------------------------
FEES AND EXPENSES
The following table describes the fees and expenses you may pay if you buy and
hold shares of the Fund. The expenses shown under Annual Fund Operating Expenses
are based upon those incurred in the fiscal year ended December 31, 1999.
SHAREHOLDER FEES (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fee: None
Exchange Fee: None
ANNUAL FUND OPERATING EXPENSES (expenses deducted from the
underlying funds' assets)
Indirect Operating Expenses: +
+Although the Fund is not expected to incur any net expenses directly, the
Fund's shareholders indirectly bear the expenses of the underlying Vanguard
funds in which the Fund invests. See THE FUNDS AND VANGUARD. The Fund's
indirect expense ratio, based on its investments in the underlying funds,
was 0.28% as of December 31, 1999.
The following example is intended to help you compare the cost of investing
in the Fund with the cost of investing in other mutual funds. It illustrates the
hypothetical expenses that you would incur over various periods if you invest
$10,000 in the Fund. This example assumes that the Fund provides a return of 5%
a year, and that operating expenses of the Fund and its underlying funds remain
the same. The results apply whether or not you redeem your investment at the end
of each period.
- -------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- -------------------------------------------------
$29 $90 $157 $356
- -------------------------------------------------
THIS EXAMPLE SHOULD NOT BE CONSIDERED TO REPRESENT ACTUAL EXPENSES OR
PERFORMANCE FROM THE PAST OR FOR THE FUTURE. ACTUAL FUTURE EXPENSES MAY BE
HIGHER OR LOWER THAN THOSE SHOWN.
<PAGE>
4
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION
DIVIDENDS AND CAPITAL GAINS MINIMUM INITIAL INVESTMENT
Dividends are distributed $3,000; $1,000 for IRAs and custodial
quarterly in March, June, September, accounts for minors
and December; capital gains, if any,
are distributed annually in December NEWSPAPER ABBREVIATION
LifeInc
INVESTMENT ADVISER
The Fund does not employ an investment VANGUARD FUND NUMBER
adviser, but benefits from the 723
investment advisory services provided
to the underlying Vanguard funds CUSIP NUMBER
in which it invests 921909206
INCEPTION DATE TICKER SYMBOL
September 30, 1994 VASIX
NET ASSETS AS OF DECEMBER 31, 1999
$555 million
SUITABLE FOR IRAS
Yes
- --------------------------------------------------------------------------------
<PAGE>
5
FUND PROFILE--VANGUARD(R) LIFESTRATEGY(R)
CONSERVATIVE GROWTH FUND
The following profile summarizes key features of Vanguard LifeStrategy
Conservative Growth Fund.
INVESTMENT OBJECTIVE
The Fund seeks to provide current income and low to moderate growth of capital.
INVESTMENT STRATEGIES
The Fund invests in other Vanguard mutual funds according to a fixed formula
that typically results in an allocation of about 60% of assets to bonds and 40%
to common stocks. The Fund's assets are invested in the underlying funds as
follows:
- - Vanguard Total Bond Market Index Fund 30%
- - Vanguard Asset Allocation Fund 25%
- - Vanguard Short-Term Corporate Fund 20%
- - Vanguard Total Stock Market Index Fund 20%
- - Vanguard Total International Stock Index Fund 5%
The Fund's indirect bond holdings are a diversified mix of short-,
intermediate-, and long-term U.S. government, U.S. agency mortgage-backed, and
investment-grade corporate bonds. Its indirect stock holdings consist
substantially of large-cap U.S. stocks, and to a lesser extent mid- and
small-cap U.S. stocks and foreign stocks.
PRIMARY RISKS
The Fund is subject to several stock and bond market risks, any of which could
cause an investor to lose money. However, because bonds usually are less
volatile than stocks, and because the Fund invests more than half of its assets
in bonds, the Fund's overall level of risk should be low to moderate.
- - With approximately 60% of its assets allocated to bonds, the Fund is
subject to bond risks: interest rate risk, which is the chance that bond
prices overall will decline over short or even long periods due to rising
interest rates; income risk, which is the chance that falling interest
rates will cause the Fund's income to decline; credit risk, which is the
chance that a bond issuer will fail to pay interest and principal in a
timely manner, thus reducing the underlying fund's return; and prepayment
risk, which is the chance that during periods of falling interest rates, a
bond issuer will repay its higher-yielding bond earlier than expected,
forcing the underlying fund to reinvest the unanticipated proceeds at lower
interest rates.
- - With approximately 40% of its assets allocated to stocks, the Fund is
subject to stock market risk, which is the chance that stock prices in
general will decline over short or even long periods.
- - The Fund is also subject to manager risk, which is the chance that poor
security selection will cause one of the Fund's actively-managed underlying
funds--and, thus, the Fund itself--to underperform funds with similar
objectives. For additional information on investment risks, see MORE ON THE
FUNDS.
<PAGE>
6
PERFORMANCE/RISK INFORMATION
The bar chart and table below provide an indication of the risk of investing in
the Fund. The bar chart shows the Fund's performance in each calendar year since
inception. The table shows how the Fund's average annual total returns for one
and five calendar years and since inception compare with those of broad-based
stock and bond market indexes and a composite stock/bond index weighted to match
the Fund's target allocation. Keep in mind that the Fund's past performance does
not indicate how it will perform in the future.
----------------------------------------------------
ANNUAL TOTAL RETURNS
----------------------------------------------------
1995 24.35%
1996 10.36%
1997 16.81%
1998 15.88%
1999 7.86%
----------------------------------------------------
During the period shown in the bar chart, the highest return for a calendar
quarter was 8.84% (quarter ended December 31, 1998) and the lowest return for a
quarter was -2.44% (quarter ended September 30, 1998).
-------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS FOR YEARS ENDED DECEMBER 31, 1999
-------------------------------------------------------------------------
1 YEAR 5 YEARS SINCE INCEPTION*
-------------------------------------------------------------------------
Vanguard LifeStrategy
Conservative Growth Fund 7.86% 14.91% 14.17%
Lehman Brothers
Aggregate Bond Index -0.82 7.73 7.43
Wilshire 5000 Total
Market Index 23.77 27.11 25.47
Conservative Growth
Composite Index** 9.98 14.22 13.52
-------------------------------------------------------------------------
*September 30, 1994.
**Derived by applying the Fund's target allocation to the results of
the following benchmarks: for U.S. stocks, the Wilshire 5000 Total
Market Index; for international stocks, the Morgan Stanley Capital
International Europe, Australasia, Far East Index; for bonds, the
Lehman Brothers Aggregate Bond Index; and for cash reserves, the
Salomon Smith Barney 3-Month U.S. Treasury Bill Index.
-------------------------------------------------------------------------
<PAGE>
7
FEES AND EXPENSES
The following table describes the fees and expenses you may pay if you buy and
hold shares of the Fund. The expenses shown under Annual Fund Operating Expenses
are based upon those incurred in the fiscal year ended December 31, 1999.
SHAREHOLDER FEES (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fee: None
Exchange Fee: None
ANNUAL FUND OPERATING EXPENSES (expenses deducted from the
underlying funds' assets)
Indirect Operating Expenses: +
+Although the Fund is not expected to incur any net expenses directly, the
Fund's shareholders indirectly bear the expenses of the underlying Vanguard
funds in which the Fund invests. See THE FUNDS AND VANGUARD. The Fund's
indirect expense ratio, based on its investments in the underlying funds,
was 0.29% as of December 31, 1999.
The following example is intended to help you compare the cost of investing
in the Fund with the cost of investing in other mutual funds. It illustrates the
hypothetical expenses that you would incur over various periods if you invest
$10,000 in the Fund. This example assumes that the Fund provides a return of 5%
a year, and that operating expenses of the Fund and its underlying funds remain
the same. The results apply whether or not you redeem your investment at the end
of each period.
- -------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- -------------------------------------------------
$30 $93 $163 $368
- -------------------------------------------------
THIS EXAMPLE SHOULD NOT BE CONSIDERED TO REPRESENT ACTUAL EXPENSES OR
PERFORMANCE FROM THE PAST OR FOR THE FUTURE. ACTUAL FUTURE EXPENSES MAY BE
HIGHER OR LOWER THAN THOSE SHOWN.
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION
DIVIDENDS AND CAPITAL GAINS MINIMUM INITIAL INVESTMENT
Dividends are distributed $3,000; $1,000 for IRAs and custodial
quarterly in March, June, September, accounts for minors
and December; capital gains, if any,
are distributed annually in December NEWSPAPER ABBREVIATION
LifeCon
INVESTMENT ADVISER
The Fund does not employ an investment VANGUARD FUND NUMBER
adviser, but benefits from the 724
investment advisory services provided
to the underlying Vanguard funds CUSIP NUMBER
in which it invests 921909305
INCEPTION DATE TICKER SYMBOL
September 30, 1994 VSCGX
NET ASSETS AS OF DECEMBER 31, 1999
$1.7 billion
SUITABLE FOR IRAS
Yes
- --------------------------------------------------------------------------------
<PAGE>
8
FUND PROFILE--VANGUARD(R) LIFESTRATEGY(R)
MODERATE GROWTH FUND
The following profile summarizes key features of Vanguard LifeStrategy Moderate
Growth Fund.
INVESTMENT OBJECTIVE
The Fund seeks to provide growth of capital and a low to moderate level of
current income.
INVESTMENT STRATEGIES
The Fund invests in other Vanguard mutual funds according to a fixed formula
that typically results in an allocation of about 60% of assets to common stocks
and 40% to bonds. The Fund's assets are invested in the underlying funds as
follows:
- - Vanguard Total Stock Market Index Fund 35%
- - Vanguard Total Bond Market Index Fund 30%
- - Vanguard Asset Allocation Fund 25%
- - Vanguard Total International Stock Index Fund 10%
The Fund's indirect stock holdings consist substantially of large-cap U.S.
stocks, and to a lesser extent mid- and small-cap U.S. stocks and foreign
stocks. Its indirect bond holdings are a diversified mix of short-,
intermediate-, and long-term U.S. government, U.S. agency mortgage-backed, and
investment-grade corporate bonds, with an emphasis on long-term U.S. Treasury
bonds.
PRIMARY RISKS
The Fund is subject to several stock and bond market risks, any of which could
cause an investor to lose money. However, because bonds usually are less
volatile than stocks, and because the Fund invests a significant portion of its
assets in bonds, the Fund's overall level of risk should be moderate.
- - With approximately 60% of its assets allocated to stocks, the Fund is
primarily subject to stock market risk, which is the chance that stock
prices in general will decline over short or even long periods. The Fund is
also subject to the following risks associated with investments in
international stocks: currency risk, which is the chance that returns will
be hurt by a rise in the value of the U.S. dollar versus foreign
currencies; and country risk, which is the chance that unfavorable
developments in a particular country--for example, political troubles,
financial problems, or natural disasters--will harm the international
portion exposed to that particular country.
- - With approximately 40% of its assets allocated to bonds, the Fund is
subject to bond risks: interest rate risk, which is the chance that bond
prices overall will decline over short or even long periods due to rising
interest rates; credit risk, which is the chance that a bond issuer will
fail to pay interest and principal in a timely manner, thus reducing the
underlying fund's return; and prepayment risk, which is the chance that
during periods of falling interest rates, a bond issuer will repay its
higher-yielding bond earlier than expected, forcing the underlying fund to
reinvest the unanticipated proceeds at lower interest rates.
- - The Fund is also subject to manager risk, which is the chance that poor
security selection will cause one of the Fund's actively-managed underlying
funds--and, thus, the Fund itself--to underperform funds with similar
objectives.
For additional information on investment risks, see MORE ON THE FUNDS.
<PAGE>
9
PERFORMANCE/RISK INFORMATION
The bar chart and table below provide an indication of the risk of investing in
the Fund. The bar chart shows the Fund's performance in each calendar year since
inception. The table shows how the Fund's average annual total returns for one
and five calendar years and since inception compare with those of broad-based
stock and bond market indexes and a composite stock/bond index weighted to match
the Fund's target allocation. Keep in mind that the Fund's past performance does
not indicate how it will perform in the future.
----------------------------------------------------
ANNUAL TOTAL RETURNS
----------------------------------------------------
1995 27.94%
1996 12.71%
1997 19.77%
1998 19.03%
1999 12.01%
----------------------------------------------------
During the period shown in the bar chart, the highest return for a calendar
quarter was 13.08% (quarter ended December 31, 1998) and the lowest return for a
quarter was -5.52% (quarter ended September 30, 1998).
-------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS FOR YEARS ENDED DECEMBER 31, 1999
-------------------------------------------------------------------------
1 YEAR 5 YEARS SINCE INCEPTION*
-------------------------------------------------------------------------
Vanguard LifeStrategy
Moderate Growth Fund 12.01% 18.15% 17.05%
Lehman Brothers
Aggregate Bond Index -0.82 7.73 7.43
Wilshire 5000 Total
Market Index 23.77 27.11 25.47
Moderate Growth
Composite Index** 13.88 17.96 16.95
-------------------------------------------------------------------------
*September 30, 1994.
**Derived by applying the Fund's target allocation to the results of
the following benchmarks: for U.S. stocks, the Wilshire 5000 Total
Market Index; for international stocks, the Morgan Stanley Capital
International Europe, Australasia, Far East Index; for bonds, the
Lehman Brothers Aggregate Bond Index; and for cash reserves, the
Salomon Smith Barney 3-Month U.S. Treasury Bill Index.
-------------------------------------------------------------------------
<PAGE>
10
FEES AND EXPENSES
The following table describes the fees and expenses you may pay if you buy and
hold shares of the Fund. The expenses shown under Annual Fund Operating Expenses
are based upon those incurred in the fiscal year ended December 31, 1999.
SHAREHOLDER FEES (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fee: None
Exchange Fee: None
ANNUAL FUND OPERATING EXPENSES (expenses deducted from the
underlying funds' assets)
Indirect Operating Expenses: +
+Although the Fund is not expected to incur any net expenses directly, the
Fund's shareholders indirectly bear the expenses of the underlying Vanguard
funds in which the Fund invests. See THE FUNDS AND VANGUARD. The Fund's
indirect expense ratio, based on its investments in the underlying funds,
was 0.29% as of December 31, 1999.
The following example is intended to help you compare the cost of investing
in the Fund with the cost of investing in other mutual funds. It illustrates the
hypothetical expenses that you would incur over various periods if you invest
$10,000 in the Fund. This example assumes that the Fund provides a return of 5%
a year, and that operating expenses of the Fund and its underlying funds remain
the same. The results apply whether or not you redeem your investment at the end
of each period.
- -------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- -------------------------------------------------
$30 $93 $163 $368
- -------------------------------------------------
THIS EXAMPLE SHOULD NOT BE CONSIDERED TO REPRESENT ACTUAL EXPENSES OR
PERFORMANCE FROM THE PAST OR FOR THE FUTURE. ACTUAL FUTURE EXPENSES MAY BE
HIGHER OR LOWER THAN THOSE SHOWN.
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION
DIVIDENDS AND CAPITAL GAINS MINIMUM INITIAL INVESTMENT
Dividends are distributed $3,000; $1,000 for IRAs and custodial
semiannually in June and December; accounts for minors
capital gains, if any, are distributed
annually in December NEWSPAPER ABBREVIATION
LifeMod
INVESTMENT ADVISER
The Fund does not employ an investment VANGUARD FUND NUMBER
adviser, but benefits from the 914
investment advisory services provided
to the underlying Vanguard funds CUSIP NUMBER
in which it invests 921909404
INCEPTION DATE TICKER SYMBOL
September 30, 1994 VSMGX
NET ASSETS AS OF DECEMBER 31, 1999
$3.4 billion
SUITABLE FOR IRAS
Yes
- --------------------------------------------------------------------------------
<PAGE>
11
FUND PROFILE--VANGUARD(R) LIFESTRATEGY(R)
GROWTH FUND
The following profile summarizes key features of Vanguard LifeStrategy Growth
Fund.
INVESTMENT OBJECTIVE
The Fund seeks to provide growth of capital and some current income.
INVESTMENT STRATEGIES
The Fund invests in other Vanguard mutual funds according to a fixed formula
that typically results in an allocation of about 80% of assets to common stocks
and 20% to bonds. The Fund's assets are invested in the underlying funds as
follows:
- - Vanguard Total Stock Market Index Fund 50%
- - Vanguard Asset Allocation Fund 25%
- - Vanguard Total International Stock Index Fund 15%
- - Vanguard Total Bond Market Index Fund 10%
The Fund's indirect stock holdings consist substantially of large-cap U.S.
stocks, and to a lesser extent mid- and small-cap U.S. stocks and foreign
stocks. Its indirect bond holdings are a diversified mix of short-,
intermediate-, and long-term U.S. government, U.S. agency mortgage-backed, and
investment-grade corporate bonds, with a strong emphasis on long-term U.S.
Treasury bonds.
PRIMARY RISKS
The Fund is subject to several stock and bond market risks, any of which could
cause an investor to lose money. Because stocks usually are more volatile than
bonds, and the Fund invests more in stocks than the other LifeStrategy Funds,
the Fund's overall level of risk should be high compared with those funds;
however, the level of risk should be lower than that of a fund investing
entirely in stocks.
- - With approximately 80% of its assets allocated to stocks, the Fund is
primarily subject to stock market risk, which is the chance that stock
prices in general will decline over short or even long periods. The Fund is
also subject to the following risks associated with investments in
international stocks: currency risk, which is the chance that returns will
be hurt by a rise in the value of the U.S. dollar versus foreign
currencies; and country risk, which is the chance that unfavorable
developments in a particular country--for example, political troubles,
financial problems, or natural disasters--will harm the international
portion exposed to that particular country.
- - With approximately 20% of its assets allocated to bonds, the Fund is
subject to bond risks: interest rate risk, which is the chance that bond
prices overall will decline over short or even long periods due to rising
interest rates; credit risk, which is the chance that a bond issuer will
fail to pay interest and principal in a timely manner, thus reducing the
underlying fund's return; and prepayment risk, which is the chance that
during periods of falling interest rates, a bond issuer will repay its
higher-yielding bond earlier than expected, forcing the underlying fund to
reinvest the unanticipated proceeds at lower interest rates.
- - The Fund is also subject to manager risk, which is the chance that poor
security selection will cause one of the Fund's actively-managed underlying
funds--and, thus, the Fund itself--to underperform funds with similar
objectives. For additional information on investment risks, see MORE ON THE
FUNDS.
<PAGE>
12
PERFORMANCE/RISK INFORMATION
The bar chart and table below provide an indication of the risk of investing in
the Fund. The bar chart shows the Fund's performance in each calendar year since
inception. The table shows how the Fund's average annual total returns for one
and five calendar years and since inception compare with those of a broad-based
stock market index and a composite stock/bond index weighted to match the Fund's
target allocation. Keep in mind that the Fund's past performance does not
indicate how it will perform in the future.
----------------------------------------------------
ANNUAL TOTAL RETURNS
----------------------------------------------------
1995 29.24%
1996 15.41%
1997 22.26%
1998 21.40%
1999 17.32%
----------------------------------------------------
During the period shown in the bar chart, the highest return for a calendar
quarter was 17.31% (quarter ended December 31, 1998) and the lowest return for a
quarter was -8.84% (quarter ended September 30, 1998).
--------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS FOR YEARS ENDED DECEMBER 31, 1999
--------------------------------------------------------------------------
1 YEAR 5 YEARS SINCE INCEPTION*
--------------------------------------------------------------------------
Vanguard LifeStrategy
Growth Fund 17.32% 21.03% 19.91%
Wilshire 5000 Total
Market Index 23.77 27.11 25.47
Growth Composite Index** 19.14 21.15 19.91
--------------------------------------------------------------------------
*September 30, 1994.
**Derived by applying the Fund's target allocation to the results of the
following benchmarks: for U.S. stocks, the Wilshire 5000 Total Market
Index; for international stocks, the Morgan Stanley Capital
International Europe, Australasia, Far East Index; for bonds, the
Lehman Brothers Aggregate Bond Index; and for cash reserves, the
Salomon Smith Barney 3-Month U.S. Treasury Bill Index.
--------------------------------------------------------------------------
<PAGE>
13
FEES AND EXPENSES
The following table describes the fees and expenses you may pay if you buy and
hold shares of the Fund. The expenses shown under Annual Fund Operating Expenses
are based upon those incurred in the fiscal year ended December 31, 1999.
SHAREHOLDER FEES (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fee: None
Exchange Fee: None
ANNUAL FUND OPERATING EXPENSES (expenses deducted from the
underlying funds' assets)
Indirect Operating Expenses: +
+Although the Fund is not expected to incur any net expenses directly, the
Fund's shareholders indirectly bear the expenses of the underlying Vanguard
funds in which the Fund invests. See THE FUNDS AND VANGUARD. The Fund's
indirect expense ratio, based on its investments in the underlying funds,
was 0.29% as of December 31, 1999.
The following example is intended to help you compare the cost of investing
in the Fund with the cost of investing in other mutual funds. It illustrates the
hypothetical expenses that you would incur over various periods if you invest
$10,000 in the Fund. This example assumes that the Fund provides a return of 5%
a year, and that operating expenses of the Fund and its underlying funds remain
the same. The results apply whether or not you redeem your investment at the end
of each period.
- -------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- -------------------------------------------------
$30 $93 $163 $368
- -------------------------------------------------
THIS EXAMPLE SHOULD NOT BE CONSIDERED TO REPRESENT ACTUAL EXPENSES OR
PERFORMANCE FROM THE PAST OR FOR THE FUTURE. ACTUAL FUTURE EXPENSES MAY BE
HIGHER OR LOWER THAN THOSE SHOWN.
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION
DIVIDENDS AND CAPITAL GAINS MINIMUM INITIAL INVESTMENT
Dividends are distributed $3,000; $1,000 for IRAs and custodial
semiannually in June and December; accounts for minors
capital gains, if any, are distributed
annually in December NEWSPAPER ABBREVIATION
LifeGro
INVESTMENT ADVISER
The Fund does not employ an investment VANGUARD FUND NUMBER
adviser, but benefits from the 122
investment advisory services provided
to the underlying Vanguard funds CUSIP NUMBER
in which it invests 921909503
INCEPTION DATE TICKER SYMBOL
September 30, 1994 VASGX
NET ASSETS AS OF DECEMBER 31, 1999
$3.2 billion
SUITABLE FOR IRAS
Yes
- --------------------------------------------------------------------------------
<PAGE>
14
MORE ON THE FUNDS
The following sections discuss other important features of the Vanguard
LifeStrategy Funds. You will find information about the risks of investing in
each Fund throughout these sections.
ASSET ALLOCATION FRAMEWORK
Asset allocation--that is, dividing your investment among stocks, bonds, and
cash reserves--is one of the most critical decisions an investor makes.
Selecting the appropriate mix should be based on personal investment objectives,
time horizons, and risk tolerances. The LifeStrategy Funds offer varying degrees
of risk and reward by holding different combinations of assets, thereby
providing shareholders with a simple way to meet investment needs at different
stages of life.
Each Fund invests in up to five underlying Vanguard funds to pursue a
target allocation of stocks, bonds, and cash instruments.* Because one of the
underlying funds (Vanguard Asset Allocation Fund) periodically shifts its
holdings among asset classes, each LifeStrategy Fund's asset mix can fluctuate
within a prescribed range. The tables below illustrate the expected asset
allocation and the potential allocation ranges for each Fund:
- -------------------------------------------------------------------
EXPECTED ASSET ALLOCATION
- -------------------------------------------------------------------
STOCKS BONDS CASH*
- -------------------------------------------------------------------
LifeStrategy Income Fund 20% 80% 0%
LifeStrategy Conservative Growth Fund 40% 60% 0%
LifeStrategy Moderate Growth Fund 60% 40% 0%
LifeStrategy Growth Fund 80% 20% 0%
- -------------------------------------------------------------------
- -------------------------------------------------------------------
POTENTIAL ASSET ALLOCATION RANGE
- -------------------------------------------------------------------
STOCKS BONDS CASH*
- -------------------------------------------------------------------
LifeStrategy Income Fund 5%-30% 70%-95% 0%-25%
LifeStrategy Conservative Growth Fund 25%-50% 50%-75% 0%-25%
LifeStrategy Moderate Growth Fund 45%-70% 30%-55% 0%-25%
LifeStrategy Growth Fund 65%-90% 10%-35% 0%-25%
- -------------------------------------------------------------------
*"Cash" consists of any cash instruments held by Vanguard Asset Allocation Fund,
one of the underlying Vanguard funds in which the LifeStrategy Funds invest.
PRIMARY INVESTMENT STRATEGIES
This section explains how the Funds pursue their individual objectives by
investing in different combinations of Vanguard funds that hold stocks, bonds,
and cash instruments. In addition, this section discusses several important
risks faced by investors in some or all of the Funds. The Funds' Board of
Trustees oversees the management of the Funds, and may change the investment
strategies in the interest of shareholders.
MARKET EXPOSURE
Each of the LifeStrategy Funds owns, indirectly through investment in the
underlying funds, a portfolio of stocks and bonds. Because one of the underlying
funds (Vanguard Asset Allocation Fund) periodically shifts its holdings among
asset classes, it is not possible to precisely describe, in all cases, the types
of stocks and bonds each LifeStrategy Fund
<PAGE>
15
owns. However, when the LifeStrategy Funds are invested at or near their
expected asset allocations (see previous page), their portfolios are expected to
be as follows:
LIFESTRATEGY INCOME FUND: Stock holdings (20%) consist substantially of
large-cap U.S. stocks, and to a lesser extent mid- and small-cap U.S. stocks.
Bond holdings (80%) are a diversified mix of short-, intermediate-, and
long-term U.S. government, U.S. agency mortgage-backed, and investment-grade
corporate bonds.
LIFESTRATEGY CONSERVATIVE GROWTH FUND: Stock holdings (40%) consist mainly of
large-cap U.S. stocks, and to a lesser extent mid- and small-cap U.S. stocks and
foreign stocks. Bond holdings (60%) are a diversified mix of short-,
intermediate-, and long-term U.S. government, U.S. agency mortgage-backed, and
investment-grade corporate bonds.
LIFESTRATEGY MODERATE GROWTH FUND: Stock holdings (60%) consist mainly of
large-cap U.S. stocks, and to a lesser extent mid- and small-cap U.S. stocks and
foreign stocks. Bond holdings (40%) are a diversified mix of short-,
intermediate-, and long-term U.S. government, U.S. agency mortgage-backed, and
investment-grade corporate bonds, with an emphasis on long-term U.S. Treasury
bonds.
LIFESTRATEGY GROWTH FUND: Stock holdings (80%) consist mainly of large-cap U.S.
stocks, and to a lesser extent mid- and small-cap U.S. stocks and foreign
stocks. Bond holdings (20%) are a diversified mix of short-, intermediate-, and
long-term U.S. government, U.S. agency mortgage-backed, and investment-grade
corporate bonds, with a strong emphasis on long-term U.S. Treasury bonds.
STOCKS
By owning shares of other Vanguard mutual funds, each of the LifeStrategy Funds
indirectly invests, to varying degrees, in U.S. common stocks, with emphasis on
large-cap stocks, and to a lesser extent in foreign stocks (except that
LifeStrategy Income Fund will not invest in foreign stocks).
[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 stock market activity. (Total returns consist of dividend income plus change
in market price.) Note that the returns shown do not include the costs of buying
and selling stocks or other expenses that a real-world investment portfolio
would incur. Note, also, that the gap between best and worst tends to narrow
over the long term.
- ------------------------------------------------------
U.S. STOCK MARKET RETURNS (1926-1999)
- ------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS 20 YEARS
- ------------------------------------------------------
Best 54.2% 28.6% 19.9% 17.9%
Worst -43.1 -12.4 -0.9 3.1
Average 13.2 11.0 11.1 11.1
- ------------------------------------------------------
<PAGE>
16
The table covers all of the 1-, 5-, 10-, and 20-year periods from 1926
through 1999. You can see, for example, that while the average return on common
stocks for all of the 5-year periods was 11.0%, returns for individual 5-year
periods ranged from a -12.4% average (from 1928 through 1932) to 28.6% (from
1995 through 1999). These average returns reflect past performance on common
stocks; you should not regard them as an indication of future returns from
either the stock market as a whole or these Funds 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 typically 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.
- --------------------------------------------------------------------------------
Through their investments in one underlying fund (the Asset Allocation
Fund), the Funds will hold a diversified combination of common stocks intended
to parallel the performance of the S&P 500 Index, which is dominated by
large-cap U.S. common stocks. Through another underlying fund (the Total Stock
Market Index Fund), each Fund will hold a representative sample of the
securities in the Wilshire 5000 Total Market Index--a benchmark for the entire
U.S. stock market.
Keep in mind that a significant portion of the market value of the Wilshire
5000 Index (about 24% as of December 31, 1999) is comprised of securities not
included in the S&P 500 Index. These securities are overwhelmingly mid- and
small-cap stocks, which historically have been more volatile than--and at times
have performed quite differently from--the stocks of larger companies.
By owning shares of Vanguard Total International Stock Index Fund, which
invests in foreign stocks, the LifeStrategy Conservative Growth, Moderate
Growth, and Growth Funds are subject to country risk and currency risk. Country
risk is the chance that political troubles (such as a war), financial problems
(such as government default), or natural disasters (such as an earthquake) will
weaken a country's economy and cause investments in that country to lose money.
Currency risk is the chance that a stronger U.S. dollar will reduce returns for
Americans investing overseas. Generally, when the dollar rises in value against
a foreign currency, your investment in that country loses value because its
currency is worth fewer U.S. dollars.
BONDS
By owning shares of other Vanguard mutual funds, each of the LifeStrategy Funds
indirectly invests, to varying degrees, in government, mortgage-backed, and
corporate bonds.
[FLAG]THE FUNDS ARE SUBJECT TO INTEREST RATE RISK, WHICH IS THE CHANCE THAT BOND
PRICES OVERALL WILL DECLINE OVER SHORT OR EVEN LONG PERIODS DUE TO RISING
INTEREST RATES. INTEREST RATE RISK IS MODEST FOR SHORTER-TERM BOND FUNDS
AND HIGHER FOR LONGER-TERM BOND FUNDS.
<PAGE>
17
Although bonds are often thought to be less risky than stocks, there have
been periods when bond prices have fallen significantly due to rising interest
rates. For instance, prices of long-term bonds fell by almost 48% between
December 1976 and September 1981.
To illustrate the relationship between bond prices and interest rates, the
following table shows the effect of a 1% and a 2% change (both up and down) in
interest rates on three bonds of different maturities, each with a face value of
$1,000.
- --------------------------------------------------------------------------------
HOW INTEREST RATE CHANGES AFFECT THE
VALUE OF A $1,000 BOND*
- -------------------------------------------------------------------------------
AFTER A 1% AFTER A 1% AFTER A 2% AFTER A 2%
TYPE OF BOND (MATURITY) INCREASE DECREASE INCREASE DECREASE
- -------------------------------------------------------------------------------
Short-Term (2.5 years) $978 $1,023 $956 $1,046
Intermediate-Term (10 years) 932 1,074 870 1,156
Long-Term (20 years) 901 1,116 816 1,251
- -------------------------------------------------------------------------------
These figures are intended only to illustrate interest rate risk; they
should not be regarded as an indication of future returns from the bond market
as a whole, or any Fund in particular.
Changes in interest rates will affect bond income as well as bond prices.
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
BONDS AND INTEREST RATES
As a rule, when interest rates rise, bond prices fall. The opposite is also
true: Bond prices go up when interest rates fall. Why do bond prices and
interest rates move in opposite directions? Let's assume that you hold a bond
offering a 5% yield. A year later, interest rates are on the rise and bonds are
offered with a 6% yield. With higher-yielding bonds available, you would have
trouble selling your 5% bond for the price you paid--causing you to lower your
asking price. On the other hand, if interest rates were falling and 4% bonds
were being offered, you should be able to sell your 5% bond for more than you
paid.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
BOND MATURITIES
A bond is issued with a specific maturity date--the date when the bond's issuer,
or seller, must pay back the bond's initial value (known as its "face value").
Bond maturities generally range from less than one year (short-term) to 30 years
(long-term). The longer a bond's maturity, the more risk you, as a bond
investor, face as interest rates rise--but also the more interest you could
receive. Long-term bonds are more suitable for investors willing to take greater
risks in hope of higher yields; short-term bond investors should be willing to
accept lower yields in return for less fluctuation in the value of their
investment.
- --------------------------------------------------------------------------------
[FLAG]THE FUNDS ARE SUBJECT TO INCOME RISK, WHICH IS THE CHANCE THAT A FUND'S
DIVIDENDS (INCOME) WILL DECLINE DUE TO FALLING INTEREST RATES. INCOME RISK
IS GENERALLY HIGHER FOR SHORT-TERM BOND FUNDS, AND LOWER FOR LONG-TERM BOND
FUNDS.
<PAGE>
18
Income risk is a concern primarily for the LifeStrategy Income and
Conservative Growth Funds, which, through their ownership of Vanguard Short-Term
Corporate Fund, indirectly own more short-term bonds.
[FLAG]THE FUNDS ARE SUBJECT TO PREPAYMENT RISK, WHICH IS THE CHANCE THAT DURING
PERIODS OF FALLING INTEREST RATES, A BOND ISSUER WILL REPAY ITS
HIGHER-YIELDING BOND EARLIER THAN SCHEDULED. FORCED TO REINVEST THE
UNANTICIPATED PROCEEDS AT LOWER RATES, THE UNDERLYING FUND WOULD EXPERIENCE
A DECLINE IN INCOME.
The risk of prepayment applies primarily to intermediate- and long-term
corporate bonds and mortgage-backed securities, which comprise a significant
portion of Vanguard Total Bond Market Index Fund. Prepayment risk is a concern
primarily for the LifeStrategy Income Fund, which will invest half of its assets
in the Total Bond Market Index Fund.
[FLAG]THE FUNDS ARE SUBJECT TO CREDIT RISK, WHICH IS THE CHANCE THAT A BOND
ISSUER WILL FAIL TO PAY INTEREST AND PRINCIPAL IN A TIMELY MANNER.
The credit quality of the bonds held by the underlying funds is expected to
be very high, and thus credit risk of the LifeStrategy Funds should be low.
To a limited extent, the Funds are also indirectly exposed to event risk,
which is the possibility that corporate fixed-income securities held by
underlying funds may suffer a substantial decline in credit quality and market
value due to a corporate restructuring.
CASH
Through one underlying fund (Vanguard Asset Allocation Fund), from 0% to 25% of
the assets of each LifeStrategy Fund can be invested in cash instruments. These
potential cash holdings make the Funds subject to inflation risk, which is the
possibility that the rising cost of living may erode the purchasing power of
your investment over time.
Since the Asset Allocation Fund typically invests only a small portion of
its assets in cash instruments, and the LifeStrategy Funds invest only
one-fourth of their assets in the Asset Allocation Fund, inflation risk to the
Funds is very low.
SECURITY SELECTION
Each Fund seeks to achieve its objective by investing in fixed percentages of
four or five underlying Vanguard funds. The following table shows these
percentages for each Fund.
- -------------------------------------------------------------------------
LIFESTRATEGY FUND
----------------------------------------
CONSERVATIVE MODERATE
UNDERLYING VANGUARD FUND INCOME GROWTH GROWTH GROWTH
- -------------------------------------------------------------------------
Total Stock Market Index 5% 20% 35% 50%
Total International Stock Index -- 5 10 15
Total Bond Market Index 50 30 30 10
Short-Term Corporate 20 20 -- --
Asset Allocation 25 25 25 25
- -------------------------------------------------------------------------
Total 100% 100% 100% 100%
- -------------------------------------------------------------------------
<PAGE>
19
The allocation of each Fund's assets among the underlying funds is made by
the LifeStrategy Funds' Board of Trustees based on the Fund's investment
objective and policies, and may be changed from time to time without shareholder
approval. The Funds' investments in the underlying funds may be limited at times
by certain factors. For example, the Board of Trustees of an underlying fund may
impose limits on additional investments in the fund.
The following briefly describes the five underlying Vanguard funds in which
the Funds invest.
- - Vanguard Total Stock Market Index Fund seeks to provide investment results
that parallel the performance of the unmanaged Wilshire 5000 Index--which
consists of all U.S. common stocks traded on the New York and American
Stock Exchanges and the NASDAQ over-the-counter market--by investing in a
select sampling of securities in the index.
- - Vanguard Total International Stock Index Fund seeks to provide investment
results that parallel the performance of the Morgan Stanley Capital
International (MSCI) Europe, Australasia, Far East Index plus the Select
Emerging Markets Free Index, by investing in three mutual funds that track
the various components of the indexes. The fund has exposure to stocks in
more than 35 foreign countries.
- - Vanguard Total Bond Market Index Fund seeks to provide investment results
that parallel the performance of the Lehman Brothers Aggregate Bond Index,
by investing in a select sampling of securities in the index. The Lehman
Brothers Aggregate Bond Index provides extensive coverage of the
investment-grade debt market in the U.S.--including government, corporate,
mortgage-backed, and asset-backed bonds--with maturities of over one year.
- - Vanguard Short-Term Corporate Fund invests in a diversified portfolio of
investment-grade corporate bonds with an expected average maturity of two
to three years.
- - Vanguard Asset Allocation Fund invests in a mix of common stocks (selected
to parallel the performance of the S&P 500 Index, which is dominated by
large-capitalization stocks), long-term U.S. Treasury bonds, and cash
equivalents. The allocations are designed to take advantage of perceived
imbalances in the relative returns and risks of each asset class. At any
given time, the adviser may allocate all, a portion, or none of the fund's
assets to stocks, bonds, or cash reserves.
[FLAG]THROUGH THEIR LIMITED INVESTMENTS IN ACTIVELY-MANAGED UNDERLYING FUNDS,
THE LIFESTRATEGY FUNDS ARE SUBJECT TO MANAGER RISK, WHICH IS THE CHANCE
THAT POOR SECURITY SELECTION WILL CAUSE AN UNDERLYING FUND--AND, THUS, THE
LIFESTRATEGY FUNDS--TO UNDERPERFORM FUNDS WITH SIMILAR OBJECTIVES.
TEMPORARY INVESTMENT MEASURES
The Funds' underlying funds may temporarily depart from their normal investment
policies--for instance, by investing substantially in cash reserves--in response
to extraordinary market, economic, political, or other conditions. In doing so,
the LifeStrategy Funds may succeed in avoiding losses but otherwise fail to
achieve their investment objectives.
<PAGE>
20
- --------------------------------------------------------------------------------
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 buying and selling of securities by the fund. 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.
- --------------------------------------------------------------------------------
COSTS AND MARKET-TIMING
Some investors try to profit from market-timing--switching money into
investments when they expect prices to rise, and taking money out when they
expect the market to fall. As money is shifted in and out, a fund incurs
expenses for buying and selling securities. These costs are borne by all fund
shareholders, including the long-term investors who do not generate the costs.
Therefore, the Funds have adopted the following policies, among others, designed
to discourage short-term trading:
- - Each Fund reserves the right to reject any purchase request--including
exchanges from other Vanguard funds--that it regards as disruptive to the
efficient management of the Fund or the underlying funds. A purchase
request could be rejected because of the timing of the request or because
of a history of excessive trading by the investor.
- - There is a limit on the number of times you can exchange into and out of
each Fund (see "Redeeming Shares" in the INVESTING WITH VANGUARD section).
- - Each Fund reserves the right to stop offering shares at any time.
THE VANGUARD FUNDS DO NOT PERMIT MARKET-TIMING. DO NOT INVEST IN THESE
FUNDS IF YOU ARE A MARKET-TIMER.
THE FUNDS AND VANGUARD
The LifeStrategy Funds have entered into an Agreement with Vanguard under which
Vanguard provides all management, administrative, and distribution services to
the Funds at cost. The Funds owe Vanguard a sum sufficient to cover Vanguard's
out-of-pocket costs. The Funds also bear the expenses of services provided by
other parties (such as auditors, legal counsel, and the Funds' custodian), as
well as taxes and other direct expenses of the Funds. However, the Agreement
provides that the Funds' expenses will be offset by a reimbursement from
Vanguard for (a) contributions made by the Funds to the cost of operating the
underlying Vanguard funds in which the LifeStrategy Funds invest, and (b)
certain savings in administrative and marketing costs that Vanguard is expected
to derive from the operation of the Funds.
The Funds' Trustees believe that the reimbursements should be sufficient to
offset most, if not all, of the expenses incurred by the Funds. Therefore, the
Funds are expected to operate at a very low or zero expense ratio. Since their
inception in 1994, the Funds in fact have had no direct net expenses.
<PAGE>
21
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
Of course, shareholders of the LifeStrategy Funds will still bear,
indirectly, their proportionate share of the costs of operating the underlying
Vanguard funds. During their most recent fiscal years, the underlying funds had
the following expense ratios:
- - Vanguard Total Stock Market Index Fund 0.20%
- - Vanguard Total International Stock Index Fund 0.34%
- - Vanguard Total Bond Market Index Fund 0.20%
- - Vanguard Short-Term Corporate Fund 0.25%
- - Vanguard Asset Allocation Fund 0.49%
Based on the percentage of each underlying fund owned, the LifeStrategy
Funds had the following indirect expense ratios as of December 31, 1999:
- - LifeStrategy Income Fund 0.28%
- - LifeStrategy Conservative Growth Fund 0.29%
- - LifeStrategy Moderate Growth Fund 0.29%
- - LifeStrategy Growth Fund 0.29%
INVESTMENT ADVISER
The LifeStrategy Funds do not employ an investment adviser, but they benefit
from the investment advisory services rendered to the underlying funds. The
underlying funds are managed by the following investment advisory firms:
- --------------------------------------------------------------------------------
UNDERLYING FUND INVESTMENT ADVISORY FIRM
- --------------------------------------------------------------------------------
Vanguard Total Stock Market Index Fund The Vanguard Group
- --------------------------------------------------------------------------------
Vanguard Total International Stock
Index Fund The Vanguard Group*
- --------------------------------------------------------------------------------
Vanguard Total Bond Market Index Fund The Vanguard Group
- --------------------------------------------------------------------------------
Vanguard Short-Term Corporate Fund The Vanguard Group
- --------------------------------------------------------------------------------
Vanguard Asset Allocation Fund Mellon Capital Management Corporation
- --------------------------------------------------------------------------------
*Vanguard Total International Stock Index Fund does not have its own investment
adviser, but rather benefits from the advisory services provided by The Vanguard
Group to the three underlying funds in which the Total International Stock Index
Fund invests: Vanguard European Stock Index Fund, Vanguard Pacific Stock Index
Fund, and Vanguard Emerging Markets Stock Index Fund. The Vanguard Group also
manages the Total International Stock Index Fund's cash assets, if any.
- --------------------------------------------------------------------------------
<PAGE>
22
The chart below briefly describes each investment advisory firm:
- --------------------------------------------------------------------------------
FIRM BACKGROUND
- --------------------------------------------------------------------------------
Mellon Capital Management Corporation - Based in San Francisco, California
- Founded in 1983
- Manages about $86 billion in assets
- --------------------------------------------------------------------------------
The Vanguard Group - Based in Valley Forge, Pennsylvania
- Founded in 1975
- Manages about $371 billion in assets
- --------------------------------------------------------------------------------
The Board of Trustees of an underlying fund may, without prior approval
from shareholders of the underlying fund or the LifeStrategy Funds, change the
terms of any advisory agreement or hire a new investment adviser--either as a
replacement for an existing adviser or as an additional adviser.
DIVIDENDS, CAPITAL GAINS, AND TAXES
FUND DISTRIBUTIONS
Each Fund distributes to shareholders virtually all of its net income (interest
and dividends paid by the underlying funds), as well as any capital gains
realized from the sale of its holdings or received as capital gains
distributions from the underlying funds. Income dividends for the Income and
Conservative Growth Funds generally are distributed in March, June, September,
and December; income dividends for the Moderate Growth and Growth Funds
generally are distributed in June and December. Capital gains 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.
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
BASIC TAX POINTS
Vanguard will send you a statement each year showing the tax status of all your
distributions. In addition, taxable investors should be aware of the following
basic tax points:
- - Distributions are taxable to you for federal income tax purposes whether or
not you reinvest these amounts in additional Fund shares.
<PAGE>
23
- - Distributions declared in December--if paid to you by the end of
January--are taxable for federal income tax purposes as if received in
December.
- - Any dividends and short-term capital gains that you receive are taxable to
you as ordinary income for federal income tax purposes.
- - Any distributions of net long-term capital gains are taxable to you as
long-term capital gains for federal income tax purposes, no matter how long
you've owned shares in the Fund.
- - Capital gains distributions may vary considerably from year to year as a
result of the Funds' normal investment activities and cash flows.
- - A sale or exchange of Fund shares is a taxable event. This means that you
may have a capital gain to report as income, or a capital loss to report as
a deduction, when you complete your federal income tax return.
- - Dividend and capital gains distributions that you receive, as well as your
gains or losses from any sale or exchange of Fund shares, may be subject to
state and local income taxes.
GENERAL INFORMATION
BACKUP WITHHOLDING. By law, Vanguard must withhold 31% of any taxable
distributions or redemptions from your account if you do not:
- - provide us with your correct taxpayer identification number;
- - certify that the taxpayer identification number is correct; and
- - confirm that you are not subject to backup withholding.
Similarly, Vanguard must withhold from your account if the IRS instructs us to
do so.
FOREIGN INVESTORS. The Vanguard funds generally do not offer their shares for
sale outside of the United States. Foreign investors should be aware that U.S.
withholding and estate taxes may apply to any investments in Vanguard funds.
INVALID ADDRESSES. If a dividend or capital gains distribution check mailed to
your address of record is returned as undeliverable, Vanguard will automatically
reinvest all future distributions until you provide us with a valid mailing
address.
TAX CONSEQUENCES. This prospectus provides general tax information only. If you
are investing through a tax-deferred retirement account, such as an IRA, special
tax rules apply. Please consult your tax adviser for detailed information about
a fund's tax consequences for you.
SHARE PRICE
Each Fund's share price, called its net asset value, or NAV, is calculated each
business day after the close of regular trading on the New York Stock Exchange
(the NAV is not calculated on holidays or other days when the Exchange is
closed). Net asset value per share is computed by adding up the total value of
the Fund's investments (i.e., shares of the underlying Vanguard funds) and other
assets, subtracting any of its liabilities (debts), and then dividing by the
number of Fund shares outstanding:
TOTAL ASSETS - LIABILITIES
NET ASSET VALUE = --------------------------------
NUMBER OF SHARES OUTSTANDING
<PAGE>
24
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.
The Funds' share prices can be found daily in the mutual fund listings of
most major newspapers under the heading "Vanguard Funds." Different newspapers
use different abbreviations of the Funds' names, but the most common are:
LIFEINC, LIFECON, LIFEMOD, and LIFEGRO.
FINANCIAL HIGHLIGHTS
The following financial highlights tables are intended to help you understand
each Fund's financial performance for the past five years, and certain
information reflects financial results for a single Fund share. The total
returns in the table represent the rate that an investor would have earned or
lost each year on an investment in each Fund (assuming reinvestment of all
dividend and capital gains distributions). This information has been derived
from the financial statements audited by PricewaterhouseCoopers LLP, independent
accountants, whose report--along with the Funds' financial statements--is
included in the Funds' most recent annual report to shareholders. You may have
the annual report sent to you without charge by contacting Vanguard.
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
HOW TO READ THE FINANCIAL HIGHLIGHTS TABLES
This explanation uses the LifeStrategy Income Fund as an example. The Fund began
fiscal 1999 with a net asset value (price) of $13.22 per share. During the year,
the Fund earned $0.69 per share from investment income and $0.14 per share in
capital gains distributions. There was a decline of $0.47 per share from
investments that had depreciated in value or that were sold for lower prices
than the Fund paid for them.
Shareholders received $0.76 per share in the form of dividend and capital gains
distributions. A portion of each year's distributions may come from the prior
year's income or capital gains.
The earnings ($0.36 per share) minus the distributions ($0.76 per share)
resulted in a share price of $12.82 at the end of the year. This was a decrease
of $0.40 per share (from $13.22 at the beginning of the year to $12.82 at the
end of the year). For a shareholder who reinvested the distributions in the
purchase of more shares, the total return from the Fund was 2.82% for the year.
As of December 31, 1999, the Fund had $555 million in net assets. For the year,
its net investment income amounted to 5.37% of its average net assets; and it
sold and replaced securities valued at 11% of its net assets.
- --------------------------------------------------------------------------------
<PAGE>
25
- --------------------------------------------------------------------------------
VANGUARD LIFESTRATEGY INCOME FUND
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------
NET ASSET VALUE,
BEGINNING OF YEAR $13.22 $12.43 $11.55 $11.54 $ 9.88
- --------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .69 .63 .63 .64 .49
Capital Gains Distributions
Received .14 .20 .15 .19 .09
Net Realized and
Unrealized Gain (Loss)
on Investments (.47) .78 .83 .03 1.66
--------------------------------------------------------
Total from Investment
Operations .36 1.61 1.61 .86 2.24
--------------------------------------------------------
DISTRIBUTIONS
Dividends from Net
Investment Income (.69) (.63) (.63) (.64) (.49)
Distributions from
Realized Capital Gains (.07) (.19) (.10) (.21) (.09)
--------------------------------------------------------
Total Distributions (.76) (.82) (.73) (.85) (.58)
- --------------------------------------------------------------------------------
NET ASSET VALUE, END
OF YEAR $12.82 $13.22 $12.43 $11.55 $11.54
================================================================================
TOTAL RETURN 2.82% 13.17% 14.23% 7.65% 22.99%
================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of
Year (Millions) $555 $449 $244 $151 $121
Ratio of Expenses to
Average Net Assets 0% 0% 0% 0% 0%
Ratio of Net
Investment Income to
Average Net Assets 5.37% 5.24% 5.54% 5.66% 5.76%
Turnover Rate 11% 3% 6% 22% 4%
================================================================================
- --------------------------------------------------------------------------------
VANGUARD LIFESTRATEGY CONSERVATIVE GROWTH FUND
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------
NET ASSET VALUE,
BEGINNING OF YEAR $14.71 $13.40 $12.14 $11.68 $ 9.89
- --------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .64 .58 .56 .53 .47
Capital Gains Distributions
Received .18 .20 .18 .20 .11
Net Realized and
Unrealized Gain (Loss)
on Investments .31 1.32 1.27 .46 1.80
--------------------------------------------------------
Total from Investment
Operations 1.13 2.10 2.01 1.19 2.38
--------------------------------------------------------
DISTRIBUTIONS
Dividends from Net
Investment Income (.63) (.59) (.56) (.53) (.47)
Distributions from
Realized Capital Gains (.11) (.20) (.19) (.20) (.12)
--------------------------------------------------------
Total Distributions (.74) (.79) (.75) (.73) (.59)
- --------------------------------------------------------------------------------
NET ASSET VALUE, END
OF YEAR $15.10 $14.71 $13.40 $12.14 $11.68
================================================================================
TOTAL RETURN 7.86% 15.88% 16.81% 10.36% 24.35%
================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of
Year (Millions) $1,748 $1,416 $803 $462 $219
Ratio of Expenses to
Average Net Assets 0% 0% 0% 0% 0%
Ratio of Net
Investment Income to
Average Net Assets 4.34% 4.32% 4.61% 4.86% 5.14%
Turnover Rate 5% 3% 1% 2% 1%
================================================================================
<PAGE>
26
- --------------------------------------------------------------------------------
VANGUARD LIFESTRATEGY MODERATE
GROWTH FUND
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------
NET ASSET VALUE,
BEGINNING OF YEAR $16.86 $14.81 $12.97 $12.11 $ 9.86
- --------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .55 .510 .490 .44 .36
Capital Gains Distributions
Received .24 .241 .236 .22 .13
Net Realized and
Unrealized Gain (Loss)
on Investments 1.21 2.054 1.819 .87 2.25
--------------------------------------------------------
Total from Investment
Operations 2.00 2.805 2.545 1.53 2.74
--------------------------------------------------------
DISTRIBUTIONS
Dividends from Net
Investment Income (.55) (.510) (.490) (.44) (.36)
Distributions from
Realized Capital Gains (.13) (.245) (.215) (.23) (.13)
--------------------------------------------------------
Total Distributions (.68) (.755) (.705) (.67) (.49)
- --------------------------------------------------------------------------------
NET ASSET VALUE, END
OF YEAR $18.18 $16.86 $14.81 $12.97 $12.11
================================================================================
TOTAL RETURN 12.01% 19.03% 19.77% 12.71% 27.94%
================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of
Year (Millions) $3,441 $2,202 $1,358 $826 $235
Ratio of Expenses to
Average Net Assets 0% 0% 0% 0% 0%
Ratio of Net
Investment Income to
Average Net Assets 3.47% 3.43% 3.72% 3.98% 4.42%
Turnover Rate 3% 5% 2% 3% 1%
================================================================================
- --------------------------------------------------------------------------------
VANGUARD LIFESTRATEGY GROWTH FUND
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------
NET ASSET VALUE,
BEGINNING OF YEAR $18.79 $16.04 $13.68 $12.36 $ 9.93
- --------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .45 .410 .39 .34 .32
Capital Gains Distributions
Received .29 .264 .28 .24 .14
Net Realized and
Unrealized Gain (Loss)
on Investments 2.49 2.751 2.36 1.32 2.43
--------------------------------------------------------
Total from Investment
Operations 3.23 3.425 3.03 1.90 2.89
--------------------------------------------------------
DISTRIBUTIONS
Dividends from Net
Investment Income (.45) (.410) (.38) (.35) (.31)
Distributions from
Realized Capital Gains (.16) (.265) (.29) (.23) (.15)
--------------------------------------------------------
Total Distributions (.61) (.675) (.67) (.58) (.46)
- --------------------------------------------------------------------------------
NET ASSET VALUE, END
OF YEAR $21.41 $18.79 $16.04 $13.68 $12.36
================================================================================
TOTAL RETURN 17.32% 21.40% 22.26% 15.41% 29.24%
================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of
Year (Millions) $3,177 $1,924 $1,184 $629 $217
Ratio of Expenses to
Average Net Assets 0% 0% 0% 0% 0%
Ratio of Net
Investment Income to
Average Net Assets 2.50% 2.53% 2.84% 3.18% 3.67%
Turnover Rate 1% 2% 1% 0% 1%
================================================================================
"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>
27
- --------------------------------------------------------------------------------
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 [BOOK]. 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 these Funds unless you notify us otherwise.
- --------------------------------------------------------------------------------
VANGUARD(R) DIRECT DEPOSIT SERVICE [BOOK]
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 [BOOK]
Automatic method for moving a fixed amount of money from one Vanguard fund
account to another.
- --------------------------------------------------------------------------------
VANGUARD FUND EXPRESS(R) [BOOK]
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(R) [BOOK]
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) [BOOK]
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>
28
- - 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 [BOOK]
Invest assets held in an existing personal trust.
- --------------------------------------------------------------------------------
FOR INDIVIDUAL RETIREMENT ACCOUNTS [BOOK]
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 [BOOK]
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>
29
BUYING SHARES
You buy your shares at a Fund's next-determined net asset value after Vanguard
receives your request. As long as your request is received before the close of
regular 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 Funds reserve the right to close any nonretirement fund account whose
balance falls below the minimum initial investment. Each Fund will deduct a $10
annual fee in June if your nonretirement account balance at that time is below
$2,500. The low balance fee is waived for investors who have aggregate Vanguard
account assets of $50,000 or more.
- --------------------------------------------------------------------------------
BY MAIL TO . . . [ENVELOPE]
open a new account
Complete and sign the account registration form and enclose your check.
add to an existing account
Mail your check with an Invest-By-Mail form detached from your confirmation
statement to the address listed on the form. Please do not alter Invest-By-Mail
forms, since they are fund- and account-specific.
Make your check payable to: The Vanguard Group-(insert appropriate Fund number;
see below)
Vanguard LifeStrategy Income Fund-723;
Vanguard LifeStrategy Conservative Growth Fund-724;
Vanguard LifeStrategy Moderate Growth Fund-914;
Vanguard LifeStrategy Growth Fund-122
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.
- --------------------------------------------------------------------------------
<PAGE>
30
- --------------------------------------------------------------------------------
BY TELEPHONE TO . . . [PHONE]
open a new account
Call Vanguard Tele-Account* 24 hours a day--or Client Services during business
hours--to exchange from another Vanguard fund account with the same registration
(name, address, taxpayer identification number, and account type). (Note that
some restrictions apply to index fund accounts.)
add to an existing account
Call Vanguard Tele-Account* 24 hours a day--or Client Services during business
hours--to exchange from another Vanguard fund account with the same registration
(name, address, taxpayer identification number, and account type). (Note that
some restrictions apply to index fund accounts.) Use Vanguard Fund Express (see
"Services and Account Features") to transfer assets from your bank account. Call
Client Services before your first use to verify that this option is available.
Vanguard Tele-Account Client Services
1-800-662-6273 1-800-662-2739
*You must obtain a Personal Identification Number (PIN) through Tele-Account at
least seven days before you request your first exchange.
- --------------------------------------------------------------------------------
IMPORTANT NOTE: Once you have initiated a telephone transaction and a
confirmation number has been assigned, the transaction cannot be revoked. We
reserve the right to refuse any purchase request.
- --------------------------------------------------------------------------------
BY WIRE TO OPEN A NEW ACCOUNT OR ADD TO AN EXISTING ACCOUNT [WIRE]
Call Client Services to arrange your wire transaction. Wire transactions to
retirement accounts are only available for asset transfers and rollovers from
other financial institutions. Individual IRA contributions will not be accepted
by wire.
Wire to:
FRB ABA 021001088
HSBC Bank USA
For credit to:
Account: 000112046
Vanguard Incoming Wire Account
In favor of:
Vanguard LifeStrategy Income Fund-723;
Vanguard LifeStrategy Conservative Growth Fund-724;
Vanguard LifeStrategy Moderate Growth Fund-914;
Vanguard LifeStrategy Growth Fund-122
[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.
<PAGE>
31
- --------------------------------------------------------------------------------
A NOTE ON LARGE PURCHASES
It is important that you call Vanguard before you invest a large dollar amount.
It is our responsibility to consider the interests of all Fund shareholders, and
so we reserve the right to refuse any purchase that may disrupt the Fund's
operation or performance.
- --------------------------------------------------------------------------------
REDEEMING SHARES
This section describes how you can redeem--that is, sell or exchange--a Fund's
shares.
When Selling Shares:
- - Vanguard sends the redemption proceeds to you or a designated third party.*
- - You can sell all or part of your Fund shares at any time.
*May require a signature guarantee; see footnote on page 34.
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 described in this "Redeeming Shares"
section of the 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 other retirement accounts. If you sell shares of these funds
online, a redemption check will be sent to your address of record.
- --------------------------------------------------------------------------------
ONLINE REQUESTS [COMPUTER]
ACCESS VANGUARD at www.vanguard.com
You can use your personal computer to sell or exchange shares of most Vanguard
funds by accessing our website. To establish this service, you must register
through our website. We will then mail you an account access password that will
enable you to sell or exchange shares online (as well as perform other
transactions).
- --------------------------------------------------------------------------------
<PAGE>
32
- --------------------------------------------------------------------------------
TELEPHONE REQUESTS [PHONE]
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 these Funds to
open an account in another Vanguard fund or to add to an existing Vanguard fund
account with an identical registration.
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.
<PAGE>
33
Vanguard Retirement Accounts:
For information on how to request distributions from:
- - Traditional IRAs and Roth IRAs--call Client Services.
- - SEP-IRAs, SIMPLE IRAs, 403(b)(7) custodial accounts, and Profit-Sharing and
Money Purchase Pension (Keogh) Plans--call Individual Retirement Plans at
1-800-662-2003.
Depending on your account registration type, additional documentation may be
required.
First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 1110 455 Devon Park Drive
Valley Forge, PA 19482-1110 Wayne, PA 19087-1815
For clients of Vanguard's Institutional Division . . .
First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 2900 455 Devon Park Drive
Valley Forge, PA 19482-2900 Wayne, PA 19087-1815
- --------------------------------------------------------------------------------
A NOTE ON LARGE REDEMPTIONS
It is important that you call Vanguard before you redeem a large dollar amount.
It is our responsibility to consider the interests of all fund shareholders, and
so we reserve the right to delay delivery of your redemption proceeds--up to
seven days--if the amount may disrupt 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(R) 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.
<PAGE>
34
- - The amount of the transaction (in dollars or shares).
- - Signatures of all owners exactly as registered on the account (for mail
requests).
- - Signature guarantees (if required).*
- - Any supporting legal documentation that may be required.
- - Any outstanding certificates representing shares to be redeemed.
*For instance, a signature guarantee must be provided by all registered account
shareholders when redemption proceeds are to be sent to a different person or
address. A signature guarantee can be obtained from most commercial and savings
banks, credit unions, trust companies, or member firms of a U.S. stock
exchange.
TRANSACTIONS ARE PROCESSED AT THE NEXT-DETERMINED SHARE PRICE AFTER VANGUARD HAS
RECEIVED ALL REQUIRED INFORMATION.
- --------------------------------------------------------------------------------
LIMITS ON ACCOUNT ACTIVITY
Because excessive account transactions can disrupt management of the Fund and
increase the Fund's costs for all shareholders, Vanguard limits account activity
as follows:
- - You may make no more than TWO SUBSTANTIVE "ROUND TRIPS" THROUGH EACH OF THE
FUNDS during any 12-month period.
- - Your round trips through the Fund must be at least 30 days apart.
- - A 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 one of the Funds followed by a purchase
back into the same Fund. Also, a "round trip" covers transactions accomplished
by any combination of methods, including transactions conducted by check, wire,
or exchange to/from another Vanguard fund. "Substantive" means a dollar amount
that Vanguard determines, in its sole discretion, could adversely affect the
management of that 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.
<PAGE>
35
First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 1110 455 Devon Park Drive
Valley Forge, PA 19482-1110 Wayne, PA 19087-1815
For clients of Vanguard's Institutional Division . . .
First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 2900 455 Devon Park Drive
Valley Forge, PA 19482-2900 Wayne, PA 19087-1815
- --------------------------------------------------------------------------------
FUND AND ACCOUNT UPDATES
STATEMENTS AND REPORTS
We will send you account and tax statements to help you keep track of your Fund
account throughout the year as well as when you are preparing your income tax
returns.
In addition, you will receive financial reports about your 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, and the Fund's financial statements which include a listing
of the Fund's holdings.
To keep each Fund's costs as low as possible (so that you and other
shareholders can keep more of the Fund's investment earnings), Vanguard attempts
to eliminate duplicate mailings to the same address. When two or more Fund
shareholders have the same last name and address, we send just one Fund report
to that address--instead of mailing separate reports to each shareholder. If you
want us to send separate reports, notify our Client Services Department at
1-800-662-2739.
- --------------------------------------------------------------------------------
CONFIRMATION STATEMENT
Sent each time you buy, sell, or exchange shares; confirms the trade date and
the amount of your transaction.
- --------------------------------------------------------------------------------
PORTFOLIO SUMMARY [BOOK]
Mailed quarterly for most accounts; shows the market value of your account at
the close of the statement period, as well as distributions, purchases, sales,
and exchanges for the current calendar year.
- --------------------------------------------------------------------------------
FUND FINANCIAL REPORTS
Mailed in February and August for these Funds.
- --------------------------------------------------------------------------------
TAX STATEMENTS
Generally mailed in January; report previous year's dividend and capital gains
distributions, proceeds from the sale of shares, and distributions from IRAs or
other retirement accounts.
- --------------------------------------------------------------------------------
AVERAGE COST REVIEW STATEMENT [BOOK]
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>
(THIS PAGE INTENTIONALLY LEFT BLANK.)
<PAGE>
GLOSSARY OF INVESTMENT TERMS
ACTIVE MANAGEMENT
An investment approach that seeks to exceed the average returns of the financial
markets. Active managers rely on research, market forecasts, and their own
judgment and experience in selecting securities to buy and sell.
BALANCED FUND
A mutual fund that seeks to provide some combination of income, capital growth,
and conservation of capital by investing in stocks, bonds, and/or money market
instruments.
BOND
A debt security (IOU) issued by a corporation, government, or government agency
in exchange for the money you lend it. In most instances, the issuer agrees to
pay back the loan by a specific date and to make regular interest payments until
that date.
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.
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.
CREDIT QUALITY
A measure of a bond issuer's ability to pay interest and principal in a timely
manner.
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-1distribution fees.
FUND DIVERSIFICATION
Holding a variety of securities so that a fund's return is not badly hurt by the
poor performance of a single security, industry, or country.
FUND OF FUNDS
A mutual fund that pursues its objective by investing in other mutual funds
rather than in individual securities.
INDEX
An unmanaged group of securities whose overall performance is used as a standard
to measure investment performance.
INVESTMENT ADVISER
An organization that makes the day-to-day decisions regarding a fund's
investments.
NET ASSET VALUE (NAV)
The market value of a mutual fund's total assets, minus liabilities, divided by
the number of shares outstanding. The value of a single share is called its
share value or share price.
PASSIVE MANAGEMENT
A low-cost investment strategy in which a mutual fund attempts to match--rather
than outperform--a particular stock or bond market index. Also known as
indexing.
PRICE/EARNINGS (P/E) RATIO
The current share price of a stock, divided by its per-share earnings (profits)
from the past year. A stock selling for $20, with earnings of $2 per share, has
a price/earnings ratio of 10.
TOTAL RETURN
A percentage change, over a specified time period, in a mutual fund's net asset
value, with the ending net asset value adjusted to account for the reinvestment
of all distributions of dividends and capital gains.
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(R) LOGO]
[THE VANGUARD GROUP(R) LOGO]
Post Office Box 2600
Valley Forge, PA 19482-2600
FOR MORE INFORMATION
If you'd like more information about
Vanguard LifeStrategy Funds, the
following documents are available
free upon request:
ANNUAL/SEMIANNUAL REPORTS
TO SHAREHOLDERS
Additional information about the
Funds' investments is available in
the Funds' annual and semiannual
reports to shareholders.
STATEMENT OF ADDITIONAL
INFORMATION (SAI)
The SAI provides more detailed
information about the Funds.
The current annual and semiannual
reports and the SAI are
incorporated by reference into
(and are thus legally a part of)
this prospectus.
To receive a free copy of the latest
annual or semiannual report or the
SAI, or to request additional
information about the Funds or other
Vanguard funds, please contact us
as follows:
THE VANGUARD GROUP
INVESTOR INFORMATION
DEPARTMENT
P.O. BOX 2600
VALLEY FORGE, PA 19482-2600
TELEPHONE:
1-800-662-7447 (SHIP)
TEXT TELEPHONE:
1-800-952-3335
WORLD WIDE WEB:
WWW.VANGUARD.COM
If you are a current Fund shareholder
and would like information about
your account, account transactions,
and/or account statements,
please call:
CLIENT SERVICES DEPARTMENT
TELEPHONE:
1-800-662-2739 (CREW)
TEXT TELEPHONE:
1-800-749-7273
INFORMATION PROVIDED BY THE
SECURITIES AND EXCHANGE
COMMISSION (SEC)
You can review and copy
information about the Funds
(including the SAI) at the SEC's
Public Reference Room in
Washington, DC. To find out more
about this public service, call the
SEC at 1-202-942-8090. Reports and
other information about the Funds
are also available on the SEC's
website (www.sec.gov), or you can
receive copies of this information,
for a fee, by electronic request at
the following e-mail address:
[email protected], or by writing
the Public Reference Section,
Securities and Exchange
Commission, Washington, DC
20549-0102.
Funds' Investment Company Act file
number: 811-3919
(C) 2000 The Vanguard Group, Inc.
All rights reserved.
Vanguard Marketing Corporation,
Distributor.
P088N-04/28/2000
<PAGE>
VANGUARD
LIFESTRATEGY(R)
FUNDS
Participant Prospectus
April 28, 2000
This prospectus contains
financial data for the
Funds through the
fiscal year ended
December 31, 1999.
VANGUARD LIFESTRATEGY
INCOME FUND
VANGUARD LIFESTRATEGY
CONSERVATIVE GROWTH
FUND
VANGUARD LIFESTRATEGY
MODERATE GROWTH FUND
VANGUARD LIFESTRATEGY
GROWTH FUND
[THE VANGUARD GROUP(R) LOGO]
<PAGE>
VANGUARD(R) LIFESTRATEGY(R) FUNDS
Participant Prospectus
April 28, 2000
- --------------------------------------------------------------------------------
CONTENTS
- --------------------------------------------------------------------------------
1 AN INTRODUCTION TO VANGUARD 20 THE FUNDS AND VANGUARD
LIFESTRATEGY FUNDS
21 INVESTMENT ADVISER
1 FUND PROFILES
22 DIVIDENDS, CAPITAL GAINS, AND
1 Vanguard LifeStrategy Income Fund TAXES
5 Vanguard LifeStrategy Conservative 22 SHARE PRICE
Growth Fund
23 FINANCIAL HIGHLIGHTS
8 Vanguard LifeStrategy Moderate
Growth Fund 26 INVESTING WITH VANGUARD
11 Vanguard LifeStrategy Growth Fund 27 ACCESSING FUND INFORMATION BY
COMPUTER
14 MORE ON THE FUNDS
GLOSSARY (inside back cover)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
WHY READING THIS PROSPECTUS IS IMPORTANT
This prospectus explains the objective, risks, and strategies of each of the
Vanguard LifeStrategy Funds. To highlight terms and concepts important to mutual
fund investors, we have provided "Plain Talk(R)" explanations along the way.
Reading the prospectus will help you to decide which Fund, if any, is the right
investment for you. We suggest that you keep it for future reference.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
IMPORTANT NOTE
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.
- --------------------------------------------------------------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE>
1
AN INTRODUCTION TO VANGUARD LIFESTRATEGY FUNDS
This Prospectus provides information about the Vanguard LifeStrategy Funds, a
group of mutual funds that invest a fixed percentage of assets in up to five
other Vanguard stock and bond mutual funds. Because they invest in other funds,
rather than in individual securities, each Fund is considered a "fund of funds."
The LifeStrategy Funds offer four distinct choices for different investment
styles and life stages. Because an investor's risk tolerance, investment goals,
investment time horizon, and financial circumstances are subject to change over
time, the LifeStrategy Funds offer alternative strategies for attaining capital
growth and income. The allocation to stocks and bonds in each LifeStrategy Fund
reflects its greater or lesser emphasis on pursuing current income or growth of
capital.
The profiles that follow summarize each Fund's objective and other key
features. Following the profiles, there is important additional information
about the Funds.
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
"FUND OF FUNDS"
The term "fund of funds" is used to describe a mutual fund that pursues its
objective by investing in other mutual funds rather than in individual stocks or
bonds. A fund of funds may charge for its own direct expenses, in addition to
bearing a proportionate share of the expenses charged by the underlying funds in
which it invests. Funds of funds are best suited for long-term investors.
- --------------------------------------------------------------------------------
FUND PROFILE--VANGUARD(R) LIFESTRATEGY(R)
INCOME FUND
The following profile summarizes key features of Vanguard LifeStrategy Income
Fund.
INVESTMENT OBJECTIVE
The Fund seeks to provide current income and some growth of capital.
INVESTMENT STRATEGIES
The Fund invests in other Vanguard mutual funds according to a fixed formula
that typically results in an allocation of about 80% of assets to bonds and 20%
to common stocks. The Fund's assets are invested in the underlying funds as
follows:
- - Vanguard Total Bond Market Index Fund 50%
- - Vanguard Asset Allocation Fund 25%
- - Vanguard Short-Term Corporate Fund 20%
- - Vanguard Total Stock Market Index Fund 5%
The Fund's indirect bond holdings are a diversified mix of short-,
intermediate-, and long-term U.S. government, U.S. agency mortgage-backed, and
investment-grade corporate bonds. Its indirect stock holdings consist
substantially of large-cap U.S. stocks, and to a lesser extent mid- and
small-cap U.S. stocks.
<PAGE>
2
PRIMARY RISKS
The Fund is subject to several stock and bond market risks, any of which could
cause an investor to lose money. However, because bonds usually are less
volatile than stocks, and because the Fund invests most of its assets in bonds,
the Fund's overall level of risk should be relatively low.
- - With approximately 80% of its assets allocated to bonds, the Fund is
primarily subject to bond risks: interest rate risk, which is the chance
that bond prices overall will decline over short or even long periods due
to rising interest rates; income risk, which is the chance that falling
interest rates will cause the Fund's income to decline; credit risk, which
is the chance that a bond issuer will fail to pay interest and principal in
a timely manner, thus reducing the underlying fund's return; and prepayment
risk, which is the chance that during periods of falling interest rates, a
bond issuer will repay its higher-yielding bond earlier than expected,
forcing the underlying fund to reinvest the unanticipated proceeds at lower
interest rates.
- - With approximately 20% of its assets allocated to stocks, the Fund is
subject to stock market risk, which is the chance that stock prices in
general will decline over short or even long periods.
- - The Fund is also subject to manager risk, which is the chance that poor
security selection will cause one of the Fund's actively-managed underlying
funds--and, thus, the Fund itself--to underperform funds with similar
objectives. For additional information on investment risks, see MORE ON THE
FUNDS.
PERFORMANCE/RISK INFORMATION
The bar chart and table below provide an indication of the risk of investing in
the Fund. The bar chart shows the Fund's performance in each calendar year since
inception. The table shows how the Fund's average annual total returns for one
and five calendar years and since inception compare with those of a broad-based
bond market index and a composite stock/bond index weighted to match the Fund's
target allocation. Keep in mind that the Fund's past performance does not
indicate how it will perform in the future.
----------------------------------------------------
ANNUAL TOTAL RETURNS
----------------------------------------------------
1995 22.99%
1996 7.65%
1997 14.23%
1998 13.17%
1999 2.82%
----------------------------------------------------
During the period shown in the bar chart, the highest return for a calendar
quarter was 6.93% (quarter ended June 30, 1995) and the lowest return for a
quarter was -0.54% (quarter ended September 30, 1999).
<PAGE>
3
-------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS FOR YEARS ENDED DECEMBER 31, 1999
-------------------------------------------------------------------------
1 YEAR 5 YEARS SINCE INCEPTION*
-------------------------------------------------------------------------
Vanguard LifeStrategy
Income Fund 2.82% 11.97% 11.41%
Lehman Brothers
Aggregate Bond Index -0.82 7.73 7.43
Income Composite Index** 4.97 11.04 10.55
-------------------------------------------------------------------------
*September 30, 1994.
**Derived by applying the Fund's target allocation to the results of
the following benchmarks: for U.S. stocks, the Wilshire 5000 Total
Market Index; for bonds, the Lehman Brothers Aggregate Bond Index; and
for cash reserves, the Salomon Smith Barney 3-Month U.S. Treasury Bill
Index.
-------------------------------------------------------------------------
FEES AND EXPENSES
The following table describes the fees and expenses you may pay if you buy and
hold shares of the Fund. The expenses shown under Annual Fund Operating Expenses
are based upon those incurred in the fiscal year ended December 31, 1999.
SHAREHOLDER FEES (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fee: None
Exchange Fee: None
ANNUAL FUND OPERATING EXPENSES (expenses deducted from the
underlying funds' assets)
Indirect Operating Expenses: +
+Although the Fund is not expected to incur any net expenses directly, the
Fund's shareholders indirectly bear the expenses of the underlying Vanguard
funds in which the Fund invests. See THE FUNDS AND VANGUARD. The Fund's
indirect expense ratio, based on its investments in the underlying funds,
was 0.28% as of December 31, 1999.
The following example is intended to help you compare the cost of investing
in the Fund with the cost of investing in other mutual funds. It illustrates the
hypothetical expenses that you would incur over various periods if you invest
$10,000 in the Fund. This example assumes that the Fund provides a return of 5%
a year, and that operating expenses of the Fund and its underlying funds remain
the same. The results apply whether or not you redeem your investment at the end
of each period.
- -------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- -------------------------------------------------
$29 $90 $157 $356
- -------------------------------------------------
THIS EXAMPLE SHOULD NOT BE CONSIDERED TO REPRESENT ACTUAL EXPENSES OR
PERFORMANCE FROM THE PAST OR FOR THE FUTURE. ACTUAL FUTURE EXPENSES MAY BE
HIGHER OR LOWER THAN THOSE SHOWN.
<PAGE>
4
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION
DIVIDENDS AND CAPITAL GAINS NET ASSETS AS OF DECEMBER 31, 1999
Dividends are distributed $555 million
quarterly in March, June, September,
and December; capital gains, if any, NEWSPAPER ABBREVIATION
are distributed annually in December LifeInc
INVESTMENT ADVISER VANGUARD FUND NUMBER
The Fund does not employ an investment 723
adviser, but benefits from the
investment advisory services provided CUSIP NUMBER
to the underlying Vanguard funds 921909206
in which it invests
TICKER SYMBOL
INCEPTION DATE VASIX
September 30, 1994
- --------------------------------------------------------------------------------
<PAGE>
5
FUND PROFILE--VANGUARD(R) LIFESTRATEGY(R)
CONSERVATIVE GROWTH FUND
The following profile summarizes key features of Vanguard LifeStrategy
Conservative Growth Fund.
INVESTMENT OBJECTIVE
The Fund seeks to provide current income and low to moderate growth of capital.
INVESTMENT STRATEGIES
The Fund invests in other Vanguard mutual funds according to a fixed formula
that typically results in an allocation of about 60% of assets to bonds and 40%
to common stocks. The Fund's assets are invested in the underlying funds as
follows:
- - Vanguard Total Bond Market Index Fund 30%
- - Vanguard Asset Allocation Fund 25%
- - Vanguard Short-Term Corporate Fund 20%
- - Vanguard Total Stock Market Index Fund 20%
- - Vanguard Total International Stock Index Fund 5%
The Fund's indirect bond holdings are a diversified mix of short-,
intermediate-, and long-term U.S. government, U.S. agency mortgage-backed, and
investment-grade corporate bonds. Its indirect stock holdings consist
substantially of large-cap U.S. stocks, and to a lesser extent mid- and
small-cap U.S. stocks and foreign stocks.
PRIMARY RISKS
The Fund is subject to several stock and bond market risks, any of which could
cause an investor to lose money. However, because bonds usually are less
volatile than stocks, and because the Fund invests more than half of its assets
in bonds, the Fund's overall level of risk should be low to moderate.
- - With approximately 60% of its assets allocated to bonds, the Fund is
subject to bond risks: interest rate risk, which is the chance that bond
prices overall will decline over short or even long periods due to rising
interest rates; income risk, which is the chance that falling interest
rates will cause the Fund's income to decline; credit risk, which is the
chance that a bond issuer will fail to pay interest and principal in a
timely manner, thus reducing the underlying fund's return; and prepayment
risk, which is the chance that during periods of falling interest rates, a
bond issuer will repay its higher-yielding bond earlier than expected,
forcing the underlying fund to reinvest the unanticipated proceeds at lower
interest rates.
- - With approximately 40% of its assets allocated to stocks, the Fund is
subject to stock market risk, which is the chance that stock prices in
general will decline over short or even long periods.
- - The Fund is also subject to manager risk, which is the chance that poor
security selection will cause one of the Fund's actively-managed underlying
funds--and, thus, the Fund itself--to underperform funds with similar
objectives. For additional information on investment risks, see MORE ON THE
FUNDS.
<PAGE>
6
PERFORMANCE/RISK INFORMATION
The bar chart and table below provide an indication of the risk of investing in
the Fund. The bar chart shows the Fund's performance in each calendar year since
inception. The table shows how the Fund's average annual total returns for one
and five calendar years and since inception compare with those of broad-based
stock and bond market indexes and a composite stock/bond index weighted to match
the Fund's target allocation. Keep in mind that the Fund's past performance does
not indicate how it will perform in the future.
----------------------------------------------------
ANNUAL TOTAL RETURNS
----------------------------------------------------
1995 24.35%
1996 10.36%
1997 16.81%
1998 15.88%
1999 7.86%
----------------------------------------------------
During the period shown in the bar chart, the highest return for a calendar
quarter was 8.84% (quarter ended December 31, 1998) and the lowest return for a
quarter was -2.44% (quarter ended September 30, 1998).
-------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS FOR YEARS ENDED DECEMBER 31, 1999
-------------------------------------------------------------------------
1 YEAR 5 YEARS SINCE INCEPTION*
-------------------------------------------------------------------------
Vanguard LifeStrategy
Conservative Growth Fund 7.86% 14.91% 14.17%
Lehman Brothers
Aggregate Bond Index -0.82 7.73 7.43
Wilshire 5000 Total
Market Index 23.77 27.11 25.47
Conservative Growth
Composite Index** 9.98 14.22 13.52
-------------------------------------------------------------------------
*September 30, 1994.
**Derived by applying the Fund's target allocation to the results of
the following benchmarks: for U.S. stocks, the Wilshire 5000 Total
Market Index; for international stocks, the Morgan Stanley Capital
International Europe, Australasia, Far East Index; for bonds, the
Lehman Brothers Aggregate Bond Index; and for cash reserves, the
Salomon Smith Barney 3-Month U.S. Treasury Bill Index.
-------------------------------------------------------------------------
<PAGE>
7
FEES AND EXPENSES
The following table describes the fees and expenses you may pay if you buy and
hold shares of the Fund. The expenses shown under Annual Fund Operating Expenses
are based upon those incurred in the fiscal year ended December 31, 1999.
SHAREHOLDER FEES (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fee: None
Exchange Fee: None
ANNUAL FUND OPERATING EXPENSES (expenses deducted from the
underlying funds' assets)
Indirect Operating Expenses: +
+Although the Fund is not expected to incur any net expenses directly, the
Fund's shareholders indirectly bear the expenses of the underlying Vanguard
funds in which the Fund invests. See THE FUNDS AND VANGUARD. The Fund's
indirect expense ratio, based on its investments in the underlying funds,
was 0.29% as of December 31, 1999.
The following example is intended to help you compare the cost of investing
in the Fund with the cost of investing in other mutual funds. It illustrates the
hypothetical expenses that you would incur over various periods if you invest
$10,000 in the Fund. This example assumes that the Fund provides a return of 5%
a year, and that operating expenses of the Fund and its underlying funds remain
the same. The results apply whether or not you redeem your investment at the end
of each period.
- -------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- -------------------------------------------------
$30 $93 $163 $368
- -------------------------------------------------
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 NET ASSETS AS OF DECEMBER 31, 1999
Dividends are distributed $1.7 billion
quarterly in March, June, September,
and December; capital gains, if any, NEWSPAPER ABBREVIATION
are distributed annually in December LifeCon
INVESTMENT ADVISER VANGUARD FUND NUMBER
The Fund does not employ an investment 724
adviser, but benefits from the
investment advisory services provided CUSIP NUMBER
to the underlying Vanguard funds 921909305
in which it invests
INCEPTION DATE TICKER SYMBOL
September 30, 1994 VSCGX
- --------------------------------------------------------------------------------
<PAGE>
8
FUND PROFILE--VANGUARD(R) LIFESTRATEGY(R)
MODERATE GROWTH FUND
The following profile summarizes key features of Vanguard LifeStrategy Moderate
Growth Fund.
INVESTMENT OBJECTIVE
The Fund seeks to provide growth of capital and a low to moderate level of
current income.
INVESTMENT STRATEGIES
The Fund invests in other Vanguard mutual funds according to a fixed formula
that typically results in an allocation of about 60% of assets to common stocks
and 40% to bonds. The Fund's assets are invested in the underlying funds as
follows:
- - Vanguard Total Stock Market Index Fund 35%
- - Vanguard Total Bond Market Index Fund 30%
- - Vanguard Asset Allocation Fund 25%
- - Vanguard Total International Stock Index Fund 10%
The Fund's indirect stock holdings consist substantially of large-cap U.S.
stocks, and to a lesser extent mid- and small-cap U.S. stocks and foreign
stocks. Its indirect bond holdings are a diversified mix of short-,
intermediate-, and long-term U.S. government, U.S. agency mortgage-backed, and
investment-grade corporate bonds, with an emphasis on long-term U.S. Treasury
bonds.
PRIMARY RISKS
The Fund is subject to several stock and bond market risks, any of which could
cause an investor to lose money. However, because bonds usually are less
volatile than stocks, and because the Fund invests a significant portion of its
assets in bonds, the Fund's overall level of risk should be moderate.
- - With approximately 60% of its assets allocated to stocks, the Fund is
primarily subject to stock market risk, which is the chance that stock
prices in general will decline over short or even long periods. The Fund is
also subject to the following risks associated with investments in
international stocks: currency risk, which is the chance that returns will
be hurt by a rise in the value of the U.S. dollar versus foreign
currencies; and country risk, which is the chance that unfavorable
developments in a particular country--for example, political troubles,
financial problems, or natural disasters--will harm the international
portion exposed to that particular country.
- - With approximately 40% of its assets allocated to bonds, the Fund is
subject to bond risks: interest rate risk, which is the chance that bond
prices overall will decline over short or even long periods due to rising
interest rates; credit risk, which is the chance that a bond issuer will
fail to pay interest and principal in a timely manner, thus reducing the
underlying fund's return; and prepayment risk, which is the chance that
during periods of falling interest rates, a bond issuer will repay its
higher-yielding bond earlier than expected, forcing the underlying fund to
reinvest the unanticipated proceeds at lower interest rates.
- - The Fund is also subject to manager risk, which is the chance that poor
security selection will cause one of the Fund's actively-managed underlying
funds--and, thus, the Fund itself--to underperform funds with similar
objectives.
For additional information on investment risks, see MORE ON THE FUNDS.
<PAGE>
9
PERFORMANCE/RISK INFORMATION
The bar chart and table below provide an indication of the risk of investing in
the Fund. The bar chart shows the Fund's performance in each calendar year since
inception. The table shows how the Fund's average annual total returns for one
and five calendar years and since inception compare with those of broad-based
stock and bond market indexes and a composite stock/bond index weighted to match
the Fund's target allocation. Keep in mind that the Fund's past performance does
not indicate how it will perform in the future.
----------------------------------------------------
ANNUAL TOTAL RETURNS
----------------------------------------------------
1995 27.94%
1996 12.71%
1997 19.77%
1998 19.03%
1999 12.01%
----------------------------------------------------
During the period shown in the bar chart, the highest return for a calendar
quarter was 13.08% (quarter ended December 31, 1998) and the lowest return for a
quarter was -5.52% (quarter ended September 30, 1998).
-------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS FOR YEARS ENDED DECEMBER 31, 1999
-------------------------------------------------------------------------
1 YEAR 5 YEARS SINCE INCEPTION*
-------------------------------------------------------------------------
Vanguard LifeStrategy
Moderate Growth Fund 12.01% 18.15% 17.05%
Lehman Brothers
Aggregate Bond Index -0.82 7.73 7.43
Wilshire 5000 Total
Market Index 23.77 27.11 25.47
Moderate Growth
Composite Index** 13.88 17.96 16.95
-------------------------------------------------------------------------
*September 30, 1994.
**Derived by applying the Fund's target allocation to the results of
the following benchmarks: for U.S. stocks, the Wilshire 5000 Total
Market Index; for international stocks, the Morgan Stanley Capital
International Europe, Australasia, Far East Index; for bonds, the
Lehman Brothers Aggregate Bond Index; and for cash reserves, the
Salomon Smith Barney 3-Month U.S. Treasury Bill Index.
-------------------------------------------------------------------------
<PAGE>
10
FEES AND EXPENSES
The following table describes the fees and expenses you may pay if you buy and
hold shares of the Fund. The expenses shown under Annual Fund Operating Expenses
are based upon those incurred in the fiscal year ended December 31, 1999.
SHAREHOLDER FEES (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fee: None
Exchange Fee: None
ANNUAL FUND OPERATING EXPENSES (expenses deducted from the
underlying funds' assets)
Indirect Operating Expenses: +
+Although the Fund is not expected to incur any net expenses directly, the
Fund's shareholders indirectly bear the expenses of the underlying Vanguard
funds in which the Fund invests. See THE FUNDS AND VANGUARD. The Fund's
indirect expense ratio, based on its investments in the underlying funds,
was 0.29% as of December 31, 1999.
The following example is intended to help you compare the cost of investing
in the Fund with the cost of investing in other mutual funds. It illustrates the
hypothetical expenses that you would incur over various periods if you invest
$10,000 in the Fund. This example assumes that the Fund provides a return of 5%
a year, and that operating expenses of the Fund and its underlying funds remain
the same. The results apply whether or not you redeem your investment at the end
of each period.
- -------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- -------------------------------------------------
$30 $93 $163 $368
- -------------------------------------------------
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 NET ASSETS AS OF DECEMBER 31, 1999
Dividends are distributed $3.4 billion
semiannually in June and December;
capital gains, if any, are distributed NEWSPAPER ABBREVIATION
annually in December LifeMod
INVESTMENT ADVISER VANGUARD FUND NUMBER
The Fund does not employ an investment 914
adviser, but benefits from the
investment advisory services provided CUSIP NUMBER
to the underlying Vanguard funds 921909404
in which it invests
INCEPTION DATE TICKER SYMBOL
September 30, 1994 VSMGX
- --------------------------------------------------------------------------------
<PAGE>
11
FUND PROFILE--VANGUARD(R) LIFESTRATEGY(R)
GROWTH FUND
The following profile summarizes key features of Vanguard LifeStrategy Growth
Fund.
INVESTMENT OBJECTIVE
The Fund seeks to provide growth of capital and some current income.
INVESTMENT STRATEGIES
The Fund invests in other Vanguard mutual funds according to a fixed formula
that typically results in an allocation of about 80% of assets to common stocks
and 20% to bonds. The Fund's assets are invested in the underlying funds as
follows:
- - Vanguard Total Stock Market Index Fund 50%
- - Vanguard Asset Allocation Fund 25%
- - Vanguard Total International Stock Index Fund 15%
- - Vanguard Total Bond Market Index Fund 10%
The Fund's indirect stock holdings consist substantially of large-cap U.S.
stocks, and to a lesser extent mid- and small-cap U.S. stocks and foreign
stocks. Its indirect bond holdings are a diversified mix of short-,
intermediate-, and long-term U.S. government, U.S. agency mortgage-backed, and
investment-grade corporate bonds, with a strong emphasis on long-term U.S.
Treasury bonds.
PRIMARY RISKS
The Fund is subject to several stock and bond market risks, any of which could
cause an investor to lose money. Because stocks usually are more volatile than
bonds, and the Fund invests more in stocks than the other LifeStrategy Funds,
the Fund's overall level of risk should be high compared with those funds;
however, the level of risk should be lower than that of a fund investing
entirely in stocks.
- - With approximately 80% of its assets allocated to stocks, the Fund is
primarily subject to stock market risk, which is the chance that stock
prices in general will decline over short or even long periods. The Fund is
also subject to the following risks associated with investments in
international stocks: currency risk, which is the chance that returns will
be hurt by a rise in the value of the U.S. dollar versus foreign
currencies; and country risk, which is the chance that unfavorable
developments in a particular country--for example, political troubles,
financial problems, or natural disasters--will harm the international
portion exposed to that particular country.
- - With approximately 20% of its assets allocated to bonds, the Fund is
subject to bond risks: interest rate risk, which is the chance that bond
prices overall will decline over short or even long periods due to rising
interest rates; credit risk, which is the chance that a bond issuer will
fail to pay interest and principal in a timely manner, thus reducing the
underlying fund's return; and prepayment risk, which is the chance that
during periods of falling interest rates, a bond issuer will repay its
higher-yielding bond earlier than expected, forcing the underlying fund to
reinvest the unanticipated proceeds at lower interest rates.
- - The Fund is also subject to manager risk, which is the chance that poor
security selection will cause one of the Fund's actively-managed underlying
funds--and, thus, the Fund itself--to underperform funds with similar
objectives. For additional information on investment risks, see MORE ON THE
FUNDS.
<PAGE>
12
PERFORMANCE/RISK INFORMATION
The bar chart and table below provide an indication of the risk of investing in
the Fund. The bar chart shows the Fund's performance in each calendar year since
inception. The table shows how the Fund's average annual total returns for one
and five calendar years and since inception compare with those of a broad-based
stock market index and a composite stock/bond index weighted to match the Fund's
target allocation. Keep in mind that the Fund's past performance does not
indicate how it will perform in the future.
----------------------------------------------------
ANNUAL TOTAL RETURNS
----------------------------------------------------
1995 29.24%
1996 15.41%
1997 22.26%
1998 21.40%
1999 17.32%
----------------------------------------------------
During the period shown in the bar chart, the highest return for a calendar
quarter was 17.31% (quarter ended December 31, 1998) and the lowest return for a
quarter was -8.84% (quarter ended September 30, 1998).
--------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS FOR YEARS ENDED DECEMBER 31, 1999
--------------------------------------------------------------------------
1 YEAR 5 YEARS SINCE INCEPTION*
--------------------------------------------------------------------------
Vanguard LifeStrategy
Growth Fund 17.32% 21.03% 19.91%
Wilshire 5000 Total
Market Index 23.77 27.11 25.47
Growth Composite Index** 19.14 21.15 19.91
--------------------------------------------------------------------------
*September 30, 1994.
**Derived by applying the Fund's target allocation to the results of the
following benchmarks: for U.S. stocks, the Wilshire 5000 Total Market
Index; for international stocks, the Morgan Stanley Capital
International Europe, Australasia, Far East Index; for bonds, the
Lehman Brothers Aggregate Bond Index; and for cash reserves, the
Salomon Smith Barney 3-Month U.S. Treasury Bill Index.
--------------------------------------------------------------------------
<PAGE>
13
FEES AND EXPENSES
The following table describes the fees and expenses you may pay if you buy and
hold shares of the Fund. The expenses shown under Annual Fund Operating Expenses
are based upon those incurred in the fiscal year ended December 31, 1999.
SHAREHOLDER FEES (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fee: None
Exchange Fee: None
ANNUAL FUND OPERATING EXPENSES (expenses deducted from the
underlying funds' assets)
Indirect Operating Expenses: +
+Although the Fund is not expected to incur any net expenses directly, the
Fund's shareholders indirectly bear the expenses of the underlying Vanguard
funds in which the Fund invests. See THE FUNDS AND VANGUARD. The Fund's
indirect expense ratio, based on its investments in the underlying funds,
was 0.29% as of December 31, 1999.
The following example is intended to help you compare the cost of investing
in the Fund with the cost of investing in other mutual funds. It illustrates the
hypothetical expenses that you would incur over various periods if you invest
$10,000 in the Fund. This example assumes that the Fund provides a return of 5%
a year, and that operating expenses of the Fund and its underlying funds remain
the same. The results apply whether or not you redeem your investment at the end
of each period.
- -------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- -------------------------------------------------
$30 $93 $163 $368
- -------------------------------------------------
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 NET ASSETS AS OF DECEMBER 31, 1999
Dividends are distributed $3.2 billion
semiannually in June and December;
capital gains, if any, are distributed NEWSPAPER ABBREVIATION
annually in December LifeGro
INVESTMENT ADVISER
The Fund does not employ an investment VANGUARD FUND NUMBER
adviser, but benefits from the 122
investment advisory services provided
to the underlying Vanguard funds CUSIP NUMBER
in which it invests 921909503
INCEPTION DATE TICKER SYMBOL
September 30, 1994 VASGX
- --------------------------------------------------------------------------------
<PAGE>
14
MORE ON THE FUNDS
The following sections discuss other important features of the Vanguard
LifeStrategy Funds. You will find information about the risks of investing in
each Fund throughout these sections.
ASSET ALLOCATION FRAMEWORK
Asset allocation--that is, dividing your investment among stocks, bonds, and
cash reserves--is one of the most critical decisions an investor makes.
Selecting the appropriate mix should be based on personal investment objectives,
time horizons, and risk tolerances. The LifeStrategy Funds offer varying degrees
of risk and reward by holding different combinations of assets, thereby
providing shareholders with a simple way to meet investment needs at different
stages of life.
Each Fund invests in up to five underlying Vanguard funds to pursue a
target allocation of stocks, bonds, and cash instruments.* Because one of the
underlying funds (Vanguard Asset Allocation Fund) periodically shifts its
holdings among asset classes, each LifeStrategy Fund's asset mix can fluctuate
within a prescribed range. The tables below illustrate the expected asset
allocation and the potential allocation ranges for each Fund:
- -------------------------------------------------------------------
EXPECTED ASSET ALLOCATION
- -------------------------------------------------------------------
STOCKS BONDS CASH*
- -------------------------------------------------------------------
LifeStrategy Income Fund 20% 80% 0%
LifeStrategy Conservative Growth Fund 40% 60% 0%
LifeStrategy Moderate Growth Fund 60% 40% 0%
LifeStrategy Growth Fund 80% 20% 0%
- -------------------------------------------------------------------
- -------------------------------------------------------------------
POTENTIAL ASSET ALLOCATION RANGE
- -------------------------------------------------------------------
STOCKS BONDS CASH*
- -------------------------------------------------------------------
LifeStrategy Income Fund 5%-30% 70%-95% 0%-25%
LifeStrategy Conservative Growth Fund 25%-50% 50%-75% 0%-25%
LifeStrategy Moderate Growth Fund 45%-70% 30%-55% 0%-25%
LifeStrategy Growth Fund 65%-90% 10%-35% 0%-25%
- -------------------------------------------------------------------
*"Cash" consists of any cash instruments held by Vanguard Asset Allocation Fund,
one of the underlying Vanguard funds in which the LifeStrategy Funds invest.
PRIMARY INVESTMENT STRATEGIES
This section explains how the Funds pursue their individual objectives by
investing in different combinations of Vanguard funds that hold stocks, bonds,
and cash instruments. In addition, this section discusses several important
risks faced by investors in some or all of the Funds. The Funds' Board of
Trustees oversees the management of the Funds, and may change the investment
strategies in the interest of shareholders.
MARKET EXPOSURE
Each of the LifeStrategy Funds owns, indirectly through investment in the
underlying funds, a portfolio of stocks and bonds. Because one of the underlying
funds (Vanguard Asset Allocation Fund) periodically shifts its holdings among
asset classes, it is not possible to precisely describe, in all cases, the types
of stocks and bonds each LifeStrategy Fund
<PAGE>
15
owns. However, when the LifeStrategy Funds are invested at or near their
expected asset allocations (see previous page), their portfolios are expected to
be as follows:
LIFESTRATEGY INCOME FUND: Stock holdings (20%) consist substantially of
large-cap U.S. stocks, and to a lesser extent mid- and small-cap U.S. stocks.
Bond holdings (80%) are a diversified mix of short-, intermediate-, and
long-term U.S. government, U.S. agency mortgage-backed, and investment-grade
corporate bonds.
LIFESTRATEGY CONSERVATIVE GROWTH FUND: Stock holdings (40%) consist mainly of
large-cap U.S. stocks, and to a lesser extent mid- and small-cap U.S. stocks and
foreign stocks. Bond holdings (60%) are a diversified mix of short-,
intermediate-, and long-term U.S. government, U.S. agency mortgage-backed, and
investment-grade corporate bonds.
LIFESTRATEGY MODERATE GROWTH FUND: Stock holdings (60%) consist mainly of
large-cap U.S. stocks, and to a lesser extent mid- and small-cap U.S. stocks and
foreign stocks. Bond holdings (40%) are a diversified mix of short-,
intermediate-, and long-term U.S. government, U.S. agency mortgage-backed, and
investment-grade corporate bonds, with an emphasis on long-term U.S. Treasury
bonds.
LIFESTRATEGY GROWTH FUND: Stock holdings (80%) consist mainly of large-cap U.S.
stocks, and to a lesser extent mid- and small-cap U.S. stocks and foreign
stocks. Bond holdings (20%) are a diversified mix of short-, intermediate-, and
long-term U.S. government, U.S. agency mortgage-backed, and investment-grade
corporate bonds, with a strong emphasis on long-term U.S. Treasury bonds.
STOCKS
By owning shares of other Vanguard mutual funds, each of the LifeStrategy Funds
indirectly invests, to varying degrees, in U.S. common stocks, with emphasis on
large-cap stocks, and to a lesser extent in foreign stocks (except that
LifeStrategy Income Fund will not invest in foreign stocks).
[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 stock market activity. (Total returns consist of dividend income plus change
in market price.) Note that the returns shown do not include the costs of buying
and selling stocks or other expenses that a real-world investment portfolio
would incur. Note, also, that the gap between best and worst tends to narrow
over the long term.
- ------------------------------------------------------
U.S. STOCK MARKET RETURNS (1926-1999)
- ------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS 20 YEARS
- ------------------------------------------------------
Best 54.2% 28.6% 19.9% 17.9%
Worst -43.1 -12.4 -0.9 3.1
Average 13.2 11.0 11.1 11.1
- ------------------------------------------------------
<PAGE>
16
The table covers all of the 1-, 5-, 10-, and 20-year periods from 1926
through 1999. You can see, for example, that while the average return on common
stocks for all of the 5-year periods was 11.0%, returns for individual 5-year
periods ranged from a -12.4% average (from 1928 through 1932) to 28.6% (from
1995 through 1999). These average returns reflect past performance on common
stocks; you should not regard them as an indication of future returns from
either the stock market as a whole or these Funds 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 typically 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.
- --------------------------------------------------------------------------------
Through their investments in one underlying fund (the Asset Allocation
Fund), the Funds will hold a diversified combination of common stocks intended
to parallel the performance of the S&P 500 Index, which is dominated by
large-cap U.S. common stocks. Through another underlying fund (the Total Stock
Market Index Fund), each Fund will hold a representative sample of the
securities in the Wilshire 5000 Total Market Index--a benchmark for the entire
U.S. stock market.
Keep in mind that a significant portion of the market value of the Wilshire
5000 Index (about 24% as of December 31, 1999) is comprised of securities not
included in the S&P 500 Index. These securities are overwhelmingly mid- and
small-cap stocks, which historically have been more volatile than--and at times
have performed quite differently from--the stocks of larger companies.
By owning shares of Vanguard Total International Stock Index Fund, which
invests in foreign stocks, the LifeStrategy Conservative Growth, Moderate
Growth, and Growth Funds are subject to country risk and currency risk. Country
risk is the chance that political troubles (such as a war), financial problems
(such as government default), or natural disasters (such as an earthquake) will
weaken a country's economy and cause investments in that country to lose money.
Currency risk is the chance that a stronger U.S. dollar will reduce returns for
Americans investing overseas. Generally, when the dollar rises in value against
a foreign currency, your investment in that country loses value because its
currency is worth fewer U.S. dollars.
BONDS
By owning shares of other Vanguard mutual funds, each of the LifeStrategy Funds
indirectly invests, to varying degrees, in government, mortgage-backed, and
corporate bonds.
[FLAG]THE FUNDS ARE SUBJECT TO INTEREST RATE RISK, WHICH IS THE CHANCE THAT BOND
PRICES OVERALL WILL DECLINE OVER SHORT OR EVEN LONG PERIODS DUE TO RISING
INTEREST RATES. INTEREST RATE RISK IS MODEST FOR SHORTER-TERM BOND FUNDS
AND HIGHER FOR LONGER-TERM BOND FUNDS.
<PAGE>
17
Although bonds are often thought to be less risky than stocks, there have
been periods when bond prices have fallen significantly due to rising interest
rates. For instance, prices of long-term bonds fell by almost 48% between
December 1976 and September 1981.
To illustrate the relationship between bond prices and interest rates, the
following table shows the effect of a 1% and a 2% change (both up and down) in
interest rates on three bonds of different maturities, each with a face value of
$1,000.
- --------------------------------------------------------------------------------
HOW INTEREST RATE CHANGES AFFECT THE
VALUE OF A $1,000 BOND*
- -------------------------------------------------------------------------------
AFTER A 1% AFTER A 1% AFTER A 2% AFTER A 2%
TYPE OF BOND (MATURITY) INCREASE DECREASE INCREASE DECREASE
- -------------------------------------------------------------------------------
Short-Term (2.5 years) $978 $1,023 $956 $1,046
Intermediate-Term (10 years) 932 1,074 870 1,156
Long-Term (20 years) 901 1,116 816 1,251
- -------------------------------------------------------------------------------
These figures are intended only to illustrate interest rate risk; they
should not be regarded as an indication of future returns from the bond market
as a whole, or any Fund in particular.
Changes in interest rates will affect bond income as well as bond prices.
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
BONDS AND INTEREST RATES
As a rule, when interest rates rise, bond prices fall. The opposite is also
true: Bond prices go up when interest rates fall. Why do bond prices and
interest rates move in opposite directions? Let's assume that you hold a bond
offering a 5% yield. A year later, interest rates are on the rise and bonds are
offered with a 6% yield. With higher-yielding bonds available, you would have
trouble selling your 5% bond for the price you paid--causing you to lower your
asking price. On the other hand, if interest rates were falling and 4% bonds
were being offered, you should be able to sell your 5% bond for more than you
paid.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
BOND MATURITIES
A bond is issued with a specific maturity date--the date when the bond's issuer,
or seller, must pay back the bond's initial value (known as its "face value").
Bond maturities generally range from less than one year (short-term) to 30 years
(long-term). The longer a bond's maturity, the more risk you, as a bond
investor, face as interest rates rise--but also the more interest you could
receive. Long-term bonds are more suitable for investors willing to take greater
risks in hope of higher yields; short-term bond investors should be willing to
accept lower yields in return for less fluctuation in the value of their
investment.
- --------------------------------------------------------------------------------
[FLAG]THE FUNDS ARE SUBJECT TO INCOME RISK, WHICH IS THE CHANCE THAT A FUND'S
DIVIDENDS (INCOME) WILL DECLINE DUE TO FALLING INTEREST RATES. INCOME RISK
IS GENERALLY HIGHER FOR SHORT-TERM BOND FUNDS, AND LOWER FOR LONG-TERM BOND
FUNDS.
<PAGE>
18
Income risk is a concern primarily for the LifeStrategy Income and
Conservative Growth Funds, which, through their ownership of Vanguard Short-Term
Corporate Fund, indirectly own more short-term bonds.
[FLAG]THE FUNDS ARE SUBJECT TO PREPAYMENT RISK, WHICH IS THE CHANCE THAT DURING
PERIODS OF FALLING INTEREST RATES, A BOND ISSUER WILL REPAY ITS
HIGHER-YIELDING BOND EARLIER THAN SCHEDULED. FORCED TO REINVEST THE
UNANTICIPATED PROCEEDS AT LOWER RATES, THE UNDERLYING FUND WOULD EXPERIENCE
A DECLINE IN INCOME.
The risk of prepayment applies primarily to intermediate- and long-term
corporate bonds and mortgage-backed securities, which comprise a significant
portion of Vanguard Total Bond Market Index Fund. Prepayment risk is a concern
primarily for the LifeStrategy Income Fund, which will invest half of its assets
in the Total Bond Market Index Fund.
[FLAG]THE FUNDS ARE SUBJECT TO CREDIT RISK, WHICH IS THE CHANCE THAT A BOND
ISSUER WILL FAIL TO PAY INTEREST AND PRINCIPAL IN A TIMELY MANNER.
The credit quality of the bonds held by the underlying funds is expected to
be very high, and thus credit risk of the LifeStrategy Funds should be low.
To a limited extent, the Funds are also indirectly exposed to event risk,
which is the possibility that corporate fixed-income securities held by
underlying funds may suffer a substantial decline in credit quality and market
value due to a corporate restructuring.
CASH
Through one underlying fund (Vanguard Asset Allocation Fund), from 0% to 25% of
the assets of each LifeStrategy Fund can be invested in cash instruments. These
potential cash holdings make the Funds subject to inflation risk, which is the
possibility that the rising cost of living may erode the purchasing power of
your investment over time.
Since the Asset Allocation Fund typically invests only a small portion of
its assets in cash instruments, and the LifeStrategy Funds invest only
one-fourth of their assets in the Asset Allocation Fund, inflation risk to the
Funds is very low.
SECURITY SELECTION
Each Fund seeks to achieve its objective by investing in fixed percentages of
four or five underlying Vanguard funds. The following table shows these
percentages for each Fund.
- -------------------------------------------------------------------------
LIFESTRATEGY FUND
----------------------------------------
CONSERVATIVE MODERATE
UNDERLYING VANGUARD FUND INCOME GROWTH GROWTH GROWTH
- -------------------------------------------------------------------------
Total Stock Market Index 5% 20% 35% 50%
Total International Stock Index -- 5 10 15
Total Bond Market Index 50 30 30 10
Short-Term Corporate 20 20 -- --
Asset Allocation 25 25 25 25
- -------------------------------------------------------------------------
Total 100% 100% 100% 100%
- -------------------------------------------------------------------------
<PAGE>
19
The allocation of each Fund's assets among the underlying funds is made by
the LifeStrategy Funds' Board of Trustees based on the Fund's investment
objective and policies, and may be changed from time to time without shareholder
approval. The Funds' investments in the underlying funds may be limited at times
by certain factors. For example, the Board of Trustees of an underlying fund may
impose limits on additional investments in the fund.
The following briefly describes the five underlying Vanguard funds in which
the Funds invest.
- - Vanguard Total Stock Market Index Fund seeks to provide investment results
that parallel the performance of the unmanaged Wilshire 5000 Index--which
consists of all U.S. common stocks traded on the New York and American
Stock Exchanges and the NASDAQ over-the-counter market--by investing in a
select sampling of securities in the index.
- - Vanguard Total International Stock Index Fund seeks to provide investment
results that parallel the performance of the Morgan Stanley Capital
International (MSCI) Europe, Australasia, Far East Index plus the Select
Emerging Markets Free Index, by investing in three mutual funds that track
the various components of the indexes. The fund has exposure to stocks in
more than 35 foreign countries.
- - Vanguard Total Bond Market Index Fund seeks to provide investment results
that parallel the performance of the Lehman Brothers Aggregate Bond Index,
by investing in a select sampling of securities in the index. The Lehman
Brothers Aggregate Bond Index provides extensive coverage of the
investment-grade debt market in the U.S.--including government, corporate,
mortgage-backed, and asset-backed bonds--with maturities of over one year.
- - Vanguard Short-Term Corporate Fund invests in a diversified portfolio of
investment-grade corporate bonds with an expected average maturity of two
to three years.
- - Vanguard Asset Allocation Fund invests in a mix of common stocks (selected
to parallel the performance of the S&P 500 Index, which is dominated by
large-capitalization stocks), long-term U.S. Treasury bonds, and cash
equivalents. The allocations are designed to take advantage of perceived
imbalances in the relative returns and risks of each asset class. At any
given time, the adviser may allocate all, a portion, or none of the fund's
assets to stocks, bonds, or cash reserves.
[FLAG]THROUGH THEIR LIMITED INVESTMENTS IN ACTIVELY-MANAGED UNDERLYING FUNDS,
THE LIFESTRATEGY FUNDS ARE SUBJECT TO MANAGER RISK, WHICH IS THE CHANCE
THAT POOR SECURITY SELECTION WILL CAUSE AN UNDERLYING FUND--AND, THUS, THE
LIFESTRATEGY FUNDS--TO UNDERPERFORM FUNDS WITH SIMILAR OBJECTIVES.
TEMPORARY INVESTMENT MEASURES
The Funds' underlying funds may temporarily depart from their normal investment
policies--for instance, by investing substantially in cash reserves--in response
to extraordinary market, economic, political, or other conditions. In doing so,
the LifeStrategy Funds may succeed in avoiding losses but otherwise fail to
achieve their investment objectives.
<PAGE>
20
- --------------------------------------------------------------------------------
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 buying and selling of securities by the fund. 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.
- --------------------------------------------------------------------------------
COSTS AND MARKET-TIMING
Some investors try to profit from market-timing--switching money into
investments when they expect prices to rise, and taking money out when they
expect the market to fall. As money is shifted in and out, a fund incurs
expenses for buying and selling securities. These costs are borne by all fund
shareholders, including the long-term investors who do not generate the costs.
Therefore, the Funds have adopted the following policies, among others, designed
to discourage short-term trading:
- - Each Fund reserves the right to reject any purchase request--including
exchanges from other Vanguard funds--that it regards as disruptive to the
efficient management of the Fund or the underlying funds. A purchase
request could be rejected because of the timing of the request or because
of a history of excessive trading by the investor.
- - There is a limit on the number of times you can exchange into and out of
each Fund (see "Exchanges" in the INVESTING WITH VANGUARD section).
- - Each Fund reserves the right to stop offering shares at any time.
THE VANGUARD FUNDS DO NOT PERMIT MARKET-TIMING. DO NOT INVEST IN THESE
FUNDS IF YOU ARE A MARKET-TIMER.
THE FUNDS AND VANGUARD
The LifeStrategy Funds have entered into an Agreement with Vanguard under which
Vanguard provides all management, administrative, and distribution services to
the Funds at cost. The Funds owe Vanguard a sum sufficient to cover Vanguard's
out-of-pocket costs. The Funds also bear the expenses of services provided by
other parties (such as auditors, legal counsel, and the Funds' custodian), as
well as taxes and other direct expenses of the Funds. However, the Agreement
provides that the Funds' expenses will be offset by a reimbursement from
Vanguard for (a) contributions made by the Funds to the cost of operating the
underlying Vanguard funds in which the LifeStrategy Funds invest, and (b)
certain savings in administrative and marketing costs that Vanguard is expected
to derive from the operation of the Funds.
The Funds' Trustees believe that the reimbursements should be sufficient to
offset most, if not all, of the expenses incurred by the Funds. Therefore, the
Funds are expected to operate at a very low or zero expense ratio. Since their
inception in 1994, the Funds in fact have had no direct net expenses.
<PAGE>
21
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
Of course, shareholders of the LifeStrategy Funds will still bear,
indirectly, their proportionate share of the costs of operating the underlying
Vanguard funds. During their most recent fiscal years, the underlying funds had
the following expense ratios:
- - Vanguard Total Stock Market Index Fund 0.20%
- - Vanguard Total International Stock Index Fund 0.34%
- - Vanguard Total Bond Market Index Fund 0.20%
- - Vanguard Short-Term Corporate Fund 0.25%
- - Vanguard Asset Allocation Fund 0.49%
Based on the percentage of each underlying fund owned, the LifeStrategy
Funds had the following indirect expense ratios as of December 31, 1999:
- - LifeStrategy Income Fund 0.28%
- - LifeStrategy Conservative Growth Fund 0.29%
- - LifeStrategy Moderate Growth Fund 0.29%
- - LifeStrategy Growth Fund 0.29%
INVESTMENT ADVISER
The LifeStrategy Funds do not employ an investment adviser, but they benefit
from the investment advisory services rendered to the underlying funds. The
underlying funds are managed by the following investment advisory firms:
- --------------------------------------------------------------------------------
UNDERLYING FUND INVESTMENT ADVISORY FIRM
- --------------------------------------------------------------------------------
Vanguard Total Stock Market Index Fund The Vanguard Group
- --------------------------------------------------------------------------------
Vanguard Total International Stock
Index Fund The Vanguard Group*
- --------------------------------------------------------------------------------
Vanguard Total Bond Market Index Fund The Vanguard Group
- --------------------------------------------------------------------------------
Vanguard Short-Term Corporate Fund The Vanguard Group
- --------------------------------------------------------------------------------
Vanguard Asset Allocation Fund Mellon Capital Management Corporation
- --------------------------------------------------------------------------------
*Vanguard Total International Stock Index Fund does not have its own investment
adviser, but rather benefits from the advisory services provided by The Vanguard
Group to the three underlying funds in which the Total International Stock Index
Fund invests: Vanguard European Stock Index Fund, Vanguard Pacific Stock Index
Fund, and Vanguard Emerging Markets Stock Index Fund. The Vanguard Group also
manages the Total International Stock Index Fund's cash assets, if any.
- --------------------------------------------------------------------------------
<PAGE>
22
The chart below briefly describes each investment advisory firm:
- --------------------------------------------------------------------------------
FIRM BACKGROUND
- --------------------------------------------------------------------------------
Mellon Capital Management Corporation - Based in San Francisco, California
- Founded in 1983
- Manages about $86 billion in assets
- --------------------------------------------------------------------------------
The Vanguard Group - Based in Valley Forge, Pennsylvania
- Founded in 1975
- Manages about $371 billion in assets
- --------------------------------------------------------------------------------
The Board of Trustees of an underlying fund may, without prior approval
from shareholders of the underlying fund or the LifeStrategy Funds, change the
terms of any advisory agreement or hire a new investment adviser--either as a
replacement for an existing adviser or as an additional adviser.
DIVIDENDS, CAPITAL GAINS, AND TAXES
Each Fund distributes to shareholders virtually all of its net income (interest
and dividends paid by the underlying funds), as well as any capital gains
realized from the sale of its holdings or received as capital gains
distributions from the underlying funds. Income dividends for the Income and
Conservative Growth Funds generally are distributed in March, June, September,
and December; income dividends for the Moderate Growth and Growth Funds
generally are distributed in June and December. Capital gains 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.
SHARE PRICE
Each Fund's share price, called its net asset value, or NAV, is calculated each
business day after the close of regular trading on the New York Stock Exchange
(the NAV is not calculated on holidays or other days when the Exchange is
closed). Net asset value per share is computed by adding up the total value of
the Fund's investments (i.e., shares of the underlying Vanguard funds) and other
assets, subtracting any of its liabilities (debts), and then dividing by the
number of Fund shares outstanding:
TOTAL ASSETS - LIABILITIES
NET ASSET VALUE = --------------------------------
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.
<PAGE>
23
The Funds' share prices can be found daily in the mutual fund listings of
most major newspapers under the heading "Vanguard Funds." Different newspapers
use different abbreviations of the Funds' names, but the most common are:
LIFEINC, LIFECON, LIFEMOD, and LIFEGRO.
FINANCIAL HIGHLIGHTS
The following financial highlights tables are intended to help you understand
each Fund's financial performance for the past five years, and certain
information reflects financial results for a single Fund share. The total
returns in the table represent the rate that an investor would have earned or
lost each year on an investment in each Fund (assuming reinvestment of all
dividend and capital gains distributions). This information has been derived
from the financial statements audited by PricewaterhouseCoopers LLP, independent
accountants, whose report--along with the Funds' financial statements--is
included in the Funds' most recent annual report to shareholders. You may have
the annual report sent to you without charge by contacting Vanguard.
- --------------------------------------------------------------------------------
VANGUARD LIFESTRATEGY INCOME FUND
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------
NET ASSET VALUE,
BEGINNING OF YEAR $13.22 $12.43 $11.55 $11.54 $ 9.88
- --------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .69 .63 .63 .64 .49
Capital Gains Distributions
Received .14 .20 .15 .19 .09
Net Realized and
Unrealized Gain (Loss)
on Investments (.47) .78 .83 .03 1.66
--------------------------------------------------------
Total from Investment
Operations .36 1.61 1.61 .86 2.24
--------------------------------------------------------
DISTRIBUTIONS
Dividends from Net
Investment Income (.69) (.63) (.63) (.64) (.49)
Distributions from
Realized Capital Gains (.07) (.19) (.10) (.21) (.09)
--------------------------------------------------------
Total Distributions (.76) (.82) (.73) (.85) (.58)
- --------------------------------------------------------------------------------
NET ASSET VALUE, END
OF YEAR $12.82 $13.22 $12.43 $11.55 $11.54
================================================================================
TOTAL RETURN 2.82% 13.17% 14.23% 7.65% 22.99%
================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of
Year (Millions) $555 $449 $244 $151 $121
Ratio of Expenses to
Average Net Assets 0% 0% 0% 0% 0%
Ratio of Net
Investment Income to
Average Net Assets 5.37% 5.24% 5.54% 5.66% 5.76%
Turnover Rate 11% 3% 6% 22% 4%
================================================================================
<PAGE>
24
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
HOW TO READ THE FINANCIAL HIGHLIGHTS TABLES
This explanation uses the LifeStrategy Income Fund as an example. The Fund began
fiscal 1999 with a net asset value (price) of $13.22 per share. During the year,
the Fund earned $0.69 per share from investment income and $0.14 per share in
capital gains distributions. There was a decline of $0.47 per share from
investments that had depreciated in value or that were sold for lower prices
than the Fund paid for them.
Shareholders received $0.76 per share in the form of dividend and capital gains
distributions. A portion of each year's distributions may come from the prior
year's income or capital gains.
The earnings ($0.36 per share) minus the distributions ($0.76 per share)
resulted in a share price of $12.82 at the end of the year. This was a decrease
of $0.40 per share (from $13.22 at the beginning of the year to $12.82 at the
end of the year). For a shareholder who reinvested the distributions in the
purchase of more shares, the total return from the Fund was 2.82% for the year.
As of December 31, 1999, the Fund had $555 million in net assets. For the year,
its net investment income amounted to 5.37% of its average net assets; and it
sold and replaced securities valued at 11% of its net assets.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
VANGUARD LIFESTRATEGY CONSERVATIVE GROWTH FUND
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------
NET ASSET VALUE,
BEGINNING OF YEAR $14.71 $13.40 $12.14 $11.68 $ 9.89
- --------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .64 .58 .56 .53 .47
Capital Gains Distributions
Received .18 .20 .18 .20 .11
Net Realized and
Unrealized Gain (Loss)
on Investments .31 1.32 1.27 .46 1.80
--------------------------------------------------------
Total from Investment
Operations 1.13 2.10 2.01 1.19 2.38
--------------------------------------------------------
DISTRIBUTIONS
Dividends from Net
Investment Income (.63) (.59) (.56) (.53) (.47)
Distributions from
Realized Capital Gains (.11) (.20) (.19) (.20) (.12)
--------------------------------------------------------
Total Distributions (.74) (.79) (.75) (.73) (.59)
- --------------------------------------------------------------------------------
NET ASSET VALUE, END
OF YEAR $15.10 $14.71 $13.40 $12.14 $11.68
================================================================================
TOTAL RETURN 7.86% 15.88% 16.81% 10.36% 24.35%
================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of
Year (Millions) $1,748 $1,416 $803 $462 $219
Ratio of Expenses to
Average Net Assets 0% 0% 0% 0% 0%
Ratio of Net
Investment Income to
Average Net Assets 4.34% 4.32% 4.61% 4.86% 5.14%
Turnover Rate 5% 3% 1% 2% 1%
================================================================================
<PAGE>
25
- --------------------------------------------------------------------------------
VANGUARD LIFESTRATEGY MODERATE
GROWTH FUND
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------
NET ASSET VALUE,
BEGINNING OF YEAR $16.86 $14.81 $12.97 $12.11 $ 9.86
- --------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .55 .510 .490 .44 .36
Capital Gains Distributions
Received .24 .241 .236 .22 .13
Net Realized and
Unrealized Gain (Loss)
on Investments 1.21 2.054 1.819 .87 2.25
--------------------------------------------------------
Total from Investment
Operations 2.00 2.805 2.545 1.53 2.74
--------------------------------------------------------
DISTRIBUTIONS
Dividends from Net
Investment Income (.55) (.510) (.490) (.44) (.36)
Distributions from
Realized Capital Gains (.13) (.245) (.215) (.23) (.13)
--------------------------------------------------------
Total Distributions (.68) (.755) (.705) (.67) (.49)
- --------------------------------------------------------------------------------
NET ASSET VALUE, END
OF YEAR $18.18 $16.86 $14.81 $12.97 $12.11
================================================================================
TOTAL RETURN 12.01% 19.03% 19.77% 12.71% 27.94%
================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of
Year (Millions) $3,441 $2,202 $1,358 $826 $235
Ratio of Expenses to
Average Net Assets 0% 0% 0% 0% 0%
Ratio of Net
Investment Income to
Average Net Assets 3.47% 3.43% 3.72% 3.98% 4.42%
Turnover Rate 3% 5% 2% 3% 1%
================================================================================
- --------------------------------------------------------------------------------
VANGUARD LIFESTRATEGY GROWTH FUND
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------
NET ASSET VALUE,
BEGINNING OF YEAR $18.79 $16.04 $13.68 $12.36 $ 9.93
- --------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .45 .410 .39 .34 .32
Capital Gains Distributions
Received .29 .264 .28 .24 .14
Net Realized and
Unrealized Gain (Loss)
on Investments 2.49 2.751 2.36 1.32 2.43
--------------------------------------------------------
Total from Investment
Operations 3.23 3.425 3.03 1.90 2.89
--------------------------------------------------------
DISTRIBUTIONS
Dividends from Net
Investment Income (.45) (.410) (.38) (.35) (.31)
Distributions from
Realized Capital Gains (.16) (.265) (.29) (.23) (.15)
--------------------------------------------------------
Total Distributions (.61) (.675) (.67) (.58) (.46)
- --------------------------------------------------------------------------------
NET ASSET VALUE, END
OF YEAR $21.41 $18.79 $16.04 $13.68 $12.36
================================================================================
TOTAL RETURN 17.32% 21.40% 22.26% 15.41% 29.24%
================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of
Year (Millions) $3,177 $1,924 $1,184 $629 $217
Ratio of Expenses to
Average Net Assets 0% 0% 0% 0% 0%
Ratio of Net
Investment Income to
Average Net Assets 2.50% 2.53% 2.84% 3.18% 3.67%
Turnover Rate 1% 2% 1% 0% 1%
================================================================================
"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>
26
INVESTING WITH VANGUARD
One or more of the Funds may be 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 Funds as an investment option.
- - If you have any questions about a Fund or Vanguard, including those about a
Fund's investment objective, strategies, or risks, contact Vanguard's
Participant Access Center, toll-free, at 1-800-523-1188.
- - If you have questions about your account, contact your plan administrator
or the organization that provides recordkeeping services for your plan.
INVESTMENT OPTIONS AND ALLOCATIONS
Your plan's specific provisions may allow you to change your investment
selections, the amount of your contributions, or how your contributions are
allocated among the investment choices available to you. Contact your plan
administrator or employee benefits office for more details.
TRANSACTIONS
Contributions, exchanges, or redemptions of the Funds' 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 regular trading on the New York Stock Exchange, generally 4 p.m.
Eastern time, you will receive that day's net asset value.
EXCHANGES
The exchange privilege (your ability to redeem shares from one fund to purchase
shares of another fund) may be available to you through your plan. Although we
make every effort to maintain the exchange privilege, Vanguard reserves the
right to revise or terminate this privilege, limit the amount of an exchange or
reject any exchange, at any time, without notice. Because excessive exchanges
can potentially disrupt the management of a Fund and increase its transaction
costs, Vanguard limits participant exchange activity to no more than FOUR
SUBSTANTIVE "ROUND TRIPS" THROUGH EACH OF THE FUNDS (at least 90 days apart)
during any 12-month period. A "round trip" is a redemption from one of the Funds
followed by a purchase back into the same Fund. "Substantive" means a dollar
amount that Vanguard determines, in its sole discretion, could adversely affect
the management of that Fund.
Before making an exchange to or from another fund available in your plan,
consider the following:
- - Certain investment options, particularly funds made up of company stock or
investment contracts, may be subject to unique restrictions.
- - Make sure to read that fund's prospectus. Contact Vanguard's Participant
Access Center, toll-free, at 1-800-523-1188 for a copy.
- - Vanguard can accept exchanges only as permitted by your plan. Contact your
plan administrator for details on the exchange policies that apply to your
plan.
<PAGE>
27
ACCESSING FUND INFORMATION BY COMPUTER
- --------------------------------------------------------------------------------
VANGUARD ON THE WORLD WIDE WEB www.vanguard.com
Use your personal computer to visit Vanguard's education-oriented website, which
provides timely news and information about Vanguard funds and services; an
online "university" that offers a variety of mutual fund classes; and
easy-to-use, interactive tools to help you create your own investment and
retirement strategies.
- --------------------------------------------------------------------------------
<PAGE>
(THIS PAGE INTENTIONALLY LEFT BLANK.)
<PAGE>
GLOSSARY OF INVESTMENT TERMS
ACTIVE MANAGEMENT
An investment approach that seeks to exceed the average returns of the financial
markets. Active managers rely on research, market forecasts, and their own
judgment and experience in selecting securities to buy and sell.
BALANCED FUND
A mutual fund that seeks to provide some combination of income, capital growth,
and conservation of capital by investing in stocks, bonds, and/or money market
instruments.
BOND
A debt security (IOU) issued by a corporation, government, or government agency
in exchange for the money you lend it. In most instances, the issuer agrees to
pay back the loan by a specific date and to make regular interest payments until
that date.
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.
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.
CREDIT QUALITY
A measure of a bond issuer's ability to pay interest and principal in a timely
manner.
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-1distribution fees.
FUND DIVERSIFICATION
Holding a variety of securities so that a fund's return is not badly hurt by the
poor performance of a single security, industry, or country.
FUND OF FUNDS
A mutual fund that pursues its objective by investing in other mutual funds
rather than in individual securities.
INDEX
An unmanaged group of securities whose overall performance is used as a standard
to measure investment performance.
INVESTMENT ADVISER
An organization that makes the day-to-day decisions regarding a fund's
investments.
NET ASSET VALUE (NAV)
The market value of a mutual fund's total assets, minus liabilities, divided by
the number of shares outstanding. The value of a single share is called its
share value or share price.
PASSIVE MANAGEMENT
A low-cost investment strategy in which a mutual fund attempts to match--rather
than outperform--a particular stock or bond market index. Also known as
indexing.
PRICE/EARNINGS (P/E) RATIO
The current share price of a stock, divided by its per-share earnings (profits)
from the past year. A stock selling for $20, with earnings of $2 per share, has
a price/earnings ratio of 10.
TOTAL RETURN
A percentage change, over a specified time period, in a mutual fund's net asset
value, with the ending net asset value adjusted to account for the reinvestment
of all distributions of dividends and capital gains.
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(R) LOGO]
[THE VANGUARD GROUP(R) LOGO]
Institutional Division
Post Office Box 2900
Valley Forge, PA 19482-2900
FOR MORE INFORMATION
If you'd like more information about
Vanguard LifeStrategy Funds, the
following documents are available
free upon request:
ANNUAL/SEMIANNUAL REPORTS
TO SHAREHOLDERS
Additional information about the
Funds' investments is available in
the Funds' annual and semiannual
reports to shareholders.
STATEMENT OF ADDITIONAL
INFORMATION (SAI)
The SAI provides more detailed
information about the Funds.
The current annual and semiannual
reports and the SAI are
incorporated by reference into
(and are thus legally a part of)
this prospectus.
To receive a free copy of the latest
annual or semiannual report or the
SAI, or to request additional
information about the Funds or other
Vanguard funds, please contact us
as follows:
THE VANGUARD GROUP
PARTICIPANT ACCESS CENTER
P.O. BOX 2900
VALLEY FORGE, PA 19482-2900
TELEPHONE:
1-800-523-1188
TEXT TELEPHONE:
1-800-523-8004
WORLD WIDE WEB:
WWW.VANGUARD.COM
INFORMATION PROVIDED BY THE
SECURITIES AND EXCHANGE
COMMISSION (SEC)
You can review and copy
information about the Funds
(including the SAI) at the SEC's
Public Reference Room in
Washington, DC. To find out more
about this public service, call the
SEC at 1-202-942-8090. Reports and
other information about the Funds
are also available on the SEC's
website (www.sec.gov), or you can
receive copies of this information,
for a fee, by electronic request at
the following e-mail address:
[email protected], or by writing
the Public Reference Section,
Securities and Exchange
Commission, Washington, DC
20549-0102.
Funds' Investment Company Act file
number: 811-3919
(C) 2000 The Vanguard Group, Inc.
All rights reserved.
Vanguard Marketing Corporation,
Distributor.
I088N-04/28/2000
<PAGE>
VANGUARD(R)
INTERNATIONAL STOCK
INDEX FUNDS
Prospectus
April 28, 2000
This prospectus contains
financial data for the
Funds through the
fiscal year ended
December 31, 1999.
VANGUARD EUROPEAN
STOCK INDEX FUND
VANGUARD PACIFIC STOCK
INDEX FUND
VANGUARD EMERGING
MARKETS STOCK INDEX
FUND
VANGUARD DEVELOPED
MARKETS INDEX FUND
VANGUARD TOTAL
INTERNATIONAL STOCK
INDEX FUND
[MEMBERS OF THE VANGUARD GROUP(R) LOGO]
<PAGE>
VANGUARD INTERNATIONAL STOCK INDEX FUNDS
Prospectus
April 28, 2000
A Group of International Stock Index Mutual Funds
- --------------------------------------------------------------------------------
CONTENTS
- --------------------------------------------------------------------------------
1 AN INTRODUCTION TO INDEX FUNDS
2 FUND PROFILES
2 Vanguard European Stock Index Fund
5 Vanguard Pacific Stock Index Fund
8 Vanguard Emerging Markets Stock Index Fund
12 Vanguard Developed Markets Index Fund
14 Vanguard Total International Stock Index Fund
14 MORE ON THE FUNDS
24 THE FUNDS AND VANGUARD
25 INVESTMENT ADVISER
26 DIVIDENDS, CAPITAL GAINS, AND TAXES
27 SHARE PRICE
28 FINANCIAL HIGHLIGHTS
32 INVESTING WITH VANGUARD
32 Services and Account Features
33 Types of Accounts
34 Buying Shares
36 Redeeming Shares
40 Transferring Registration
40 Fund and Account Updates
GLOSSARY (inside back cover)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
WHY READING THIS PROSPECTUS IS IMPORTANT
This prospectus explains the objective, risks, and strategies of each of the
Vanguard International Stock Index Funds. To highlight terms and concepts
important to mutual fund investors, we have provided "Plain Talk(R)"
explanations along the way. Reading the prospectus will help you to decide which
Fund, if any, is the right investment for you. We suggest that you keep it for
future reference.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
IMPORTANT NOTE
The Vanguard European, Pacific, and Emerging Markets Stock Index Funds each
offer two separate classes of shares: Investor and Institutional. This
prospectus offers the Funds' Investor Shares, which have an investment minimum
of $3,000 ($1,000 for IRAs) and are intended for individual investors. Please
call Vanguard's Institutional Investor Group at 1-800-523-1036 to obtain a
separate prospectus that offers the Funds' Institutional Shares as well as the
institutional version of Vanguard Developed Markets Index Fund. These
institutional options have an investment minimum of $10 million and generally
are not available to investors who require special employee benefit plan
services.
The Funds' separate share classes have different expenses; as a result,
their investment performances will vary. UNLESS OTHERWISE NOTED, ALL REFERENCES
IN THIS PROSPECTUS TO FEES, EXPENSES, AND INVESTMENT PERFORMANCE RELATE
SPECIFICALLY TO INVESTOR SHARES.
- --------------------------------------------------------------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE>
1
AN INTRODUCTION TO INDEX FUNDS
WHAT IS INDEXING?
An index is an unmanaged group of securities whose overall performance is used
as a standard to measure investment performance. 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. Keep in mind that an index
fund has operating expenses and transaction costs, while a market index does
not. Therefore, an index fund, while expected to track its target index closely,
typically will be unable to match the performance of the index exactly.
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 foreign stock market.
Index funds are not actively managed by investment advisers 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.
WHAT INDEX FUNDS DOES VANGUARD OFFER?
Vanguard offers a variety of stock (both U.S. and international), bond, and
balanced index funds. This prospectus provides information about Vanguard's
International Stock Index Funds. There are five such Funds offered in this
prospectus, each of which seeks to track a different segment of the
international stock market:
- --------------------------------------------------------------------------------
FUND SEEKS TO TRACK
- --------------------------------------------------------------------------------
Vanguard European Stock Index Fund European stock markets
Vanguard Pacific Stock Index Fund Australian and Far East
stock markets
Vanguard Emerging Markets Stock 13 emerging stock markets in
Index Fund Europe, Asia, Africa, and
Latin America
Vanguard Developed Markets Index Fund European, Australian, and Far
East stock markets
Vanguard Total International Stock European, Australian, Far East,
Index Fund and 13 emerging stock
markets in Europe, Asia,
Africa, and Latin America
- --------------------------------------------------------------------------------
This prospectus contains profiles that summarize key features of each Fund.
Following the profiles, there is important additional information about the
Funds.
<PAGE>
2
FUND PROFILE--
VANGUARD(R) EUROPEAN STOCK INDEX FUND
The following profile summarizes key features of Vanguard European Stock Index
Fund.
INVESTMENT OBJECTIVE
The Fund seeks to match the performance of the Morgan Stanley Capital
International (MSCI) Europe Index.
INVESTMENT STRATEGIES
The Fund employs a "passively managed"--or index--investment approach, by
investing all or substantially all of its assets in a representative sample of
the common stocks included in the MSCI Europe Index. The MSCI Europe Index is
made up of approximately 550 common stocks of companies located in 15 European
countries--mostly in the United Kingdom, France, Germany, and the Netherlands,
(which comprised 29%, 15%, 14%, and 8% of the Index's market capitalization,
respectively, as of March 31, 2000), as well as in Austria, Belgium, Denmark,
Finland, Ireland, Italy, Norway, Portugal, Spain, Sweden, and Switzerland. For
more information about passive management, see "Indexing Methods" under MORE ON
THE FUNDS.
PRIMARY RISKS
THE FUND'S TOTAL RETURN, LIKE STOCK PRICES GENERALLY, WILL FLUCTUATE WITHIN A
WIDE RANGE, SO AN INVESTOR COULD LOSE MONEY OVER SHORT OR EVEN LONG PERIODS. The
Fund is also subject to:
- - Country risk, which is the chance that a country's economy will be hurt by
political troubles, financial problems, or natural disasters. The Index's,
and therefore the Fund's, heavy exposure to four countries (United Kingdom,
France, Germany, and the Netherlands) involves a higher degree of country
risk than that of more geographically diversified international funds.
- - Regional risk, which is the chance that an entire region--namely
Europe--will be hurt by political troubles, financial problems, or natural
disasters.
- - Currency risk, which is the chance that returns will be hurt by a rise in
the value of the U.S. dollar versus foreign currencies.
- - Investment style risk, which is the chance that returns from foreign stocks
will trail returns from other asset classes or the overall stock market.
PERFORMANCE/RISK INFORMATION
The bar chart and table below provide an indication of the risk of investing in
the Fund. The bar chart shows the Fund's performance in each calendar year since
inception. The table shows how the Fund's average annual total returns for one
and five calendar years and since inception compare with those of a broad-based
securities market index. Keep in mind that the Fund's past performance does not
indicate how it will perform in the future.
<PAGE>
3
----------------------------------------------------
ANNUAL TOTAL RETURNS
----------------------------------------------------
1991 12.40%
1992 -3.32%
1993 29.13%
1994 1.88%
1995 22.28%
1996 21.26%
1997 24.23%
1998 28.86%
1999 16.62%
----------------------------------------------------
Return figures do not reflect the annual account
maintenance fee imposed on accounts with balances of
less than $10,000, or the transaction fee imposed on
purchases prior to April 1, 2000. If these amounts
were reflected, returns would be less than those
shown.
----------------------------------------------------
During the period shown in the bar chart, the highest return for a calendar
quarter was 20.37% (quarter ended March 31, 1998) and the lowest return for a
quarter was -14.41% (quarter ended September 30, 1998).
-------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS FOR YEARS ENDED DECEMBER 31, 1999
-------------------------------------------------------------------------
1 YEAR 5 YEARS SINCE INCEPTION*
-------------------------------------------------------------------------
Vanguard European Stock
Index Fund** 16.62% 22.58% 14.61%
MSCI Europe Index 15.77 22.27 14.78
-------------------------------------------------------------------------
*June 18, 1990.
**Return figures do not reflect the annual account maintenance fee
imposed on accounts with balances of less than $10,000, or the
transaction fee imposed on purchases prior to April 1, 2000.
-------------------------------------------------------------------------
FEES AND EXPENSES
The following table describes the fees and expenses you may pay if you buy and
hold shares of the Fund. The expenses shown under Annual Fund Operating Expenses
are based upon those incurred in the fiscal year ended December 31, 1999.
SHAREHOLDER FEES (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None
Transaction Fee on Purchases: None
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fee: None
Exchange Fee: None
Account Maintenance Fee (for accounts under $10,000): $10/year*
ANNUAL FUND OPERATING EXPENSES (expenses deducted from the Fund's assets)
Management Expenses: 0.22%
12b-1 Distribution Fee: None
Other Expenses: 0.07%
TOTAL ANNUAL FUND OPERATING EXPENSES: 0.29%
*The account maintenance fee will be deducted from your annual
distribution of the Fund's dividends. If your distribution is less
than the fee, fractional shares will be automatically redeemed to make
up the difference.
<PAGE>
4
The following example is intended to help you compare the cost of investing
in the Fund with the cost of investing in other mutual funds. It illustrates the
hypothetical expenses that you would incur over various periods if you invest
$10,000 in the Fund. This example assumes that the Fund provides a return of 5%
a year, and that operating expenses remain the same. The results apply whether
or not you redeem your investment at the end of each period.
- -------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- -------------------------------------------------
$30 $93 $163 $368
- -------------------------------------------------
THIS EXAMPLE SHOULD NOT BE CONSIDERED TO REPRESENT ACTUAL EXPENSES OR
PERFORMANCE FROM THE PAST OR FOR THE FUTURE. ACTUAL FUTURE EXPENSES MAY BE
HIGHER OR LOWER THAN THOSE SHOWN.
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION
DIVIDENDS AND CAPITAL GAINS MINIMUM INITIAL INVESTMENT
Distributed annually in December $3,000; $1,000 for IRAs and custodial
accounts for minors
INVESTMENT ADVISER
The Vanguard Group, Valley Forge, NEWSPAPER ABBREVIATION
Pa., since inception Europe
INCEPTION DATE VANGUARD FUND NUMBER
June 18, 1990 079
NET ASSETS AS OF DECEMBER 31, 1999 CUSIP NUMBER
$6.1 billion 922042205
SUITABLE FOR IRAS TICKER SYMBOL
Yes VEURX
- --------------------------------------------------------------------------------
<PAGE>
5
FUND PROFILE--
VANGUARD(R) PACIFIC STOCK INDEX FUND
The following profile summarizes key features of Vanguard Pacific Stock Index
Fund.
INVESTMENT OBJECTIVE
The Fund seeks to match the performance of the MSCI Pacific Free Index.*
*The designation "Free" in the name of the Index refers to the securities that
the Index tracks. Some countries restrict foreign investment in certain
industries, so only stocks that can be bought freely by a fund are tracked.
INVESTMENT STRATEGIES
The Fund employs a "passively managed"--or index--investment approach, by
investing all or substantially all of its assets in a representative sample of
the common stocks included in the MSCI Pacific Free Index. The MSCI Pacific Free
Index consists of approximately 420 common stocks of companies located in Japan
(which comprised 82% of the Index's market capitalization as of March 31, 2000),
Australia, Hong Kong, New Zealand, and Singapore. For more information about
passive management, see "Indexing Methods" under MORE ON THE FUNDS.
PRIMARY RISKS
THE FUND'S TOTAL RETURN, LIKE STOCK PRICES GENERALLY, WILL FLUCTUATE WITHIN A
WIDE RANGE, SO AN INVESTOR COULD LOSE MONEY OVER SHORT OR EVEN LONG PERIODS. The
Fund is also subject to:
- - Country risk, which is the chance that a country's economy will be hurt by
political troubles, financial problems, or natural disasters. The Index's,
and therefore the Fund's, heavy exposure to Japan involves a higher degree
of country risk than that of more geographically diversified international
funds.
- - Regional risk, which is the chance that an entire region--namely the
Pacific region--will be hurt by political troubles, financial problems, or
natural disasters.
- - Currency risk, which is the chance that returns will be hurt by a rise in
the value of the U.S. dollar versus foreign currencies.
- - Investment style risk, which is the chance that returns from foreign stocks
will trail returns from other asset classes or the overall stock market.
PERFORMANCE/RISK INFORMATION
The bar chart and table below provide an indication of the risk of investing in
the Fund. The bar chart shows the Fund's performance in each calendar year since
inception. The table shows how the Fund's average annual total returns for one
and five years and since inception compare with those of a broad-based
securities market index. Keep in mind that the Fund's past performance does not
indicate how it will perform in the future.
<PAGE>
6
----------------------------------------------------
ANNUAL TOTAL RETURNS
----------------------------------------------------
1991 10.65%
1992 -18.17%
1993 35.46%
1994 13.04%
1995 2.75%
1996 -7.82%
1997 -25.67%
1998 2.41%
1999 57.05%
----------------------------------------------------
Return figures do not reflect the annual account
maintenance fee imposed on accounts with balances of
less than $10,000, or the transaction fee imposed on
purchases prior to April 1, 2000. If these amounts
were reflected, returns would be less than those
shown.
----------------------------------------------------
During the period shown in the bar chart, the highest return for a calendar
quarter was 26.50% (quarter ended December 31, 1998) and the lowest return for a
quarter was -20.69% (quarter ended December 31, 1997).
-------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS FOR YEARS ENDED DECEMBER 31, 1999
-------------------------------------------------------------------------
1 YEAR 5 YEARS SINCE INCEPTION*
-------------------------------------------------------------------------
Vanguard Pacific Stock
Index Fund** 57.05% 2.52% 3.20%
MSCI Pacific Free Index 56.38 2.39 3.08
-------------------------------------------------------------------------
*June 18, 1990.
**Return figures do not reflect the annual account maintenance fee
imposed on accounts with balances of less than $10,000, or the
transaction fee imposed on purchases prior to April 1, 2000.
-------------------------------------------------------------------------
FEES AND EXPENSES
The following table describes the fees and expenses you may pay if you buy and
hold shares of the Fund. The expenses shown under Annual Fund Operating Expenses
are based upon those incurred in the fiscal year ended December 31, 1999.
SHAREHOLDER FEES (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None
Transaction Fee on Purchases: None
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fee: None
Exchange Fee: None
Account Maintenance Fee (for accounts under $10,000): $10/year*
ANNUAL FUND OPERATING EXPENSES (expenses deducted from the Fund's assets)
Management Expenses: 0.31%
12b-1 Distribution Fee: None
Other Expenses: 0.06%
TOTAL ANNUAL FUND OPERATING EXPENSES: 0.37%
*The account maintenance fee will be deducted from your annual
distribution of the Fund's dividends. If your distribution is less
than the fee, fractional shares will be automatically redeemed to make
up the difference.
<PAGE>
7
The following example is intended to help you compare the cost of investing
in the Fund with the cost of investing in other mutual funds. It illustrates the
hypothetical expenses that you would incur over various periods if you invest
$10,000 in the Fund. This example assumes that the Fund provides a return of 5%
a year, and that operating expenses remain the same. The results apply whether
or not you redeem your investment at the end of each period.
- -------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- -------------------------------------------------
$38 $119 $208 $468
- -------------------------------------------------
THIS EXAMPLE SHOULD NOT BE CONSIDERED TO REPRESENT ACTUAL EXPENSES OR
PERFORMANCE FROM THE PAST OR FOR THE FUTURE. ACTUAL FUTURE EXPENSES MAY BE
HIGHER OR LOWER THAN THOSE SHOWN.
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION
DIVIDENDS AND CAPITAL GAINS MINIMUM INITIAL INVESTMENT
Distributed annually in December $3,000; $1,000 for IRAs and custodial
accounts for minors
INVESTMENT ADVISER
The Vanguard Group, Valley Forge, NEWSPAPER ABBREVIATION
Pa., since inception Pacific
INCEPTION DATE VANGUARD FUND NUMBER
June 18, 1990 072
NET ASSETS AS OF DECEMBER 31, 1999 CUSIP NUMBER
$2.5 billion 922042106
SUITABLE FOR IRAS TICKER SYMBOL
Yes VPACX
- --------------------------------------------------------------------------------
<PAGE>
8
FUND PROFILE--
VANGUARD(R) EMERGING MARKETS STOCK INDEX FUND
The following profile summarizes key features of Vanguard Emerging Markets Stock
Index Fund.
INVESTMENT OBJECTIVE
The Fund seeks to match the performance of the Select Emerging Markets Free
Index.*
*The designation "Free" in the name of the Index refers to the securities that
the Index tracks. Some countries restrict foreign investment in certain
industries, so only stocks that can be bought freely are tracked.
INVESTMENT STRATEGIES
The Fund employs a "passively managed"--or index--investment approach, by
investing all or substantially all of its assets in a representative sample of
the common stocks included in the Select Emerging Markets Free Index. The Select
Emerging Markets Free Index includes approximately 500 common stocks of
companies located in emerging markets around the world. As of March 31, 2000,
the largest markets covered in the Index were Mexico, Brazil, and South Africa
(which comprised 16%, 14%, and 13% of the Index's market capitalization,
respectively). Other countries represented in the Index included Argentina, the
Czech Republic, Greece, Hungary, Indonesia, Israel, the Philippines, Poland,
Thailand, Turkey, Hong Kong, and Singapore. MSCI administers the Select Index
exclusively for Vanguard. For more information about passive management, see
"Indexing Methods" under MORE ON THE FUNDS.
PRIMARY RISKS
THE FUND'S TOTAL RETURN, LIKE STOCK PRICES GENERALLY, WILL FLUCTUATE WITHIN A
WIDE RANGE, SO AN INVESTOR COULD LOSE MONEY OVER SHORT OR EVEN LONG PERIODS. The
Fund is also subject to:
- - Country risk, which is the chance that a country's economy will be hurt by
political troubles, financial problems, or natural disasters. Country risk
is especially high for funds that focus on stocks in emerging markets. The
Index's, and therefore the Fund's, heavy exposure to Mexico, Brazil, and
South Africa involves a higher degree of country risk than that of more
geographically diversified international funds.
- - Currency risk, which is the chance that returns will be hurt by a rise in
the value of the U.S. dollar versus foreign currencies.
- - Investment style risk, which is the chance that returns from foreign stocks
will trail returns from other asset classes or the overall stock market.
PERFORMANCE/RISK INFORMATION
The bar chart and table below provide an indication of the risk of investing in
the Fund. The bar chart shows the Fund's performance in each calendar year since
inception. The table shows how the Fund's average annual total returns for one
and five calendar years and since inception compare with those of both a
broad-based securities market index and the Fund's target index. Keep in mind
that the Fund's past performance does not indicate how it will perform in the
future.
<PAGE>
9
----------------------------------------------------
ANNUAL TOTAL RETURNS
----------------------------------------------------
1995 0.56%
1996 15.83%
1997 -16.82%
1998 -18.12%
1999 61.57%
----------------------------------------------------
Return figures do not reflect the annual account
maintenance fee imposed on accounts with balances of
less than $10,000, or the transaction fee imposed on
purchases and redemptions. If these amounts were
reflected, returns would be less than those shown.
----------------------------------------------------
During the period shown in the bar chart, the highest return for a calendar
quarter was 28.32% (quarter ended December 31, 1999) and the lowest return for a
quarter was -21.52% (quarter ended June 30, 1998).
-------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS FOR YEARS ENDED DECEMBER 31, 1999
-------------------------------------------------------------------------
1 YEAR 5 YEARS SINCE INCEPTION*
-------------------------------------------------------------------------
Vanguard Emerging Markets
Stock Index Fund** 59.96% 4.88% 6.03%
MSCI Emerging Markets
Free Index 66.40 2.00 3.69
Select Emerging Markets
Free Index+ 60.86 4.81 4.93
-------------------------------------------------------------------------
*May 4, 1994.
**Return figures do not reflect the annual account maintenance fee
imposed on accounts with balances of less than $10,000, but do
reflect the 0.5% transaction fee imposed on purchases and redemptions.
+The Select Emerging Markets Free Index is administered by MSCI
exclusively by Vanguard.
-------------------------------------------------------------------------
<PAGE>
10
FEES AND EXPENSES
The following table describes the fees and expenses you may pay if you buy and
hold shares of the Fund. The expenses shown under Annual Fund Operating Expenses
are based upon those incurred in the fiscal year ended December 31, 1999.
SHAREHOLDER FEES (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None
Transaction Fee on Purchases: 0.5%*
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fee: 0.5%**
Exchange Fee: None
Account Maintenance Fee (for accounts under $10,000): $10/year+
ANNUAL FUND OPERATING EXPENSES (expenses deducted from the Fund's assets)
Management Expenses: 0.32%
12b-1 Distribution Fee: None
Other Expenses: 0.26%
TOTAL ANNUAL FUND OPERATING EXPENSES: 0.58%
*The transaction fee on purchases is deducted from all purchases
(including exchanges from other Vanguard funds) but not from
reinvested dividends and capital gains.
**The redemption fee applies to all redemptions (sales or exchanges);
it is deducted from redemption proceeds, and retained by the Fund.
+The account maintenance fee will be deducted from your annual
distribution of the Fund's dividends. If your distribution is less
than the fee, fractional shares will be automatically redeemed to make
up the difference.
The following example is intended to help you compare the cost of investing
in the Fund with the cost of investing in other mutual funds. It illustrates the
hypothetical expenses that you would incur over various periods if you invest
$10,000 in the Fund. This example assumes that the Fund provides a return of 5%
a year, that operating expenses remain the same, and that you redeem all your
shares at the end of each period.
- -------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- -------------------------------------------------
$161 $292 $434 $849
- -------------------------------------------------
You would pay the following expenses if you did not redeem your shares (the
difference being that the Fund's 0.5% redemption fee would not apply to any of
the periods below, as it would to those above):
- -------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- -------------------------------------------------
$109 $235 $372 $772
- -------------------------------------------------
THESE EXAMPLES SHOULD NOT BE CONSIDERED TO REPRESENT ACTUAL EXPENSES OR
PERFORMANCE FROM THE PAST OR FOR THE FUTURE. ACTUAL FUTURE EXPENSES MAY BE
HIGHER OR LOWER THAN THOSE SHOWN.
<PAGE>
11
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION
DIVIDENDS AND CAPITAL GAINS MINIMUM INITIAL INVESTMENT
Distributed annually in December $3,000; $1,000 for IRAs and custodial
accounts for minors
INVESTMENT ADVISER
The Vanguard Group, Valley Forge, NEWSPAPER ABBREVIATION
Pa., since inception EmerMkt
INCEPTION DATE VANGUARD FUND NUMBER
May 4, 1994 533
NET ASSETS AS OF DECEMBER 31, 1999 CUSIP NUMBER
$1.1 billion 922042304
SUITABLE FOR IRAS TICKER SYMBOL
Yes VEIEX
- --------------------------------------------------------------------------------
<PAGE>
12
FUND PROFILE--
VANGUARD(R) DEVELOPED MARKETS INDEX FUND
The following profile summarizes key features of Vanguard Developed Markets
Index Fund.
INVESTMENT OBJECTIVE
The Fund seeks to track the performance of the MSCI Europe, Australasia, Far
East (EAFE) Index.
INVESTMENT STRATEGIES
The Fund employs a "passively managed"--or index--investment approach. The Fund
seeks to track the performance of the MSCI EAFE Index by investing in two other
Vanguard funds--the European Stock Index Fund and the Pacific Stock Index Fund.
These other Vanguard funds have the respective objectives of tracking the MSCI
Europe Index and the MSCI Pacific Free Index, which together comprise the MSCI
EAFE Index. The Fund allocates all or substantially all of its assets between
the European Stock Index Fund and the Pacific Stock Index Fund based on the
market capitalization of European and Pacific stocks in the MSCI EAFE Index. The
MSCI EAFE Index includes approximately 1,000 common stocks of companies located
in Europe, Australia, Asia, and the Far East. For more information about passive
management, see "Indexing Methods" under MORE ON THE FUNDS.
PRIMARY RISKS
THE FUND'S TOTAL RETURN, LIKE STOCK PRICES GENERALLY, WILL FLUCTUATE WITHIN A
WIDE RANGE, SO AN INVESTOR COULD LOSE MONEY OVER SHORT OR EVEN LONG PERIODS. The
Fund is also subject to:
- - Country risk, which is the chance that a country's economy will be hurt by
political troubles, financial problems, or natural disasters.
- - Regional risk, which is the chance that an entire region--either Europe or
the Far East--will be hurt by political troubles, financial problems, or
natural disasters.
- - Currency risk, which is the chance that returns will be hurt by a rise in
the value of the U.S. dollar versus foreign currencies.
- - Investment style risk, which is the chance that returns from foreign stocks
will trail returns from other asset classes or the overall stock market.
PERFORMANCE/RISK INFORMATION
The Fund began operations on May 5, 2000, so performance information (including
annual total returns and average annual total returns) for a full calendar year
is not yet available.
<PAGE>
13
FEES AND EXPENSES
The following table describes the fees and expenses you may pay if you buy and
hold shares of the Fund. The expenses shown under Annual Fund Operating Expenses
are based on estimated amounts for the current fiscal year.
SHAREHOLDER FEES (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None
Transaction Fee on Purchases: None
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fee: None
Exchange Fee: None
Account Maintenance Fee (for accounts under $10,000): $10/year*
ANNUAL FUND OPERATING EXPENSES (expenses deducted from the Fund's assets)
Indirect Operating Expenses: **
*The account maintenance fee will be deducted from your annual
distribution of the Fund's dividends. If your distribution is less
than the fee, fractional shares will be automatically redeemed to make
up the difference.
**Although Developed Markets Index Fund is not expected to incur any net
expenses directly, the Fund's shareholders indirectly bear the expenses
of the underlying Vanguard funds in which the Fund invests. See THE
FUNDS AND VANGUARD. It is estimated that the Fund's indirect expense
ratio for its first fiscal year, based on its underlying investments,
will be 0.30%.
The following example is intended to help you compare the cost of investing
in the Fund with the cost of investing in other mutual funds. It illustrates the
hypothetical expenses that you would incur over various periods if you invest
$10,000 in the Fund. This example assumes that the Fund provides a return of 5%
a year, and that operating expenses remain the same. The results apply whether
or not you redeem your investment at the end of each period.
- ------------------------
1 YEAR 3 YEARS
- ------------------------
$35 $110
- ------------------------
THIS EXAMPLE SHOULD NOT BE CONSIDERED TO REPRESENT ACTUAL EXPENSES OR
PERFORMANCE FROM THE PAST OR FOR THE FUTURE. ACTUAL FUTURE EXPENSES MAY BE
HIGHER OR LOWER THAN THOSE SHOWN.
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION
DIVIDENDS AND CAPITAL GAINS MINIMUM INITIAL INVESTMENT
Distributed annually in December $3,000; $1,000 for IRAs and custodial
accounts for minors
INVESTMENT ADVISER
The Vanguard Group, Valley Forge, NEWSPAPER ABBREVIATION
Pa., since inception DevMkt
INCEPTION DATE VANGUARD FUND NUMBER
May 5, 2000 227
SUITABLE FOR IRAS CUSIP NUMBER
Yes 921909701
- --------------------------------------------------------------------------------
<PAGE>
14
FUND PROFILE--
VANGUARD(R) TOTAL INTERNATIONAL STOCK INDEX FUND
The following profile summarizes key features of Vanguard Total International
Stock Index Fund.
INVESTMENT OBJECTIVE
The Fund seeks to match the performance of the Total International Composite
Index. The Total International Composite Index is a combination of the indexes
tracked by the European, Pacific, and Emerging Markets Stock Index Funds.
INVESTMENT STRATEGIES
The Fund seeks to track the performance of the Total International Composite
Index by investing in three other Vanguard funds--the European Stock Index Fund,
the Pacific Stock Index Fund, and the Emerging Markets Stock Index Fund. These
other Vanguard funds have the respective objectives of tracking the MSCI Europe
Index, the MSCI Pacific Free Index, and the Select Emerging Markets Free Index,
which together comprise the Total International Composite Index. The Fund
allocates all or substantially all of its assets between the European Stock
Index Fund, the Pacific Stock Index Fund, and the Emerging Markets Stock Index
Fund based on the market capitalization of European, Pacific, and emerging
markets stocks in the Total International Composite Index. The Index is a market
capitalization weighted index that combines the MSCI Europe Index, the MSCI
Pacific Free Index, and the Select Emerging Markets Free Index. MSCI administers
the Index exclusively for Vanguard. For more information about passive
management, see "Indexing Methods" under MORE ON THE FUNDS.
PRIMARY RISKS
THE FUND'S TOTAL RETURN, LIKE STOCK PRICES GENERALLY, WILL FLUCTUATE WITHIN A
WIDE RANGE, SO AN INVESTOR COULD LOSE MONEY OVER SHORT OR EVEN LONG PERIODS. The
Fund is also subject to:
- - Country risk, which is the chance that a country's economy will be hurt by
political troubles, financial problems, or natural disasters.
- - Currency risk, which is the chance that returns will be hurt by a rise in
the value of the U.S. dollar versus foreign currencies.
- - Investment style risk, which is the chance that returns from foreign stocks
will trail returns from other asset classes or the overall stock market.
PERFORMANCE/RISK INFORMATION
The bar chart and table below provide an indication of the risk of investing in
the Fund. The bar chart shows the Fund's performance in each calendar year since
inception. The table shows how the Fund's average annual total returns for one
calendar year and since inception compare with those of both a broad-based
securities market index and the Fund's target index. Keep in mind that the
Fund's past performance does not indicate how it will perform in the future.
<PAGE>
15
----------------------------------------------------
ANNUAL TOTAL RETURNS
----------------------------------------------------
1997 -0.77%
1998 15.60%
1999 29.92%
----------------------------------------------------
Return figures do not reflect the annual account
maintenance fee imposed on accounts with balances of
less than $10,000, or the transaction fee imposed on
purchases prior to April 1, 2000. If these amounts
were reflected, returns would be less than those
shown.
----------------------------------------------------
During the period shown in the bar chart, the highest return for a calendar
quarter was 20.49% (quarter ended December 31, 1998) and the lowest return for a
quarter was -14.53% (quarter ended September 30, 1998).
-------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS FOR YEARS ENDED DECEMBER 31, 1999
-------------------------------------------------------------------------
1 YEAR SINCE INCEPTION*
-------------------------------------------------------------------------
Vanguard Total International
Stock Index Fund** 29.92% 11.64%
MSCI EAFE + Emerging Markets
Free Index 30.33 12.11
Total International Composite
Index+ 28.13 11.30
-------------------------------------------------------------------------
*April 29, 1996.
**Return figures do not reflect the annual account maintenance fee
imposed on accounts with balances of less than $10,000, or the
transaction fee imposed on purchases prior to April 1, 2000.
+Consists of the MSCI EAFE Index and the Select Emerging Markets Free
Index. This index is administered by MSCI exclusively for Vanguard.
-------------------------------------------------------------------------
<PAGE>
16
FEES AND EXPENSES
The following table describes the fees and expenses you may pay if you buy and
hold shares of the Fund. The expenses shown under Annual Fund Operating Expenses
are based upon those incurred in the fiscal year ended December 31, 1999.
SHAREHOLDER FEES (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None
Transaction Fee on Purchases: None
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fee: None
Exchange Fee: None
Account Maintenance Fee (for accounts under $10,000): $10/year*
ANNUAL FUND OPERATING EXPENSES (expenses deducted from the Fund's assets)
Indirect Operating Expenses: **
*The account maintenance fee will be deducted from your annual
distribution of the Fund's dividends. If your distribution is less
than the fee, fractional shares will be automatically redeemed to make
up the difference.
**Although Total International Stock Index Fund is not expected to incur
any net expenses directly, the Fund's shareholders indirectly bear the
expenses of the underlying Vanguard funds in which the Fund invests.
See THE FUNDS AND VANGUARD. The Fund's indirect expense ratio, based
on its underlying investments, was 0.34% as of December 31, 1999.
The following example is intended to help you compare the cost of investing
in the Fund with the cost of investing in other mutual funds. It illustrates the
hypothetical expenses that you would incur over various periods if you invest
$10,000 in the Fund. This example assumes that the Fund provides a return of 5%
a year, and that operating expenses remain the same. The results apply whether
or not you redeem your investment at the end of each period.
- -------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- -------------------------------------------------
$35 $110 $193 $434
- -------------------------------------------------
THIS EXAMPLE SHOULD NOT BE CONSIDERED TO REPRESENT ACTUAL EXPENSES OR
PERFORMANCE FROM THE PAST OR FOR THE FUTURE. ACTUAL FUTURE EXPENSES MAY BE
HIGHER OR LOWER THAN THOSE SHOWN.
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION
DIVIDENDS AND CAPITAL GAINS MINIMUM INITIAL INVESTMENT
Distributed annually in December $3,000; $1,000 for IRAs and custodial
accounts for minors
INVESTMENT ADVISER
The Vanguard Group, Valley Forge, NEWSPAPER ABBREVIATION
Pa., since inception TotIntl
INCEPTION DATE VANGUARD FUND NUMBER
April 29, 1996 113
NET ASSETS AS OF DECEMBER 31, 1999 CUSIP NUMBER
$2.6 billion 921909602
SUITABLE FOR IRAS TICKER SYMBOL
Yes VGTSX
- --------------------------------------------------------------------------------
<PAGE>
17
MORE ON THE FUNDS
The following sections discuss other important features of Vanguard
International Stock Index Funds, including indexing methods, fund
characteristics, costs and market-timing, fund turnover, and other investment
policies and risks.
WHY INVEST IN INDEX FUNDS?
Index funds appeal to many investors for a number of reasons:
- - Diversification. Index funds generally invest in a diversified mix of
companies and industries.
- - Relative consistency. Index funds typically track the performance of
relevant market benchmarks more closely than comparable actively managed
funds do.
- - Low cost. Index funds do not have many of the expenses of an actively
managed fund--such as research--and 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 the number
of shares it holds to reflect a change in its target index, the fund's
turnover rate--and thus its realization of capital gains--is usually very
low.
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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.
- --------------------------------------------------------------------------------
INDEXING METHODS
Some index funds hold each stock found in their target indexes in about the
same proportions as represented in the indexes themselves.
Other index funds may use a different selection process. Because it would
be very expensive to buy all of the stocks held in certain indexes (the Select
Emerging Markets Free Index, for example, includes approximately 500 stocks),
funds tracking these larger indexes use a "sampling" technique. Using a
sophisticated computer program, these funds invest in stocks that will, in the
aggregate, recreate the key characteristics of their target indexes. For
instance, if 10% of the market capitalization of the MSCI Europe Index were
attributed to companies in Germany, Vanguard European Stock Index Fund would
invest about 10% of its assets in stocks of German issuers. Furthermore, the
Fund would construct a German portfolio whose size and industry weightings, as
well as average financial characteristics, approximated the German component of
the MSCI Europe Index. The European, Pacific, and Emerging Markets Stock Index
Funds each employ this sampling method of indexing.
While each Fund attempts to track the performance of its target index,
there is no guarantee that securities selected for the Fund will provide
investment performance exactly matching that of the index.
Yet another indexing approach is to invest in other index funds that seek
to track subsets of a target index. The Total International Stock Index Fund and
Developed Markets Index Fund both use this "fund of funds" approach, which can
be very cost-effective and efficient
<PAGE>
18
when starting an index fund from scratch. For example, the Developed Markets
Index Fund seeks to track the performance of the MSCI EAFE Index by investing in
two other Vanguard funds--the European Stock Index Fund and the Pacific Stock
Index Fund. These other Vanguard funds have the respective objectives of
tracking the MSCI Europe Index and the MSCI Pacific Free Index, which together
comprise the MSCI EAFE Index. The Fund allocates its assets between the European
Stock Index Fund and the Pacific Stock Index Fund based on the market
capitalization of European and Pacific stocks in the MSCI EAFE Index.
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PLAIN TALK ABOUT
"FUND OF FUNDS"
The term "fund of funds" is used to describe a mutual fund that pursues its
objective by investing in other mutual funds rather than in individual stocks or
bonds. A fund of funds may charge for its own direct expenses, in addition to
bearing a proportionate share of the expenses charged by the underlying funds in
which it invests. Funds of funds are best suited for long-term investors.
- --------------------------------------------------------------------------------
To track their target indexes as closely as possible, the European and
Pacific Stock Index Funds attempt to remain fully invested in foreign stocks
included in their particular indexes. Each Fund intends to invest at least 95%
of its total assets in the stocks of its target index. The Emerging Markets
Stock Index Fund normally invests 95% of its total assets in stocks of its
target index, holding the remaining 5% in cash reserves to meet daily redemption
requests. The Total International Stock and Developed Markets Index Funds
normally hold 100% of their assets in shares of their underlying funds
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PLAIN TALK ABOUT
THE RISKS OF INTERNATIONAL INVESTING
Because foreign stock markets operate differently from the U.S. market,
Americans investing abroad will encounter risks not typically associated with
U.S. companies. For instance, foreign companies are not subject to the same
accounting, auditing, and financial reporting standards and practices as U.S.
companies; and their stocks may not be as liquid as those of similar U.S.
companies. In addition, foreign stock exchanges, brokers, and companies
generally have less government supervision and regulation than their
counterparts in the United States. These factors, among others, could negatively
impact the returns Americans receive from foreign investments.
- --------------------------------------------------------------------------------
[FLAG] EACH FUND IS SUBJECT TO STOCK MARKET RISK, WHICH IS THE CHANCE THAT STOCK
PRICES OVERALL WILL DECLINE OVER SHORT OR EVEN LONG PERIODS. STOCK MARKETS
TEND TO MOVE IN CYCLES, WITH PERIODS OF RISING PRICES AND PERIODS OF
FALLING PRICES.
IN ADDITION, INVESTMENTS IN FOREIGN STOCK MARKETS CAN BE RISKIER THAN
U.S. STOCK INVESTMENTS. THE PRICES OF INTERNATIONAL STOCKS AND THE PRICES
OF U.S. STOCKS HAVE OFTEN MOVED IN OPPOSITE DIRECTIONS. THESE PERIODS HAVE,
IN THE PAST, LASTED FOR AS LONG AS SEVERAL YEARS.
<PAGE>
19
To illustrate the volatility of international stock prices, the following
table shows the best, worst, and average total returns for foreign stock markets
over various periods as measured by the MSCI EAFE Index, a widely used barometer
of international market activity. (Total returns consist of dividend income plus
change in market price.) Note that the returns shown do not include the costs of
buying and selling stocks or other expenses that a real-world investment
portfolio would incur. Note, also, that the gap between best and worst tends to
narrow over the long term.
- ----------------------------------------------------------
INTERNATIONAL STOCK MARKET RETURNS (1969-1999)
- ----------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS 20 YEARS
- ----------------------------------------------------------
Best 69.9% 36.5% 22.8% 16.3%
Worst -23.2 1.5 5.9 12.0
Average 15.2 13.6 14.5 14.7
- ----------------------------------------------------------
The table covers all of the 1-, 5-, 10-, and 20-year periods from 1969
through 1999. Keep in mind that this was a particularly favorable period for all
stock markets. These average returns reflect past performance on international
stocks; you should not regard them as an indication of future returns from
either foreign markets as a whole or any of the Funds in particular.
Note that the preceding chart does not take into account returns measured
by the MSCI Emerging Markets Free Index, a widely used barometer of less
developed stock markets. Emerging markets can be substantially more volatile
than more developed foreign markets. In addition, because the MSCI EAFE Index
tracks the European and Pacific markets collectively, the above returns do not
reflect the variability of returns from year to year for these markets
individually, or the variability across these and other geographic regions or
market sectors. To illustrate this variability, the following table shows
returns for different international markets--as well as the U.S. market for
comparison--from 1990 to 1999, as measured by their respective indexes. Note
that the returns shown do not include the costs of buying and selling stocks or
other expenses that a real-world investment portfolio would incur.
<PAGE>
20
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STOCK MARKET RETURNS FOR DIFFERENT INTERNATIONAL MARKETS*
- --------------------------------------------------------------------------------
EUROPEAN PACIFIC EMERGING U.S.
MARKET MARKET MARKETS MARKETS
- --------------------------------------------------------------------------------
1990 -2.00% -34.43% -10.55% -3.10%
1991 14.12 11.51 59.91 30.47
1992 -3.92 -18.51 11.40 7.62
1993 29.25 36.15 74.84 10.08
1994 2.82 12.82 -7.31 1.32
1995 22.08 2.89 0.01** 37.58
1996 21.42 -8.23 15.19 22.96
1997 23.75 -25.74 -16.37 33.36
1998 28.68 2.64 -18.39 28.58
1999 15.77 56.38 60.86 21.04
- --------------------------------------------------------------------------------
* European market returns are measured by the MSCI Europe Index; Pacific
market returns are measured by the MSCI Pacific Free Index; emerging
markets returns are measured by the Select Emerging Markets Free Index;
and U.S. market returns are measured by the Standard & Poor's 500 Index.
** The inception date of the Select Emerging Markets Free Index was May 4,
1994; returns shown for 1990 to 1994 are measured by the MSCI Emerging
Markets Free Index.
- --------------------------------------------------------------------------------
Keep in mind, however, that these average returns reflect past performance
of the various indexes; you should not consider them as an indication of future
returns from the indexes, or from any of the Funds in particular.
[FLAG] EACH FUND IS SUBJECT TO COUNTRY RISK, WHICH IS THE CHANCE THAT POLITICAL
EVENTS (A WAR, NATIONAL ELECTIONS), FINANCIAL PROBLEMS (RISING INFLATION,
GOVERNMENT DEFAULT), OR NATURAL DISASTERS (AN EARTHQUAKE, A FLOOD) WILL
WEAKEN A COUNTRY'S ECONOMY AND CAUSE INVESTMENTS IN THAT COUNTRY TO LOSE
MONEY.
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PLAIN TALK ABOUT
REGIONAL VERSUS BROAD INTERNATIONAL INVESTING
Regional funds are international funds that invest in a particular geographical
region, such as Europe or the Pacific Basin. Because they concentrate their
holdings in a single region, these funds typically have higher share price
volatility than broadly diversified international stock funds (which, by
investing in many different foreign markets, may offset losses from one country
with gains from another at any given time).
- --------------------------------------------------------------------------------
EUROPEAN STOCK INDEX FUND. Stocks from the United Kingdom, France, Germany,
and the Netherlands comprised 29%, 15%, 14%, and 8% of the MSCI Europe Index,
respectively, as of March 31, 2000; stocks from the remaining 11 countries in
the Index have much less significant market capitalization weightings in the
Index and thus much less impact on the Fund's total return. The Fund's heavy
exposure to just four countries involves a higher degree of country risk than
that of more geographically diversified international funds.
PACIFIC STOCK INDEX FUND. Japanese stocks comprised 82% of the MSCI Pacific
Free Index as of March 31, 2000. Therefore, Japanese stocks represent a
correspondingly large component of the Pacific Stock Index Fund's assets. The
Fund's large investment in the
<PAGE>
21
Japanese stock market involves a higher degree of country risk than that of more
geographically diversified international funds.
EMERGING MARKETS STOCK INDEX FUND. As discussed above, emerging markets can
be substantially more volatile than both U.S. and more developed foreign
markets. Therefore, the Emerging Markets Stock Index Fund may expose investors
to a higher degree of volatility than funds that invest in more developed
markets.
DEVELOPED MARKETS INDEX FUND. As a fund of funds, the Developed Markets
Index Fund intends to invest all of its assets in shares of the European and
Pacific Stock Index Funds; indirectly, its country risk will proportionately
mirror that of the European and Pacific Stock Index Funds.
TOTAL INTERNATIONAL STOCK INDEX FUND. As a fund of funds, the Total
International Stock Index Fund intends to invest all of its assets in shares of
the European, Pacific, and Emerging Markets Stock Index Funds; indirectly, its
country risk will proportionately mirror that of the underlying funds. As of
March 31, 2000, the Fund's assets were invested as follows: 60% in the European
Stock Index Fund; 30% in the Pacific Stock Index Fund; and 10% in the Emerging
Markets Stock Index Fund.
[FLAG]EACH FUND IS SUBJECT TO CURRENCY RISK, WHICH IS THE CHANCE THAT A STRONGER
U.S. DOLLAR WILL REDUCE RETURNS FOR AMERICANS INVESTING OVERSEAS.
GENERALLY, WHEN THE DOLLAR RISES IN VALUE AGAINST ANOTHER COUNTRY'S
CURRENCY, YOUR INVESTMENT IN THAT COUNTRY LOSES VALUE BECAUSE ITS CURRENCY
IS WORTH FEWER U.S. DOLLARS. ON THE OTHER HAND, A WEAKER U.S. DOLLAR
GENERALLY LEADS TO HIGHER RETURNS FOR AMERICANS HOLDING FOREIGN
INVESTMENTS.
SECURITY SELECTION
In seeking to track its target index, the European Stock Index, Pacific Stock
Index, and Emerging Markets Stock Index Funds each invest in a portfolio of
foreign stocks selected in a manner that mirrors the weightings of their target
indexes. The Total International Stock Index Fund simply invests in shares of
the European, Pacific, and Emerging Markets Stock Index Funds. Likewise, the
Developed Markets Index Fund will simply invest in shares of the European and
Pacific Stock Index Funds. Each Fund seeks to provide investment results that
correspond to its target index. The correlation between the performance of a
Fund and its target index is expected to be at least 95%. (A correlation of 100%
would indicate perfect correlation.)
EUROPEAN STOCK INDEX FUND. The Fund invests in a statistically selected
sample of approximately 550 common stocks included in the MSCI Europe Index,
which is made up of the stocks of companies located in 15 European countries.
Four countries--the United Kingdom, France, Germany, and the
Netherlands--dominate the Index, with 29%, 15%, 14%, and 8% of the market
capitalization of the Index, respectively, as of March 31, 2000. The other 11
countries, which include Austria, Belgium, Denmark, Finland, Ireland, Italy,
Norway, Portugal, Spain, Sweden, and Switzerland, are much less significant to
the Index and, consequently, the Fund.
PACIFIC STOCK INDEX FUND. The Fund invests in a statistically selected
sample of the approximately 420 common stocks included in the MSCI Pacific Free
Index, which is comprised of the stocks of Pacific Basin companies. The Index is
dominated by the Japanese stock market, which represented 82% of the market
capitalization of the Index as of March 31, 2000. The other four countries
represented in the Index are Australia, Hong Kong, New Zealand, and Singapore.
<PAGE>
22
EMERGING MARKETS STOCK INDEX FUND. The Fund invests in a statistically
selected sample of the approximately 500 common stocks included in the Select
Emerging Markets Free Index, which is made up of the stocks of companies located
in 13 emerging markets of Europe, Asia, Africa, and Latin America. Three
countries--Mexico, Brazil, and South Africa--represent a majority of the Index,
with 16%, 14%, and 13% of the market capitalization of the Index, respectively,
as of March 31, 2000. The other 10 countries include Argentina, the Czech
Republic, Greece, Hungary, Indonesia, Israel, Philippines, Poland, Thailand, and
Turkey. The developed countries of Hong Kong and Singapore are included in the
Index to broaden diversification and ensure adequate liquidity. The Index is
called "select" because it is modeled on a larger index--the MSCI Emerging
Markets Free Index--but with certain adjustments designed to reduce risk. For
instance, MSCI considers the Hong Kong and Singapore markets too mature to
include in its index, but they are part of the Select Index. Conversely, as of
March 31, 2000, the Select Index excluded certain countries found in the MSCI
Emerging Markets Free Index--Chile, China, Colombia, India, Jordan, Korea,
Pakistan, Peru, Russia, Sri Lanka, and Taiwan--due to concerns about liquidity
or entry barriers in those markets. MSCI administers the Select Index
exclusively for Vanguard, and periodically adjusts the included countries to
keep pace with evolution in world markets. (Such adjustments are made on a
forward-looking basis, so past performance of the Select Index always reflects
actual country representation during the relevant period.)
Although index funds, by their nature, tend to be tax-efficient investment
vehicles, the Funds are generally managed without regard to tax ramifications.
TRANSACTION FEES AND ACCOUNT MAINTENANCE FEES
Some of Vanguard's index funds charge a transaction fee on purchases of fund
shares to offset the higher costs of trading certain securities, particularly
small-company and international stocks. The transaction fee ensures that these
higher costs are borne by the investors making the transactions--and not by
shareholders already in the fund who do not generate the costs. In addition,
most of Vanguard's index funds charge an account maintenance fee on accounts
under $10,000 to divide the costs of maintaining accounts equitably among
shareholders.
All transaction fees are paid directly to the fund itself (unlike a sales
charge or load that non-Vanguard funds may impose to compensate their sales
representatives). Without transaction fees, some index funds would have trouble
tracking their target indexes.
Vanguard assesses an account maintenance fee on index fund shareholders
whose account balances are below $10,000 (for any reason, including a decline in
the value of a fund's shares) on the date a dividend is distributed. This fee is
intended to allocate the costs of maintaining accounts more equitably among
shareholders. For funds that distribute dividends annually, the account
maintenance fee is $10 per year, deducted from the annual dividend, which
usually is distributed during the last two weeks of the calendar year. If the
fee is deducted from your dividend distribution, you will still be taxed on the
full amount of your dividend (unless you hold your shares through a nontaxable
account). If you are due a dividend that is less than the fee, fractional shares
will be automatically redeemed to make up the difference. This fee cannot be
prepaid.
COSTS AND MARKET-TIMING
Some investors try to profit from a strategy called market-timing--switching
money into investments when they expect prices to rise, and taking money out
when they expect prices to fall. As money is shifted in and out, a fund incurs
expenses for buying and selling
<PAGE>
23
securities. These costs are borne by all fund shareholders, including the
long-term investors who do not generate the costs. Therefore, the Vanguard
International Stock Index Funds have adopted the following policies, among
others, designed to discourage short-term trading:
- - Each Fund reserves the right to reject any purchase request--including
exchanges from other Vanguard funds--that it regards as disruptive to the
efficient management of the Fund. A purchase request could be rejected
because of the timing of the investment or because of a history of
excessive trading by the investor.
- - The Emerging Markets Stock Index Fund charges a transaction fee on
purchases and redemptions.
- - Telephone and online exchanges are not accepted for non-IRA accounts.
- - There is a limit on the number of times you can exchange into and out of a
Fund (see "Redeeming Shares" in the INVESTING WITH VANGUARD section).
- - Each Fund reserves the right to stop offering shares at any time.
THE VANGUARD FUNDS DO NOT PERMIT MARKET-TIMING. DO NOT INVEST IN THESE
FUNDS IF YOU ARE A MARKET-TIMER.
TURNOVER RATE
Although each Fund seeks to invest for the long term, the Funds retain the right
to sell securities regardless of how long the securities have been held.
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. Because of this, the turnover rate for each Fund has
been extremely low. The Financial Highlights tables beginning on page 29 show
historic turnover rates for each Fund.
- --------------------------------------------------------------------------------
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 passively managed foreign stock
index funds in 1999 was roughly 17%; for all foreign stock funds, the average
turnover was approximately 76%, according to Morningstar, Inc. (A turnover rate
of 100% would occur, for example, if a fund sold and replaced securities valued
at 100% of its net assets within a one-year period.)
- --------------------------------------------------------------------------------
OTHER INVESTMENT POLICIES AND RISKS
Besides investing in common stocks of foreign companies, each Fund may make
certain other kinds of investments to achieve its objective. Each Fund may
change its objective without shareholder approval.
The Funds may also invest, to a limited extent, in futures and options
contracts, warrants, convertible securities, and swap agreements, which are
types of derivatives. Losses (or gains) involving futures contracts can
sometimes be substantial--in part because a relatively small price movement in a
futures contract may result in an immediate and substantial loss (or gain) for a
fund. Similar risks exist for warrants (securities that permit their
<PAGE>
24
owners to purchase a specific number of shares of stock at a predetermined
price), convertible securities (securities that may be exchanged for another
asset), and swap agreements (contracts between two parties in which each agrees
to make payments to the other based on the return of a specified index or
asset).
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
For this reason, the Funds will not use futures, options, warrants,
convertible securities, or swap agreements for speculative purposes or as
leveraged investments that magnify the gains or losses of an investment. A
Fund's obligation under futures contracts will not exceed 20% of its total
assets.
The reasons for which a Fund will invest in futures and options are:
- - To keep cash on hand to meet shareholder redemptions or other needs while
simulating full investment in stocks.
- - To reduce the Fund's transaction costs or add value when these instruments
are favorably priced.
Each Fund may also enter into forward foreign currency contracts in order
to maintain the same currency exposure as its respective Index. A forward
foreign currency contract is an agreement to buy or sell a country's currency at
a specific price on a specific date, usually 30, 60, or 90 days in the future.
In other words, the contract guarantees an exchange rate on a given date.
Managers of international stock funds typically use these contracts to guard
against sudden, unfavorable changes in U.S. dollar/foreign currency exchange
rates. However, the Funds will use these contracts for different reasons:
- - To gain currency exposure when investing in futures.
- - To settle trades in a foreign currency.
THE FUNDS AND VANGUARD
Vanguard International Stock Index Funds are offered by The Vanguard Group, a
family of more than 35 investment companies with more than 100 funds holding
assets worth more than $550 billion. All of the 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.
Total International Stock and Developed Markets Index Funds will indirectly
bear a proportionate share of the expenses of the underlying funds in which they
invest. However, their direct expenses are expected to be very low or zero. For
example, Total International
<PAGE>
25
Stock Index Fund has incurred no direct expenses since its inception in 1996.
Total International Stock and Developed Markets Index Funds may operate without
incurring direct expenses because Vanguard will reimburse them for (i) their
contributions to the cost of operating the underlying funds in which they
invest, and (ii) savings in administrative and marketing costs that Vanguard
expects to derive from their operations.
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
VANGUARD'S UNIQUE CORPORATE STRUCTURE
The Vanguard Group is truly a MUTUAL mutual fund company. It is owned jointly by
the funds it oversees and thus indirectly by the shareholders in those funds.
Most other mutual funds are operated by for-profit management companies that may
be owned by one person, by a group of individuals, or by investors who own the
management company's stock. By contrast, Vanguard provides its services on an
"at-cost" basis, and the funds' expense ratios reflect only these costs. No
separate management company reaps profits or absorbs losses from operating the
funds.
- --------------------------------------------------------------------------------
INVESTMENT ADVISER
The Vanguard Group (Vanguard), P.O. Box 2600, Valley Forge, PA 19482, founded in
1975, serves as the Funds' adviser through its Quantitative Equity Group. (The
Developed Markets and Total International Stock Index Funds receive advisory
services indirectly, by investing in other funds.) Vanguard manages the Funds on
an at-cost basis, subject to the control of the Trustees and officers of the
Funds. For the fiscal year ended December 31, 1999, the advisory fees
represented an effective annual rate of less than 0.01% each for the European,
Pacific, and Emerging Markets Stock Index Funds.
The Funds have authorized Vanguard to choose brokers or dealers to handle
the purchase and sale of securities for the Funds, and to get the best available
price and most favorable execution from these brokers or dealers with respect to
all transactions. The Funds may direct Vanguard to use a particular broker for
certain transactions in exchange for commission rebates or research services
provided to the Funds.
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
THE FUNDS' ADVISER
The Vanguard Group provides investment advisory services to many Vanguard funds;
as of December 31, 1999, the Group managed more than $371 billion in total
assets. The individual responsible for overseeing the European, Pacific, and
Emerging Markets Stock Index Funds' investments is:
GEORGE U. SAUTER, Managing Director of Vanguard, and head of Vanguard's
Quantitative Equity Group; has worked in investment management since 1985;
primary responsibility for Vanguard's stock indexing policy and strategy since
joining the company in 1987; A.B., Dartmouth College; M.B.A., University of
Chicago.
- --------------------------------------------------------------------------------
<PAGE>
26
DIVIDENDS, CAPITAL GAINS, AND TAXES
FUND DISTRIBUTIONS
Each Fund distributes to shareholders virtually all of its net income (interest
and dividends, less expenses), as well as any capital gains realized from the
sale of its holdings. Distributions generally occur in December. In addition, a
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.
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
DISTRIBUTIONS
As a shareholder, you are entitled to your share of the fund's income from
interest and dividends, and gains from the sale of investments. You receive such
earnings as either an income dividend or a capital gains distribution. Income
dividends come from both the dividends that the fund earns from its holdings and
the interest it receives from its money market and bond investments. Capital
gains are realized whenever the fund sells securities for higher prices than it
paid for them. These capital gains are either short-term or long-term, depending
on whether the fund held the securities for one year or less, or more than one
year.
- --------------------------------------------------------------------------------
BASIC TAX POINTS
Vanguard will send you a statement each year showing the tax status of all your
distributions. In addition, taxable investors should be aware of the following
basic tax points:
- - 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 for federal income tax purposes as if received in
December.
- - Any dividends and short-term capital gains that you receive are taxable to
you as ordinary income for federal income tax purposes.
- - Any distributions of net long-term capital gains are taxable to you as
long-term capital gains for federal income tax purposes, no matter how long
you've owned shares in the Fund.
- - Capital gains distributions may vary considerably from year to year as a
result of the Funds' normal investment activities and cash flows.
- - A sale or exchange of Fund shares is a taxable event. This means that you
may have a capital gain to report as income, or a capital loss to report as
a deduction, when you complete your federal income tax return.
- - Dividend and capital gains distributions that you receive, as well as your
gains or losses from any sale or exchange of Fund shares, may be subject to
state and local income taxes.
- - The European, Pacific, and Emerging Markets Stock Index Funds may be
subject to foreign taxes or foreign tax withholding on dividends, interest,
and some capital gains that they receive on foreign securities. You may
qualify for an offsetting credit or deduction under U.S. tax laws for your
portion of a Fund's foreign tax obligations, provided that you meet certain
requirements. Because the Total International Stock and Developed Markets
Index Funds invest in foreign stocks indirectly through other funds, their
investors are not able to take advantage of foreign tax credits or
deductions. See your tax adviser or IRS publications for more information.
<PAGE>
27
GENERAL INFORMATION
BACKUP WITHHOLDING. By law, Vanguard must withhold 31% of any taxable
distributions or redemptions from your account if you do not:
- - provide us with your correct taxpayer identification number;
- - certify that the taxpayer identification number is correct; and
- - confirm that you are not subject to backup withholding.
Similarly, Vanguard must withhold from your account if the IRS instructs us to
do so.
FOREIGN INVESTORS. The Vanguard funds generally do not offer their shares for
sale outside of the United States. Foreign investors should be aware that U.S.
withholding and estate taxes may apply to any investments in Vanguard funds.
INVALID ADDRESSES. If a dividend or capital gains distribution check mailed to
your address of record is returned as undeliverable, Vanguard will automatically
reinvest all future distributions until you provide us with a valid mailing
address.
TAX CONSEQUENCES. This prospectus provides general tax information only. If you
are investing through a tax-deferred retirement account, such as an IRA, special
tax rules apply. Please consult your tax adviser for detailed information about
a fund's tax consequences for you.
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
"BUYING A DIVIDEND"
Unless you are investing through a tax-deferred retirement account (such as an
IRA), you should avoid buying shares of a fund shortly before it makes a
distribution, because doing so can cost you money in taxes. This is known as
"buying a dividend." For example: On December 15, you invest $5,000, buying 250
shares for $20 each. If the fund pays a distribution of $1 per share on December
16, its share price would drop to $19 (not counting market change). You still
have only $5,000 (250 shares x $19 = $4,750 in share value, plus 250 shares x $1
= $250 in distributions), but you owe tax on the $250 distribution you
received--even if you reinvest it in more shares. To avoid "buying a dividend,"
check a fund's distribution schedule before you invest.
- --------------------------------------------------------------------------------
SHARE PRICE
Each Fund's share price, called its net asset value, or NAV, is calculated each
business day after the close of regular trading on the New York Stock Exchange
(the NAV is not calculated on holidays or other days when the Exchange is
closed). Net asset value per share for the Developed Markets and Total
International Stock Index Funds is computed by adding up the total value of the
Fund's investments (i.e., shares of the underlying funds) and other assets,
subtracting any of its liabilities (debts), and then dividing by the number of
Fund shares outstanding:
TOTAL ASSETS - LIABILITIES
NET ASSET VALUE = --------------------------------
NUMBER OF SHARES OUTSTANDING
Net asset value per share for the European, Pacific, and Emerging Markets
Stock Index Funds is computed in a similar way, by dividing the net assets
attributed to each class by the number of Fund shares outstanding for that
class.
<PAGE>
28
Knowing the daily net asset value is useful to you as a shareholder because
it indicates the current value of your investment. The Fund's NAV, multiplied by
the number of shares you own, gives you the dollar amount you would have
received had you sold all of your shares back to the Fund that day. Because
foreign securities markets may operate on days which are not business days in
the United States, the value of a Fund's holdings may change on days when
shareholders will not be able to purchase or redeem the Fund's shares.
A NOTE ON PRICING: A Fund's investments will be priced at their market
value when market quotations are readily available. When these quotations are
not readily available, investments will be priced at their fair value,
calculated according to procedures adopted by the Funds' Board of Trustees. A
Fund also may use fair value pricing if the value of a security held by the Fund
is materially affected by events occurring after the close of the primary
markets or exchanges on which such security is traded. In these situations,
prices used by the Fund to calculate its net asset value may differ from quoted
or published prices for the underlying securities.
Each Fund's share price can be found daily in the mutual fund listings of
most major newspapers under the heading "Vanguard Index Funds." Different
newspapers use different abbreviations for each Fund, but the most common are
EUROPE, PACIFIC, EMERMKT, DEVMKT, and TOTINTL for the European, Pacific,
Emerging Markets, Developed Markets, and Total International Stock Index Funds,
respectively.
FINANCIAL HIGHLIGHTS
The following financial highlights tables are intended to help you understand
each Fund's financial performance for the past five years or since inception
(except for the Developed Markets Index Fund, which did not start operations
until May 5, 2000), and certain information reflects financial results for a
single Fund share. The total returns in each table represent the rate that an
investor would have earned or lost each year on an investment in the Fund
(assuming reinvestment of all dividend and capital gains distributions). This
information has been derived from the financial statements audited by
PricewaterhouseCoopers LLP, independent accountants, whose report--along with
each Fund's financial statements--is included in the Funds' most recent annual
report to shareholders. You may have the annual report sent to you without
charge by contacting Vanguard.
<PAGE>
29
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
HOW TO READ THE FINANCIAL HIGHLIGHTS TABLE
This explanation uses the European Stock Index Fund as an example. The Fund
began fiscal 1999 with a net asset value (price) of $25.28 per share. During the
year, the Fund earned $0.50 per share from investment income (interest and
dividends) and $3.69 per share from investments that had appreciated in value or
that were sold for higher prices than the Fund paid for them.
Shareholders received $0.65 per share in the form of dividend and capital gains
distributions. A portion of each year's distributions may come from the prior
year's income or capital gains.
The earnings ($4.19 per share) minus the distributions ($0.65 per share)
resulted in a share price of $28.82 at the end of the year. This was an increase
of $3.54 per share (from $25.28 at the beginning of the year to $28.82 at the
end of the year). For a shareholder who reinvested the distributions in the
purchase of more shares, the total return from the Fund was 16.62% for the year.
As of December 31, 1999, the Fund had $6.1 billion in net assets. For the year,
its expense ratio was 0.29% ($2.90 per $1,000 of net assets); and its net
investment income amounted to 1.99% of its average net assets. It sold and
replaced securities valued at 7% of its net assets.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
VANGUARD EUROPEAN STOCK INDEX FUND
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------
NET ASSET VALUE,
BEGINNING OF YEAR $25.28 $20.13 $16.57 $14.02 $11.76
- --------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .50 .41 .38 .34 .32
Net Realized and
Unrealized Gain
(Loss) on Investments 3.69 5.40 3.63 2.63 2.30
--------------------------------------------------------
Total from Investment
Operations 4.19 5.81 4.01 2.97 2.62
--------------------------------------------------------
DISTRIBUTIONS
Dividends from Net
Investment Income (.50) (.52) (.37) (.36) (.32)
Distributions from
Realized Capital Gains (.15) (.14) (.08) (.06) (.04)
--------------------------------------------------------
Total Distributions (.65) (.66) (.45) (.42) (.36)
- --------------------------------------------------------------------------------
NET ASSET VALUE, END
OF YEAR $28.82 $25.28 $20.13 $16.57 $14.02
================================================================================
TOTAL RETURN* 16.62% 28.86% 24.23% 21.26% 22.28%
================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of
Year (Millions) $6,106 $4,479 $2,432 $1,595 $1,017
Ratio of Total
Expenses to Average
Net Assets 0.29% 0.29% 0.31% 0.35% 0.35%
Ratio of Net
Investment Income to
Average Net Assets 1.99% 1.97% 2.19% 2.45% 2.66%
Turnover Rate 7% 7% 3% 4% 2%
================================================================================
*Total return figures do not reflect the transaction fee on purchases imposed
prior to 4/1/2000 or the annual account maintenance fee.
<PAGE>
30
FINANCIAL HIGHLIGHTS (CONTINUED)
- --------------------------------------------------------------------------------
VANGUARD PACIFIC STOCK INDEX FUND
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------
NET ASSET VALUE,
BEGINNING OF YEAR $ 7.84 $7.72 $10.51 $11.50 $11.31
- --------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .08 .085 .09 .10 .10
Net Realized and
Unrealized Gain
(Loss) on Investments 4.39 .100 (2.79) (1.00) .21
--------------------------------------------------------
Total from Investment
Operations 4.47 .185 (2.70) (.90) .31
--------------------------------------------------------
DISTRIBUTIONS
Dividends from Net
Investment Income (.09) (.065) (.09) (.09) (.12)
Distributions from
Realized Capital Gains -- -- -- -- --
--------------------------------------------------------
Total Distributions (.09) (.065) (.09) (.09) (.12)
- --------------------------------------------------------------------------------
NET ASSET VALUE, END
OF YEAR $12.22 $7.84 $ 7.72 $10.51 $11.50
================================================================================
TOTAL RETURN* 57.05% 2.41% -25.67% -7.82% 2.75%
================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of
Year (Millions) $2,526 $1,033 $827 $978 $831
Ratio of Total
Expenses to Average
Net Assets 0.37% 0.40% 0.35% 0.35% 0.35%
Ratio of Net
Investment Income to
Average Net Assets 0.95% 1.17% 1.03% 0.89% 0.97%
Turnover Rate 6% 4% 8% 9% 1%
================================================================================
*Total return figures do not reflect the transaction fee on purchases imposed
prior to 4/1/2000 or the annual account maintenance fee.
- --------------------------------------------------------------------------------
VANGUARD EMERGING MARKETS STOCK INDEX FUND
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------
NET ASSET VALUE,
BEGINNING OF YEAR $ 7.91 $9.98 $12.28 $10.75 $10.87
- --------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .24 .27 .24 .18 .15
Net Realized and
Unrealized Gain
(Loss) on Investments 4.62 (2.08) (2.31) 1.52 (.09)
--------------------------------------------------------
Total from Investment
Operations 4.86 (1.81) (2.07) 1.70 .06
--------------------------------------------------------
DISTRIBUTIONS
Dividends from Net
Investment Income (.27) (.26) (.23) (.17) (.18)
Distributions from
Realized Capital Gains -- -- -- -- --
--------------------------------------------------------
Total Distributions (.27) (.26) (.23) (.17) (.18)
- --------------------------------------------------------------------------------
NET ASSET VALUE, END
OF YEAR $21.50 $7.91 $ 9.98 $12.28 $10.75
================================================================================
TOTAL RETURN* 61.57% -18.12% -16.82% 15.83% 0.56%
================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of
Year (Millions) $1,138 $577 $660 $637 $234
Ratio of Total
Expenses to Average
Net Assets 0.58% 0.61% 0.57% 0.60% 0.60%
Ratio of Net
Investment Income to
Average Net Assets 2.55% 2.99% 1.96% 1.69% 2.00%
Turnover Rate 22% 22% 19% 1% 3%
================================================================================
*Total return figures do not reflect the transaction fee on purchases (0.5%
beginning 4/1/2000, 1.0% from 11/3/1997 to 3/31/2000, 1.5% from 1/1/1997 to
11/2/1997, 2.0% in 1995 through 1996), the transaction fee on redemptions
(0.5% beginning 4/1/2000, 1.0% through 3/31/2000), or the annual account
maintenance fee.
<PAGE>
31
- --------------------------------------------------------------------------------
VANGUARD TOTAL INTERNATIONAL
STOCK INDEX FUND
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1999 1998 1997 1996*
- --------------------------------------------------------------------------------
NET ASSET VALUE,
BEGINNING OF PERIOD $11.19 $ 9.87 $10.14 $10.26
- --------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .21 .21 .18 .150
Capital Gain Distributions
Received .04 .02 .02 .015
Net Realized and
Unrealized Gain
(Loss) on Investments 3.09 1.31 (.28) (.110)
--------------------------------------------------------
Total from Investment
Operations 3.34 1.54 (.08) .055
--------------------------------------------------------
DISTRIBUTIONS
Dividends from Net
Investment Income (.21) (.21) (.17) (.160)
Distributions from
Realized Capital Gains (.01) (.01) (.02) (.015)
--------------------------------------------------------
Total Distributions (.22) (.22) (.19) (.175)
- --------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $14.31 $11.19 $ 9.87 $10.14
================================================================================
TOTAL RETURN** 29.92% 15.60% -0.77% 0.55%
================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of
Period (Millions) $2,570 $1,375 $903 $280
Ratio of Total
Expenses to Average
Net Assets 0% 0% 0% 0%
Ratio of Net
Investment Income to
Average Net Assets 2.04% 2.18% 2.19% 1.51%+
Turnover Rate 1% 2% 0% 0%
================================================================================
*April 29 (inception) through December 31, 1996.
**Total return figures do not reflect the transaction fee on purchases imposed
prior to April 1, 2000 or the annual account maintenance fee.
+Annualized.
The Funds are not sponsored, sold, promoted, or endorsed by Morgan Stanley
Capital International. 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., and
have been licensed for use by The Vanguard Group.
<PAGE>
32
- --------------------------------------------------------------------------------
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 [BOOK ICON]. 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 these Funds unless you notify us otherwise. Note:
Limitations do apply; see page 37.
- --------------------------------------------------------------------------------
VANGUARD(R) DIRECT DEPOSIT SERVICE [BOOK ICON]
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 [BOOK ICON]
Automatic method for moving a fixed amount of money from one Vanguard fund
account to another.
- --------------------------------------------------------------------------------
VANGUARD FUND EXPRESS(R) [BOOK ICON]
Electronic method for buying or selling shares. You can transfer money between
your Vanguard fund account and an account at your bank, savings and loan, or
credit union on a systematic schedule.
- --------------------------------------------------------------------------------
VANGUARD DIVIDEND EXPRESS(R) [BOOK ICON]
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) [BOOK ICON]
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 [BOOK ICON]
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>
33
- - 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 [BOOK ICON]
Invest assets held in an existing personal trust.
- --------------------------------------------------------------------------------
FOR INDIVIDUAL RETIREMENT ACCOUNTS [BOOK ICON]
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 [BOOK ICON]
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>
34
BUYING SHARES
You buy your shares at a Fund's next-determined net asset value after Vanguard
receives your request. As long as your request is received before the close of
regular trading on the New York Stock Exchange, generally 4 p.m. Eastern time,
you will buy your shares at that day's net asset value.
- --------------------------------------------------------------------------------
MINIMUM INVESTMENT TO . . .
open a new account
$3,000 (regular account); $1,000 (traditional IRAs and Roth IRAs).
add to an existing account
$100 by mail or exchange; $1,000 by wire.
- --------------------------------------------------------------------------------
A NOTE ON LOW BALANCES
Each Fund reserves the right to close any nonretirement fund account whose
balance falls below the minimum initial investment. The Fund will deduct a $10
annual fee in June if your nonretirement account balance at that time is below
$2,500. The low balance fee is waived for investors who have aggregate Vanguard
account assets of $50,000 or more.
- --------------------------------------------------------------------------------
A NOTE ON PURCHASE FEES
Emerging Markets Stock Index Fund deducts a 0.5% fee from all purchases
(including exchanges from other Vanguard funds), but not from reinvested
dividends or capital gains.
- --------------------------------------------------------------------------------
BY MAIL TO . . . [ENVELOPE ICON]
open a new account
Complete and sign the account registration form and enclose your check.
add to an existing account
Mail your check with an Invest-By-Mail form detached from your confirmation
statement to the address listed on the form. Please do not alter Invest-By-Mail
forms, since they are fund- and account-specific.
Make your check payable to: The Vanguard Group-(insert appropriate Fund number;
see below)
European Stock Index Fund-79
Pacific Stock Index Fund-72
Emerging Markets Stock Index Fund-533
Developed Markets Index Fund-227
Total International Stock Index Fund-113
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
<PAGE>
35
- --------------------------------------------------------------------------------
IMPORTANT NOTE: To prevent check fraud, Vanguard will not accept checks made
payable to third parties.
- --------------------------------------------------------------------------------
BY TELEPHONE TO . . . [TELEPHONE ICON]
open a new account
Call Vanguard Tele-Account* 24 hours a day--or Client Services during business
hours--to exchange from another Vanguard fund account with the same registration
(name, address, taxpayer identification number, and account type). (Note that
some restrictions apply to index fund accounts.)
add to an existing account
Call Vanguard Tele-Account* 24 hours a day--or Client Services during business
hours--to exchange from another Vanguard fund account with the same registration
(name, address, taxpayer identification number, and account type). (Note that
some restrictions apply to index fund accounts.) Use Vanguard Fund Express (see
"Services and Account Features") to transfer assets from your bank account. Call
Client Services before your first use to verify that this option is available.
Vanguard Tele-Account Client Services
1-800-662-6273 1-800-662-2739
*You must obtain a Personal Identification Number (PIN) through Tele-Account at
least seven days before you request your first exchange.
- --------------------------------------------------------------------------------
IMPORTANT NOTE: Once you have initiated a telephone transaction and a
confirmation number has been assigned, the transaction cannot be revoked. We
reserve the right to refuse any purchase request.
- --------------------------------------------------------------------------------
BY WIRE TO OPEN A NEW ACCOUNT OR ADD TO AN EXISTING ACCOUNT [WIRE ICON]
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:
European Stock Index Fund-79
Pacific Stock Index Fund-72
Emerging Markets Stock Index Fund-533
Developed Markets Index Fund-227
Total International Stock Index Fund-113
[Account number, or temporary number for a new account]
[Registered account owner(s)]
[Registered address]
- --------------------------------------------------------------------------------
<PAGE>
36
- --------------------------------------------------------------------------------
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 a Fund's
operation or performance.
- --------------------------------------------------------------------------------
REDEEMING SHARES
This section describes how you can redeem--that is, sell or exchange--a Fund's
shares.
When Selling Shares:
- - Vanguard sends the redemption proceeds to you or a designated third party.*
- - You can sell all or part of your Fund shares at any time.
*May require a signature guarantee; see footnote on page 39.
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 signature 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 described in this "Redeeming Shares"
section of the prospectus.
- --------------------------------------------------------------------------------
A NOTE ON REDEMPTION FEES
Emerging Markets Stock Index Fund imposes a 0.5% redemption fee on all share
redemptions. Currently, redemption fees do not apply to Fund shares held through
Vanguard's separate recordkeeping system for employee benefit plan accounts, due
to certain economies associated with these accounts. However, the Fund reserves
the right to impose redemption fees on its shares at any time if warranted by
the Fund's future costs of processing redemptions from these accounts.
- --------------------------------------------------------------------------------
NOTE: Once a redemption is initiated and a confirmation number given, the
transaction CANNOT be canceled.
- --------------------------------------------------------------------------------
<PAGE>
37
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 ICON]
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 ICON]
All Account Types Except Retirement:
Call Vanguard Tele-Account 24 hours a day--or Client Services during business
hours--to sell shares.
Retirement Accounts:
You can exchange--but not sell--shares by calling Tele-Account or Client
Services.
Vanguard Tele-Account Client Services
1-800-662-6273 1-800-662-2739
- --------------------------------------------------------------------------------
SPECIAL INFORMATION: We will automatically establish the telephone redemption
option for your account, unless you instruct us otherwise in writing. While
telephone redemption is easy and convenient, this account feature involves a
risk of loss from unauthorized or fraudulent transactions. Vanguard will take
reasonable precautions to protect your account from fraud. You should do the
same by keeping your account information private and immediately reviewing any
account statements that we send to you. Make sure to contact Vanguard
immediately about any transaction you believe to be unauthorized.
- --------------------------------------------------------------------------------
We reserve the right to refuse a telephone redemption if the caller is unable to
provide:
- - The ten-digit account number.
- - The name and address exactly as registered on the account.
- - The primary Social Security or employer identification number as registered
on the account.
- - The Personal Identification Number (PIN), if applicable (for instance,
Tele-Account).
Please note that Vanguard will not be responsible for any account losses
due to telephone fraud, so long as we have taken reasonable steps to verify the
caller's identity. If you wish to remove the telephone redemption feature from
your account, please notify us in writing.
- --------------------------------------------------------------------------------
A NOTE ON UNUSUAL CIRCUMSTANCES
Vanguard reserves the right to revise or terminate the telephone redemption
privilege at any time, without notice. In addition, Vanguard can stop selling
shares or postpone payment at times when the New York Stock Exchange is closed
or under any emergency circumstances as determined by the U.S. Securities and
Exchange Commission. If you
<PAGE>
38
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 ICON]
All Account Types Except Retirement:
Send a letter of instruction signed by all registered account holders. Include
the fund name and account number and (if you are selling) a dollar amount or
number of shares OR (if you are exchanging) the name of the fund you want to
exchange into and a dollar amount or number of shares. To exchange into an
account with a different registration (including a different name, address,
taxpayer identification number, or account type), you must provide Vanguard with
written instructions that include the guaranteed signatures of all current
owners of the fund from which you wish to redeem.
Vanguard Retirement Accounts:
For information on how to request distributions from:
- - Traditional IRAs and Roth IRAs--call Client Services.
- - SEP-IRAs, SIMPLE IRAs, 403(b)(7) custodial accounts, and Profit-Sharing and
Money Purchase Pension (Keogh) Plans--call Individual Retirement Plans at
1-800-662-2003.
Depending on your account registration type, additional documentation may be
required.
First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 1110 455 Devon Park Drive
Valley Forge, PA 19482-1110 Wayne, PA 19087-1815
For clients of Vanguard's Institutional Division . . .
First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 2900 455 Devon Park Drive
Valley Forge, PA 19482-2900 Wayne, PA 19087-1815
- --------------------------------------------------------------------------------
A NOTE ON LARGE REDEMPTIONS
It is important that you call Vanguard before you redeem a large dollar amount.
It is our responsibility to consider the interests of all fund shareholders, and
so we reserve the right to delay delivery of your redemption proceeds--up to
seven days--if the amount may disrupt a Fund's operation or performance.
If you redeem more than $250,000 worth of Fund shares within any 90-day
period, the Fund reserves the right to pay part or all of the redemption
proceeds above $250,000 in-kind, i.e., in securities, rather than in cash. If
payment is made in-kind, you may incur brokerage commissions if you elect to
sell the securities for cash.
- --------------------------------------------------------------------------------
OPTIONS FOR REDEMPTION PROCEEDS
You may receive your redemption proceeds in one of three ways: check, exchange
to another Vanguard fund, or Fund Express redemption.
- --------------------------------------------------------------------------------
CHECK REDEMPTIONS
Normally, Vanguard will mail your check within two business days of a
redemption.
- --------------------------------------------------------------------------------
<PAGE>
39
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 can be obtained from most commercial and savings
banks, credit unions, trust companies, or member firms of a U.S. stock
exchange.
TRANSACTIONS ARE PROCESSED AT THE NEXT-DETERMINED SHARE PRICE AFTER VANGUARD HAS
RECEIVED ALL REQUIRED INFORMATION.
- --------------------------------------------------------------------------------
LIMITS ON ACCOUNT ACTIVITY
Because excessive account transactions can disrupt the management of a Fund and
increase the Fund's costs for all shareholders, Vanguard limits account activity
as follows:
- - You may make no more than TWO SUBSTANTIVE "ROUND TRIPS" THROUGH A FUND
during any 12-month period.
- - Your round trips through a Fund must be at least 30 days apart.
- - A 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 a 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 a Fund.
- --------------------------------------------------------------------------------
RETURN YOUR SHARE CERTIFICATES
Any portion of your account represented by share certificates cannot be redeemed
until you return the certificates to Vanguard. Certificates must be returned
(unsigned), along with a letter requesting the sale or exchange you wish to
process, via certified mail to:
The Vanguard Group
455 Devon Park Drive
Wayne, PA 19087-1815
<PAGE>
40
- --------------------------------------------------------------------------------
ALL TRADES ARE FINAL
Vanguard will not cancel any transaction request (including any purchase or
redemption) that we believe to be authentic once the request has been initiated
and a confirmation number assigned.
- --------------------------------------------------------------------------------
UNCASHED CHECKS
Please cash your distribution or redemption checks promptly. Vanguard will not
pay interest on uncashed checks.
- --------------------------------------------------------------------------------
TRANSFERRING REGISTRATION
You can transfer the registration of your Fund shares to another owner by
completing a transfer form and sending it to Vanguard.
First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 1110 455 Devon Park Drive
Valley Forge, PA 19482-1110 Wayne, PA 19087-1815
For clients of Vanguard's Institutional Division . . .
First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 2900 455 Devon Park Drive
Valley Forge, PA 19482-2900 Wayne, PA 19087-1815
- --------------------------------------------------------------------------------
FUND AND ACCOUNT UPDATES
STATEMENTS AND REPORTS
We will send you account and tax statements to help you keep track of your Fund
account throughout the year as well as when you are preparing your income tax
returns.
In addition, you will receive financial reports about your Fund twice a
year. These comprehensive reports include an assessment of the Fund's
performance (and a comparison to its industry benchmark), an overview of the
financial markets, a report from the adviser, and the Fund's financial
statements which include a listing of the Fund's holdings.
To keep each Fund's costs as low as possible (so that you and other
shareholders can keep more of the Fund's investment earnings), Vanguard attempts
to eliminate duplicate mailings to the same address. When two or more Fund
shareholders have the same last name and address, we send just one Fund report
to that address--instead of mailing separate reports to each shareholder. If you
want us to send separate reports, notify our Client Services Department at
1-800-662-2739.
- --------------------------------------------------------------------------------
CONFIRMATION STATEMENT
Sent each time you buy, sell, or exchange shares; confirms the trade date and
the amount of your transaction.
- --------------------------------------------------------------------------------
PORTFOLIO SUMMARY [BOOK ICON]
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.
<PAGE>
41
- --------------------------------------------------------------------------------
FUND FINANCIAL REPORTS
Mailed in February and August for these Funds.
- --------------------------------------------------------------------------------
TAX STATEMENTS
Generally mailed in January; report previous year's dividend and capital gains
distributions, proceeds from the sale of shares, and distributions from IRAs or
other retirement accounts.
- --------------------------------------------------------------------------------
AVERAGE COST REVIEW STATEMENT [BOOK ICON]
Issued quarterly for most taxable accounts (accompanies your Portfolio Summary);
shows the average cost of shares that you redeemed during the calendar year,
using only the average cost single category method.
- --------------------------------------------------------------------------------
<PAGE>
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<PAGE>
(THIS PAGE INTENTIONALLY LEFT BLANK.)
<PAGE>
(THIS PAGE INTENTIONALLY LEFT BLANK.)
<PAGE>
GLOSSARY OF INVESTMENT TERMS
ACTIVE MANAGEMENT
An investment approach that seeks to exceed the average returns of the financial
markets. Active managers rely on research, market forecasts, and their own
judgment and experience in selecting securities to buy and sell.
CAPITAL GAINS DISTRIBUTION
Payment to mutual fund shareholders of gains realized on securities that a fund
has sold at a profit, minus any realized losses.
CASH RESERVES
Cash deposits, short-term bank deposits, and money market instruments which
include U.S. Treasury bills, bank certificates of deposit (CDs), repurchase
agreements, commercial paper, and banker's acceptances.
COMMON STOCK
A security representing ownership rights in a corporation. A stockholder is
entitled to share in the company's profits, some of which may be paid out as
dividends.
COUNTRY RISK
The chance that domestic events--such as political upheaval, financial troubles,
or a natural disaster--will weaken a country's securities markets.
CURRENCY RISK
The chance that a foreign investment will decrease in value because of
unfavorable changes in currency exchange rates.
DIVIDEND INCOME
Payment to shareholders of income from interest or dividends generated by a
fund's investments.
EXPENSE RATIO
The percentage of a fund's average net assets used to pay its expenses. The
expense ratio includes management fees, administrative fees, and any 12b-1
distribution fees.
INDEX
An unmanaged group of securities whose overall performance is used as a standard
to measure investment performance.
INTERNATIONAL STOCK FUND
A mutual fund that invests in the stocks of companies located outside the United
States.
INVESTMENT ADVISER
An organization that makes the day-to-day decisions regarding a fund's
investments.
MUTUAL FUND
An investment company that pools the money of many people and invests it in a
variety of securities in an effort to achieve a specific objective over time.
NET ASSET VALUE (NAV)
The market value of a mutual fund's total assets, minus liabilities, divided by
the number of shares outstanding. The value of a single share is called its
share value or share price.
PASSIVE MANAGEMENT
A low-cost investment strategy in which a mutual fund attempts to match--rather
than outperform--a particular stock or bond market index. Also known as
indexing.
PRINCIPAL
The amount of money you put into an investment.
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>
[LOGO]
[THE VANGUARD GROUP(R) LOGO]
Post Office Box 2600
Valley Forge, PA 19482-2600
FOR MORE INFORMATION
If you'd like more information about
Vanguard International Stock Index
Funds, the following documents are
available free upon request:
ANNUAL/SEMIANNUAL REPORT TO
SHAREHOLDERS
Additional information about the
Funds' investments is available in
the Funds' annual and semiannual
reports to shareholders.
STATEMENT OF ADDITIONAL
INFORMATION (SAI)
The SAI provides more detailed
information about the Funds (there
is a separate SAI for Vanguard
Developed Markets and Total
International Stock Index Funds,
which are legally a part of Vanguard
STAR Funds).
The current annual and semiannual
reports and each SAI are
incorporated by reference into
(and are thus legally a part of)
this prospectus.
To receive a free copy of the latest
annual or semiannual report or the
SAI, or to request additional
information about the Funds or other
Vanguard funds, please contact us
as follows:
THE VANGUARD GROUP
INVESTOR INFORMATION
DEPARTMENT
P.O. BOX 2600
VALLEY FORGE, PA
19482-2600
TELEPHONE:
1-800-662-7447 (SHIP)
TEXT TELEPHONE:
1-800-952-3335
WORLD WIDE WEB:
WWW.VANGUARD.COM
If you are a current Fund shareholder
and would like information about
your account, account transactions,
and/or account statements,
please call:
CLIENT SERVICES DEPARTMENT
TELEPHONE:
1-800-662-2739 (CREW)
TEXT TELEPHONE:
1-800-749-7273
INFORMATION PROVIDED BY THE
SECURITIES AND EXCHANGE
COMMISSION (SEC)
You can review and copy
information about the Funds
(including the SAI) at the SEC's
Public Reference Room in
Washington, DC. To find out more
about this public service, call the
SEC at 1-202-942-8090. Reports and
other information about the Funds
are also available on the SEC's
website (www.sec.gov), or you can
receive copies of this information,
for a fee, by electronic request at
the following e-mail address:
[email protected], or by writing
the Public Reference Section,
Securities and Exchange
Commission, Washington, DC
20549-0102.
Funds' Investment Company Act
file number: 811-5972 (811-3919)
for Developed Markets and Total
International Stock Index Funds)
(C) 2000 The Vanguard Group, Inc.
All rights reserved.
Vanguard Marketing Corporation,
Distributor.
P072N-04/28/2000
<PAGE>
VANGUARD(R)
INTERNATIONAL STOCK
INDEX FUNDS
Participant Prospectus
April 28, 2000
This prospectus contains
financial data for the
Funds through the
fiscal year ended
December 31, 1999.
VANGUARD EUROPEAN
STOCK INDEX FUND
VANGUARD PACIFIC STOCK
INDEX FUND
VANGUARD EMERGING
MARKETS STOCK INDEX
FUND
VANGUARD DEVELOPED
MARKETS INDEX FUND
VANGUARD TOTAL
INTERNATIONAL STOCK
INDEX FUND
[MEMBERS OF THE VANGUARD GROUP(R) LOGO]
<PAGE>
VANGUARD INTERNATIONAL STOCK INDEX FUNDS
Participant Prospectus
April 28, 2000
A Group of International Stock Index Mutual Funds
- --------------------------------------------------------------------------------
CONTENTS
- --------------------------------------------------------------------------------
1 AN INTRODUCTION TO INDEX FUNDS
2 FUND PROFILES
2 Vanguard European Stock Index Fund
5 Vanguard Pacific Stock Index Fund
8 Vanguard Emerging Markets Stock Index Fund
11 Vanguard Developed Markets Index Fund
13 Vanguard Total International Stock Index Fund
16 MORE ON THE FUNDS
23 THE FUNDS AND VANGUARD
24 INVESTMENT ADVISER
25 DIVIDENDS, CAPITAL GAINS, AND TAXES
25 SHARE PRICE
26 FINANCIAL HIGHLIGHTS
29 INVESTING WITH VANGUARD
30 ACCESSING FUND INFORMATION BY COMPUTER
GLOSSARY (inside back cover)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
WHY READING THIS PROSPECTUS IS IMPORTANT
This prospectus explains the objective, risks, and strategies of each of the
Vanguard International Stock Index Funds. To highlight terms and concepts
important to mutual fund investors, we have provided "Plain Talk(R)"
explanations along the way. Reading the prospectus will help you to decide which
Fund, if any, is the right investment for you. We suggest that you keep it for
future reference.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
IMPORTANT NOTE
The Vanguard European, Pacific, and Emerging Markets Stock Index Funds each
offer two separate classes of shares: Investor and Institutional. This
prospectus offers the Funds' Investor Shares to participants in
employer-sponsored retirement or savings plans. Please call Vanguard to obtain
separate prospectuses that offer:
- - Investor Shares for private investors ($3,000 minimum)--1-800-662-7447
- - Institutional Shares for very large investors ($10 million
minimum)--1-800-523-1036
The Funds' separate share classes have different expenses; as a result,
their investment performances will vary. UNLESS OTHERWISE NOTED, ALL REFERENCES
IN THIS PROSPECTUS TO FEES, EXPENSES, AND INVESTMENT PERFORMANCE RELATE
SPECIFICALLY TO INVESTOR SHARES.
- --------------------------------------------------------------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE>
1
AN INTRODUCTION TO INDEX FUNDS
WHAT IS INDEXING?
An index is an unmanaged group of securities whose overall performance is used
as a standard to measure investment performance. 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. Keep in mind that an index
fund has operating expenses and transaction costs, while a market index does
not. Therefore, an index fund, while expected to track its target index closely,
typically will be unable to match the performance of the index exactly.
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 foreign stock market.
Index funds are not actively managed by investment advisers 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.
WHAT INDEX FUNDS DOES VANGUARD OFFER?
Vanguard offers a variety of stock (both U.S. and international), bond, and
balanced index funds. This prospectus provides information about Vanguard's
International Stock Index Funds. There are five such Funds offered in this
prospectus, each of which seeks to track a different segment of the
international stock market:
- --------------------------------------------------------------------------------
FUND SEEKS TO TRACK
- --------------------------------------------------------------------------------
Vanguard European Stock Index Fund European stock markets
Vanguard Pacific Stock Index Fund Australian and Far East
stock markets
Vanguard Emerging Markets Stock 13 emerging stock markets in
Index Fund Europe, Asia, Africa, and
Latin America
Vanguard Developed Markets Index Fund European, Australian, and Far
East stock markets
Vanguard Total International Stock European, Australian, Far East,
Index Fund and 13 emerging stock
markets in Europe, Asia,
Africa, and Latin America
- --------------------------------------------------------------------------------
This prospectus contains profiles that summarize key features of each Fund.
Following the profiles, there is important additional information about the
Funds.
<PAGE>
2
FUND PROFILE--
VANGUARD(R) EUROPEAN STOCK INDEX FUND
The following profile summarizes key features of Vanguard European Stock Index
Fund.
INVESTMENT OBJECTIVE
The Fund seeks to match the performance of the Morgan Stanley Capital
International (MSCI) Europe Index.
INVESTMENT STRATEGIES
The Fund employs a "passively managed"--or index--investment approach, by
investing all or substantially all of its assets in a representative sample of
the common stocks included in the MSCI Europe Index. The MSCI Europe Index is
made up of approximately 550 common stocks of companies located in 15 European
countries--mostly in the United Kingdom, France, Germany, and the Netherlands,
(which comprised 29%, 15%, 14%, and 8% of the Index's market capitalization,
respectively, as of March 31, 2000), as well as in Austria, Belgium, Denmark,
Finland, Ireland, Italy, Norway, Portugal, Spain, Sweden, and Switzerland. For
more information about passive management, see "Indexing Methods" under MORE ON
THE FUNDS.
PRIMARY RISKS
THE FUND'S TOTAL RETURN, LIKE STOCK PRICES GENERALLY, WILL FLUCTUATE WITHIN A
WIDE RANGE, SO AN INVESTOR COULD LOSE MONEY OVER SHORT OR EVEN LONG PERIODS. The
Fund is also subject to:
- - Country risk, which is the chance that a country's economy will be hurt by
political troubles, financial problems, or natural disasters. The Index's,
and therefore the Fund's, heavy exposure to four countries (United Kingdom,
France, Germany, and the Netherlands) involves a higher degree of country
risk than that of more geographically diversified international funds.
- - Regional risk, which is the chance that an entire region--namely
Europe--will be hurt by political troubles, financial problems, or natural
disasters.
- - Currency risk, which is the chance that returns will be hurt by a rise in
the value of the U.S. dollar versus foreign currencies.
- - Investment style risk, which is the chance that returns from foreign stocks
will trail returns from other asset classes or the overall stock market.
PERFORMANCE/RISK INFORMATION
The bar chart and table below provide an indication of the risk of investing in
the Fund. The bar chart shows the Fund's performance in each calendar year since
inception. The table shows how the Fund's average annual total returns for one
and five calendar years and since inception compare with those of a broad-based
securities market index. Keep in mind that the Fund's past performance does not
indicate how it will perform in the future.
<PAGE>
3
----------------------------------------------------
ANNUAL TOTAL RETURNS
----------------------------------------------------
1991 12.40%
1992 -3.32%
1993 29.13%
1994 1.88%
1995 22.28%
1996 21.26%
1997 24.23%
1998 28.86%
1999 16.62%
----------------------------------------------------
Return figures do not reflect the transaction fee
imposed on purchases prior to April 1, 2000. If the
fee was reflected, returns would be less than those
shown.
----------------------------------------------------
During the period shown in the bar chart, the highest return for a calendar
quarter was 20.37% (quarter ended March 31, 1998) and the lowest return for a
quarter was -14.41% (quarter ended September 30, 1998).
-------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS FOR YEARS ENDED DECEMBER 31, 1999
-------------------------------------------------------------------------
1 YEAR 5 YEARS SINCE INCEPTION*
-------------------------------------------------------------------------
Vanguard European Stock
Index Fund** 16.62% 22.58% 14.61%
MSCI Europe Index 15.77 22.27 14.78
-------------------------------------------------------------------------
*June 18, 1990.
**Return figures do not reflect the transaction fee imposed on purchases
prior to April 1, 2000.
-------------------------------------------------------------------------
FEES AND EXPENSES
The following table describes the fees and expenses you may pay if you buy and
hold shares of the Fund. The expenses shown under Annual Fund Operating Expenses
are based upon those incurred in the fiscal year ended December 31, 1999.
SHAREHOLDER FEES (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None
Transaction Fee on Purchases: None
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fee: None
Exchange Fee: None
ANNUAL FUND OPERATING EXPENSES (expenses deducted from the Fund's assets)
Management Expenses: 0.22%
12b-1 Distribution Fee: None
Other Expenses: 0.07%
TOTAL ANNUAL FUND OPERATING EXPENSES: 0.29%
<PAGE>
4
The following example is intended to help you compare the cost of investing
in the Fund with the cost of investing in other mutual funds. It illustrates the
hypothetical expenses that you would incur over various periods if you invest
$10,000 in the Fund. This example assumes that the Fund provides a return of 5%
a year, and that operating expenses remain the same. The results apply whether
or not you redeem your investment at the end of each period.
- -------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- -------------------------------------------------
$30 $93 $163 $368
- -------------------------------------------------
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 Europe
INVESTMENT ADVISER VANGUARD FUND NUMBER
The Vanguard Group, Valley Forge, 079
Pa., since inception
CUSIP NUMBER
INCEPTION DATE 922042205
June 18, 1990
NET ASSETS AS OF DECEMBER 31, 1999 TICKER SYMBOL
$6.1 billion VEURX
- --------------------------------------------------------------------------------
<PAGE>
5
FUND PROFILE--
VANGUARD(R) PACIFIC STOCK INDEX FUND
The following profile summarizes key features of Vanguard Pacific Stock Index
Fund.
INVESTMENT OBJECTIVE
The Fund seeks to match the performance of the MSCI Pacific Free Index.*
*The designation "Free" in the name of the Index refers to the securities that
the Index tracks. Some countries restrict foreign investment in certain
industries, so only stocks that can be bought freely by a fund are tracked.
INVESTMENT STRATEGIES
The Fund employs a "passively managed"--or index--investment approach, by
investing all or substantially all of its assets in a representative sample of
the common stocks included in the MSCI Pacific Free Index. The MSCI Pacific Free
Index consists of approximately 420 common stocks of companies located in Japan
(which comprised 82% of the Index's market capitalization as of March 31, 2000),
Australia, Hong Kong, New Zealand, and Singapore. For more information about
passive management, see "Indexing Methods" under MORE ON THE FUNDS.
PRIMARY RISKS
THE FUND'S TOTAL RETURN, LIKE STOCK PRICES GENERALLY, WILL FLUCTUATE WITHIN A
WIDE RANGE, SO AN INVESTOR COULD LOSE MONEY OVER SHORT OR EVEN LONG PERIODS. The
Fund is also subject to:
- - Country risk, which is the chance that a country's economy will be hurt by
political troubles, financial problems, or natural disasters. The Index's,
and therefore the Fund's, heavy exposure to Japan involves a higher degree
of country risk than that of more geographically diversified international
funds.
- - Regional risk, which is the chance that an entire region--namely the
Pacific region--will be hurt by political troubles, financial problems, or
natural disasters.
- - Currency risk, which is the chance that returns will be hurt by a rise in
the value of the U.S. dollar versus foreign currencies.
- - Investment style risk, which is the chance that returns from foreign stocks
will trail returns from other asset classes or the overall stock market.
PERFORMANCE/RISK INFORMATION
The bar chart and table below provide an indication of the risk of investing in
the Fund. The bar chart shows the Fund's performance in each calendar year since
inception. The table shows how the Fund's average annual total returns for one
and five years and since inception compare with those of a broad-based
securities market index. Keep in mind that the Fund's past performance does not
indicate how it will perform in the future.
<PAGE>
6
----------------------------------------------------
ANNUAL TOTAL RETURNS
----------------------------------------------------
1991 10.65%
1992 -18.17%
1993 35.46%
1994 13.04%
1995 2.75%
1996 -7.82%
1997 -25.67%
1998 2.41%
1999 57.05%
----------------------------------------------------
Return figures do not reflect the transaction fee
imposed on purchases prior to April 1, 2000. If the
fee was reflected, returns would be less than those
shown.
----------------------------------------------------
During the period shown in the bar chart, the highest return for a calendar
quarter was 26.50% (quarter ended December 31, 1998) and the lowest return for a
quarter was -20.69% (quarter ended December 31, 1997).
-------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS FOR YEARS ENDED DECEMBER 31, 1999
-------------------------------------------------------------------------
1 YEAR 5 YEARS SINCE INCEPTION*
-------------------------------------------------------------------------
Vanguard Pacific Stock
Index Fund** 57.05% 2.52% 3.20%
MSCI Pacific Free Index 56.38 2.39 3.08
-------------------------------------------------------------------------
*June 18, 1990.
**Return figures do not reflect the transaction fee imposed on purchases
prior to April 1, 2000.
-------------------------------------------------------------------------
FEES AND EXPENSES
The following table describes the fees and expenses you may pay if you buy and
hold shares of the Fund. The expenses shown under Annual Fund Operating Expenses
are based upon those incurred in the fiscal year ended December 31, 1999.
SHAREHOLDER FEES (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None
Transaction Fee on Purchases: None
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fee: None
Exchange Fee: None
ANNUAL FUND OPERATING EXPENSES (expenses deducted from the Fund's assets)
Management Expenses: 0.31%
12b-1 Distribution Fee: None
Other Expenses: 0.06%
TOTAL ANNUAL FUND OPERATING EXPENSES: 0.37%
<PAGE>
7
The following example is intended to help you compare the cost of investing
in the Fund with the cost of investing in other mutual funds. It illustrates the
hypothetical expenses that you would incur over various periods if you invest
$10,000 in the Fund. This example assumes that the Fund provides a return of 5%
a year, and that operating expenses remain the same. The results apply whether
or not you redeem your investment at the end of each period.
- -------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- -------------------------------------------------
$38 $119 $208 $468
- -------------------------------------------------
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 Pacific
INVESTMENT ADVISER VANGUARD FUND NUMBER
The Vanguard Group, Valley Forge, 072
Pa., since inception
INCEPTION DATE CUSIP NUMBER
June 18, 1990 922042106
NET ASSETS AS OF DECEMBER 31, 1999 TICKER SYMBOL
$2.5 billion VPACX
- --------------------------------------------------------------------------------
<PAGE>
8
FUND PROFILE--
VANGUARD(R) EMERGING MARKETS STOCK INDEX FUND
The following profile summarizes key features of Vanguard Emerging Markets Stock
Index Fund.
INVESTMENT OBJECTIVE
The Fund seeks to match the performance of the Select Emerging Markets Free
Index.*
*The designation "Free" in the name of the Index refers to the securities that
the Index tracks. Some countries restrict foreign investment in certain
industries, so only stocks that can be bought freely are tracked.
INVESTMENT STRATEGIES
The Fund employs a "passively managed"--or index--investment approach, by
investing all or substantially all of its assets in a representative sample of
the common stocks included in the Select Emerging Markets Free Index. The Select
Emerging Markets Free Index includes approximately 500 common stocks of
companies located in emerging markets around the world. As of March 31, 2000,
the largest markets covered in the Index were Mexico, Brazil, and South Africa
(which comprised 16%, 14%, and 13% of the Index's market capitalization,
respectively). Other countries represented in the Index included Argentina, the
Czech Republic, Greece, Hungary, Indonesia, Israel, the Philippines, Poland,
Thailand, Turkey, Hong Kong, and Singapore. MSCI administers the Select Index
exclusively for Vanguard. For more information about passive management, see
"Indexing Methods" under MORE ON THE FUNDS.
PRIMARY RISKS
THE FUND'S TOTAL RETURN, LIKE STOCK PRICES GENERALLY, WILL FLUCTUATE WITHIN A
WIDE RANGE, SO AN INVESTOR COULD LOSE MONEY OVER SHORT OR EVEN LONG PERIODS. The
Fund is also subject to:
- - Country risk, which is the chance that a country's economy will be hurt by
political troubles, financial problems, or natural disasters. Country risk
is especially high for funds that focus on stocks in emerging markets. The
Index's, and therefore the Fund's, heavy exposure to Mexico, Brazil, and
South Africa involves a higher degree of country risk than that of more
geographically diversified international funds.
- - Currency risk, which is the chance that returns will be hurt by a rise in
the value of the U.S. dollar versus foreign currencies.
- - Investment style risk, which is the chance that returns from foreign stocks
will trail returns from other asset classes or the overall stock market.
PERFORMANCE/RISK INFORMATION
The bar chart and table below provide an indication of the risk of investing in
the Fund. The bar chart shows the Fund's performance in each calendar year since
inception. The table shows how the Fund's average annual total returns for one
and five calendar years and since inception compare with those of both a
broad-based securities market index and the Fund's target index. Keep in mind
that the Fund's past performance does not indicate how it will perform in the
future.
<PAGE>
9
----------------------------------------------------
ANNUAL TOTAL RETURNS
----------------------------------------------------
1995 0.56%
1996 15.83%
1997 -16.82%
1998 -18.12%
1999 61.57%
----------------------------------------------------
Return figures do not reflect the transaction fee
imposed on purchases and redemptions. If these
amounts were reflected, returns would be less than
those shown.
----------------------------------------------------
During the period shown in the bar chart, the highest return for a calendar
quarter was 28.32% (quarter ended December 31, 1999) and the lowest return for a
quarter was -21.52% (quarter ended June 30, 1998).
-------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS FOR YEARS ENDED DECEMBER 31, 1999
-------------------------------------------------------------------------
1 YEAR 5 YEARS SINCE INCEPTION*
-------------------------------------------------------------------------
Vanguard Emerging Markets
Stock Index Fund** 59.96% 4.88% 6.03%
MSCI Emerging Markets
Free Index 66.40 2.00 3.69
Select Emerging Markets
Free Index+ 60.86 4.81 4.93
-------------------------------------------------------------------------
*May 4, 1994.
**Return figures reflect the 0.5% transaction fee imposed on purchases
and redemptions.
+The Select Emerging Markets Free Index is administered by MSCI
exclusively by Vanguard.
-------------------------------------------------------------------------
FEES AND EXPENSES
The following table describes the fees and expenses you may pay if you buy and
hold shares of the Fund. The expenses shown under Annual Fund Operating Expenses
are based upon those incurred in the fiscal year ended December 31, 1999.
SHAREHOLDER FEES (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None
Transaction Fee on Purchases: 0.5%*
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fee: 0.5%**
Exchange Fee: None
ANNUAL FUND OPERATING EXPENSES (expenses deducted from the Fund's assets)
Management Expenses: 0.32%
12b-1 Distribution Fee: None
Other Expenses: 0.26%
TOTAL ANNUAL FUND OPERATING EXPENSES: 0.58%
*The transaction fee on purchases is deducted from all purchases
(including exchanges from other Vanguard funds) but not from
reinvested dividends and capital gains.
**The redemption fee applies to all redemptions (sales or exchanges);
it is deducted from redemption proceeds, and retained by the Fund.
<PAGE>
10
The following example is intended to help you compare the cost of investing
in the Fund with the cost of investing in other mutual funds. It illustrates the
hypothetical expenses that you would incur over various periods if you invest
$10,000 in the Fund. This example assumes that the Fund provides a return of 5%
a year, that operating expenses remain the same, and that you redeem all your
shares at the end of each period.
- -------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- -------------------------------------------------
$161 $292 $434 $849
- -------------------------------------------------
You would pay the following expenses if you did not redeem your shares (the
difference being that the Fund's 0.5% redemption fee would not apply to any of
the periods below, as it would to those above):
- -------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- -------------------------------------------------
$109 $235 $372 $772
- -------------------------------------------------
THESE EXAMPLES 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 EmerMkt
INVESTMENT ADVISER VANGUARD FUND NUMBER
The Vanguard Group, Valley Forge, 533
Pa., since inception
INCEPTION DATE CUSIP NUMBER
May 4, 1994 922042304
NET ASSETS AS OF DECEMBER 31, 1999 TICKER SYMBOL
$1.1 billion VEIEX
- --------------------------------------------------------------------------------
<PAGE>
11
FUND PROFILE--
VANGUARD(R) DEVELOPED MARKETS INDEX FUND
The following profile summarizes key features of Vanguard Developed Markets
Index Fund.
INVESTMENT OBJECTIVE
The Fund seeks to track the performance of the MSCI Europe, Australasia, Far
East (EAFE) Index.
INVESTMENT STRATEGIES
The Fund employs a "passively managed"--or index--investment approach. The Fund
seeks to track the performance of the MSCI EAFE Index by investing in two other
Vanguard funds--the European Stock Index Fund and the Pacific Stock Index Fund.
These other Vanguard funds have the respective objectives of tracking the MSCI
Europe Index and the MSCI Pacific Free Index, which together comprise the MSCI
EAFE Index. The Fund allocates all or substantially all of its assets between
the European Stock Index Fund and the Pacific Stock Index Fund based on the
market capitalization of European and Pacific stocks in the MSCI EAFE Index. The
MSCI EAFE Index includes approximately 1,000 common stocks of companies located
in Europe, Australia, Asia, and the Far East. For more information about passive
management, see "Indexing Methods" under MORE ON THE FUNDS.
PRIMARY RISKS
THE FUND'S TOTAL RETURN, LIKE STOCK PRICES GENERALLY, WILL FLUCTUATE WITHIN A
WIDE RANGE, SO AN INVESTOR COULD LOSE MONEY OVER SHORT OR EVEN LONG PERIODS. The
Fund is also subject to:
- - Country risk, which is the chance that a country's economy will be hurt by
political troubles, financial problems, or natural disasters.
- - Regional risk, which is the chance that an entire region--either Europe or
the Far East--will be hurt by political troubles, financial problems, or
natural disasters.
- - Currency risk, which is the chance that returns will be hurt by a rise in
the value of the U.S. dollar versus foreign currencies.
- - Investment style risk, which is the chance that returns from foreign stocks
will trail returns from other asset classes or the overall stock market.
PERFORMANCE/RISK INFORMATION
The Fund began operations on May 5, 2000, so performance information (including
annual total returns and average annual total returns) for a full calendar year
is not yet available.
<PAGE>
12
FEES AND EXPENSES
The following table describes the fees and expenses you may pay if you buy and
hold shares of the Fund. The expenses shown under Annual Fund Operating Expenses
are based on estimated amounts for the current fiscal year.
SHAREHOLDER FEES (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None
Transaction Fee on Purchases: None
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fee: None
Exchange Fee: None
ANNUAL FUND OPERATING EXPENSES (expenses deducted from the Fund's assets)
Indirect Operating Expenses: +
+Although Developed Markets Index Fund is not expected to incur any net
expenses directly, the Fund's shareholders indirectly bear the expenses
of the underlying Vanguard funds in which the Fund invests. See THE
FUNDS AND VANGUARD. It is estimated that the Fund's indirect expense
ratio for its first fiscal year, based on its underlying investments,
will be 0.30%.
The following example is intended to help you compare the cost of investing
in the Fund with the cost of investing in other mutual funds. It illustrates the
hypothetical expenses that you would incur over various periods if you invest
$10,000 in the Fund. This example assumes that the Fund provides a return of 5%
a year, and that operating expenses remain the same. The results apply whether
or not you redeem your investment at the end of each period.
- ------------------------
1 YEAR 3 YEARS
- ------------------------
$35 $110
- ------------------------
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 DevMkt
INVESTMENT ADVISER VANGUARD FUND NUMBER
The Vanguard Group, Valley Forge, 227
Pa., since inception
INCEPTION DATE CUSIP NUMBER
May 5, 2000 921909701
- --------------------------------------------------------------------------------
<PAGE>
13
FUND PROFILE--
VANGUARD(R) TOTAL INTERNATIONAL STOCK INDEX FUND
The following profile summarizes key features of Vanguard Total International
Stock Index Fund.
INVESTMENT OBJECTIVE
The Fund seeks to match the performance of the Total International Composite
Index. The Total International Composite Index is a combination of the indexes
tracked by the European, Pacific, and Emerging Markets Stock Index Funds.
INVESTMENT STRATEGIES
The Fund seeks to track the performance of the Total International Composite
Index by investing in three other Vanguard funds--the European Stock Index Fund,
the Pacific Stock Index Fund, and the Emerging Markets Stock Index Fund. These
other Vanguard funds have the respective objectives of tracking the MSCI Europe
Index, the MSCI Pacific Free Index, and the Select Emerging Markets Free Index,
which together comprise the Total International Composite Index. The Fund
allocates all or substantially all of its assets between the European Stock
Index Fund, the Pacific Stock Index Fund, and the Emerging Markets Stock Index
Fund based on the market capitalization of European, Pacific, and emerging
markets stocks in the Total International Composite Index. The Index is a market
capitalization weighted index that combines the MSCI Europe Index, the MSCI
Pacific Free Index, and the Select Emerging Markets Free Index. MSCI administers
the Index exclusively for Vanguard. For more information about passive
management, see "Indexing Methods" under MORE ON THE FUNDS.
PRIMARY RISKS
THE FUND'S TOTAL RETURN, LIKE STOCK PRICES GENERALLY, WILL FLUCTUATE WITHIN A
WIDE RANGE, SO AN INVESTOR COULD LOSE MONEY OVER SHORT OR EVEN LONG PERIODS. The
Fund is also subject to:
- - Country risk, which is the chance that a country's economy will be hurt by
political troubles, financial problems, or natural disasters.
- - Currency risk, which is the chance that returns will be hurt by a rise in
the value of the U.S. dollar versus foreign currencies.
- - Investment style risk, which is the chance that returns from foreign stocks
will trail returns from other asset classes or the overall stock market.
PERFORMANCE/RISK INFORMATION
The bar chart and table below provide an indication of the risk of investing in
the Fund. The bar chart shows the Fund's performance in each calendar year since
inception. The table shows how the Fund's average annual total returns for one
calendar year and since inception compare with those of both a broad-based
securities market index and the Fund's target index. Keep in mind that the
Fund's past performance does not indicate how it will perform in the future.
<PAGE>
14
----------------------------------------------------
ANNUAL TOTAL RETURNS
----------------------------------------------------
1997 -0.77%
1998 15.60%
1999 29.92%
----------------------------------------------------
Return figures do not reflect the transaction fee
imposed on purchases prior to April 1, 2000. If the
fee was reflected, returns would be less than those
shown.
----------------------------------------------------
During the period shown in the bar chart, the highest return for a calendar
quarter was 20.49% (quarter ended December 31, 1998) and the lowest return for a
quarter was -14.53% (quarter ended September 30, 1998).
-------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS FOR YEARS ENDED DECEMBER 31, 1999
-------------------------------------------------------------------------
1 YEAR SINCE INCEPTION*
-------------------------------------------------------------------------
Vanguard Total International
Stock Index Fund** 29.92% 11.64%
MSCI EAFE + Emerging Markets
Free Index 30.33 12.11
Total International Composite
Index+ 28.13 11.30
-------------------------------------------------------------------------
*April 29, 1996.
**Return figures do not reflect the transaction fee imposed on purchases
prior to April 1, 2000.
+Consists of the MSCI EAFE Index and the Select Emerging Markets Free
Index. This index is administered by MSCI exclusively for Vanguard.
-------------------------------------------------------------------------
FEES AND EXPENSES
The following table describes the fees and expenses you may pay if you buy and
hold shares of the Fund. The expenses shown under Annual Fund Operating Expenses
are based upon those incurred in the fiscal year ended December 31, 1999.
SHAREHOLDER FEES (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None
Transaction Fee on Purchases: None
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fee: None
Exchange Fee: None
ANNUAL FUND OPERATING EXPENSES (expenses deducted from the Fund's assets)
Indirect Operating Expenses: +
+Although Total International Stock Index Fund is not expected to incur
any net expenses directly, the Fund's shareholders indirectly bear the
expenses of the underlying Vanguard funds in which the Fund invests.
See THE FUNDS AND VANGUARD. The Fund's indirect expense ratio, based
on its underlying investments, was 0.34% as of December 31, 1999.
<PAGE>
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 various periods if you invest
$10,000 in the Fund. This example assumes that the Fund provides a return of 5%
a year, and that operating expenses remain the same. The results apply whether
or not you redeem your investment at the end of each period.
- -------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- -------------------------------------------------
$35 $110 $193 $434
- -------------------------------------------------
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 TotIntl
INVESTMENT ADVISER VANGUARD FUND NUMBER
The Vanguard Group, Valley Forge, 113
Pa., since inception
INCEPTION DATE CUSIP NUMBER
April 29, 1996 921909602
NET ASSETS AS OF DECEMBER 31, 1999 TICKER SYMBOL
$2.6 billion VGTSX
- --------------------------------------------------------------------------------
<PAGE>
16
MORE ON THE FUNDS
The following sections discuss other important features of Vanguard
International Stock Index Funds, including indexing methods, fund
characteristics, costs and market-timing, fund turnover, and other investment
policies and risks.
WHY INVEST IN INDEX FUNDS?
Index funds appeal to many investors for a number of reasons:
- - Diversification. Index funds generally invest in a diversified mix of
companies and industries.
- - Relative consistency. Index funds typically track the performance of
relevant market benchmarks more closely than comparable actively managed
funds do.
- - Low cost. Index funds do not have many of the expenses of an actively
managed fund--such as research--and 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 the number
of shares it holds to reflect a change in its target index, the fund's
turnover rate--and thus its realization of capital gains--is usually very
low.
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
INDEXING METHODS
Some index funds hold each stock found in their target indexes in about the
same proportions as represented in the indexes themselves.
Other index funds may use a different selection process. Because it would
be very expensive to buy all of the stocks held in certain indexes (the Select
Emerging Markets Free Index, for example, includes approximately 500 stocks),
funds tracking these larger indexes use a "sampling" technique. Using a
sophisticated computer program, these funds invest in stocks that will, in the
aggregate, recreate the key characteristics of their target indexes. For
instance, if 10% of the market capitalization of the MSCI Europe Index were
attributed to companies in Germany, Vanguard European Stock Index Fund would
invest about 10% of its assets in stocks of German issuers. Furthermore, the
Fund would construct a German portfolio whose size and industry weightings, as
well as average financial characteristics, approximated the German component of
the MSCI Europe Index. The European, Pacific, and Emerging Markets Stock Index
Funds each employ this sampling method of indexing.
While each Fund attempts to track the performance of its target index,
there is no guarantee that securities selected for the Fund will provide
investment performance exactly matching that of the index.
Yet another indexing approach is to invest in other index funds that seek
to track subsets of a target index. The Total International Stock Index Fund and
Developed Markets Index Fund both use this "fund of funds" approach, which can
be very cost-effective and efficient
<PAGE>
17
when starting an index fund from scratch. For example, the Developed Markets
Index Fund seeks to track the performance of the MSCI EAFE Index by investing in
two other Vanguard funds--the European Stock Index Fund and the Pacific Stock
Index Fund. These other Vanguard funds have the respective objectives of
tracking the MSCI Europe Index and the MSCI Pacific Free Index, which together
comprise the MSCI EAFE Index. The Fund allocates its assets between the European
Stock Index Fund and the Pacific Stock Index Fund based on the market
capitalization of European and Pacific stocks in the MSCI EAFE Index.
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
"FUND OF FUNDS"
The term "fund of funds" is used to describe a mutual fund that pursues its
objective by investing in other mutual funds rather than in individual stocks or
bonds. A fund of funds may charge for its own direct expenses, in addition to
bearing a proportionate share of the expenses charged by the underlying funds in
which it invests. Funds of funds are best suited for long-term investors.
- --------------------------------------------------------------------------------
To track their target indexes as closely as possible, the European and
Pacific Stock Index Funds attempt to remain fully invested in foreign stocks
included in their particular indexes. Each Fund intends to invest at least 95%
of its total assets in the stocks of its target index. The Emerging Markets
Stock Index Fund normally invests 95% of its total assets in stocks of its
target index, holding the remaining 5% in cash reserves to meet daily redemption
requests. The Total International Stock and Developed Markets Index Funds
normally hold 100% of their assets in shares of their underlying funds
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
THE RISKS OF INTERNATIONAL INVESTING
Because foreign stock markets operate differently from the U.S. market,
Americans investing abroad will encounter risks not typically associated with
U.S. companies. For instance, foreign companies are not subject to the same
accounting, auditing, and financial reporting standards and practices as U.S.
companies; and their stocks may not be as liquid as those of similar U.S.
companies. In addition, foreign stock exchanges, brokers, and companies
generally have less government supervision and regulation than their
counterparts in the United States. These factors, among others, could negatively
impact the returns Americans receive from foreign investments.
- --------------------------------------------------------------------------------
[FLAG] EACH FUND IS SUBJECT TO STOCK MARKET RISK, WHICH IS THE CHANCE THAT STOCK
PRICES OVERALL WILL DECLINE OVER SHORT OR EVEN LONG PERIODS. STOCK MARKETS
TEND TO MOVE IN CYCLES, WITH PERIODS OF RISING PRICES AND PERIODS OF
FALLING PRICES.
IN ADDITION, INVESTMENTS IN FOREIGN STOCK MARKETS CAN BE RISKIER THAN
U.S. STOCK INVESTMENTS. THE PRICES OF INTERNATIONAL STOCKS AND THE PRICES
OF U.S. STOCKS HAVE OFTEN MOVED IN OPPOSITE DIRECTIONS. THESE PERIODS HAVE,
IN THE PAST, LASTED FOR AS LONG AS SEVERAL YEARS.
<PAGE>
18
To illustrate the volatility of international stock prices, the following
table shows the best, worst, and average total returns for foreign stock markets
over various periods as measured by the MSCI EAFE Index, a widely used barometer
of international market activity. (Total returns consist of dividend income plus
change in market price.) Note that the returns shown do not include the costs of
buying and selling stocks or other expenses that a real-world investment
portfolio would incur. Note, also, that the gap between best and worst tends to
narrow over the long term.
- ----------------------------------------------------------
INTERNATIONAL STOCK MARKET RETURNS (1969-1999)
- ----------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS 20 YEARS
- ----------------------------------------------------------
Best 69.9% 36.5% 22.8% 16.3%
Worst -23.2 1.5 5.9 12.0
Average 15.2 13.6 14.5 14.7
- ----------------------------------------------------------
The table covers all of the 1-, 5-, 10-, and 20-year periods from 1969
through 1999. Keep in mind that this was a particularly favorable period for all
stock markets. These average returns reflect past performance on international
stocks; you should not regard them as an indication of future returns from
either foreign markets as a whole or any of the Funds in particular.
Note that the preceding chart does not take into account returns measured
by the MSCI Emerging Markets Free Index, a widely used barometer of less
developed stock markets. Emerging markets can be substantially more volatile
than more developed foreign markets. In addition, because the MSCI EAFE Index
tracks the European and Pacific markets collectively, the above returns do not
reflect the variability of returns from year to year for these markets
individually, or the variability across these and other geographic regions or
market sectors. To illustrate this variability, the following table shows
returns for different international markets--as well as the U.S. market for
comparison--from 1990 to 1999, as measured by their respective indexes. Note
that the returns shown do not include the costs of buying and selling stocks or
other expenses that a real-world investment portfolio would incur.
<PAGE>
19
- --------------------------------------------------------------------------------
STOCK MARKET RETURNS FOR DIFFERENT INTERNATIONAL MARKETS*
- --------------------------------------------------------------------------------
EUROPEAN PACIFIC EMERGING U.S.
MARKET MARKET MARKETS MARKETS
- --------------------------------------------------------------------------------
1990 -2.00% -34.43% -10.55% -3.10%
1991 14.12 11.51 59.91 30.47
1992 -3.92 -18.51 11.40 7.62
1993 29.25 36.15 74.84 10.08
1994 2.82 12.82 -7.31 1.32
1995 22.08 2.89 0.01** 37.58
1996 21.42 -8.23 15.19 22.96
1997 23.75 -25.74 -16.37 33.36
1998 28.68 2.64 -18.39 28.58
1999 15.77 56.38 60.86 21.04
- --------------------------------------------------------------------------------
* European market returns are measured by the MSCI Europe Index; Pacific
market returns are measured by the MSCI Pacific Free Index; emerging
markets returns are measured by the Select Emerging Markets Free Index;
and U.S. market returns are measured by the Standard & Poor's 500 Index.
** The inception date of the Select Emerging Markets Free Index was May 4,
1994; returns shown for 1990 to 1994 are measured by the MSCI Emerging
Markets Free Index.
- --------------------------------------------------------------------------------
Keep in mind, however, that these average returns reflect past performance
of the various indexes; you should not consider them as an indication of future
returns from the indexes, or from any of the Funds in particular.
[FLAG] EACH FUND IS SUBJECT TO COUNTRY RISK, WHICH IS THE CHANCE THAT POLITICAL
EVENTS (A WAR, NATIONAL ELECTIONS), FINANCIAL PROBLEMS (RISING INFLATION,
GOVERNMENT DEFAULT), OR NATURAL DISASTERS (AN EARTHQUAKE, A FLOOD) WILL
WEAKEN A COUNTRY'S ECONOMY AND CAUSE INVESTMENTS IN THAT COUNTRY TO LOSE
MONEY.
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
REGIONAL VERSUS BROAD INTERNATIONAL INVESTING
Regional funds are international funds that invest in a particular geographical
region, such as Europe or the Pacific Basin. Because they concentrate their
holdings in a single region, these funds typically have higher share price
volatility than broadly diversified international stock funds (which, by
investing in many different foreign markets, may offset losses from one country
with gains from another at any given time).
- --------------------------------------------------------------------------------
EUROPEAN STOCK INDEX FUND. Stocks from the United Kingdom, France, Germany,
and the Netherlands comprised 29%, 15%, 14%, and 8% of the MSCI Europe Index,
respectively, as of March 31, 2000; stocks from the remaining 11 countries in
the Index have much less significant market capitalization weightings in the
Index and thus much less impact on the Fund's total return. The Fund's heavy
exposure to just four countries involves a higher degree of country risk than
that of more geographically diversified international funds.
PACIFIC STOCK INDEX FUND. Japanese stocks comprised 82% of the MSCI Pacific
Free Index as of March 31, 2000. Therefore, Japanese stocks represent a
correspondingly large component of the Pacific Stock Index Fund's assets. The
Fund's large investment in the
<PAGE>
20
Japanese stock market involves a higher degree of country risk than that of more
geographically diversified international funds.
EMERGING MARKETS STOCK INDEX FUND. As discussed above, emerging markets can
be substantially more volatile than both U.S. and more developed foreign
markets. Therefore, the Emerging Markets Stock Index Fund may expose investors
to a higher degree of volatility than funds that invest in more developed
markets.
DEVELOPED MARKETS INDEX FUND. As a fund of funds, the Developed Markets
Index Fund intends to invest all of its assets in shares of the European and
Pacific Stock Index Funds; indirectly, its country risk will proportionately
mirror that of the European and Pacific Stock Index Funds.
TOTAL INTERNATIONAL STOCK INDEX FUND. As a fund of funds, the Total
International Stock Index Fund intends to invest all of its assets in shares of
the European, Pacific, and Emerging Markets Stock Index Funds; indirectly, its
country risk will proportionately mirror that of the underlying funds. As of
March 31, 2000, the Fund's assets were invested as follows: 60% in the European
Stock Index Fund; 30% in the Pacific Stock Index Fund; and 10% in the Emerging
Markets Stock Index Fund.
[FLAG]EACH FUND IS SUBJECT TO CURRENCY RISK, WHICH IS THE CHANCE THAT A STRONGER
U.S. DOLLAR WILL REDUCE RETURNS FOR AMERICANS INVESTING OVERSEAS.
GENERALLY, WHEN THE DOLLAR RISES IN VALUE AGAINST ANOTHER COUNTRY'S
CURRENCY, YOUR INVESTMENT IN THAT COUNTRY LOSES VALUE BECAUSE ITS CURRENCY
IS WORTH FEWER U.S. DOLLARS. ON THE OTHER HAND, A WEAKER U.S. DOLLAR
GENERALLY LEADS TO HIGHER RETURNS FOR AMERICANS HOLDING FOREIGN
INVESTMENTS.
SECURITY SELECTION
In seeking to track its target index, the European Stock Index, Pacific Stock
Index, and Emerging Markets Stock Index Funds each invest in a portfolio of
foreign stocks selected in a manner that mirrors the weightings of their target
indexes. The Total International Stock Index Fund simply invests in shares of
the European, Pacific, and Emerging Markets Stock Index Funds. Likewise, the
Developed Markets Index Fund will simply invest in shares of the European and
Pacific Stock Index Funds. Each Fund seeks to provide investment results that
correspond to its target index. The correlation between the performance of a
Fund and its target index is expected to be at least 95%. (A correlation of 100%
would indicate perfect correlation.)
EUROPEAN STOCK INDEX FUND. The Fund invests in a statistically selected
sample of approximately 550 common stocks included in the MSCI Europe Index,
which is made up of the stocks of companies located in 15 European countries.
Four countries--the United Kingdom, France, Germany, and the
Netherlands--dominate the Index, with 29%, 15%, 14%, and 8% of the market
capitalization of the Index, respectively, as of March 31, 2000. The other 11
countries, which include Austria, Belgium, Denmark, Finland, Ireland, Italy,
Norway, Portugal, Spain, Sweden, and Switzerland, are much less significant to
the Index and, consequently, the Fund.
PACIFIC STOCK INDEX FUND. The Fund invests in a statistically selected
sample of the approximately 420 common stocks included in the MSCI Pacific Free
Index, which is comprised of the stocks of Pacific Basin companies. The Index is
dominated by the Japanese stock market, which represented 82% of the market
capitalization of the Index as of March 31, 2000. The other four countries
represented in the Index are Australia, Hong Kong, New Zealand, and Singapore.
<PAGE>
21
EMERGING MARKETS STOCK INDEX FUND. The Fund invests in a statistically
selected sample of the approximately 500 common stocks included in the Select
Emerging Markets Free Index, which is made up of the stocks of companies located
in 13 emerging markets of Europe, Asia, Africa, and Latin America. Three
countries--Mexico, Brazil, and South Africa--represent a majority of the Index,
with 16%, 14%, and 13% of the market capitalization of the Index, respectively,
as of March 31, 2000. The other 10 countries include Argentina, the Czech
Republic, Greece, Hungary, Indonesia, Israel, Philippines, Poland, Thailand, and
Turkey. The developed countries of Hong Kong and Singapore are included in the
Index to broaden diversification and ensure adequate liquidity. The Index is
called "select" because it is modeled on a larger index--the MSCI Emerging
Markets Free Index--but with certain adjustments designed to reduce risk. For
instance, MSCI considers the Hong Kong and Singapore markets too mature to
include in its index, but they are part of the Select Index. Conversely, as of
March 31, 2000, the Select Index excluded certain countries found in the MSCI
Emerging Markets Free Index--Chile, China, Colombia, India, Jordan, Korea,
Pakistan, Peru, Russia, Sri Lanka, and Taiwan--due to concerns about liquidity
or entry barriers in those markets. MSCI administers the Select Index
exclusively for Vanguard, and periodically adjusts the included countries to
keep pace with evolution in world markets. (Such adjustments are made on a
forward-looking basis, so past performance of the Select Index always reflects
actual country representation during the relevant period.)
Although index funds, by their nature, tend to be tax-efficient investment
vehicles, the Funds are generally managed without regard to tax ramifications.
TRANSACTION FEES
Some of Vanguard's index funds charge a transaction fee on purchases of fund
shares to offset the higher costs of trading certain securities, particularly
small-company and international stocks. The transaction fee ensures that these
higher costs are borne by the investors making the transactions--and not by
shareholders already in the fund who do not generate the costs. All transaction
fees are paid directly to the fund itself (unlike a sales charge or load that
non-Vanguard funds may impose to compensate their sales representatives).
Without transaction fees, some index funds would have trouble tracking their
target indexes.
COSTS AND MARKET-TIMING
Some investors try to profit from a strategy called market-timing--switching
money into investments when they expect prices to rise, and taking money out
when they expect prices to fall. As money is shifted in and out, a fund incurs
expenses for buying and selling securities. These costs are borne by all fund
shareholders, including the long-term investors who do not generate the costs.
Therefore, the Vanguard International Stock Index Funds have adopted the
following policies, among others, designed to discourage short-term trading:
- - Each Fund reserves the right to reject any purchase request--including
exchanges from other Vanguard funds--that it regards as disruptive to the
efficient management of the Fund. A purchase request could be rejected
because of the timing of the investment or because of a history of
excessive trading by the investor.
- - The Emerging Markets Stock Index Fund charges a transaction fee on
purchases and redemptions.
<PAGE>
22
- - Telephone and online exchanges are not accepted for non-IRA accounts.
- - There is a limit on the number of times you can exchange into and out of a
Fund (see "Exchanges" in the INVESTING WITH VANGUARD section).
- - Each Fund reserves the right to stop offering shares at any time.
THE VANGUARD FUNDS DO NOT PERMIT MARKET-TIMING. DO NOT INVEST IN THESE
FUNDS IF YOU ARE A MARKET-TIMER.
TURNOVER RATE
Although each Fund seeks to invest for the long term, the Funds retain the right
to sell securities regardless of how long the securities have been held.
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. Because of this, the turnover rate for each Fund has
been extremely low. The Financial Highlights tables beginning on page 27 show
historic turnover rates for each Fund.
- --------------------------------------------------------------------------------
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 passively managed foreign stock
index funds in 1999 was roughly 17%; for all foreign stock funds, the average
turnover was approximately 76%, according to Morningstar, Inc. (A turnover rate
of 100% would occur, for example, if a fund sold and replaced securities valued
at 100% of its net assets within a one-year period.)
- --------------------------------------------------------------------------------
OTHER INVESTMENT POLICIES AND RISKS
Besides investing in common stocks of foreign companies, each Fund may make
certain other kinds of investments to achieve its objective. Each Fund may
change its objective without shareholder approval.
The Funds may also invest, to a limited extent, in futures and options
contracts, warrants, convertible securities, and swap agreements, which are
types of derivatives. Losses (or gains) involving futures contracts can
sometimes be substantial--in part because a relatively small price movement in a
futures contract may result in an immediate and substantial loss (or gain) for a
fund. Similar risks exist for warrants (securities that permit their owners to
purchase a specific number of shares of stock at a predetermined price),
convertible securities (securities that may be exchanged for another asset), and
swap agreements (contracts between two parties in which each agrees to make
payments to the other based on the return of a specified index or asset).
<PAGE>
23
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
For this reason, the Funds will not use futures, options, warrants,
convertible securities, or swap agreements for speculative purposes or as
leveraged investments that magnify the gains or losses of an investment. A
Fund's obligation under futures contracts will not exceed 20% of its total
assets.
The reasons for which a Fund will invest in futures and options are:
- - To keep cash on hand to meet shareholder redemptions or other needs while
simulating full investment in stocks.
- - To reduce the Fund's transaction costs or add value when these instruments
are favorably priced.
Each Fund may also enter into forward foreign currency contracts in order
to maintain the same currency exposure as its respective Index. A forward
foreign currency contract is an agreement to buy or sell a country's currency at
a specific price on a specific date, usually 30, 60, or 90 days in the future.
In other words, the contract guarantees an exchange rate on a given date.
Managers of international stock funds typically use these contracts to guard
against sudden, unfavorable changes in U.S. dollar/foreign currency exchange
rates. However, the Funds will use these contracts for different reasons:
- - To gain currency exposure when investing in futures.
- - To settle trades in a foreign currency.
THE FUNDS AND VANGUARD
Vanguard International Stock Index Funds are offered by The Vanguard Group, a
family of more than 35 investment companies with more than 100 funds holding
assets worth more than $550 billion. All of the 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.
Total International Stock and Developed Markets Index Funds will indirectly
bear a proportionate share of the expenses of the underlying funds in which they
invest. However, their direct expenses are expected to be very low or zero. For
example, Total International Stock Index Fund has incurred no direct expenses
since its inception in 1996. Total International Stock and Developed Markets
Index Funds may operate without incurring direct expenses because Vanguard will
reimburse them for (i) their contributions to the cost of operating the
underlying funds in which they invest, and (ii) savings in administrative and
marketing costs that Vanguard expects to derive from their operations.
<PAGE>
24
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
VANGUARD'S UNIQUE CORPORATE STRUCTURE
The Vanguard Group is truly a MUTUAL mutual fund company. It is owned jointly by
the funds it oversees and thus indirectly by the shareholders in those funds.
Most other mutual funds are operated by for-profit management companies that may
be owned by one person, by a group of individuals, or by investors who own the
management company's stock. By contrast, Vanguard provides its services on an
"at-cost" basis, and the funds' expense ratios reflect only these costs. No
separate management company reaps profits or absorbs losses from operating the
funds.
- --------------------------------------------------------------------------------
INVESTMENT ADVISER
The Vanguard Group (Vanguard), P.O. Box 2600, Valley Forge, PA 19482, founded in
1975, serves as the Funds' adviser through its Quantitative Equity Group. (The
Developed Markets and Total International Stock Index Funds receive advisory
services indirectly, by investing in other funds.) Vanguard manages the Funds on
an at-cost basis, subject to the control of the Trustees and officers of the
Funds. For the fiscal year ended December 31, 1999, the advisory fees
represented an effective annual rate of less than 0.01% each for the European,
Pacific, and Emerging Markets Stock Index Funds.
The Funds have authorized Vanguard to choose brokers or dealers to handle
the purchase and sale of securities for the Funds, and to get the best available
price and most favorable execution from these brokers or dealers with respect to
all transactions. The Funds may direct Vanguard to use a particular broker for
certain transactions in exchange for commission rebates or research services
provided to the Funds.
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
THE FUNDS' ADVISER
The Vanguard Group provides investment advisory services to many Vanguard funds;
as of December 31, 1999, the Group managed more than $371 billion in total
assets. The individual responsible for overseeing the European, Pacific, and
Emerging Markets Stock Index Funds' investments is:
GEORGE U. SAUTER, Managing Director of Vanguard, and head of Vanguard's
Quantitative Equity Group; has worked in investment management since 1985;
primary responsibility for Vanguard's stock indexing policy and strategy since
joining the company in 1987; A.B., Dartmouth College; M.B.A., University of
Chicago.
- --------------------------------------------------------------------------------
<PAGE>
25
DIVIDENDS, CAPITAL GAINS, AND TAXES
Each Fund distributes to shareholders virtually all of its net income (interest
and dividends, less expenses), as well as any capital gains realized from the
sale of its holdings. 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.
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
DISTRIBUTIONS
As a shareholder, you are entitled to your share of the fund's income from
interest and dividends, and gains from the sale of investments. You receive such
earnings as either an income dividend or a capital gains distribution. Income
dividends come from both the dividends that the fund earns from its holdings and
the interest it receives from its money market and bond investments. Capital
gains are realized whenever the fund sells securities for higher prices than it
paid for them. These capital gains are either short-term or long-term, depending
on whether the fund held the securities for one year or less, or more than one
year.
- --------------------------------------------------------------------------------
SHARE PRICE
Each Fund's share price, called its net asset value, or NAV, is calculated each
business day after the close of regular trading on the New York Stock Exchange
(the NAV is not calculated on holidays or other days when the Exchange is
closed). Net asset value per share for the Developed Markets and Total
International Stock Index Funds is computed by adding up the total value of the
Fund's investments (i.e., shares of the underlying funds) and other assets,
subtracting any of its liabilities (debts), and then dividing by the number of
Fund shares outstanding:
TOTAL ASSETS - LIABILITIES
NET ASSET VALUE = --------------------------------
NUMBER OF SHARES OUTSTANDING
Net asset value per share for the European, Pacific, and Emerging Markets
Stock Index Funds is computed in a similar way, by dividing the net assets
attributed to each class by the number of Fund shares outstanding for that
class.
Knowing the daily net asset value is useful to you as a shareholder because
it indicates the current value of your investment. The Fund's NAV, multiplied by
the number of shares you own, gives you the dollar amount you would have
received had you sold all of your shares back to the Fund that day. Because
foreign securities markets may operate on days which are not business days in
the United States, the value of a Fund's holdings may change on days when
shareholders will not be able to purchase or redeem the Fund's shares.
<PAGE>
26
A NOTE ON PRICING: A Fund's investments will be priced at their market
value when market quotations are readily available. When these quotations are
not readily available, investments will be priced at their fair value,
calculated according to procedures adopted by the Funds' Board of Trustees. A
Fund also may use fair value pricing if the value of a security held by the Fund
is materially affected by events occurring after the close of the primary
markets or exchanges on which such security is traded. In these situations,
prices used by the Fund to calculate its net asset value may differ from quoted
or published prices for the underlying securities.
Each Fund's share price can be found daily in the mutual fund listings of
most major newspapers under the heading "Vanguard Index Funds." Different
newspapers use different abbreviations for each Fund, but the most common are
EUROPE, PACIFIC, EMERMKT, DEVMKT, and TOTINTL for the European, Pacific,
Emerging Markets, Developed Markets, and Total International Stock Index Funds,
respectively.
FINANCIAL HIGHLIGHTS
The following financial highlights tables are intended to help you understand
each Fund's financial performance for the past five years or since inception
(except for the Developed Markets Index Fund, which did not start operations
until May 5, 2000), and certain information reflects financial results for a
single Fund share. The total returns in each table represent the rate that an
investor would have earned or lost each year on an investment in the Fund
(assuming reinvestment of all dividend and capital gains distributions). This
information has been derived from the financial statements audited by
PricewaterhouseCoopers LLP, independent accountants, whose report--along with
each Fund's financial statements--is included in the Funds' most recent annual
report to shareholders. You may have the annual report sent to you without
charge by contacting Vanguard.
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
HOW TO READ THE FINANCIAL HIGHLIGHTS TABLE
This explanation uses the European Stock Index Fund as an example. The Fund
began fiscal 1999 with a net asset value (price) of $25.28 per share. During the
year, the Fund earned $0.50 per share from investment income (interest and
dividends) and $3.69 per share from investments that had appreciated in value or
that were sold for higher prices than the Fund paid for them.
Shareholders received $0.65 per share in the form of dividend and capital gains
distributions. A portion of each year's distributions may come from the prior
year's income or capital gains.
The earnings ($4.19 per share) minus the distributions ($0.65 per share)
resulted in a share price of $28.82 at the end of the year. This was an increase
of $3.54 per share (from $25.28 at the beginning of the year to $28.82 at the
end of the year). For a shareholder who reinvested the distributions in the
purchase of more shares, the total return from the Fund was 16.62% for the year.
As of December 31, 1999, the Fund had $6.1 billion in net assets. For the year,
its expense ratio was 0.29% ($2.90 per $1,000 of net assets); and its net
investment income amounted to 1.99% of its average net assets. It sold and
replaced securities valued at 7% of its net assets.
- --------------------------------------------------------------------------------
<PAGE>
27
- --------------------------------------------------------------------------------
VANGUARD EUROPEAN STOCK INDEX FUND
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------
NET ASSET VALUE,
BEGINNING OF YEAR $25.28 $20.13 $16.57 $14.02 $11.76
- --------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .50 .41 .38 .34 .32
Net Realized and
Unrealized Gain
(Loss) on Investments 3.69 5.40 3.63 2.63 2.30
--------------------------------------------------------
Total from Investment
Operations 4.19 5.81 4.01 2.97 2.62
--------------------------------------------------------
DISTRIBUTIONS
Dividends from Net
Investment Income (.50) (.52) (.37) (.36) (.32)
Distributions from
Realized Capital Gains (.15) (.14) (.08) (.06) (.04)
--------------------------------------------------------
Total Distributions (.65) (.66) (.45) (.42) (.36)
- --------------------------------------------------------------------------------
NET ASSET VALUE, END
OF YEAR $28.82 $25.28 $20.13 $16.57 $14.02
================================================================================
TOTAL RETURN* 16.62% 28.86% 24.23% 21.26% 22.28%
================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of
Year (Millions) $6,106 $4,479 $2,432 $1,595 $1,017
Ratio of Total
Expenses to Average
Net Assets 0.29% 0.29% 0.31% 0.35% 0.35%
Ratio of Net
Investment Income to
Average Net Assets 1.99% 1.97% 2.19% 2.45% 2.66%
Turnover Rate 7% 7% 3% 4% 2%
================================================================================
*Total return figures do not reflect the transaction fee on purchases imposed
prior to 4/1/2000.
- --------------------------------------------------------------------------------
VANGUARD PACIFIC STOCK INDEX FUND
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------
NET ASSET VALUE,
BEGINNING OF YEAR $ 7.84 $7.72 $10.51 $11.50 $11.31
- --------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .08 .085 .09 .10 .10
Net Realized and
Unrealized Gain
(Loss) on Investments 4.39 .100 (2.79) (1.00) .21
--------------------------------------------------------
Total from Investment
Operations 4.47 .185 (2.70) (.90) .31
--------------------------------------------------------
DISTRIBUTIONS
Dividends from Net
Investment Income (.09) (.065) (.09) (.09) (.12)
Distributions from
Realized Capital Gains -- -- -- -- --
--------------------------------------------------------
Total Distributions (.09) (.065) (.09) (.09) (.12)
- --------------------------------------------------------------------------------
NET ASSET VALUE, END
OF YEAR $12.22 $7.84 $ 7.72 $10.51 $11.50
================================================================================
TOTAL RETURN* 57.05% 2.41% -25.67% -7.82% 2.75%
================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of
Year (Millions) $2,526 $1,033 $827 $978 $831
Ratio of Total
Expenses to Average
Net Assets 0.37% 0.40% 0.35% 0.35% 0.35%
Ratio of Net
Investment Income to
Average Net Assets 0.95% 1.17% 1.03% 0.89% 0.97%
Turnover Rate 6% 4% 8% 9% 1%
================================================================================
*Total return figures do not reflect the transaction fee on purchases imposed
prior to 4/1/2000.
<PAGE>
28
FINANCIAL HIGHLIGHTS (CONTINUED)
- --------------------------------------------------------------------------------
VANGUARD EMERGING MARKETS STOCK INDEX FUND
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------
NET ASSET VALUE,
BEGINNING OF YEAR $ 7.91 $9.98 $12.28 $10.75 $10.87
- --------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .24 .27 .24 .18 .15
Net Realized and
Unrealized Gain
(Loss) on Investments 4.62 (2.08) (2.31) 1.52 (.09)
--------------------------------------------------------
Total from Investment
Operations 4.86 (1.81) (2.07) 1.70 .06
--------------------------------------------------------
DISTRIBUTIONS
Dividends from Net
Investment Income (.27) (.26) (.23) (.17) (.18)
Distributions from
Realized Capital Gains -- -- -- -- --
--------------------------------------------------------
Total Distributions (.27) (.26) (.23) (.17) (.18)
- --------------------------------------------------------------------------------
NET ASSET VALUE, END
OF YEAR $21.50 $7.91 $ 9.98 $12.28 $10.75
================================================================================
TOTAL RETURN* 61.57% -18.12% -16.82% 15.83% 0.56%
================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of
Year (Millions) $1,138 $577 $660 $637 $234
Ratio of Total
Expenses to Average
Net Assets 0.58% 0.61% 0.57% 0.60% 0.60%
Ratio of Net
Investment Income to
Average Net Assets 2.55% 2.99% 1.96% 1.69% 2.00%
Turnover Rate 22% 22% 19% 1% 3%
================================================================================
*Total return figures do not reflect the transaction fee on purchases (0.5%
beginning 4/1/2000, 1.0% from 11/3/1997 to 3/31/2000, 1.5% from 1/1/1997 to
11/2/1997, 2.0% in 1995 through 1996), or the transaction fee on redemptions
(0.5% beginning 4/1/2000, 1.0% through 3/31/2000).
- --------------------------------------------------------------------------------
VANGUARD TOTAL INTERNATIONAL
STOCK INDEX FUND
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1999 1998 1997 1996*
- --------------------------------------------------------------------------------
NET ASSET VALUE,
BEGINNING OF PERIOD $11.19 $ 9.87 $10.14 $10.26
- --------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .21 .21 .18 .150
Capital Gain Distributions
Received .04 .02 .02 .015
Net Realized and
Unrealized Gain
(Loss) on Investments 3.09 1.31 (.28) (.110)
--------------------------------------------------------
Total from Investment
Operations 3.34 1.54 (.08) .055
--------------------------------------------------------
DISTRIBUTIONS
Dividends from Net
Investment Income (.21) (.21) (.17) (.160)
Distributions from
Realized Capital Gains (.01) (.01) (.02) (.015)
--------------------------------------------------------
Total Distributions (.22) (.22) (.19) (.175)
- --------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $14.31 $11.19 $ 9.87 $10.14
================================================================================
TOTAL RETURN** 29.92% 15.60% -0.77% 0.55%
================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of
Period (Millions) $2,570 $1,375 $903 $280
Ratio of Total
Expenses to Average
Net Assets 0% 0% 0% 0%
Ratio of Net
Investment Income to
Average Net Assets 2.04% 2.18% 2.19% 1.51%+
Turnover Rate 1% 2% 0% 0%
================================================================================
*April 29 (inception) through December 31, 1996.
**Total return figures do not reflect the transaction fee on purchases imposed
prior to April 1, 2000.
+Annualized.
The Funds are not sponsored, sold, promoted, or endorsed by Morgan Stanley
Capital International. 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., and
have been licensed for use by The Vanguard Group.
<PAGE>
29
INVESTING WITH VANGUARD
One or more of the Funds is an investment option in your retirement or savings
plan. Your plan administrator or your employee benefits office can provide you
with detailed information on how to participate in your plan and how to elect
any of the Funds as an investment option.
- - If you have any questions about a Fund or Vanguard, including those about
the Fund's investment objective, strategies, or risks, contact Vanguard's
Participant Access Center, toll-free, at 1-800-523-1188.
- - If you have questions about your account, contact your plan administrator
or the organization that provides recordkeeping services for your plan.
INVESTMENT OPTIONS AND ALLOCATIONS
Your plan's specific provisions may allow you to change your investment
selections, the amount of your contributions, or how your contributions are
allocated among the investment choices available to you. Contact your plan
administrator or employee benefits office for more details.
TRANSACTIONS
Contributions, exchanges, or redemptions of a Fund's shares are processed as
soon as they have been received by Vanguard in good order. Good order means that
your request includes complete information on your contribution, exchange, or
redemption, and that Vanguard has received the appropriate assets.
In all cases, your transaction will be based on 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 regular trading on the New York Stock Exchange, generally 4 p.m.
Eastern time, you will receive that day's net asset value.
EXCHANGES
The exchange privilege (your ability to redeem shares from one fund to purchase
shares of another fund) may be available to you through your plan. Although we
make every effort to maintain the exchange privilege, Vanguard reserves the
right to revise or terminate this privilege, limit the amount of an exchange or
reject any exchange, at any time, without notice. Because excessive exchanges
can potentially disrupt the management of a Fund and increase its transaction
costs, Vanguard limits participant exchange activity to no more than FOUR
SUBSTANTIVE "ROUND TRIPS" THROUGH THE FUND (at least 90 days apart) during any
12-month period. A "round trip" is a redemption from the Fund followed by a
purchase back into the Fund. "Substantive" means a dollar amount that Vanguard
determines, in its sole discretion, could adversely affect the management of the
Fund.
Before making an exchange to or from another fund available in your plan,
consider the following:
- - Certain investment options, particularly funds made up of company stock or
investment contracts, may be subject to unique restrictions.
- - Make sure to read that fund's prospectus. Contact Vanguard Participant
Access Center, toll-free, at 1-800-523-1188 for a copy.
- - Vanguard can accept exchanges only as permitted by your plan. Contact your
plan administrator for details on the exchange policies that apply to your
plan.
<PAGE>
30
- --------------------------------------------------------------------------------
A NOTE ON REDEMPTION FEES: The Emerging Markets Stock Index Fund imposes a 0.5%
redemption fee on all share redemptions. Currently, redemption fees do not apply
to Fund shares held through Vanguard's separate recordkeeping system for
employee benefit plan accounts, due to certain economies associated with these
accounts. However, the Fund reserves the right to impose redemption fees on its
shares at any time if warranted by the Fund's future costs of processing
redemptions from these accounts.
- --------------------------------------------------------------------------------
ACCESSING FUND INFORMATION BY COMPUTER
- --------------------------------------------------------------------------------
VANGUARD ON THE WORLD WIDE WEB WWW.VANGUARD.COM
Use your personal computer to visit Vanguard's education-oriented website, which
provides timely news and information about Vanguard funds and services; an
online "university" that offers a variety of mutual fund classes; and
easy-to-use, interactive tools to help you create your own investment and
retirement strategies.
- --------------------------------------------------------------------------------
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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.
COUNTRY RISK
The chance that domestic events--such as political upheaval, financial troubles,
or a natural disaster--will weaken a country's securities markets.
CURRENCY RISK
The chance that a foreign investment will decrease in value because of
unfavorable changes in currency exchange rates.
DIVIDEND INCOME
Payment to shareholders of income from interest or dividends generated by a
fund's investments.
EXPENSE RATIO
The percentage of a fund's average net assets used to pay its expenses. The
expense ratio includes management fees, administrative fees, and any 12b-1
distribution fees.
INDEX
An unmanaged group of securities whose overall performance is used as a standard
to measure investment performance.
INTERNATIONAL STOCK FUND
A mutual fund that invests in the stocks of companies located outside the United
States.
INVESTMENT ADVISER
An organization that makes the day-to-day decisions regarding a fund's
investments.
MUTUAL FUND
An investment company that pools the money of many people and invests it in a
variety of securities in an effort to achieve a specific objective over time.
NET ASSET VALUE (NAV)
The market value of a mutual fund's total assets, minus liabilities, divided by
the number of shares outstanding. The value of a single share is called its
share value or share price.
PASSIVE MANAGEMENT
A low-cost investment strategy in which a mutual fund attempts to match--rather
than outperform--a particular stock or bond market index. Also known as
indexing.
PRINCIPAL
The amount of money you put into an investment.
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>
[LOGO]
[THE VANGUARD GROUP(R) LOGO]
Institutional Division
Post Office Box 2900
Valley Forge, PA 19482-2900
FOR MORE INFORMATION
If you'd like more information about
Vanguard International Stock Index
Funds, the following documents are
available free upon request:
ANNUAL/SEMIANNUAL REPORTS
TO SHAREHOLDERS
Additional information about the
Funds' investments is available in
the Funds' annual and semiannual
reports to shareholders.
STATEMENT OF ADDITIONAL
INFORMATION (SAI)
The SAI provides more detailed
information about the Funds (there
is a separate SAI for Vanguard
Developed Markets and Total
International Stock Index Funds,
which are legally a part of Vanguard
STAR Funds).
The current annual and semiannual
reports and each SAI are
incorporated by reference into
(and are thus legally a part of)
this prospectus.
To receive a free copy of the latest
annual or semiannual report or the
SAI, or to request additional
information about the Funds or other
Vanguard funds, please contact us
as follows:
THE VANGUARD GROUP
PARTICIPANT ACCESS CENTER
P.O. BOX 2900
VALLEY FORGE, PA 19482-2900
TELEPHONE:
1-800-523-1188
TEXT TELEPHONE:
1-800-523-8004
WORLD WIDE WEB:
WWW.VANGUARD.COM
INFORMATION PROVIDED BY THE
SECURITIES AND EXCHANGE
COMMISSION (SEC)
You can review and copy
information about the Funds
(including the SAI) at the SEC's
Public Reference Room in
Washington, DC. To find out more
about this public service, call the
SEC at 1-202-942-8090. Reports and
other information about the Funds
are also available on the SEC's
website (www.sec.gov), or you can
receive copies of this information,
for a fee, by electronic request at
the following e-mail address:
[email protected], or by writing
the Public Reference Section,
Securities and Exchange
Commission, Washington, DC
20549-0102.
Funds' Investment Company Act
file number: 811-5972 (811-3919)
for Developed Markets and Total
International Stock Index Funds)
(C) 2000 The Vanguard Group, Inc.
All rights reserved.
Vanguard Marketing Corporation,
Distributor.
I072N-04/28/2000
<PAGE>
VANGUARD(R) INTERNATIONAL
STOCK INDEX FUNDS
INSTITUTIONAL SHARES
VANGUARD(R) INSTITUTIONAL
DEVELOPED MARKETS
INDEX FUND
Prospectus
April 28, 2000
This prospectus contains
financial data for the
Funds through the
fiscal year ended
December 31, 1999.
VANGUARD INTERNATIONAL
STOCK INDEX FUNDS
INSTITUTIONAL SHARES OF:
VANGUARD EUROPEAN
STOCK INDEX FUND
VANGUARD PACIFIC
STOCK INDEX FUND
VANGUARD EMERGING
MARKETS STOCK INDEX
FUND
VANGUARD INSTITUTIONAL
DEVELOPED MARKETS
INDEX FUND
[MEMBERS OF THE VANGUARD GROUP(R) LOGO]
<PAGE>
VANGUARD INTERNATIONAL STOCK INDEX FUNDS INSTITUTIONAL SHARES
VANGUARD INSTITUTIONAL DEVELOPED MARKETS INDEX FUND
Prospectus
April 28, 2000
A Group of International Stock Index Mutual Funds
- --------------------------------------------------------------------------------
CONTENTS
- --------------------------------------------------------------------------------
1 AN INTRODUCTION TO INDEX FUNDS
2 FUND PROFILES
2 Vanguard European Stock Index Fund Institutional Shares
5 Vanguard Pacific Stock Index Fund Institutional Shares
8 Vanguard Emerging Markets Stock Index Fund Institutional Shares
12 Vanguard Institutional Developed Markets Index Fund
14 MORE ON THE FUNDS
21 THE FUNDS AND VANGUARD
22 INVESTMENT ADVISER
22 DIVIDENDS, CAPITAL GAINS, AND TAXES
24 SHARE PRICE
25 FINANCIAL HIGHLIGHTS
28 INVESTING WITH VANGUARD
28 Services and Account Features
29 Types of Accounts
29 Buying Shares
31 Redeeming Shares
34 Transferring Registration
34 Fund and Account Updates
35 Mandatory Conversion to Investor Shares
GLOSSARY (inside back cover)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
WHY READING THIS PROSPECTUS IS IMPORTANT
This prospectus explains the objective, risks, and strategies of each of the
Vanguard International Stock Index Funds Institutional Shares and Vanguard
Institutional Developed Markets 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 which
Fund, if any, is the right investment for you. We suggest that you keep it for
future reference.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
IMPORTANT NOTE
The Vanguard European, Pacific, and Emerging Markets Stock Index Funds each
offer two separate classes of shares: Investor and Institutional. This
prospectus offers the Funds' Institutional Shares, which have an investment
minimum of $10 million and generally are not available to investors who require
special employee benefit plan services. Please call Vanguard at 1-800-662-7447
to obtain a separate prospectus that offers the Funds' Investor Shares as well
as the investor version of Vanguard Institutional Developed Markets Fund. These
options have an investment minimum of $3,000 ($1,000 for IRAs).
The Funds' separate share classes have different expenses; as a result,
their investment performances will vary. UNLESS OTHERWISE NOTED, ALL REFERENCES
IN THIS PROSPECTUS TO FEES, EXPENSES, AND INVESTMENT PERFORMANCE RELATE
SPECIFICALLY TO INSTITUTIONAL SHARES.
- --------------------------------------------------------------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE>
1
AN INTRODUCTION TO INDEX FUNDS
WHAT IS INDEXING?
An index is an unmanaged group of securities whose overall performance is used
as a standard to measure investment performance. 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. Keep in mind that an index
fund has operating expenses and transaction costs, while a market index does
not. Therefore, an index fund, while expected to track its target index closely,
typically will be unable to match the performance of the index exactly.
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 foreign stock market.
Index funds are not actively managed by investment advisers 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.
WHAT INDEX FUNDS DOES VANGUARD OFFER?
Vanguard offers a variety of stock (both U.S. and international), bond, and
balanced index funds. This prospectus provides information about Vanguard's
International Stock Index Funds Institutional Shares and Vanguard Institutional
Developed Markets Index Fund. There are four such funds, each of which seeks to
track a different segment of the international stock market:
- --------------------------------------------------------------------------------
FUND SEEKS TO TRACK
- --------------------------------------------------------------------------------
Vanguard European Stock Index Fund European stock markets
Vanguard Pacific Stock Index Fund Australian and Far East stock
markets
Vanguard Emerging Markets Stock 13 emerging stock markets in
Index Fund Europe, Asia, Africa, and
Latin America
Vanguard Institutional Developed European, Australian, and Far
Markets Index Fund East stock markets
- --------------------------------------------------------------------------------
This prospectus contains profiles that summarize key features of each Fund.
Following the profiles, there is important additional information about the
Funds.
<PAGE>
2
FUND PROFILE--VANGUARD(R) EUROPEAN STOCK
INDEX FUND INSTITUTIONAL SHARES
The following profile provides you with a summary of the key features of
Vanguard European Stock Index Fund Institutional Shares.
INVESTMENT OBJECTIVE
The Fund seeks to match the performance of the Morgan Stanley Capital
International (MSCI) Europe Index.
INVESTMENT STRATEGIES
The Fund employs a "passively managed"--or index--investment approach, by
investing all or substantially all of its assets in a representative sample of
the common stocks included in the MSCI Europe Index. The MSCI Europe Index is
made up of approximately 550 common stocks of companies located in 15 European
countries--mostly in the United Kingdom, France, Germany, and the Netherlands,
(which comprised 29%, 15%, 14%, and 8% of the Index's market capitalization,
respectively, as of March 31, 2000), as well as in Austria, Belgium, Denmark,
Finland, Ireland, Italy, Norway, Portugal, Spain, Sweden, and Switzerland. For
more information about passive management, see "Indexing Methods" under MORE ON
THE FUNDS.
PRIMARY RISKS
THE FUND'S TOTAL RETURN, LIKE STOCK PRICES GENERALLY, WILL FLUCTUATE WITHIN A
WIDE RANGE, SO AN INVESTOR COULD LOSE MONEY OVER SHORT OR EVEN LONG PERIODS. The
Fund is also subject to:
- - Country risk, which is the chance that a country's economy will be hurt by
political troubles, financial problems, or natural disasters. The Index's,
and therefore the Fund's, heavy exposure to four countries (United Kingdom,
France, Germany, and the Netherlands) involves a higher degree of country
risk than that of more geographically diversified international funds.
- - Regional risk, which is the chance that an entire region--namely
Europe--will be hurt by political troubles, financial problems, or natural
disasters.
- - Currency risk, which is the chance that returns will be hurt by a rise in
the value of the U.S. dollar versus foreign currencies.
- - Investment style risk, which is the chance that returns from foreign stocks
will trail returns from other asset classes or the overall stock market.
PERFORMANCE/RISK INFORMATION
The bar chart and table below provide an indication of the risk of investing in
the Fund. The bar chart shows the performance of the Investor Shares of the Fund
in each calendar year since inception. The table shows how the average annual
total returns of the Fund's Investor Shares for one and five calendar years and
since inception compare with those of a broad-based securities market index.
Keep in mind that the Fund's past performance does not indicate how it will
perform in the future.
<PAGE>
3
----------------------------------------------------
ANNUAL TOTAL RETURNS FOR INVESTOR SHARES
----------------------------------------------------
1991 12.40%
1992 -3.32%
1993 29.13%
1994 1.88%
1995 22.28%
1996 21.26%
1997 24.23%
1998 28.86%
1999 16.62%
----------------------------------------------------
Return figures do not reflect the transaction fee
imposed on purchases prior to April 1, 2000.
Note: This prospectus offers the Fund's Institutional
Shares, not the Investor Shares. Performance for the
Investor Shares is shown here because the Fund's
Institutional Shares are new and don't have a full
calendar year of performance. However, the two share
classes are invested in the same portfolio of
securities and will have the same returns except
that their operating expenses differ.
----------------------------------------------------
During the period shown in the bar chart, the highest return for a calendar
quarter was 20.37% (quarter ended March 31, 1998) and the lowest return for a
quarter was -14.41% (quarter ended September 30, 1998).
-------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS FOR YEARS ENDED DECEMBER 31, 1999
-------------------------------------------------------------------------
1 YEAR 5 YEARS SINCE INCEPTION*
-------------------------------------------------------------------------
Vanguard European Stock
Index Fund Investor
Shares** 16.62% 22.58% 14.61%
MSCI Europe Index 15.77 22.27 14.78
-------------------------------------------------------------------------
*June 18, 1990.
**Return figures do not reflect the transaction fee imposed on purchases
prior to April 1, 2000.
-------------------------------------------------------------------------
FEES AND EXPENSES
The following table describes the fees and expenses you may pay if you buy and
hold Institutional Shares of the Fund. Since the Fund did not begin offering
Institutional Shares until May 5, 2000, the expenses shown under Annual Fund
Operating Expenses are based upon estimated amounts for the current fiscal year.
SHAREHOLDER FEES (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None
Transaction Fee on Purchases: None
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fee: None
Exchange Fee: None
ANNUAL FUND OPERATING EXPENSES (expenses deducted from the Fund's assets)
Management Expenses: 0.11%
12b-1 Distribution Fee: None
Other Expenses: 0.07%
TOTAL ANNUAL FUND OPERATING EXPENSES: 0.18%
<PAGE>
4
The following example is intended to help you compare the cost of investing
in the Fund with the cost of investing in other mutual funds. It illustrates the
hypothetical expenses that you would incur over various periods if you invest
$10,000 in the Fund's Institutional Shares. This example assumes that the Fund
provides a return of 5% a year, and that operating expenses remain the same. The
results apply whether or not you redeem your investment at the end of each
period.
- -------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- -------------------------------------------------
$20 $64 $113 $255
- -------------------------------------------------
THIS EXAMPLE SHOULD NOT BE CONSIDERED TO REPRESENT ACTUAL EXPENSES OR
PERFORMANCE FROM THE PAST OR FOR THE FUTURE. ACTUAL FUTURE EXPENSES MAY BE
HIGHER OR LOWER THAN THOSE SHOWN.
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION
DIVIDENDS AND CAPITAL GAINS MINIMUM INITIAL INVESTMENT
Distributed annually in December $10 million
INVESTMENT ADVISER
The Vanguard Group, Valley Forge, NEWSPAPER ABBREVIATION
Pa., since inception EuroInst
INCEPTION DATE VANGUARD FUND NUMBER
May 5, 2000 235
NET ASSETS (INVESTOR SHARES) AS OF CUSIP NUMBER
DECEMBER 31, 1999 922042502
$6.1 billion
- --------------------------------------------------------------------------------
<PAGE>
5
FUND PROFILE--VANGUARD(R) PACIFIC STOCK
INDEX FUND INSTITUTIONAL SHARES
The following profile summarizes key features of Vanguard Pacific Stock Index
Fund Institutional Shares.
INVESTMENT OBJECTIVE
The Fund seeks to match the performance of the MSCI Pacific Free Index.*
*The designation "Free" in the name of the Index refers to the securities that
the Index tracks. Some countries restrict foreign investment in certain
industries, so only stocks that can be bought freely by a fund are tracked.
INVESTMENT STRATEGIES
The Fund employs a "passively managed"--or index--investment approach, by
investing all or substantially all of its assets in a representative sample of
the common stocks included in the MSCI Pacific Free Index. The MSCI Pacific Free
Index consists of approximately 420 common stocks of companies located in Japan
(which comprised 82% of the Index's market capitalization as of March 31, 2000),
Australia, Hong Kong, New Zealand, and Singapore. For more information about
passive management, see "Indexing Methods" under MORE ON THE FUNDS.
PRIMARY RISKS
THE FUND'S TOTAL RETURN, LIKE STOCK PRICES GENERALLY, WILL FLUCTUATE WITHIN A
WIDE RANGE, SO AN INVESTOR COULD LOSE MONEY OVER SHORT OR EVEN LONG PERIODS. The
Fund is also subject to:
- - Country risk, which is the chance that a country's economy will be hurt by
political troubles, financial problems, or natural disasters. The Index's,
and therefore the Fund's, heavy exposure to Japan involves a higher degree
of country risk than that of more geographically diversified international
funds.
- - Regional risk, which is the chance that an entire region--namely the
Pacific region--will be hurt by political troubles, financial problems, or
natural disasters.
- - Currency risk, which is the chance that returns will be hurt by a rise in
the value of the U.S. dollar versus foreign currencies.
- - Investment style risk, which is the chance that returns from foreign stocks
will trail returns from other asset classes or the overall stock market.
PERFORMANCE/RISK INFORMATION
The bar chart and table below provide an indication of the risk of investing in
the Fund. The bar chart shows the performance of the Investor Shares of the Fund
in each calendar year since inception. The table shows how the average annual
total returns of the Fund's Investor Shares for one and five calendar years and
since inception compare with those of a broad-based securities market index.
Keep in mind that the Fund's past performance does not indicate how it will
perform in the future.
<PAGE>
6
----------------------------------------------------
ANNUAL TOTAL RETURNS FOR INVESTOR SHARES
----------------------------------------------------
1991 10.65%
1992 -18.17%
1993 35.46%
1994 13.04%
1995 2.75%
1996 -7.82%
1997 -25.67%
1998 2.41%
1999 57.05%
----------------------------------------------------
Return figures do not reflect the transaction fee
imposed on purchases prior to April 1, 2000.
Note: This prospectus offers the Fund's Institutional
Shares, not the Investor Shares. Performance for the
Investor Shares is shown here because the Fund's
Institutional Shares are new and don't have a full
calendar year of performance. However, the two share
classes are invested in the same portfolio of
securities and will have the same returns except
that their operating expenses differ.
----------------------------------------------------
During the period shown in the bar chart, the highest return for a calendar
quarter was 26.50% (quarter ended December 31, 1998) and the lowest return for a
quarter was -20.69% (quarter ended December 31, 1997).
-------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS FOR YEARS ENDED DECEMBER 31, 1999
-------------------------------------------------------------------------
1 YEAR 5 YEARS SINCE INCEPTION*
-------------------------------------------------------------------------
Vanguard Pacific Stock Index
Fund Investor Shares** 57.05% 2.52% 3.20%
MSCI Pacific Free Index 56.38 2.39 3.08
-------------------------------------------------------------------------
*June 18, 1990.
**Return figures do not reflect the transaction fee imposed on purchases
prior to April 1, 2000.
-------------------------------------------------------------------------
FEES AND EXPENSES
The following table describes the fees and expenses you may pay if you buy and
hold Institutional Shares of the Fund. Since the Fund did not begin offering
Institutional Shares until May 5, 2000, the expenses shown under Annual Fund
Operating Expenses are based upon estimated amounts for the current fiscal year.
SHAREHOLDER FEES (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None
Transaction Fee on Purchases: None
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fee: None
Exchange Fee: None
ANNUAL FUND OPERATING EXPENSES (expenses deducted from the Fund's assets)
Management Expenses: 0.18%
12b-1 Distribution Fee: None
Other Expenses: 0.06%
TOTAL ANNUAL FUND OPERATING EXPENSES: 0.24%
<PAGE>
7
The following example is intended to help you compare the cost of investing in
the Fund with the cost of investing in other mutual funds. It illustrates the
hypothetical expenses that you would incur over various periods if you invest
$10,000 in the Fund's Institutional Shares. This example assumes that the Fund
provides a return of 5% a year, and that operating expenses remain the same. The
results apply whether or not you redeem your investment at the end of each
period.
- -------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- -------------------------------------------------
$30 $93 $163 $368
- -------------------------------------------------
THIS EXAMPLE SHOULD NOT BE CONSIDERED TO REPRESENT ACTUAL EXPENSES OR
PERFORMANCE FROM THE PAST OR FOR THE FUTURE. ACTUAL FUTURE EXPENSES MAY BE
HIGHER OR LOWER THAN THOSE SHOWN.
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION
DIVIDENDS AND CAPITAL GAINS MINIMUM INITIAL INVESTMENT
Distributed annually in December $10 million
INVESTMENT ADVISER
The Vanguard Group, Valley Forge, NEWSPAPER ABBREVIATION
Pa., since inception PacInst
INCEPTION DATE VANGUARD FUND NUMBER
May 5, 2000 237
NET ASSETS (INVESTOR SHARES) AS OF CUSIP NUMBER
DECEMBER 31, 1999 922042403
$2.5 billion
- --------------------------------------------------------------------------------
<PAGE>
8
FUND PROFILE--VANGUARD(R) EMERGING MARKETS
STOCK INDEX FUND INSTITUTIONAL SHARES
The following profile summarizes key features of Vanguard Emerging Markets Stock
Index Fund Institutional Shares.
INVESTMENT OBJECTIVE
The Fund seeks to match the performance of the Select Emerging Markets Free
Index.*
*The designation "Free" in the name of the Index refers to the securities that
the Index tracks. Some countries restrict foreign investment in certain
industries, so only stocks that can be bought freely are tracked.
INVESTMENT STRATEGIES
The Fund employs a "passively managed"--or index--investment approach, by
investing all or substantially all of its assets in a representative sample of
the common stocks included in the Select Emerging Markets Free Index. The Select
Emerging Markets Free Index includes approximately 500 common stocks of
companies located in emerging markets around the world. As of March 31, 2000,
the largest markets covered in the Index were Mexico, Brazil, and South Africa
(which comprised 16%, 14%, and 13% of the Index's market capitalization,
respectively). Other countries represented in the Index included Argentina, the
Czech Republic, Greece, Hungary, Indonesia, Israel, the Philippines, Poland,
Thailand, Turkey, Hong Kong, and Singapore. MSCI administers the Select Index
exclusively for Vanguard. For more information about passive management, see
"Indexing Methods" under MORE ON THE FUNDS.
PRIMARY RISKS
THE FUND'S TOTAL RETURN, LIKE STOCK PRICES GENERALLY, WILL FLUCTUATE WITHIN A
WIDE RANGE, SO AN INVESTOR COULD LOSE MONEY OVER SHORT OR EVEN LONG PERIODS. The
Fund is also subject to:
- - Country risk, which is the chance that a country's economy will be hurt by
political troubles, financial problems, or natural disasters. Country risk
is especially high for funds that focus on stocks in emerging markets. The
Index's, and therefore the Fund's, heavy exposure to Mexico, Brazil, and
South Africa involves a higher degree of country risk than that of more
geographically diversified international funds.
- - Currency risk, which is the chance that returns will be hurt by a rise in
the value of the U.S. dollar versus foreign currencies.
- - Investment style risk, which is the chance that returns from foreign stocks
will trail returns from other asset classes or the overall stock market.
PERFORMANCE/RISK INFORMATION
The bar chart and table below provide an indication of the risk of investing in
the Fund. The bar chart shows the performance of the Investor Shares of the Fund
in each calendar year since inception. The table shows how the average annual
total returns of the Fund's Investor Shares for one and five calendar years and
since inception compare with those of both a broad-based securities market index
and the Fund's target index. Keep in mind that the Fund's past performance does
not indicate how it will perform in the future.
<PAGE>
9
----------------------------------------------------
ANNUAL TOTAL RETURNS FOR INVESTOR SHARES
----------------------------------------------------
1995 0.56%
1996 15.83%
1997 -16.82%
1998 -18.12%
1999 61.57%
----------------------------------------------------
Return figures do not reflect the transaction fee
imposed on purchases and redemptions. If these
amounts were reflected, returns would be less than
those shown.
Note: This prospectus offers the Fund's Institutional
Shares, not the Investor Shares. Performance for the
Investor Shares is shown here because the Fund's
Institutional Shares are new and don't have a full
calendar year of performance. However, the two share
classes are invested in the same portfolio of
securities and will have the same returns except
that their operating expenses differ.
----------------------------------------------------
During the period shown in the bar chart, the highest return for a calendar
quarter was 28.32% (quarter ended December 31, 1999) and the lowest return for a
quarter was -21.52% (quarter ended June 30, 1998).
-------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS FOR YEARS ENDED DECEMBER 31, 1999
-------------------------------------------------------------------------
1 YEAR 5 YEARS SINCE INCEPTION*
-------------------------------------------------------------------------
Vanguard Emerging Markets
Stock Index Fund
Investor Shares** 59.96% 4.88% 6.03%
MSCI Emerging Markets
Free Index 66.40 2.00 3.69
Select Emerging Markets
Free Index+ 60.86 4.81 4.93
-------------------------------------------------------------------------
*May 4, 1994.
**Return figures reflect the 0.5% transaction fee imposed on purchases
and redemptions.
+The Select Emerging Markets Free Index is administered by MSCI
exclusively for Vanguard.
-------------------------------------------------------------------------
<PAGE>
10
FEES AND EXPENSES
The following table describes the fees and expenses you may pay if you buy and
hold Institutional Shares of the Fund. Since the Fund did not begin offering
Institutional Shares until May 5, 2000, the expenses shown under Annual Fund
Operating Expenses are based upon estimated amounts for the current fiscal year.
SHAREHOLDER FEES (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None
Transaction Fee on Purchases: 0.5%*
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fee: 0.5%**
Exchange Fee: None
ANNUAL FUND OPERATING EXPENSES (expenses deducted from the Fund's assets)
Management Expenses: 0.25%
12b-1 Distribution Fee: None
Other Expenses: 0.20%
TOTAL ANNUAL FUND OPERATING EXPENSES: 0.45%
*The transaction fee on purchases is deducted from all purchases
(including exchanges from other Vanguard funds) but not from
reinvested dividends and capital gains.
**The redemption fee applies to all redemptions (sales or exchanges);
it is deducted from redemption proceeds, and retained by the Fund.
The following example is intended to help you compare the cost of investing
in the Fund with the cost of investing in other mutual funds. It illustrates the
hypothetical expenses that you would incur over various periods if you invest
$10,000 in the Fund's Institutional Shares. This example assumes that the Fund
provides a return of 5% a year, that operating expenses remain the same, and
that you redeem all your shares at the end of each period.
- -------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- -------------------------------------------------
$148 $251 $363 $692
- -------------------------------------------------
You would pay the following expenses if you did not redeem your shares (the
difference being that the Fund's 0.5% redemption fee would not apply to any of
the periods below, as it would to those above):
- -------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- -------------------------------------------------
$96 $194 $301 $614
- -------------------------------------------------
THESE EXAMPLES SHOULD NOT BE CONSIDERED TO REPRESENT ACTUAL EXPENSES OR
PERFORMANCE FROM THE PAST OR FOR THE FUTURE. ACTUAL FUTURE EXPENSES MAY BE
HIGHER OR LOWER THAN THOSE SHOWN.
<PAGE>
11
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION
DIVIDENDS AND CAPITAL GAINS MINIMUM INITIAL INVESTMENT
Distributed annually in December $10 million
INVESTMENT ADVISER
The Vanguard Group, Valley Forge, NEWSPAPER ABBREVIATION
Pa., since inception EmergInst
INCEPTION DATE VANGUARD FUND NUMBER
May 5, 2000 239
NET ASSETS (INVESTOR SHARES) AS OF CUSIP NUMBER
DECEMBER 31, 1999 922042601
$1.1 billion
- --------------------------------------------------------------------------------
<PAGE>
12
FUND PROFILE--VANGUARD(R) INSTITUTIONAL DEVELOPED
MARKETS INDEX FUND
The following profile summarizes key features of Vanguard Institutional
Developed Markets Index Fund.
INVESTMENT OBJECTIVE
The Fund seeks to track the performance of the MSCI Europe, Australasia, Far
East (EAFE) Index.
INVESTMENT STRATEGIES
The Fund employs a "passively managed"--or index--investment approach. The Fund
seeks to track the performance of the MSCI EAFE Index by investing in two other
Vanguard funds--the European Stock Index Fund Institutional Shares and the
Pacific Stock Index Fund Institutional Shares. These other Vanguard funds have
the respective objectives of tracking the MSCI Europe Index and the MSCI Pacific
Free Index, which together comprise the MSCI EAFE Index. The Fund allocates all
or substantially all of its assets between the European Stock Index Fund
Institutional Shares and the Pacific Stock Index Fund Institutional Shares based
on the market capitalization of European and Pacific stocks in the MSCI EAFE
Index. The MSCI EAFE Index includes approximately 1,000 common stocks of
companies located in Europe, Australia, Asia, and the Far East. For more
information about passive management, see "Indexing Methods" under MORE ON THE
FUNDS.
PRIMARY RISKS
THE FUND'S TOTAL RETURN, LIKE STOCK PRICES GENERALLY, WILL FLUCTUATE WITHIN A
WIDE RANGE, SO AN INVESTOR COULD LOSE MONEY OVER SHORT OR EVEN LONG PERIODS. The
Fund is also subject to:
- - Country risk, which is the chance that a country's economy will be hurt by
political troubles, financial problems, or natural disasters.
- - Regional risk, which is the chance that an entire region--either Europe or
the Far East--will be hurt by political troubles, financial problems, or
natural disasters.
- - Currency risk, which is the chance that returns will be hurt by a rise in
the value of the U.S. dollar versus foreign currencies.
- - Investment style risk, which is the chance that returns from foreign stocks
will trail returns from other asset classes or the overall stock market.
PERFORMANCE/RISK INFORMATION
The Fund began operations on May 5, 2000, so performance information (including
annual total returns and average annual total returns) for a full calendar year
is not yet available.
<PAGE>
13
FEES AND EXPENSES
The following table describes the fees and expenses you may pay if you buy and
hold shares of the Fund. The expenses shown under Annual Fund Operating Expenses
are based on estimated amounts for the current fiscal year.
SHAREHOLDER FEES (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None
Transaction Fee on Purchases: None
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fee: None
Exchange Fee: None
ANNUAL FUND OPERATING EXPENSES (expenses deducted from the Fund's assets)
Indirect Operating Expenses: +
+Although Developed Markets Index Fund is not expected to incur any net
expenses directly, the Fund's shareholders indirectly bear the expenses
of the underlying Vanguard funds in which the Fund invests. See
THE FUNDS AND VANGUARD. It is estimated that the Fund's indirect
expense ratio for its first fiscal year, based on its underlying
investments, will be 0.20%.
The following example is intended to help you compare the cost of investing
in the Fund with the cost of investing in other mutual funds. It illustrates the
hypothetical expenses that you would incur over various periods if you invest
$10,000 in the Fund. This example assumes that the Fund provides a return of 5%
a year, and that operating expenses remain the same. The results apply whether
or not you redeem your investment at the end of each period.
- ------------------------
1 YEAR 3 YEARS
- ------------------------
$24 $74
- ------------------------
THIS EXAMPLE SHOULD NOT BE CONSIDERED TO REPRESENT ACTUAL EXPENSES OR
PERFORMANCE FROM THE PAST OR FOR THE FUTURE. ACTUAL FUTURE EXPENSES MAY BE
HIGHER OR LOWER THAN THOSE SHOWN.
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION
DIVIDENDS AND CAPITAL GAINS MINIMUM INITIAL INVESTMENT
Distributed annually in December $10 million
INVESTMENT ADVISER
The Vanguard Group, Valley Forge, NEWSPAPER ABBREVIATION
Pa., since inception DevMktInst
INCEPTION DATE VANGUARD FUND NUMBER
May 5, 2000 234
CUSIP NUMBER
921909800
- --------------------------------------------------------------------------------
<PAGE>
14
MORE ON THE FUNDS
The following sections discuss other important features of Vanguard
International Stock Index Funds and Vanguard Institutional Developed Markets
Index Fund, including indexing methods, fund characteristics, costs and
market-timing, fund turnover, and other investment policies and risks.
WHY INVEST IN INDEX FUNDS?
Index funds appeal to many investors for a number of reasons:
- - Diversification. Index funds generally invest in a diversified mix of
companies and industries.
- - Relative consistency. Index funds typically track the performance of
relevant market benchmarks more closely than comparable actively managed
funds do.
- - Low cost. Index funds do not have many of the expenses of an actively
managed fund--such as research--and 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 the number
of shares it holds to reflect a change in its target index, the fund's
turnover rate--and thus its realization of capital gains--is usually very
low.
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
INDEXING METHODS
Some index funds hold each stock found in their target indexes in about the same
proportions as represented in the indexes themselves.
Other index funds may use a different selection process. Because it would
be very expensive to buy all of the stocks held in certain indexes (the Select
Emerging Markets Free Index, for example, includes approximately 500 stocks),
funds tracking these larger indexes use a "sampling" technique. Using a
sophisticated computer program, these funds invest in stocks that will, in the
aggregate, recreate the key characteristics of their target indexes. For
instance, if 10% of the market capitalization of the MSCI Europe Index were
attributed to companies in Germany, Vanguard European Stock Index Fund would
invest about 10% of its assets in stocks of German issuers. Furthermore, the
Fund would construct a German portfolio whose size and industry weightings, as
well as average financial characteristics, approximated the German component of
the MSCI Europe Index. The European, Pacific, and Emerging Markets Stock Index
Funds each employ this sampling method of indexing.
While each Fund attempts to track the performance of its target index,
there is no guarantee that securities selected for the Fund will provide
investment performance exactly matching that of the index.
Yet another indexing approach is to invest in other index funds that seek
to track subsets of a target index. The Institutional Developed Markets Index
Fund uses this "fund of funds"
<PAGE>
15
approach, which can be very cost-effective and efficient when starting an index
fund from scratch. For example, the Institutional Developed Markets Index Fund
seeks to track the performance of the MSCI EAFE Index by investing in two other
Vanguard funds--the European Stock Index Fund Institutional Shares and the
Pacific Stock Index Fund Institutional Shares. These other Vanguard funds have
the respective objectives of tracking the MSCI Europe Index and the MSCI Pacific
Free Index, which together comprise the MSCI EAFE Index. The Fund allocates its
assets between the European Stock Index Fund Institutional Shares and the
Pacific Stock Index Fund Institutional Shares based on the market capitalization
of European and Pacific stocks in the MSCI EAFE Index.
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
"FUND OF FUNDS"
The term "fund of funds" is used to describe a mutual fund that pursues its
objective by investing in other mutual funds rather than in individual stocks or
bonds. A fund of funds may charge for its own direct expenses, in addition to
bearing a proportionate share of the expenses charged by the underlying funds in
which it invests. Funds of funds are best suited for long-term investors.
- --------------------------------------------------------------------------------
To track their target indexes as closely as possible, the European and
Pacific Stock Index Funds attempt to remain fully invested in foreign stocks
included in their particular indexes. Each Fund intends to invest at least 95%
of its total assets in the stocks of its target index. The Emerging Markets
Stock Index Fund normally invests 95% of its total assets in stocks of its
target index, holding the remaining 5% in cash reserves to meet daily redemption
requests. Institutional Developed Markets Index Fund normally holds100% of its
assets in shares of its underlying funds.
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
THE RISKS OF INTERNATIONAL INVESTING
Because foreign stock markets operate differently from the U.S. market,
Americans investing abroad will encounter risks not typically associated with
U.S. companies. For instance, foreign companies are not subject to the same
accounting, auditing, and financial reporting standards and practices as U.S.
companies; and their stocks may not be as liquid as those of similar U.S.
companies. In addition, foreign stock exchanges, brokers, and companies
generally have less government supervision and regulation than their
counterparts in the United States. These factors, among others, could negatively
impact the returns Americans receive from foreign investments.
- --------------------------------------------------------------------------------
[FLAG] EACH FUND IS SUBJECT TO STOCK MARKET RISK, WHICH IS THE CHANCE THAT STOCK
PRICES OVERALL WILL DECLINE OVER SHORT OR EVEN LONG PERIODS. STOCK MARKETS
TEND TO MOVE IN CYCLES, WITH PERIODS OF RISING PRICES AND PERIODS OF
FALLING PRICES.
IN ADDITION, INVESTMENTS IN FOREIGN STOCK MARKETS CAN BE RISKIER THAN
U.S. STOCK INVESTMENTS. THE PRICES OF INTERNATIONAL STOCKS AND THE PRICES
OF U.S. STOCKS HAVE OFTEN MOVED IN OPPOSITE DIRECTIONS. THESE PERIODS HAVE,
IN THE PAST, LASTED FOR AS LONG AS SEVERAL YEARS.
<PAGE>
16
To illustrate the volatility of international stock prices, the following
table shows the best, worst, and average total returns for foreign stock markets
over various periods as measured by the MSCI EAFE Index, a widely used barometer
of international market activity. (Total returns consist of dividend income plus
change in market price.) Note that the returns shown do not include the costs of
buying and selling stocks or other expenses that a real-world investment
portfolio would incur. Note, also, that the gap between best and worst tends to
narrow over the long term.
- ----------------------------------------------------------
INTERNATIONAL STOCK MARKET RETURNS (1969-1999)
- ----------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS 20 YEARS
- ----------------------------------------------------------
Best 69.9% 36.5% 22.8% 16.3%
Worst -23.2 1.5 5.9 12.0
Average 15.2 13.6 14.5 14.7
- ----------------------------------------------------------
The table covers all of the 1-, 5-, 10-, and 20-year periods from 1969
through 1999. Keep in mind that this was a particularly favorable period for all
stock markets. These average returns reflect past performance on international
stocks; you should not regard them as an indication of future returns from
either foreign markets as a whole or any of the Funds in particular.
Note that the preceding chart does not take into account returns measured
by the MSCI Emerging Markets Free Index, a widely used barometer of less
developed stock markets. Emerging markets can be substantially more volatile
than more developed foreign markets. In addition, because the MSCI EAFE Index
tracks the European and Pacific markets collectively, the above returns do not
reflect the variability of returns from year to year for these markets
individually, or the variability across these and other geographic regions or
market sectors. To illustrate this variability, the following table shows
returns for different international markets--as well as the U.S. market for
comparison--from 1990 to 1999, as measured by their respective indexes. Note
that the returns shown do not include the costs of buying and selling stocks or
other expenses that a real-world investment portfolio would incur.
<PAGE>
17
- --------------------------------------------------------------------------------
STOCK MARKET RETURNS FOR DIFFERENT INTERNATIONAL MARKETS*
- --------------------------------------------------------------------------------
EUROPEAN PACIFIC EMERGING U.S.
MARKET MARKET MARKETS MARKETS
- --------------------------------------------------------------------------------
1990 -2.00% -34.43% -10.55% -3.10%
1991 14.12 11.51 59.91 30.47
1992 -3.92 -18.51 11.40 7.62
1993 29.25 36.15 74.84 10.08
1994 2.82 12.82 -7.31 1.32
1995 22.08 2.89 0.01** 37.58
1996 21.42 -8.23 15.19 22.96
1997 23.75 -25.74 -16.37 33.36
1998 28.68 2.64 -18.39 28.58
1999 15.77 56.38 60.86 21.04
- --------------------------------------------------------------------------------
* European market returns are measured by the MSCI Europe Index; Pacific
market returns are measured by the MSCI Pacific Free Index; emerging
markets returns are measured by the Select Emerging Markets Free Index;
and U.S. market returns are measured by the Standard & Poor's 500 Index.
** The inception date of the Select Emerging Markets Free Index was May 4,
1994; returns shown for 1990 to 1994 are measured by the MSCI Emerging
Markets Free Index.
- --------------------------------------------------------------------------------
Keep in mind, however, that these average returns reflect past performance
of the various indexes; you should not consider them as an indication of future
returns from the indexes, or from any of the Funds in particular.
[FLAG] EACH FUND IS SUBJECT TO COUNTRY RISK, WHICH IS THE CHANCE THAT POLITICAL
EVENTS (A WAR, NATIONAL ELECTIONS), FINANCIAL PROBLEMS (RISING INFLATION,
GOVERNMENT DEFAULT), OR NATURAL DISASTERS (AN EARTHQUAKE, A FLOOD) WILL
WEAKEN A COUNTRY'S ECONOMY AND CAUSE INVESTMENTS IN THAT COUNTRY TO LOSE
MONEY.
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
REGIONAL VERSUS BROAD INTERNATIONAL INVESTING
Regional funds are international funds that invest in a particular geographical
region, such as Europe or the Pacific Basin. Because they concentrate their
holdings in a single region, these funds typically have higher share price
volatility than broadly diversified international stock funds (which, by
investing in many different foreign markets, may offset losses from one country
with gains from another at any given time).
- --------------------------------------------------------------------------------
EUROPEAN STOCK INDEX FUND. Stocks from the United Kingdom, France, Germany,
and the Netherlands comprised 29%, 15%, 14%, and 8% of the MSCI Europe Index,
respectively, as of March 31, 2000; stocks from the remaining 11 countries in
the Index have much less significant market capitalization weightings in the
Index and thus much less impact on the Fund's total return. The Fund's heavy
exposure to just four countries involves a higher degree of country risk than
that of more geographically diversified international funds.
PACIFIC STOCK INDEX FUND. Japanese stocks comprised 82% of the MSCI Pacific
Free Index as of March 31, 2000. Therefore, Japanese stocks represent a
correspondingly large component of the Pacific Stock Index Fund's assets. The
Fund's large investment in the
<PAGE>
18
Japanese stock market involves a higher degree of country risk than that of more
geographically diversified international funds.
EMERGING MARKETS STOCK INDEX FUND. As discussed above, emerging markets can
be substantially more volatile than both U.S. and more developed foreign
markets. Therefore, the Emerging Markets Stock Index Fund may expose investors
to a higher degree of volatility than funds that invest in more developed
markets.
INSTITUTIONAL DEVELOPED MARKETS INDEX FUND. As a fund of funds, the
Institutional Developed Markets Index Fund intends to invest all of its assets
in shares of the European and Pacific Stock Index Funds Institutional Shares;
indirectly, its country risk will proportionately mirror that of the European
and Pacific Stock Index Funds.
[FLAG] EACH FUND IS SUBJECT TO CURRENCY RISK, WHICH IS THE CHANCE THAT A
STRONGER U.S. DOLLAR WILL REDUCE RETURNS FOR AMERICANS INVESTING OVERSEAS.
GENERALLY, WHEN THE DOLLAR RISES IN VALUE AGAINST ANOTHER COUNTRY'S
CURRENCY, YOUR INVESTMENT IN THAT COUNTRY LOSES VALUE BECAUSE ITS CURRENCY
IS WORTH FEWER U.S. DOLLARS. ON THE OTHER HAND, A WEAKER U.S. DOLLAR
GENERALLY LEADS TO HIGHER RETURNS FOR AMERICANS HOLDING FOREIGN
INVESTMENTS.
SECURITY SELECTION
In seeking to track its target index, the European Stock Index, Pacific Stock
Index, and Emerging Markets Stock Index Funds each invest in a portfolio of
foreign stocks selected in a manner that mirrors the weightings of their target
indexes. The Institutional Developed Markets Index Fund simply invests in the
Institutional Shares of the European and Pacific Stock Index Funds. Each Fund
seeks to provide investment results that correspond to its target index. The
correlation between the performance of a Fund and its target index is expected
to be at least 95%. (A correlation of 100% would indicate perfect correlation.)
EUROPEAN STOCK INDEX FUND. The Fund invests in a statistically selected
sample of approximately 550 common stocks included in the MSCI Europe Index,
which is made up of the stocks of companies located in 15 European countries.
Four countries--the United Kingdom, France, Germany, and the
Netherlands--dominate the Index, with 29%, 15%, 14%, and 8% of the market
capitalization of the Index, respectively, as of March 31, 2000. The other 11
countries, which include Austria, Belgium, Denmark, Finland, Ireland, Italy,
Norway, Portugal, Spain, Sweden, and Switzerland, are much less significant to
the Index and, consequently, the Fund.
PACIFIC STOCK INDEX FUND. The Fund invests in a statistically selected
sample of the approximately 420 common stocks included in the MSCI Pacific Free
Index, which is comprised of the stocks of Pacific Basin companies. The Index is
dominated by the Japanese stock market, which represented 82% of the market
capitalization of the Index as of March 31, 2000. The other four countries
represented in the Index are Australia, Hong Kong, New Zealand, and Singapore.
EMERGING MARKETS STOCK INDEX FUND. The Fund invests in a statistically
selected sample of the approximately 500 common stocks included in the Select
Emerging Markets Free Index, which is made up of the stocks of companies located
in 13 emerging markets of Europe, Asia, Africa, and Latin America. Three
countries--Mexico, Brazil, and South Africa--represent a majority of the Index,
with 16%, 14%, and 13% of the market capitalization of the Index, respectively,
as of March 31, 2000. The other 10 countries include Argentina, the Czech
Republic, Greece, Hungary, Indonesia, Israel, Philippines, Poland, Thailand, and
Turkey. The developed countries of Hong Kong and Singapore are included in
<PAGE>
19
the Index to broaden diversification and ensure adequate liquidity. The Index is
called "select" because it is modeled on a larger index--the MSCI Emerging
Markets Free Index--but with certain adjustments designed to reduce risk. For
instance, MSCI considers the Hong Kong and Singapore markets too mature to
include in its index, but they are part of the Select Index. Conversely, as of
March 31, 2000, the Select Index excluded certain countries found in the MSCI
Emerging Markets Free Index--Chile, China, Colombia, India, Jordan, Korea,
Pakistan, Peru, Russia, Sri Lanka, and Taiwan--due to concerns about liquidity
or entry barriers in those markets. MSCI administers the Select Index
exclusively for Vanguard, and periodically adjusts the included countries to
keep pace with evolution in world markets. (Such adjustments are made on a
forward-looking basis, so past performance of the Select Index always reflects
actual country representation during the relevant period.)
Although index funds, by their nature, tend to be tax-efficient investment
vehicles, the Funds are generally managed without regard to tax ramifications.
TRANSACTION FEES
Some of Vanguard's index funds charge a transaction fee on purchases of fund
shares to offset the higher costs of trading certain securities, particularly
small-company and international stocks. The transaction fee ensures that these
higher costs are borne by the investors making the transactions--and not by
shareholders already in the fund who do not generate the costs. All transaction
fees are paid directly to the fund itself (unlike a sales charge or load that
non-Vanguard funds may impose to compensate their sales representatives).
Without transaction fees, some index funds would have trouble tracking their
target indexes.
COSTS AND MARKET-TIMING
Some investors try to profit from a strategy called market-timing--switching
money into investments when they expect prices to rise, and taking money out
when they expect prices to fall. As money is shifted in and out, a fund incurs
expenses for buying and selling securities. These costs are borne by all fund
shareholders, including the long-term investors who do not generate the costs.
Therefore, the Vanguard International and Vanguard Institutional Developed
Markets Index Funds have adopted the following policies, among others, designed
to discourage short-term trading:
- - Each Fund reserves the right to reject any purchase request--including
exchanges from other Vanguard funds--that it regards as disruptive to the
efficient management of the Fund. A purchase request could be rejected
because of the timing of the investment or because of a history of
excessive trading by the investor.
- - The Emerging Markets Stock Index Fund charges a transaction fee on
purchases and redemptions.
- - Telephone and online exchanges are not accepted for non-IRA accounts.
- - There is a limit on the number of times you can exchange into and out of a
Fund (see "Redeeming Shares" in the INVESTING WITH VANGUARD section).
- - Each Fund reserves the right to stop offering shares at any time.
THE VANGUARD FUNDS DO NOT PERMIT MARKET-TIMING. DO NOT INVEST IN THESE
FUNDS IF YOU ARE A MARKET-TIMER.
<PAGE>
20
TURNOVER RATE
Although each Fund seeks to invest for the long term, the Funds retain the right
to sell securities regardless of how long the securities have been held.
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. Because of this, the turnover rate for each Fund has
been extremely low. The Financial Highlights tables beginning on page 26 show
historic turnover rates for each Fund.
- --------------------------------------------------------------------------------
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 passively managed foreign stock
index funds in 1999 was roughly 17%; for all foreign stock funds, the average
turnover was approximately 76%, according to Morningstar, Inc. (A turnover rate
of 100% would occur, for example, if a fund sold and replaced securities valued
at 100% of its net assets within a one-year period.)
- --------------------------------------------------------------------------------
OTHER INVESTMENT POLICIES AND RISKS
Besides investing in common stocks of foreign companies, each Fund may make
certain other kinds of investments to achieve its objective. Each Fund may
change its objective without shareholder approval.
The Funds may also invest, to a limited extent, in futures and options
contracts, warrants, convertible securities, and swap agreements, which are
types of derivatives. Losses (or gains) involving futures contracts can
sometimes be substantial--in part because a relatively small price movement in a
futures contract may result in an immediate and substantial loss (or gain) for a
fund. Similar risks exist for warrants (securities that permit their owners to
purchase a specific number of shares of stock at a predetermined price),
convertible securities (securities that may be exchanged for another asset), and
swap agreements (contracts between two parties in which each agrees to make
payments to the other based on the return of a specified index or asset).
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
<PAGE>
21
For this reason, the Funds will not use futures, options, warrants,
convertible securities, or swap agreements for speculative purposes or as
leveraged investments that magnify the gains or losses of an investment. A
Fund's obligation under futures contracts will not exceed 20% of its total
assets.
The reasons for which a Fund will invest in futures and options are:
- - To keep cash on hand to meet shareholder redemptions or other needs while
simulating full investment in stocks.
- - To reduce the Fund's transaction costs or add value when these instruments
are favorably priced.
Each Fund may also enter into forward foreign currency contracts in order
to maintain the same currency exposure as its respective Index. A forward
foreign currency contract is an agreement to buy or sell a country's currency at
a specific price on a specific date, usually 30, 60, or 90 days in the future.
In other words, the contract guarantees an exchange rate on a given date.
Managers of international stock funds typically use these contracts to guard
against sudden, unfavorable changes in U.S. dollar/foreign currency exchange
rates. However, the Funds will use these contracts for different reasons:
- - To gain currency exposure when investing in futures.
- - To settle trades in a foreign currency.
THE FUNDS AND VANGUARD
The Funds are offered by The Vanguard Group, a family of more than 35 investment
companies with more than 100 funds holding assets worth more than $550 billion.
All of the 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.
Vanguard Institutional Developed Markets Index Fund will indirectly bear a
proportionate share of the expenses of the underlying funds in which it invests.
However, the Fund's direct expenses are expected to be very low or zero. The
Fund may operate without incurring direct expenses because Vanguard will
reimburse it for (i) its contributions to the cost of operating the underlying
funds in which it invests, and (ii) savings in administrative and marketing
costs that Vanguard expects to derive from its operations.
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
VANGUARD'S UNIQUE CORPORATE STRUCTURE
The Vanguard Group is truly a MUTUAL mutual fund company. It is owned jointly by
the funds it oversees and thus indirectly by the shareholders in those funds.
Most other mutual funds are operated by for-profit management companies that may
be owned by one person, by a group of individuals, or by investors who own the
management company's stock. By contrast, Vanguard provides its services on an
"at-cost" basis, and the funds' expense ratios reflect only these costs. No
separate management company reaps profits or absorbs losses from operating the
funds.
- --------------------------------------------------------------------------------
<PAGE>
22
INVESTMENT ADVISER
The Vanguard Group (Vanguard), P.O. Box 2600, Valley Forge, PA 19482, founded in
1975, serves as the Funds' adviser through its Quantitative Equity Group.
(Institutional Developed Markets Index Fund receives advisory services
indirectly, by investing in the European and Pacific Stock Index Funds
Institutional Shares.) Vanguard manages the Funds on an at-cost basis, subject
to the control of the Trustees and officers of the Funds. The Funds began
operations on May 5, 2000. Advisory fees for the first fiscal year of the
European, Pacific, and Emerging Markets Stock Index Funds Institutional Shares
is estimated at an effective annual rate of less than 0.01% each.
The Funds have authorized Vanguard to choose brokers or dealers to handle
the purchase and sale of securities for the Funds, and to get the best available
price and most favorable execution from these brokers or dealers with respect to
all transactions. The Funds may direct Vanguard to use a particular broker for
certain transactions in exchange for commission rebates or research services
provided to the Funds.
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
THE FUNDS' ADVISER
The Vanguard Group provides investment advisory services to many Vanguard funds;
as of December 31, 1999, the Group managed more than $371 billion in total
assets. The individual responsible for overseeing the European, Pacific, and
Emerging Markets Stock Index Funds' investments is:
GEORGE U. SAUTER, Managing Director of Vanguard, and head of Vanguard's
Quantitative Equity Group; has worked in investment management since 1985;
primary responsibility for Vanguard's stock indexing policy and strategy since
joining the company in 1987; A.B., Dartmouth College; M.B.A., University of
Chicago.
- --------------------------------------------------------------------------------
DIVIDENDS, CAPITAL GAINS, AND TAXES
FUND DISTRIBUTIONS
Each Fund distributes to shareholders virtually all of its net income (interest
and dividends, less expenses), as well as any capital gains realized from the
sale of its holdings. Distributions generally occur in December. In addition, a
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.
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
DISTRIBUTIONS
As a shareholder, you are entitled to your share of the fund's income from
interest and dividends, and gains from the sale of investments. You receive such
earnings as either an income dividend or a capital gains distribution. Income
dividends come from both the dividends that the fund earns from its holdings and
the interest it receives from its money market and bond investments. Capital
gains are realized whenever the fund sells securities for higher prices than it
paid for them. These capital gains are either short-term or long-term, depending
on whether the fund held the securities for one year or less, or more than one
year.
- --------------------------------------------------------------------------------
<PAGE>
23
BASIC TAX POINTS
Vanguard will send you a statement each year showing the tax status of all your
distributions. In addition, taxable investors should be aware of the following
basic tax points:
- - Distributions are taxable to you for federal income tax purposes whether or
not you reinvest these amounts in additional Fund shares.
- - Distributions declared in December--if paid to you by the end of
January--are taxable for federal income tax purposes as if received in
December.
- - Any dividends and short-term capital gains that you receive are taxable to
you as ordinary income for federal income tax purposes.
- - Any distributions of net long-term capital gains are taxable to you as
long-term capital gains for federal income tax purposes, no matter how long
you've owned shares in the Fund.
- - Capital gains distributions may vary considerably from year to year as a
result of the Funds' normal investment activities and cash flows.
- - A sale or exchange of Fund shares is a taxable event. This means that you
may have a capital gain to report as income, or a capital loss to report as
a deduction, when you complete your federal income tax return.
- - 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.
- - The European, Pacific, and Emerging Markets Stock Index Funds may be
subject to foreign taxes or foreign tax withholding on dividends, interest,
and some capital gains that they receive on foreign securities. You may
qualify for an offsetting credit or deduction under U.S. tax laws for your
portion of a Fund's foreign tax obligations, provided that you meet certain
requirements. Because the Institutional Developed Markets Index Fund
invests in foreign stocks indirectly through the European and Pacific Stock
Index Funds, its investors are not able to take advantage of foreign tax
credits or deductions. See your tax adviser or IRS publications for more
information.
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
"BUYING A DIVIDEND"
Unless you are investing through a tax-deferred retirement account (such as an
IRA), you should avoid buying shares of a fund shortly before it makes a
distribution, because doing so can cost you money in taxes. This is known as
"buying a dividend." For example: On December 15, you invest $5,000, buying 250
shares for $20 each. If the fund pays a distribution of $1 per share on December
16, its share price would drop to $19 (not counting market change). You still
have only $5,000 (250 shares x $19 = $4,750 in share value, plus 250 shares x $1
= $250 in distributions), but you owe tax on the $250 distribution you
received--even if you reinvest it in more shares. To avoid "buying a dividend,"
check a fund's distribution schedule before you invest.
- --------------------------------------------------------------------------------
GENERAL INFORMATION
BACKUP WITHHOLDING. By law, Vanguard must withhold 31% of any taxable
distributions or redemptions from your account if you do not:
- - provide us with your correct taxpayer identification number;
- - certify that the taxpayer identification number is correct; and
- - confirm that you are not subject to backup withholding.
Similarly, Vanguard must withhold from your account if the IRS instructs us to
do so.
<PAGE>
24
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.
SHARE PRICE
Each Fund's share price, called its net asset value, or NAV, is calculated each
business day after the close of regular trading on the New York Stock Exchange
(the NAV is not calculated on holidays or other days when the Exchange is
closed). Net asset value per share for the Institutional Developed Markets Index
Fund is computed by adding up the total value of the Fund's investments (i.e.,
shares of the underlying funds) and other assets, subtracting any of its
liabilities (debts), and then dividing by the number of Fund shares outstanding:
TOTAL ASSETS - LIABILITIES
NET ASSET VALUE = --------------------------------
NUMBER OF SHARES OUTSTANDING
Net asset value per share for the European, Pacific, and Emerging Markets
Stock Index Funds is computed in a similar way, by dividing the net assets
attributed to each class by the number of Fund shares outstanding for that
class.
Knowing the daily net asset value is useful to you as a shareholder because
it indicates the current value of your investment. The Fund's NAV, multiplied by
the number of shares you own, gives you the dollar amount you would have
received had you sold all of your shares back to the Fund that day. Because
foreign securities markets may operate on days which are not business days in
the United States, the value of a Fund's holdings may change on days when
shareholders will not be able to purchase or redeem the Fund's shares.
A NOTE ON PRICING: A Fund's investments will be priced at their market
value when market quotations are readily available. When these quotations are
not readily available, investments will be priced at their fair value,
calculated according to procedures adopted by the Funds' Board of Trustees. A
Fund also may use fair value pricing if the value of a security held by the Fund
is materially affected by events occurring after the close of the primary
markets or exchanges on which such security is traded. In these situations,
prices used by the Fund to calculate its net asset value may differ from quoted
or published prices for the underlying securities.
Each Fund's share price can be found daily in the mutual fund listings of
most major newspapers under the heading "Vanguard Index Funds." Different
newspapers use different abbreviations for each Fund, but the most common are
EUROINST, PACINST, EMERGINST, and DEVMKTINST for the Institutional Shares of the
European, Pacific, and Emerging Markets Stock Index Funds, and the Institutional
Developed Markets Index Fund, respectively.
<PAGE>
25
FINANCIAL HIGHLIGHTS
The following financial highlights tables are intended to help you understand
each Fund's financial performance for the past five years or since inception
(except for Institutional Developed Markets Index Fund, which did not start
operations until May 5, 2000), and certain information reflects financial
results for a single Fund share. The total returns in each table represent the
rate that an investor would have earned or lost each year on an investment in
the Fund (assuming reinvestment of all dividend and capital gains
distributions). This information has been derived from the financial statements
audited by PricewaterhouseCoopers LLP, independent accountants, whose
report--along with each Fund's financial statements--is included in the Funds'
most recent annual report to shareholders. You may have the annual report sent
to you without charge by contacting Vanguard.
NOTE: This prospectus offers the Funds' Institutional Shares, not the Investor
Shares. Information for the Investor Shares is shown here because each of the
Fund's Institutional Shares are new. However, the two share classes are invested
in the same portfolio of securities and will have the same financial performance
except to the extent that their operating expenses differ.
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
HOW TO READ THE FINANCIAL HIGHLIGHTS TABLE
This explanation uses the European Stock Index Fund Investor Shares as an
example. The Fund began fiscal 1999 with a net asset value (price) of $25.28 per
share. During the year, the Fund earned $0.50 per share from investment income
(interest and dividends) and $3.69 per share from investments that had
appreciated in value or that were sold for higher prices than the Fund paid for
them.
Shareholders received $0.65 per share in the form of dividend and capital gains
distributions. A portion of each year's distributions may come from the prior
year's income or capital gains.
The earnings ($4.19 per share) minus the distributions ($0.65 per share)
resulted in a share price of $28.82 at the end of the year. This was an increase
of $3.54 per share (from $25.28 at the beginning of the year to $28.82 at the
end of the year). For a shareholder who reinvested the distributions in the
purchase of more shares, the total return from the Fund was 16.62% for the year.
As of December 31, 1999, the Fund had $6.1 billion in net assets. For the year,
its expense ratio was 0.29% ($2.90 per $1,000 of net assets); and its net
investment income amounted to 1.99% of its average net assets. It sold and
replaced securities valued at 7% of its net assets.
- --------------------------------------------------------------------------------
<PAGE>
26
FINANCIAL HIGHLIGHTS (CONTINUED)
- --------------------------------------------------------------------------------
VANGUARD EUROPEAN STOCK INDEX FUND
INVESTOR SHARES
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------
NET ASSET VALUE,
BEGINNING OF YEAR $25.28 $20.13 $16.57 $14.02 $11.76
- --------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .50 .41 .38 .34 .32
Net Realized and
Unrealized Gain
(Loss) on Investments 3.69 5.40 3.63 2.63 2.30
--------------------------------------------------------
Total from Investment
Operations 4.19 5.81 4.01 2.97 2.62
--------------------------------------------------------
DISTRIBUTIONS
Dividends from Net
Investment Income (.50) (.52) (.37) (.36) (.32)
Distributions from
Realized Capital Gains (.15) (.14) (.08) (.06) (.04)
--------------------------------------------------------
Total Distributions (.65) (.66) (.45) (.42) (.36)
- --------------------------------------------------------------------------------
NET ASSET VALUE, END
OF YEAR $28.82 $25.28 $20.13 $16.57 $14.02
================================================================================
TOTAL RETURN* 16.62% 28.86% 24.23% 21.26% 22.28%
================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of
Year (Millions) $6,106 $4,479 $2,432 $1,595 $1,017
Ratio of Total
Expenses to Average
Net Assets 0.29% 0.29% 0.31% 0.35% 0.35%
Ratio of Net
Investment Income to
Average Net Assets 1.99% 1.97% 2.19% 2.45% 2.66%
Turnover Rate 7% 7% 3% 4% 2%
================================================================================
*Total return figures do not reflect the transaction fee on purchases imposed
prior to 4/1/2000.
- --------------------------------------------------------------------------------
VANGUARD PACIFIC STOCK INDEX FUND
INVESTOR SHARES
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------
NET ASSET VALUE,
BEGINNING OF YEAR $ 7.84 $7.72 $10.51 $11.50 $11.31
- --------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .08 .085 .09 .10 .10
Net Realized and
Unrealized Gain
(Loss) on Investments 4.39 .100 (2.79) (1.00) .21
--------------------------------------------------------
Total from Investment
Operations 4.47 .185 (2.70) (.90) .31
--------------------------------------------------------
DISTRIBUTIONS
Dividends from Net
Investment Income (.09) (.065) (.09) (.09) (.12)
Distributions from
Realized Capital Gains -- -- -- -- --
--------------------------------------------------------
Total Distributions (.09) (.065) (.09) (.09) (.12)
- --------------------------------------------------------------------------------
NET ASSET VALUE, END
OF YEAR $12.22 $7.84 $ 7.72 $10.51 $11.50
================================================================================
TOTAL RETURN* 57.05% 2.41% -25.67% -7.82% 2.75%
================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of
Year (Millions) $2,526 $1,033 $827 $978 $831
Ratio of Total
Expenses to Average
Net Assets 0.37% 0.40% 0.35% 0.35% 0.35%
Ratio of Net
Investment Income to
Average Net Assets 0.95% 1.17% 1.03% 0.89% 0.97%
Turnover Rate 6% 4% 8% 9% 1%
================================================================================
*Total return figures do not reflect the transaction fee on purchases imposed
prior to 4/1/2000.
<PAGE>
27
- --------------------------------------------------------------------------------
VANGUARD EMERGING MARKETS STOCK INDEX FUND
INVESTOR SHARES
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------
NET ASSET VALUE,
BEGINNING OF YEAR $ 7.91 $9.98 $12.28 $10.75 $10.87
- --------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .24 .27 .24 .18 .15
Net Realized and
Unrealized Gain
(Loss) on Investments 4.62 (2.08) (2.31) 1.52 (.09)
--------------------------------------------------------
Total from Investment
Operations 4.86 (1.81) (2.07) 1.70 .06
--------------------------------------------------------
DISTRIBUTIONS
Dividends from Net
Investment Income (.27) (.26) (.23) (.17) (.18)
Distributions from
Realized Capital Gains -- -- -- -- --
--------------------------------------------------------
Total Distributions (.27) (.26) (.23) (.17) (.18)
- --------------------------------------------------------------------------------
NET ASSET VALUE, END
OF YEAR $21.50 $7.91 $ 9.98 $12.28 $10.75
================================================================================
TOTAL RETURN* 61.57% -18.12% -16.82% 15.83% 0.56%
================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of
Year (Millions) $1,138 $577 $660 $637 $234
Ratio of Total
Expenses to Average
Net Assets 0.58% 0.61% 0.57% 0.60% 0.60%
Ratio of Net
Investment Income to
Average Net Assets 2.55% 2.99% 1.96% 1.69% 2.00%
Turnover Rate 22% 22% 19% 1% 3%
================================================================================
*Total return figures do not reflect the transaction fee on purchases (0.5%
beginning 4/1/2000, 1.0% from 11/3/1997 to 3/31/2000, 1.5% from 1/1/1997 to
11/2/1997, 2.0% in 1995 through 1996), or the transaction fee on redemptions
(0.5% beginning 4/1/2000, 1.0% through 3/31/2000).
The Funds are not sponsored, sold, promoted, or endorsed by Morgan Stanley
Capital International. 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., and
have been licensed for use by The Vanguard Group.
<PAGE>
28
- --------------------------------------------------------------------------------
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 [BOOK ICON]. 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.
Note: Limitations do apply; see page 32.
- --------------------------------------------------------------------------------
VANGUARD(R) AUTOMATIC EXCHANGE SERVICE [BOOK ICON]
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) [BOOK ICON]
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 [BOOK ICON]
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, 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.
- --------------------------------------------------------------------------------
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>
29
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 [BOOK ICON]
Invest assets held in an existing personal trust.
- --------------------------------------------------------------------------------
FOR AN ORGANIZATION [BOOK ICON]
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 a Fund's next-determined net asset value after Vanguard
receives your request. As long as your request is received before the close of
regular trading on the New York Stock Exchange, generally 4 p.m. Eastern time,
you will buy your shares at that day's net asset value. You may convert the
Investor Shares of European, Pacific, and Emerging Markets Stock Index Funds
into Institutional Shares of the same Fund provided that you meet the minimum
initial investment requirements for such Shares.
- --------------------------------------------------------------------------------
MINIMUM INVESTMENT TO . . .
open a new account
$10 million
add to an existing account
$100 by mail or exchange; $1,000 by wire.
- --------------------------------------------------------------------------------
A NOTE ON PURCHASE FEES
Emerging Markets Stock Index Fund deducts a 0.5% fee from all purchases
(including exchanges from other Vanguard funds), but not from reinvested
dividends or capital gains.
- --------------------------------------------------------------------------------
BY WIRE TO OPEN A NEW ACCOUNT OR ADD TO AN EXISTING ACCOUNT [WIRE ICON]
Call your assigned Service Associate to arrange your wire transaction.
Wire to:
FRB ABA 021001088
HSBC Bank USA
For credit to:
Account: 000112046
Vanguard Incoming Wire Account
<PAGE>
30
In favor of:
European Stock Index Fund Institutional Shares-235
Pacific Stock Index Fund Institutional Shares-237
Emerging Markets Stock Index Fund Institutional Shares-239
Institutional Developed Markets Index Fund-234
In favor of:
[Account number, or temporary number for a new account]
[Registered account owner(s)]
[Registered address]
- --------------------------------------------------------------------------------
BY MAIL TO . . . [ENVELOPE ICON]
open a new account
Complete and sign the account registration form and enclose your check.
add to an existing account
Mail your check with an Invest-By-Mail form detached from your confirmation
statement to the address listed on the form. Please do not alter Invest-By-Mail
forms, since they are fund- and account-specific.
Make your check payable to: The Vanguard Group-(insert appropriate Fund number;
see below)
European Stock Index Fund Institutional Shares-235
Pacific Stock Index Fund Institutional Shares-237
Emerging Markets Stock Index Fund Institutional Shares-239
Institutional Developed Markets Index Fund-234
All purchases must be made in U.S. dollars, and checks must be drawn on U.S.
banks.
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 100 Vanguard Boulevard
Valley Forge, PA 19482-2900 Malvern, PA 19355-2331
- --------------------------------------------------------------------------------
IMPORTANT NOTE: To prevent check fraud, Vanguard will not accept checks made
payable to third parties.
- --------------------------------------------------------------------------------
BY TELEPHONE TO . . . [TELEPHONE ICON]
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).
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.
<PAGE>
31
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
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 33.
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 signature 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 described in this "Redeeming Shares"
section of the prospectus.
- --------------------------------------------------------------------------------
A NOTE ON REDEMPTION FEES
Emerging Markets Stock Index Fund Institutional Shares imposes a 0.5% redemption
fee on all share redemptions. Currently, redemption fees do not apply to Fund
shares held through Vanguard's separate recordkeeping system for employee
benefit plan accounts, due to certain economies associated with these accounts.
However, the Fund reserves the right to impose redemption fees on its shares at
any time if warranted by the Fund's future costs of processing redemptions from
these accounts.
- --------------------------------------------------------------------------------
NOTE: Once a redemption is initiated and a confirmation number given, the
transaction CANNOT be canceled.
- --------------------------------------------------------------------------------
<PAGE>
32
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 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 ICON]
Call Vanguard Tele-Account 24 hours a day--or your assigned Service Associate
during business hours--to sell shares.
- --------------------------------------------------------------------------------
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 ICON]
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.
<PAGE>
33
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 19355-2331
- --------------------------------------------------------------------------------
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 or exchange
to another Vanguard fund.
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
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 a Fund and
increase the Fund's costs for all shareholders, Vanguard limits account activity
as follows:
- - You may make no more than TWO SUBSTANTIVE "ROUND TRIPS" THROUGH A FUND
during any 12-month period.
- - Your round trips through a Fund must be at least 30 days apart.
- - A Fund may refuse a share purchase at any time, for any reason.
<PAGE>
34
- - 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 a 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.
- --------------------------------------------------------------------------------
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, PA 19355-2331
- --------------------------------------------------------------------------------
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 your Fund twice a
year. These comprehensive reports include an assessment of the Fund's
performance (and a comparison to its industry benchmark), an overview of the
financial markets, a report from the adviser, and the Fund's financial
statements which include a listing of the Fund's holdings.
To keep each Fund's costs as low as possible (so that you and other shareholders
can keep more of the Fund's investment earnings), Vanguard attempts to eliminate
duplicate mailings to the same address. When two or more Fund shareholders have
the same last name and address, we send just one Fund report to that
address--instead of mailing separate reports to each shareholder. If you want us
to send separate reports, notify our Institutional Division at 1-888-809-8102.
- --------------------------------------------------------------------------------
CONFIRMATION STATEMENT
Sent each time you buy, sell, or exchange shares; confirms the trade date and
the amount of your transaction.
- --------------------------------------------------------------------------------
<PAGE>
35
- --------------------------------------------------------------------------------
PORTFOLIO SUMMARY [BOOK ICON]
Mailed quarterly for most accounts; shows the market value of your account at
the close of the statement period, as well as distributions, purchases, sales,
and exchanges for the current calendar year.
- --------------------------------------------------------------------------------
FUND FINANCIAL REPORTS
Mailed in February and August for these Funds.
- --------------------------------------------------------------------------------
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
Vanguard European, Pacific, and Emerging Markets Stock Index Funds each reserve
the right to convert an investor's Institutional Shares into Investor Shares of
the same Fund if the investor's account balance falls below $10 million. In
addition, Vanguard Institutional Developed Markets Index Fund reserves the right
to redeem an investor's shares if the investor's account balance falls below $10
million. Any such conversion or redemption will be preceded by written notice to
the investor. No transaction fee will be imposed on share-class conversions.
<PAGE>
(THIS PAGE INTENTIONALLY LEFT BLANK.)
<PAGE>
GLOSSARY OF INVESTMENT TERMS
ACTIVE MANAGEMENT
An investment approach that seeks to exceed the average returns of the financial
markets. Active managers rely on research, market forecasts, and their own
judgment and experience in selecting securities to buy and sell.
CAPITAL GAINS DISTRIBUTION
Payment to mutual fund shareholders of gains realized on securities that a fund
has sold at a profit, minus any realized losses.
CASH RESERVES
Cash deposits, short-term bank deposits, and money market instruments which
include U.S. Treasury bills, bank certificates of deposit (CDs), repurchase
agreements, commercial paper, and banker's acceptances.
COMMON STOCK
A security representing ownership rights in a corporation. A stockholder is
entitled to share in the company's profits, some of which may be paid out as
dividends.
COUNTRY RISK
The chance that domestic events--such as political upheaval, financial troubles,
or a natural disaster--will weaken a country's securities markets.
CURRENCY RISK
The chance that a foreign investment will decrease in value because of
unfavorable changes in currency exchange rates.
DIVIDEND INCOME
Payment to shareholders of income from interest or dividends generated by a
fund's investments.
EXPENSE RATIO
The percentage of a fund's average net assets used to pay its expenses. The
expense ratio includes management fees, administrative fees, and any 12b-1
distribution fees.
INDEX
An unmanaged group of securities whose overall performance is used as a standard
to measure investment performance.
INTERNATIONAL STOCK FUND
A mutual fund that invests in the stocks of companies located outside the United
States.
INVESTMENT ADVISER
An organization that makes the day-to-day decisions regarding a fund's
investments.
MUTUAL FUND
An investment company that pools the money of many people and invests it in a
variety of securities in an effort to achieve a specific objective over time.
NET ASSET VALUE (NAV)
The market value of a mutual fund's total assets, minus liabilities, divided by
the number of shares outstanding. The value of a single share is called its
share value or share price.
PASSIVE MANAGEMENT
A low-cost investment strategy in which a mutual fund attempts to match--rather
than outperform--a particular stock or bond market index. Also known as
indexing.
PRINCIPAL
The amount of money you put into an investment.
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>
[LOGO]
[THE VANGUARD GROUP(R) LOGO]
Institutional Division
Post Office Box 2600
Valley Forge, PA 19482-2600
FOR MORE INFORMATION
If you'd like more information about
Vanguard International Stock Index
Funds, the following documents are
available free upon request:
ANNUAL/SEMIANNUAL REPORTS
TO SHAREHOLDERS
Additional information about the
Funds' investments is available in
the Funds' annual and semiannual
reports to shareholders.
STATEMENT OF ADDITIONAL
INFORMATION (SAI)
The SAI provides more detailed
information about the Funds (there
is a separate SAI for Vanguard
Institutional Developed Markets
Index Fund, which is legally a part of
Vanguard STAR Funds).
The current annual and semiannual
reports and each SAI are
incorporated by reference into
(and are thus legally a part of)
this prospectus.
To receive a free copy of the latest
annual or semiannual report or the
SAI, or to request additional
information about the Funds or other
Vanguard funds, please contact us
as follows:
If you are an Individual Investor:
THE VANGUARD GROUP
INVESTOR INFORMATION
DEPARTMENT
P.O. BOX 2900
VALLEY FORGE, PA 19482-2900
TELEPHONE:
1-800-662-7447 (SHIP)
TEXT TELEPHONE:
1-800-952-3335
If you are a client of Vanguard's
Institutional Division:
THE VANGUARD GROUP
INSTITUTIONAL INVESTOR
INFORMATION DEPARTMENT
P.O. BOX 2900
VALLEY FORGE, PA 19482-2900
TELEPHONE:
1-888-809-8102
WORLD WIDE WEB:
WWW.VANGUARD.COM
If you are a current Fund shareholder
and would like information about
your account, account transactions,
and/or account statements,
please call:
CLIENT SERVICES DEPARTMENT
TELEPHONE:
1-800-662-2739 (CREW)
TEXT TELEPHONE:
1-800-749-7273
INFORMATION PROVIDED BY THE
SECURITIES AND EXCHANGE
COMMISSION (SEC)
You can review and copy
information about the Funds
(including the SAI) at the SEC's
Public Reference Room in
Washington, DC. To find out more
about this public service, call the
SEC at 1-202-942-8090. Reports and
other information about the Funds
are also available on the SEC's
website (www.sec.gov), or you can
receive copies of this information,
for a fee, by electronic request at
the following e-mail address:
[email protected], or by writing
the Public Reference Section,
Securities and Exchange
Commission, Washington, DC
20549-0102.
Funds' Investment Company Act
file number: 811-5972 (811-3919
for Institutional Developed Markets
Index Fund)
(C) 2000 The Vanguard Group, Inc.
All rights reserved.
Vanguard Marketing Corporation,
Distributor.
I235N-04/28/2000
<PAGE>
PART B
VANGUARD(R) STAR FUNDS
(THE TRUST)
STATEMENT OF ADDITIONAL INFORMATION
APRIL 28, 2000
This Statement is not a prospectus but should be read in conjunction with
the Trust's current Prospectuses (dated April 28, 2000). To obtain a Prospectus
or the most recent Annual Report to Shareholders, which contains the Funds'
Financial Statements (except for Vanguard Developed Markets Index Fund and
Vanguard Institutional Developed Markets Index Fund) as hereby incorporated by
reference, please call:
INVESTOR INFORMATION DEPARTMENT
1-800-662-7447(SHIP)
TABLE OF CONTENTS
PAGE
----
DESCRIPTION OF THE TRUST.....................................................B-1
FUNDAMENTAL INVESTMENT LIMITATIONS...........................................B-3
INVESTMENT POLICIES..........................................................B-4
MANAGEMENT OF THE FUNDS......................................................B-8
INVESTMENT ADVISORY SERVICES................................................B-10
PORTFOLIO TRANSACTIONS......................................................B-21
PURCHASE OF SHARES..........................................................B-21
REDEMPTION OF SHARES........................................................B-21
SHARE PRICE.................................................................B-22
YIELD AND TOTAL RETURN......................................................B-22
COMPARATIVE INDEXES.........................................................B-24
DESCRIPTION OF BOND CREDIT RATINGS..........................................B-26
FINANCIAL STATEMENTS........................................................B-26
DESCRIPTION OF THE TRUST
ORGANIZATION
The Trust was organized as a Pennsylvania business trust in 1983, and was
reorganized as a Delaware business trust in June 1998. The Trust is registered
with the United States Securities and Exchange Commission (the Commission) under
the Investment Company Act of 1940 (the 1940 Act) as an open-end diversified
management investment company. It currently offers the following diversified
Funds, each of which has outstanding one class of shares:
Vanguard(R) Developed Markets Index Fund
Vanguard(R) Institutional Developed Markets Index Fund
Vanguard(R) LifeStrategy(R) Conservative Growth Fund
Vanguard(R) LifeStrategy(R) Growth Fund
Vanguard(R) LifeStrategy(R) Income Fund
Vanguard(R) LifeStrategy(R) Moderate Growth Fund
Vanguard(R) STAR(TM) Fund
Vanguard(R) Total International Stock Index Fund
(individually, a Fund; collectively, the Funds)
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 a single fund
or class of shares may issue.
B-1
<PAGE>
SERVICE PROVIDERS
CUSTODIAN. First Union National Bank, PA4943, 530 Walnut Street,
Philadelphia, Pennsylvania 19106 and The Chase Manhattan Bank, N.A., 4 Chase
MetroTech Center, Brooklyn, New York 11245, serve as the Funds' custodians. The
custodians are responsible for maintaining the Funds' assets and keeping all
necessary accounts and records of Fund assets.
INDEPENDENT ACCOUNTANTS. PricewaterhouseCoopers LLP, 30 South 17th Street,
Philadelphia, Pennsylvania 19103, serves as the Funds' independent accountants.
The accountants audit the Funds' financial statements and provide other related
services.
TRANSFER AND DIVIDEND-PAYING AGENT. The Funds' transfer and dividend-paying
agent is The Vanguard Group, Inc., 100 Vanguard Boulevard, Malvern, Pennsylvania
19355.
CHARACTERISTICS OF THE FUNDS' SHARES
RESTRICTIONS ON HOLDING OR DISPOSING OF SHARES. There are no restrictions
on the right of shareholders to retain or dispose of each Fund's shares, other
than the possible future termination of a Fund. The Funds may be terminated by
reorganization into another mutual fund or by liquidation and distribution of
the assets of the affected Fund. Unless terminated by reorganization or
liquidation, the Funds will continue indefinitely.
SHAREHOLDER LIABILITY. The Trust is organized under Delaware law, which
provides that shareholders of a business trust are entitled to the same
limitations of personal liability as shareholders of a corporation organized
under Delaware law. Effectively, this means that a fund shareholder 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 of the Declaration of Trust that would adversely affect to a material
degree the rights and preferences of the shares of any 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 written request of shareholders
representing 10% or more of a fund's net assets, and to change any fundamental
policy of the fund. Shareholders of a fund receive one vote for each dollar of
net asset value owned on the record date, and a fractional vote for each
fractional dollar of net assets owned on the record date. However, only the
shares of a 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 Fund 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.
CONVERSION RIGHTS. There are no conversion rights associated with shares of
each Fund.
REDEMPTION PROVISIONS. The Funds' redemption provisions are described in
their current prospectuses and elsewhere in this Statement of Additional
Information.
SINKING FUND PROVISIONS. The Funds have no sinking fund provisions.
CALLS OR ASSESSMENTS. Each Fund's shares, when issued, are fully paid and
non-assessable.
B-2
<PAGE>
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, a 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.
FUNDAMENTAL INVESTMENT LIMITATIONS
Each Fund is subject to the following fundamental investment limitations,
which cannot be changed in any way without the approval of the holders of a
majority of the affected Fund's shares. For these purposes, a "majority" of a
Fund's 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 a Fund's net asset value.
BORROWING. A Fund may not borrow money, except for temporary or emergency
purposes in an amount not exceeding 15% of the Fund's net assets. The Fund may
borrow money through banks or Vanguard's interfund lending program only, and
must comply with all applicable regulatory conditions.
COMMODITIES. A Fund may not purchase or sell commodities, except that the
Institutional Developed Markets Index, Developed Markets Index, LifeStrategy
Conservative Growth, LifeStrategy Growth, LifeStrategy Income, LifeStrategy
Moderate Growth, and Total International Stock Index Funds may invest in futures
contracts and options transactions. 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.
ILLIQUID. A Fund may not acquire any security if, as a result, more than
15% of its net assets would be invested in securities that are illiquid.
INVESTING FOR CONTROL. A Fund may not invest in a company for the purpose
of controlling its management.
LOANS. A Fund may not lend money to any person except by purchasing bonds
and other debt securities that are publicly distributed or customarily purchased
by institutional investors, by entering into repurchase agreements, or through
Vanguard's interfund lending program.
MARGIN. A Fund may not purchase securities on margin or sell securities
short, except as permitted by the Fund's investment policies relating to
commodities.
OIL, GAS, MINERALS. A Fund may not invest in interests in oil, gas, or
other mineral exploration or development programs.
PUTS, CALLS. A Fund may not purchase or sell puts or calls.
PLEDGING ASSETS. A Fund may not pledge, mortgage, or hypothecate more than
15% of its net assets.
REAL ESTATE. A Fund may not invest directly in real estate.
SENIOR SECURITIES. A Fund may not issue senior securities, except in
compliance with the 1940 Act.
UNDERWRITING. A Fund may not engage in the business of underwriting
securities issued by other persons. A Fund will not be considered an underwriter
when disposing of its investment securities.
The investment limitations set forth above are considered at the time that
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 restrictions.
The investment limitations set forth above relate only to the Funds, and
may not necessarily apply to the underlying funds in which the Funds invest.
Thus, while a Fund may not invest directly in real estate, for example, it may
do so indirectly if one of the underlying funds does so.
B-3
<PAGE>
INVESTMENT POLICIES
The following policies supplement the Funds' investment policies set forth
in the Prospectuses:
REPURCHASE AGREEMENTS. Each Fund (and each of the underlying Vanguard
funds) may invest in repurchase agreements with commercial banks, brokers, or
dealers to generate income from its excess cash balances. A repurchase agreement
is an agreement under which a Fund acquires a fixed-income security (generally a
security issued by the U.S. Government or an agency thereof, a banker's
acceptance or a certificate of deposit) from a commercial bank, broker, or
dealer, subject to resale to the seller at an agreed upon price and date
(normally, the next business day). A repurchase agreement may be considered a
loan collateralized by securities. The resale price reflects an agreed upon
interest rate effective for the period the instrument is held by a Fund and is
unrelated to the interest rate on the underlying instrument. In these
transactions, the securities acquired by a 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 Fund's custodian bank until repurchased. In
addition, the Funds' Board of Trustees will monitor each Fund's repurchase
agreement transactions generally and will establish guidelines and standards for
review of the creditworthiness of any bank, broker, or dealer party to a
repurchase agreement with a Fund.
The use of repurchase agreements involves certain risks. For example, if
the other party to the agreement defaults on its obligation to repurchase the
underlying security at a time when the value of the security has declined, a
Fund may incur a loss upon disposition of the security. If the other party to
the agreement becomes insolvent and subject to liquidation or reorganization
under bankruptcy or other laws, a court may determine that the underlying
security is collateral for a loan by a 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 a 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 advisers
acknowledge these risks, it is expected that they can be controlled through
careful monitoring procedures.
FUTURES CONTRACTS. Institutional Developed Markets Index, Developed Markets
Index, LifeStrategy Conservative Growth, LifeStrategy Growth, LifeStrategy
Income, LifeStrategy Moderate Growth, and Total International Stock Index Funds
(as well as most of their underlying funds) may enter into futures contracts,
options, and options on futures contracts for several reasons: to maintain cash
reserves while remaining fully invested, 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.
Futures contracts provide for the future sale by one party and purchase by
another party of a specified amount of a specific financial instrument 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 most futures contracts by their terms call for actual delivery or
acceptance of the underlying financial instrument, the Funds will generally only
utilize stock index contracts which are settled by a cash amount equal to the
value of an explicit stock index (such as the Standard & Poor's 500 Stock Index)
on the contract maturity date. In most cases, however, the contracts are closed
out before the settlement date. Closing out an open futures position is done by
taking an opposite position ("buying" a contract which has previously been
"sold," or "selling" a contract previously "purchased") in an identical contract
to terminate the position. Brokerage commissions are incurred when a futures
contract is bought or sold.
Futures traders are required to make a good faith margin deposit in cash or
government securities with a broker or custodian to initiate and maintain open
positions in futures contracts. A margin deposit is intended to assure
completion of the contract (delivery or acceptance of the underlying security)
if it is not terminated prior to the specified delivery date. Minimal initial
margin requirements are established by the futures exchange and may be changed.
Brokers may establish deposit requirements which are higher than the exchange
minimums. Futures contracts are customarily purchased and sold on margin which
may range upward from less than 5% of the value of the contract being traded.
After a futures contract position is opened, the value of the contract is
marked to market daily. If the futures contract price changes to the extent that
the margin on deposit does not satisfy margin requirements, payment
B-4
<PAGE>
of additional "variation" margin will be required. Conversely, change in the
contract value may reduce the required margin, resulting in a repayment of
excess margin to the contract holder. Variation margin payments are made to and
from the futures broker for as long as the contract remains open. The Funds
expect to earn interest income on their margin deposits.
Traders in futures contracts, in general, use the futures markets for one
of two purposes: 1) to offset or hedge unfavorable changes in the value of
securities otherwise held (or expected to be held) for investment purposes; or,
2) to profit from fluctuations in the financial instrument underlying the value
of the futures contracts. In either case, futures contracts general offer a cost
effective and efficient means to replicate exposure to various financial
instruments. The Funds intend to use futures contracts to either simulate full
(or near full) investment in stocks, while keeping cash on hand to meet
shareholder redemptions, or to reduce transaction costs. A Fund will not utilize
futures contracts to leverage its exposure to gains and losses to that above
100% of its assets.
Regulations of the CFTC applicable to the Funds require that all of their
futures transactions constitute bona fide hedging transactions except to the
extent that the aggregate initial margins and premiums required to establish any
non-hedging positions do not exceed five percent of the value of a Fund's
portfolio. The Funds 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, the Funds expect that approximately 75% of all futures contract
purchases will be "completed;" that is, equivalent amounts of related securities
will have been purchased or are being purchased by the Funds upon sale of open
futures contracts.
Although techniques other than the sale and purchase of futures contracts
could be used to control a Fund's exposure to market fluctuations, the use of
futures contracts may be a more effective means of hedging this exposure. While
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 the underlying securities.
Restrictions on the Use of Futures Contracts. A Fund will not enter into
futures contract transactions to the extent that, immediately thereafter, the
sum of its initial margin deposits on open contracts exceeds 5% of the market
value of the Fund's total assets. In addition, the Fund will not enter into
futures contracts to the extent that its outstanding obligations to purchase
securities under these contracts would exceed 20% of the Fund's total assets.
Risk Factors in Futures Transactions. Positions in futures contracts may be
closed out only on an Exchange which provides a secondary market for such
futures. However, there can be no assurance that a liquid secondary market will
exist for any particular futures contract at any specific time. Thus, it may not
be possible to close a futures position. In the event of adverse price
movements, a Fund would continue to be required to make daily cash payments to
maintain its required margin. In such situations, if 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, the 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. The Funds will minimize the
risk that they will be unable to close out a futures contract by only entering
into futures which are traded on national futures exchanges and for which there
appears to be a liquid secondary market.
The risk of loss in trading futures contracts in some strategies can be
substantial, due both to the low margin deposits required, and the extremely
high degree of leverage involved in futures pricing. As a result, a relatively
small price movement in a futures contract may result in immediate and
substantial loss (as well as gain) to the investor. For example, if at the time
of purchase, 10% of the value of the futures contract is deposited as margin, a
subsequent 10% decrease in the value of the futures contract would result in a
total loss of the margin deposit, before any deduction for the transaction
costs, if the account were then closed out. A 15% decrease would result in a
loss equal to 150% of the original margin deposit if the contract were closed
out. Thus, a purchase or sale of a futures contract may result in losses in
excess of the amount invested in the contract. However, because the futures
strategies of the Funds are engaged in only for hedging purposes, the adviser
does not believe that the Funds are subject to the risks of loss frequently
associated with futures transactions. The Funds would presumably have sustained
comparable losses if, instead of the futures contract, they had invested in the
underlying financial instrument and sold it after the decline.
B-5
<PAGE>
Utilization of futures transactions by a Fund does involve the risk of
imperfect or no correlation, particularly considering that futures contracts
have set maturity dates (referred to as "expiration dates") while the underlying
equity securities of the contract generally do not. Even in the event that a
Fund utilizes futures for some limited hedging purpose, it is also possible that
the Fund could both lose money on futures contracts and also experience a
decline in value of its portfolio securities. There is also the risk of loss by
a Fund of margin deposits in the event of bankruptcy of a broker with whom the
Fund has an open position in a futures contract or related option.
Most futures exchanges limit the amount of fluctuation permitted in futures
contract prices during a single trading day. The daily limit establishes the
maximum amount that the price of a futures contract may vary either up or down
from the previous day's settlement price at the end of a trading session. Once
the daily limit has been reached in a particular type of contract, no trades may
be made on that day at a price beyond that limit. The daily limit governs only
price movement during a particular trading day and therefore does not limit
potential losses, because the limit may prevent the liquidation of unfavorable
positions. Futures contract prices have occasionally moved to the daily limit
for several consecutive trading days with little or no trading, thereby
preventing prompt liquidation of futures positions and subjecting some futures
traders to substantial losses.
Federal Tax Treatment of Futures Contracts. Each Fund is required for
Federal income tax purposes to recognize as income for each taxable year its net
unrealized gains and losses on certain futures contracts as of the end of the
year as well as those actually realized during the year. In these cases, any
gain or loss recognized with respect to a futures contract is considered to be
60% long-term capital gain or loss and 40% short-term capital gain or loss,
without regard to the holding period of the contract. Gains and losses on
certain other futures contracts (primarily non-U.S. futures contracts) are not
recognized until the contracts are closed and are treated as long-term or
short-term depending on the holding period of the contract. Sales of futures
contracts which are intended to hedge against a change in the value of
securities held by a Fund may affect the holding period of such securities and,
consequently, the nature of the gain or loss on such securities upon
disposition. A Fund may be required to defer the recognition of losses on
futures contracts to the extent of any unrecognized gains on related positions
held by the Fund.
In order for a Fund to continue to qualify for Federal income tax treatment
as a regulated investment company, at least 90% of its gross income for a
taxable year must be derived from qualifying income; i.e., dividends, interest,
income derived from loans of securities, gains from the sale of securities or
foreign currencies, or other income derived with respect to the Fund's business
of investing in securities or currencies. It is anticipated that any net gain
recognized on futures contracts will be considered qualifying income for
purposes of the 90% requirement.
Each Fund will distribute to shareholders annually any net capital gains
which have been recognized for Federal income tax purposes on futures
transactions. Such distributions will be combined with distributions of capital
gains realized on the Funds' other investments and shareholders will be advised
on the nature of the transactions.
ILLIQUID SECURITIES. Each underlying fund may invest up to 15% (10% for
Prime Money Market Fund) 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.
The underlying funds may invest in restricted, privately placed securities
that, under securities laws, may be sold only to qualified institutional buyers.
Because these securities can be resold only to qualified institutional buyers or
after they have been held for a number of years, they may be considered illiquid
securities--meaning that they could be difficult for the funds to convert to
cash if needed.
If a substantial market develops for a restricted security held by a fund,
it will be treated as a liquid security, in accordance with procedures and
guidelines approved by the funds' 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. While each
fund's investment adviser determines the liquidity of restricted securities on a
daily basis, the Board oversees and retains ultimate responsibility for the
adviser's decisions. Several factors that the Board considers in monitoring
these decisions include the valuation of a security, the availability of
qualified institutional buyers, and the availability of information about the
security's issuer.
B-6
<PAGE>
LENDING OF SECURITIES. The Funds (or any underlying 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 securities, a Fund will be attempting to increase its net investment
income through the receipt of interest on the loan. Any gain or loss in the
market price of the securities loaned that might occur during the term of the
loan would be for the account of the Fund. The terms and the structure and the
aggregate amount of such loans must be consistent with the 1940 Act and the
Rules or interpretations of the Commission thereunder. These provisions limit
the amount of securities a fund may lend to 33 1/3% of the fund's total assets,
and require that (a) the borrower pledge and maintain with the fund collateral
consisting of cash, an irrevocable letter of credit or securities issued or
guaranteed by the United States Government having a value 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 a
fund will comply with all other applicable regulatory requirements, including
the rules of the New York Stock Exchange, which rules presently require the
borrower, after notice, to redeliver the securities within the normal settlement
time of three business days. All relevant facts and circumstances, including the
credit-worthiness of the broker, dealer, or institution, will be considered in
making decisions with respect to the lending of securities, subject to review by
the Funds' Board of Trustees.
FOREIGN INVESTMENTS. Each underlying fund in which the Funds invest may
invest its assets in securities of foreign companies. Investors should recognize
that investing in foreign companies involves certain special considerations
which are not typically associated with investing in U.S. companies.
Currency Risk. Since the stocks of foreign companies are frequently
dominated 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.
Country Risk. As foreign countries 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 custodial arrangements of the
funds' foreign securities will be somewhat greater than the expenses for
custodial 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 each fund. However, these
foreign withholding taxes are not expected to have a significant impact on the
funds.
Federal Tax Treatment of Non-U.S. Transactions. Special rules govern the
Federal income tax treatment of certain transactions denominated in foreign
currency or determined by reference to the value of one or more foreign
currencies. The types of transactions covered by the special rules include the
following: (i) the acquisition of, or becoming the obligor under, a bond or
other debt instrument (including, to the extent provided in Treasury
regulations, preferred stock); (ii) the accruing of certain trade receivables
and payables; and (iii) the entering into or acquisition of any forward
contract, futures contract, option or similar financial instrument if such
instrument is not marked to market. The disposition of a currency other than the
U.S. dollar by a taxpayer whose functional currency is the U.S. dollar is also
treated as a transaction subject to the special currency rules.
B-7
<PAGE>
However, foreign currency-related regulated futures contracts and nonequity
options are generally not subject to the special currency rules if they are or
would be treated as sold for their fair market value at year-end under the
marking-to-market rules applicable to other futures contracts unless an election
is made to have such currency rules apply. With respect to transactions covered
by the special rules, foreign currency gain or loss is calculated separately
from any gain or loss on the underlying transaction and is normally taxable as
ordinary income or loss. A taxpayer may elect to treat as capital gain or loss
foreign currency gain or loss arising from certain identified forward contracts,
futures contracts, and options that are capital assets in the hands of the
taxpayer and which are not part of a straddle. The Treasury Department issued
regulations under which certain transactions subject to the special currency
rules that are part of a "section 988 hedging transaction" (as defined in the
Internal Revenue Code of 1986, as amended, and the Treasury regulations) will be
integrated and treated as a single transaction or otherwise treated consistently
for purposes of the Code. Any gain or loss attributable to the foreign currency
component of a transaction engaged in by a fund which is not subject to the
special currency rules (such as foreign equity investments other than certain
preferred stock) will be treated as capital gain or loss and will not be
segregated from the gain or loss on the underlying transaction.
VANGUARD INTERFUND LENDING PROGRAM.The Commission has issued an exemptive
order permitting the Funds and other Vanguard funds to participate in Vanguard's
interfund lending program. This program allows the Vanguard funds to borrow
money from and loan money to each other for temporary or emergency purposes. The
program is subject to a number of conditions, including the requirement that no
fund may borrow or lend money through the program unless it receives a more
favorable interest rate than is available from a typical bank for a comparable
transaction. In addition, a Vanguard fund may participate in the program only if
and to the extent that such participation is consistent with the fund's
investment objective and other investment policies. The Boards of Trustees of
the Vanguard funds are responsible for ensuring that the interfund lending
program operates in compliance with all conditions of the Commission's exemptive
order.
TEMPORARY INVESTMENTS. Each underlying fund in which the Funds invest 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, the funds may fail to achieve their investment
objective.
MANAGEMENT OF THE FUNDS
OFFICERS AND TRUSTEES
The officers of each Fund manage its day-to-day operations and are
responsible to the Fund's Board of Trustees. The Trustees set broad policies for
the Funds 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 funds administered by Vanguard. The mailing address of the Trustees and
officers of the Funds is Post Office Box 876, Valley Forge, PA 19482.
JOHN J. BRENNAN, (DOB: 7/29/1954) Chairman, Chief Executive Officer & 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.
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<PAGE>
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, Inc. (Machinery/Coal/
Appliances); and Director of The BFGoodrich Co. (Aircraft
Systems/Manufacturing/Chemicals).
JOHN C. SAWHILL, (DOB: 6/12/1936) Trustee President and Chief Executive Officer
of The Nature Conservancy (Non-Profit Conservation Group); Director of Pacific
Gas and Electric Co., Procter & Gamble Co., NACCO Industries
(Machinery/Coal/Appliances), and Newfield Exploration Co. (Energy); formerly,
Director and Senior Partner of McKinsey & Co., and President of New York
University.
JAMES O. WELCH, JR., (DOB: 5/13/1931) Trustee Retired Chairman of Nabisco
Brands, Inc. (Food Products); retired Vice Chairman and Director of RJR Nabisco
(Food and Tobacco Products); Director of TECO Energy, Inc., and Kmart Corp.
J. LAWRENCE WILSON, (DOB: 3/2/1936) Trustee Retired Chairman of Rohm & Haas Co.
(Chemicals); Director of Cummins Engine Co.(Diesel Engine Company), 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: 9/4/1961) Controller* Principal of The Vanguard Group,
Inc.; Controller of each of the investment companies in The Vanguard Group.
- ---------
*Officers of the Funds are "interested persons" as defined in the 1940 Act.
The Trustees and officers of the Funds will receive no remuneration from
the Funds. However, the Trustees are also Trustees of The Vanguard Group, Inc.
(Vanguard) and of the Funds' underlying investment companies in The Vanguard
Group (the Vanguard funds). Each Vanguard fund pays its unaffiliated Trustees an
annual fee plus a proportionate share of travel and other expenses incurred in
attending Board meetings. The officers are paid by Vanguard which, in turn, is
reimbursed by each Vanguard fund for its proportionate share of officers'
salaries and benefits.
THE VANGUARD GROUP
GENERAL. Each Fund is part of the Vanguard family of mutual funds, which
consists of more than 35 investment companies with over 100 funds. Each of the
Vanguard funds receives at cost from The Vanguard Group, Inc. (Vanguard)
virtually all of its administrative and distribution services. Vanguard also
provides investment advisory services at cost to certain Vanguard funds; other
Vanguard funds are advised by independent advisers unaffiliated with Vanguard.
Vanguard is jointly owned by all of the Vanguard funds except the STAR
Funds and one other investment company (the Member funds). Each of the Member
funds contributes to Vanguard's capitalization, and pays its share of Vanguard's
expenses, pursuant to formulas determined by the Member funds' boards of
trustees. The STAR Funds are not Member funds because they contribute to
Vanguard's capitalization and expenses indirectly through ownership of certain
Vanguard funds. It is possible that, in the future, the Funds may become Member
B-9
<PAGE>
funds, but this will only happen on terms that assure that the Funds will not
bear any duplicative capital contribution or expense allocation costs.
SPECIAL SERVICING AGREEMENT. The Funds and Vanguard have entered into a
Special Servicing Agreement under which Vanguard provides the Funds with
administrative and distribution services, including dividend disbursing,
shareholder servicing, and transfer agency services. The Agreement provides that
the Funds pay Vanguard for the cost of providing these services, and bear the
cost of services provided by outside parties, such as auditors, custodians, and
outside legal counsel, as well as taxes and other direct expenses of the Funds.
The Agreement further provides that the Funds' expenses will be offset, in whole
or in part, by reimbursement from Vanguard for (a) contributions made by the
Funds to the cost of operating the Vanguard funds in which the Funds invest, and
(b) certain savings in administrative and marketing costs that Vanguard is
expected to derive from the operation of the Funds. The Funds' Board of Trustees
believe that the reimbursements to be made by Vanguard to the Funds should be
sufficient to offset most or all of the expenses incurred by each Fund.
Therefore, the Funds are expected to operate at a very low--or zero--expense
ratio. For the fiscal year ended December 31, 1999, all of the Funds in fact had
expense ratios of zero. Of course, there is no guarantee that this will always
be the case.
Although the Funds are expected to operate at a zero expense ratio after
reimbursement, they will bear indirectly, as shareholders of the underlying
Vanguard funds, the costs associated with operating those funds. As of December
31, 1999, it is estimated that the indirect expense ratio of the Funds was as
follows: STAR Fund--[0.36%]; LifeStrategy Income Fund--[0.28%]; LifeStrategy
Conservative Growth Fund--[0.29%]; LifeStrategy Moderate Growth Fund--[0.29%];
LifeStrategy Growth Fund--[0.29%]; Total International Stock Index
Fund--[0.34%]. Vanguard Institutional Developed Markets and Vanguard Developed
Markets Index Funds did not commence operations until May 5, 2000.
CODE OF ETHICS.Vanguard has adopted a Code of Ethics designed to prevent
employees who may have access to nonpublic information about the trading
activities of the Funds (access persons) from profiting from that information.
The Code permits access persons to invest in securities for their own accounts,
including securities that may be held by the Funds, but places substantive and
procedural restrictions on their trading activities. For example, the Code
requires that access persons of the Funds receive advance approval for every
securities trade to ensure that there is no conflict with the trading activities
of the Funds.
INVESTMENT ADVISORY SERVICES
The Funds do not employ an investment adviser. The allocation of each
Fund's assets among the underlying Vanguard funds is made by officers of the
Funds pursuant to instructions of the Funds' Board of Trustees and in conformity
with each Fund's investment objective, strategies, and policies. The Declaration
of Trust authorizes the Trustees to retain an investment adviser if they
determine that such action is in the best interests of the shareholders of each
Fund. The Trustees have no present intention to retain an investment adviser for
any of the Funds. A Fund could not retain an investment adviser without first
obtaining shareholder approval.
The Funds benefit from the investment advisory services provided to the
underlying Vanguard funds and, as shareholders of those funds, indirectly bear a
proportionate share of those funds' advisory fees. The following is a
description of the investment advisory agreements for each underlying Vanguard
fund.
VANGUARD WINDSOR FUND
Vanguard Windsor Fund employs a multimanager approach, using two primary
investment advisers for the bulk of its assets and Vanguard's Quantitative
Equity Group to manage its cash reserves.
WELLINGTON MANAGEMENT COMPANY, LLP
Wellington Management Company, LLP (Wellington Management) manages a
portion of the assets of Vanguard Windsor Fund. Windsor Fund pays Wellington
Management a basic fee, calculated by applying a quarterly rate, based on the
following annual percentage rates, to Windsor Fund's average month-end net
assets managed by Wellington Management for the quarter:
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<PAGE>
NET ASSETS RATE
---------- ----
First $17.5 billion ................... 125%
Assets in excess of $17.5 billion ..... 100%
The basic fee may be increased or decreased by applying an adjustment
formula based on the investment performance of the assets of the fund managed by
Wellington Management for the thirty-six months preceding the end of the quarter
relative to the investment record of the Standard and Poor's 500 Composite Stock
Price Index (the S&P 500) for the same period.
During the fiscal years ended October 31, 1997, 1998, and 1999, Windsor
Fund incurred the following advisory fees owed to Wellington Management:
1997 1998 1999
---- ---- ----
Basic Fee $23,502,000 $24,971,000 $19,713,650
Increase/(Decrease) for (11,821,000) (15,501,000) (14,040,175)
Performance Adjustment ----------- ----------- ------------
Total $11,681,000 $ 9,470,000 $ 5,673,475
----------- ----------- ------------
----------- ----------- ------------
SANFORD C. BERNSTEIN & CO., INC.
Sanford C. Bernstein & Co., Inc. (Bernstein) manages a portion of the
assets of Vanguard Windsor Fund. The fund pays Bernstein a basic fee at the end
of each of the fund's fiscal quarters, calculated by applying a quarterly rate,
based on the following annual percentage rates, to the average month-end net
assets managed by Bernstein for the quarter:
NET ASSETS RATE
---------- ----
First $1 billion ..................... .15%
Next $2 billion ...................... .14%
Next $2 billion ...................... .12%
Assets in excess of $5 billion ....... .10%
The basic fee may be increased or decreased by applying an adjustment
formula based on the investment performance of the assets of the fund managed by
Bernstein for the thirty-six months preceding the end of the quarter relative to
the investment record of the Russell 1000 Value Index for the same period.
During the fiscal year ended October 31, 1999, Windsor Fund incurred the
following advisory fees owed to Bernstein:
1999
----
Basic Fee ....................................... $2,309,256
Increase/(Decrease) for Performance Adjustment .. 0
----------
Total ........................................... $2,309,256
----------
----------
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<PAGE>
VANGUARD MORGAN GROWTH FUND
Vanguard Morgan Growth Fund employs three separate investment advisers,
each of whom manages the investment and reinvestment of a portion of the fund's
assets.
WELLINGTON MANAGEMENT COMPANY, LLP
Morgan Fund employs Wellington Management Company, LLP (Wellington
Management) under an investment advisory agreement to manage the investment and
reinvestment of approximately 42% (as of December 31, 1999) of the fund's assets
and to continuously review, supervise, and administer the fund's investment
program. Wellington Management discharges its responsibilities subject to the
control of Morgan's officers and Trustees.
Wellington Management is a Massachusetts limited liability partnership, and
the following persons serve as managing partners of Wellington Management:
Laurie A. Gabriel, Duncan M. McFarland, and John R. Ryan. Wellington Management
and its predecessor organizations have provided investment advisory services to
investment companies since 1928 and to investment counseling clients since 1960.
Morgan Fund pays Wellington Management 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 fund's average month-end net assets for the
quarter:
NET ASSETS RATE
---------- ----
First $500 million .................. .175%
Next $500 million ................... .100%
Assets in excess of $1 billion ...... .075%
The basic fee may be increased or decreased by applying an
incentive/penalty fee based on the investment performance of the fund's assets
managed by Wellington Management, over a 36-month period, relative to the
investment record of a benchmark index composed of the stocks held in the
country's 50 largest growth stock mutual funds (the Growth Fund Stock Index).
During the fiscal years ended December 31, 1997, 1998, and 1999, Morgan
Fund incurred the following advisory fees owed to Wellington Management:
1997 1998 1999
---- ---- ----
Basic Fee ............................ $1,292,417 $1,541,922 $1,830,546
Increase/(Decrease) for Performance
Adjustment ......................... (63,493) 76,371 378,563
---------- ---------- ----------
Total ................................ $1,228,924 $1,618,293 $2,209,109
---------- ---------- ----------
---------- ---------- ----------
FRANKLIN PORTFOLIO ASSOCIATES LLC
Morgan Fund employs Franklin Portfolio Associates LLC under an investment
advisory agreement to manage the investment and reinvestment of approximately
39% (as of December 31, 1999) of the fund's assets. Franklin Portfolio
Associates discharges its responsibilities subject to the control of the
officers and Trustees of the fund.
Franklin Portfolio Associates is a Massachusetts limited liability company.
The shares of Franklin Portfolio Associates are owned by MBC Investments
Corporation, a holding company of Mellon Bank Corporation.
Morgan Fund pays Franklin Portfolio Associates a basic fee by applying
various percentage rates to the average net assets of the fund managed by
Franklin Portfolio Associates. The fee schedule is as follows:
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<PAGE>
NET ASSETS RATE
- ---------- ----
First $100 million ........................ .25%
Next $200 million ......................... .20%
Next $200 million ......................... .15%
Next $500 million ......................... .10%
Next $4 billion ........................... .08%
Assets in excess of $5 billion ............ .06%
The basic fee may be increased or decreased by applying an
incentive/penalty fee based on the investment performance of the assets of the
fund managed by Franklin Portfolio Associates, over a 36-month period, relative
to the investment record of the Growth Fund Stock Index.
During the fiscal years ended October 31, 1997, 1998, and 1999, Morgan Fund
incurred the following advisory fees owed to Franklin Portfolio Associates:
1997 1998 1999
---- ---- ----
Basic Fee ............................ $1,310,220 $1,701,152 $1,981,731
Increase/(Decrease) for Performance
Adjustment ......................... 571,862 383,794 (212,101)
---------- ---------- ----------
Total ................................ $1,882,082 $2,084,946 $1,769,630
---------- ---------- ----------
---------- ---------- ----------
VANGUARD'S QUANTITATIVE EQUITY GROUP
Vanguard's Quantitative Equity Group provides investment advisory services
on an at-cost basis with respect to approximately 19% of Morgan Fund's assets as
of December 31, 1999.
During the fiscal years ended December 31, 1997, 1998, and 1999, Morgan
Fund incurred expenses for investment advisory services provided by Vanguard in
the following approximate amounts: $219,000, $317,000, and $500,000,
respectively.
VANGUARD GNMA AND LONG-TERM CORPORATE FUNDS
Wellington Management Company, LLP (Wellington Management) serves as
investment adviser to GNMA and Long-Term Corporate Funds. Each of the funds pays
Wellington Management an investment advisory fee at the end of each fiscal
quarter, calculated by applying a quarterly rate to the average month-end net
assets of each fund.
VANGUARD GNMA FUND
NET ASSETS RATE
---------- ----
First $3 billion .................... .020%
Next $3 billion ..................... .010%
Assets in excess of $6 billion ...... .008%
VANGUARD LONG-TERM CORPORATE FUND
NET ASSETS RATE
---------- ----
First $1 billion .................... .040%
Next $1 billion ..................... .030%
Next $1 billion ..................... .020%
Assets in excess of $3 billion ...... .015%
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<PAGE>
During the fiscal years ended January 31, 1998, 1999, and 2000, GNMA and
Long-Term Corporate Funds paid Wellington Management the following advisory
fees:
FUND 1998 1999 2000
---- ---- ---- ----
GNMA ................................ $1,067,000 $1,229,000 $1,408,000
---------- ---------- ----------
---------- ---------- ----------
Long-Term Corporate ................. $ 963,000 $1,048,000 $1,037,000
---------- ---------- ----------
---------- ---------- ----------
VANGUARD SHORT-TERM CORPORATE FUND
Vanguard Short-Term Corporate Fund receives its investment advisory
services on an "internalized," at-cost basis from an investment management staff
employed directly by Vanguard. This staff, Vanguard's Fixed Income Group, is
supervised by the officers of the fund. During the fiscal years ended January
31, 1998, 1999, and 2000, the fund incurred expenses for investment advisory
services provided by Vanguard in the following approximate amounts: $698,000,
$671,000, and $814,000, respectively.
VANGUARD WINDSOR II
Vanguard Windsor II Fund employs a multimanager approach utilizing four
investment advisers, each of whom manages the investment and reinvestment of a
portion of the fund's assets.
BARROW, HANLEY, MEWHINNEY & STRAUSS
Windsor II Fund has entered into an investment advisory agreement with
Barrow, Hanley, Mewhinney & Strauss, Inc. (Barrow, Hanley) to manage a portion
of the fund's equity assets (approximately 64%, as of October 31, 1999). Under
this agreement, Barrow, Hanley manages the investment and reinvestment of the
designated assets and continuously reviews, supervises, and administers the
investment program of the fund with respect to those assets. Barrow, Hanley
discharges its responsibilities subject to the control of the officers and
Trustees of the fund.
Barrow Hanley is a Nevada corporation controlled by the following officers
of Barrow Hanley: James Purdy Barrow, Principal; Bryant Miller Hanley, Jr.,
President, Secretary and Treasurer; Richard Albert Englander, Principal; and
Joseph Ray Nixon, Principal.
Windsor II Fund pays Barrow, Hanley 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 managed by
Barrow, Hanley for the quarter:
NET ASSETS RATE
---------- ----
First $200 million .................. .300%
Next $300 million ................... .200%
Next $500 million ................... .150%
Assets in excess of $1 billion ...... .125%
The basic fee paid to Barrow, Hanley, as provided above, will be increased
or decreased by applying an incentive/penalty fee adjustment based on the
investment performance of the assets of the fund managed by Barrow, Hanley over
a trailing 36-month period relative to that of the Standard & Poor's 500/BARRA
Value Index (the BARRA Value Index). The BARRA Value Index includes stocks in
the Standard and Poor's 500 Composite Stock Price Index with lower than average
ratios of market price to book value. These types of stocks are often referred
to as "value" stocks.
During the fiscal years ended October 31, 1997, 1998, and 1999, Windsor II
Fund incurred the following advisory fees owed to Barrow, Hanley:
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<PAGE>
1997 1998 1999
---- ---- ----
Basic Fee ......................... $16,925,953 $24,225,773 $27,518,622
Increase/(Decrease) for
Performance Adjustment .......... 2,495,021 3,887,915 (1,429,591)
----------- ----------- ------------
Total ............................. $19,420,974 $28,113,688 $26,089,031
----------- ----------- ------------
----------- ----------- ------------
EQUINOX CAPITAL MANAGEMENT, INC.
Windsor II Fund has entered into an investment advisory agreement with
Equinox Capital Management, Inc. (Equinox) to manage a portion of the fund's
equity assets (approximately 14%, as of October 31, 1999). Under this agreement,
Equinox manages the investment and reinvestment of the designated assets and
continuously reviews, supervises, and administers the investment program of the
fund with respect to those assets. Equinox discharges its responsibilities
subject to the control of the officers and Trustees of the fund.
Equinox is a Delaware Limited Liability Company controlled by the following
officers of Equinox: Ronald J. Ulrich, Director and President; and Wendy D. Lee,
Managing Director.
Windsor II Fund pays Equinox a basic fee by applying a quarterly rate,
based on the following annual percentage rates, to the portion of the fund's
average month-end net assets managed by Equinox. The fee schedule is as follows:
NET ASSETS RATE
---------- ----
First $400 million .................. .200%
Next $600 million ................... .150%
Next $1 billion ..................... .125%
Assets in excess of $2 billion ...... .100%
The basic fee paid to Equinox may be increased or decreased by applying an
adjustment formula based on the 36-month investment performance of the fund's
assets managed by Equinox relative to the investment record of the Russell 1000
Value Index.
During the fiscal years ended October 31, 1997, 1998, and 1999, Windsor II
Fund incurred the following advisory fees owed to Equinox:
1997 1998 1999
---- ---- ----
Basic Fee ........................... $2,791,342 $3,945,052 $4,992,060
Increase/(Decrease) for Performance
Adjustment ........................ 408,295 868,234 1,788,014
---------- ---------- ----------
Total ............................... $3,199,637 $4,813,286 $6,780,074
---------- ---------- ----------
---------- ---------- ----------
TUKMAN
Windsor II Fund has entered into an investment advisory agreement with
Tukman Capital Management, Inc. (Tukman) to manage a portion of the fund's
equity assets (approximately 12%, as of October 31, 1999). Under this agreement,
Tukman manages the investment and reinvestment of the designated assets and
continuously reviews, supervises, and administers the investment program of the
fund with respect to those assets. Tukman discharges its responsibilities
subject to the control of the officers and Trustees of the fund.
Tukman is a Delaware corporation controlled by the following Officers of
Tukman: Melvin T. Tukman, President and Director, and Daniel L. Grossman, Vice
President.
Windsor II Fund pays Tukman a basic fee by applying a quarterly rate, based
on the following annual percentage rates, to the portion of Windsor II's average
month-end assets managed by Tukman:
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<PAGE>
NET ASSETS RATE
---------- ----
First $25 million .................... .40%
Next $125 million .................... .35%
Next $350 million .................... .25%
Next $500 million .................... .20%
Assets in excess of $1 billion ....... .15%
The basic fee paid to Tukman may be increased or decreased by applying an
incentive/penalty fee adjustment based on the 36-month investment performance of
the fund's assets managed by Tukman relative to the investment record of the
Standard & Poor's 500 Composite Stock Price Index.
During the fiscal years ended October 31, 1997, 1998, and 1999, Windsor II
Fund incurred the following advisory fees owed to Tukman:
1997 1998 1999
---- ---- ----
Basic Fee ........................... $3,622,904 $5,126,168 $6,192,444
Increase/(Decrease) for
Performance Adjustment ............ 785,658 992,760 (2,000,847)
---------- ---------- -----------
Total ............................... $4,408,562 $6,118,928 $4,191,597
---------- ---------- -----------
---------- ---------- -----------
VANGUARD'S QUANTITATIVE EQUITY GROUP
Vanguard's Quantitative Equity Group (the Group) provides investment
advisory services on an at-cost basis with respect to a portion of Windsor II
Fund's assets (approximately 6%, as of October 31, 1999). In addition, the Group
manages any cash reserves held by the fund (approximately 4%, as of October 31,
1999). The Group also provides investment advisory services to several other
Vanguard funds. The Group is supervised by the officers of the fund.
During the fiscal years ended October 31, 1997, 1998, and 1999, Windsor II
Fund incurred expenses for investment advisory services provided by the Group in
the following approximate amounts: $196,000, $287,000, and $511,000,
respectively.
VANGUARD EXPLORER FUND
Vanguard Explorer Fund employs a multimanager approach utilizing four
investment advisers, each of whom manages the investment and reinvestment of a
portion of the fund's assets. Until February 28, 1990, when Explorer Fund
acquired the assets of Explorer II Fund, Wellington Management was sole
investment adviser to the fund (then known simply as Explorer Fund), and
Granahan served as sole investment adviser to Explorer II Fund, the acquired
fund.
WELLINGTON MANAGEMENT COMPANY, LLP
Explorer has entered into an advisory agreement with Wellington Management
under which Wellington Management manages the investment and reinvestment of a
portion of Explorer's assets and continuously reviews, supervises, and
administers Explorer's investment program with respect to those assets. As of
October 31, 1999, Wellington Management managed approximately 29% of Explorer's
equity investments. Wellington Management discharges its responsibilities
subject to the control of the officers and Trustees of Explorer.
Explorer pays Wellington Management 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 portion of Explorer's average month-end net assets
managed by Wellington Management for the quarter:
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<PAGE>
NET ASSETS RATE
---------- ----
First $500 million .................. .250%
Next $250 million ................... .200%
Next $250 million ................... .150%
Assets in excess of $1 billion ...... .100%
The basic fee paid to Wellington Management may be increased or decreased
by applying an incentive/ penalty fee adjustment based on the 36-month
investment performance of the fund's assets managed by Wellington Management
relative to the investment performance of the Small Company Growth Fund Stock
Index.
During the fiscal years ended October 31, 1997, 1998, and 1999, Explorer
Fund paid Wellington Management the following advisory fees:
1997 1998 1999
---- ---- ----
Basic Fee ........................... $1,950,387 $1,647,928 $1,588,542
Increase/(Decrease) for Performance
Adjustment ........................ (89,408) (288,253) 659,915
---------- ---------- ----------
Total ............................... $1,860,979 $1,359,675 $2,248,457
---------- ---------- ----------
---------- ---------- ----------
GRANAHAN INVESTMENT MANAGEMENT, INC.
Granahan Investment Management, Inc. (Granahan) serves as a second
investment adviser to Explorer. Under its advisory agreement, Granahan manages
the investment and reinvestment of a portion of Explorer's assets and
continuously reviews, supervises, and administers Explorer's investment program
with respect to those assets. As of October 31, 1999, Granahan managed
approximately 46% of Explorer's equity investments. Granahan discharges its
responsibilities subject to the control of the officers and Trustees of
Explorer.
Granahan is an investment advisory firm specializing in small company stock
investments. Mr. John Granahan is the President and major stockholder of
Granahan Investment Management, Inc.
Explorer pays Granahan 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 portion of Explorer's average month-end net assets
managed by Granahan for the quarter:
NET ASSETS RATE
---------- ----
First $500 million .300%
Next $250 million .200%
Next $250 million .150%
Assets in excess of $1 billion .100%
The basic fee paid to Granahan may be increased or decreased by applying an
incentive/penalty fee adjustment based on the investment performance of the
fund's assets managed by Granahan over a trailing thirty-six month period
relative to that of the Small Company Growth Fund Stock Index for the same
period.
During the fiscal years ended October 31, 1997, 1998, and 1999, Explorer
Fund paid Granahan the following advisory fees:
1997 1998 1999
---- ---- ----
Basic Fee ............................ $2,532,966 $2,508,538 $2,476,006
Increase/(Decrease) for Performance
Adjustment ......................... (242,952) (479,000) 0
---------- ----------- ----------
Total ................................ $2,290,014 $2,029,538 $2,476,006
---------- ----------- ----------
---------- ----------- ----------
B-17
<PAGE>
CHARTWELL INVESTMENT PARTNERS
Explorer has entered into an advisory agreement with Chartwell Investment
Partners (Chartwell) under which Chartwell manages the investment and
reinvestment of a portion of Explorer's assets and continuously reviews,
supervises, and administers Explorer's investment program with respect to those
assets. As of October 31, 1999, Chartwell managed approximately 11% of
Explorer's equity investments. Chartwell discharges its responsibilities subject
to the control of the officers and Trustees of the fund.
Chartwell is an employee-owned investment partnership providing equity and
fixed income management. Edward N. Antoian, one of the firm's partners, is the
portfolio manager for their small-capitalization growth products.
For the services provided by Chartwell under the advisory agreement,
Explorer will pay Chartwell 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 Explorer managed by
Chartwell for the quarter:
NET ASSETS RATE
---------- ----
First $250 million .................. 0.40%
Next $250 million ................... 0.30%
Assets in excess of $500 million .... 0.20%
Effective with the quarter ended July 31, 1998, the basic fee, as provided
above, shall be increased or decreased by applying an incentive/penalty fee
adjustment based on the 36-month investment performance of the assets of
Explorer managed by Chartwell relative to the investment performance of the
Small Company Growth Fund Stock Index, which is made up of stocks held by the
nation's 25 largest small company funds.
For the period August 1, 1997 to October 31, 1997, and the fiscal years
ended October 31, 1998 and 1999, Explorer paid Chartwell the following advisory
fees:
AUG. 1-OCT. 31
1997 1998 1999
---- ---- ----
Basic Fee ........................ $202,329 $952,259 $1,042,721
Increase/(Decrease) for
Performance Adjustment ......... 0 (71,146) 70,879
-------------- -------- ----------
Total ............................ $202,329 $881,113 $1,113,600
-------------- -------- ----------
-------------- -------- ----------
THE VANGUARD GROUP, INC.
Vanguard's Quantitative Equity Group provides investment advisory services
on an at-cost basis with respect to approximately 10% (as of October 31, 1999)
of Vanguard Explorer Fund's assets, and any cash reserves held by the fund
(approximately 4%, as of October 31, 1999). Vanguard's Quantitative Equity Group
is supervised by the officers of the fund.
For the period August 1, 1997 to October 31, 1997, and the fiscal years
ended October 31, 1998 and 1999, the fund incurred expenses for investment
advisory services provided by Vanguard in the following approximate amounts:
$2,000, $38,000, and $170,000, respectively.
VANGUARD U.S. GROWTH PORTFOLIO
Vanguard World Fund entered into an investment advisory agreement with
Lincoln Capital Management Company (Lincoln) under which Lincoln manages the
investment and reinvestment of the fund's assets and continuously reviews,
supervises, and administers the fund. 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:
B-18
<PAGE>
NET ASSETS RATE
---------- ----
First $25 million ................... 0.40%
Next $125 million ................... 0.35%
Next $350 million ................... 0.25%
Next $500 million ................... 0.20%
Next $1.5 billion ................... 0.15%
Next $12.5 billion .................. 0.10%
Assets in excess of $15 billion ..... 0.08%
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.
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.
VANGUARD PRIMECAP FUND
Vanguard PRIMECAP Fund employs PRIMECAP Management Company (PRIMECAP) under
an investment advisory agreement to manage the investment and reinvestment of
the assets of the fund and to continuously review, supervise, and administer the
fund's investment program. PRIMECAP discharges its responsibilities subject to
the control of the officers and Trustees of the fund.
PRIMECAP is a California corporation whose outstanding shares are owned by
its directors and officers. The directors of the corporation and the offices
they currently hold are: Howard Bernard Schow, Chairman; Mitchell John Milias,
Vice Chairman and Treasurer; Theofanis Anastasios Kolokotrones, President and
Secretary; and Joel P. Fried, Executive Vice President.
The fund pays PRIMECAP 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 $50 million ................... 0.500%
Next $200 million ................... 0.450%
Next $250 million ................... 0.375%
Next $1,750 million ................. 0.250%
Next $2,750 million ................. 0.200%
Next $5 billion ..................... 0.175%
Assets in excess of $10 billion ..... 0.150%
During the fiscal years ended December 31, 1997, 1998, and 1999, the fund
incurred investment advisory fees of approximately $14,455,000, $20,669,000, and
$26,764,000, respectively.
VANGUARD PRIME MONEY MARKET FUND
Vanguard's Fixed Income Group provides investment advisory services on an
at-cost basis to Vanguard Prime Money Market Fund.
During the fiscal years ended November 30, 1997, 1998, and 1999, Vanguard
Prime Money Market Fund's share of Vanguard's investment advisory expenses
totaled approximately $3,782,000, $3,811,000, and $4,718,000, respectively.
B-19
<PAGE>
VANGUARD ASSET ALLOCATION FUND
Vanguard Asset Allocation Fund employs Mellon Capital Management
Corporation (Mellon), under an investment advisory agreement to manage the
investment and reinvestment of the assets of the fund and to continuously
review, supervise, and administer the fund's investment program. Mellon
discharges its responsibilities subject to the control of the officers and
Trustees of the fund.
Mellon is an investment management firm which manages well diversified
stock and bond portfolios for institutional clients. Mellon is a wholly-owned
subsidiary of MBC Investment Corporation, which itself is a wholly-owned
subsidiary of Mellon Financial Corporation.
Asset Allocation Fund pays Mellon 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 fund's average month-end net assets for the quarter:
NET ASSETS RATE
---------- ----
First $100 million .................. 0.200%
Next $900 million ................... 0.150%
Next $500 million ................... 0.125%
Assets in excess of $1.5 billion .... 0.100%
This fee may be increased or decreased by applying an adjustment formula
based on the cumulative investment performance of the fund's portfolio for the
thirty-six months preceding the end of the quarter relative to the investment
record of a Combined Index for the same period. The Combined Index is comprised
of the Standard & Poor's 500 Index (65% of the Combined Index) and the Lehman
Brothers Long-Term U.S. Treasury Index (35% of the Combined Index).
During the fiscal years ended September 30, 1997, 1998, and 1999, the fund
incurred investment advisory fees as follows:
1997 1998 1999
---- ---- ----
Basic Fee $3,723,000 $5,466,000 $8,336,000
Increase/(Decrease) for
Performance Adjustment. . . (921,000) (1,404,000) (1,564,000)
---------- ---------- -----------
Total $2,802,000 $4,062,000 $6,772,000
---------- ---------- -----------
---------- ---------- -----------
VANGUARD TOTAL STOCK MARKET INDEX FUND, VANGUARD EUROPEAN STOCK
INDEX FUND, VANGUARD PACIFIC STOCK INDEX FUND,
AND VANGUARD TOTAL INTERNATIONAL STOCK INDEX FUND
Vanguard Total Stock Market, European Stock, and Pacific Stock Index Funds
receive their investment advisory services on an at-cost basis from Vanguard's
Quantitative Equity Group. Vanguard Total International Fund invests solely in
other Vanguard funds and therefore does not employ an investment adviser or pay
advisory fees. However, Total International Stock Index Fund benefits from the
investment advisory services provided by Vanguard to the underlying funds in
which it invests.
During the fiscal years ended December 31, 1997, 1998, and 1999, the Funds
incurred expenses for investment advisory services of approximately the
following amounts:
FUND 1997 1998 1999
---- ---- ---- ----
European Stock Index Fund ............ $23,000 $47,000 $ 87,000
Pacific Stock Index Fund ............. 23,000 47,000 87,000
Total Stock Market Index Fund ........ 56,000 82,000 120,000
B-20
<PAGE>
PORTFOLIO TRANSACTIONS
Each Fund will purchase and sell the principal portion of its Fund
securities (i.e., shares of the underlying Vanguard funds) by dealing directly
with the issuer--the underlying funds. As such, the Funds incur no brokerage
commissions.
PURCHASE OF SHARES
The purchase price of shares of the Funds is the net asset value next
determined after the order is received. The net asset value is calculated as of
the close of the New York Stock Exchange (the Exchange, generally 4 p.m. Eastern
time) on each day the Exchange is open for business and on any other day on
which there is sufficient trading in each Fund's underlying securities to
materially affect its net asset value per share. 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 reject purchase orders when in the judgment of
management such rejection is in the best interest of the Fund, and (iii) 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.
To assure that each Fund continues to operate in the manner set forth in
its Prospectus, including the desired composition of shareholder investments in
the Fund, the officers of the Funds will monitor and report to the Trustees the
composition of the Funds' shareholder base. The Funds' shares will be marketed
to tax-advantaged and other retirement accounts. The officers will recommend to
the Trustees any action they deem necessary to assure that investments in the
Funds do not become inconsistent with the policies applicable to the Funds. This
could include recommendations to limit sales to specific categories of investors
or to revise the suitability standards for investors.
REDEMPTION OF SHARES
Each Fund may suspend redemption privileges or postpone the date of payment
(i) during any period that the New York Stock Exchange is closed, or trading on
the Exchange is restricted as determined by the Commission, (ii) during any
period when an emergency exists as defined by the Commission as a result of
which it is not reasonably practicable for the Fund to dispose of securities
owned by it, or fairly to determine the value of its assets, and (iii) for such
other periods as the Commission may permit.
Each Fund has made an election with the Commission to pay in cash all
redemptions requested by any shareholder of record limited in amount during any
90-day period to the lesser of $250,000 or 1% of the net assets of the Fund at
the beginning of such period.
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 the Funds' behalf subject to those terms and
conditions. Under this arrangement, a 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 the Fund's instructions. Customer
orders that are properly transmitted to the 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.
No charge is made by the Funds for redemptions. Shares redeemed may be
worth more or less than what was paid for them, depending on the market value of
the securities held by the Funds.
B-21
<PAGE>
SHARE PRICE
Each Fund's share price, or "net asset value" per share, is calculated by
dividing the total assets of the Fund, less all liabilities, by the total number
of shares outstanding. The net asset value is determined as of the regular close
of the New York Stock Exchange (generally 4:00 p.m. Eastern time) on each day
that the Exchange is open for trading. This determination is made by appraising
each Fund's underlying investment (i.e., the underlying Vanguard funds) at the
price of each such fund determined at the regular close of the Exchange.
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.
YIELD AND TOTAL RETURN
The yield of each Fund for the 30-day period ended December 31, 1999 was as
follows:
LifeStrategy Conservative Growth ............ 4.49%
LifeStrategy Growth ......................... 2.28%
LifeStrategy Income ......................... 5.73%
LifeStrategy Moderate Growth ................ 3.42%
STAR ........................................ 3.51%
AVERAGE ANNUAL TOTAL RETURN
Average annual total return is the average annual compounded rate of return
for the periods of one year, five years, ten years or the life of the Fund, all
ended on the last day of a recent month. Average annual total return quotations
will reflect changes in the price of the Fund's shares and assume that all
dividends and capital gains distributions during the respective periods were
reinvested in Fund shares.
Average annual total return is calculated by finding the average annual
compounded rates of return of a hypothetical investment over such periods
according to the following formula (average annual total return is then
expressed as a percentage):
T = (ERV/P)1/N - 1
Where:
T =average annual total return
P =a hypothetical initial investment of $1,000
n =number of years
ERV =ending redeemable value: ERV is the value, at the end
of the applicable period, of a hypothetical $1,000
investment made at the beginning of the applicable
period
AVERAGE ANNUAL AFTER-TAX TOTAL RETURN QUOTATION
We calculate the Fund's average annual after-tax total return by finding
the average annual compounded rate of return over the 1-, 5-, and 10-year
periods that would equate the initial amount invested to the after-tax value,
according to the following formulas:
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
B-22
<PAGE>
Instructions:
1. Assume all distributions by the Fund are reinvested--less the taxes due on
such distributions--at the price on the reinvestment dates during the
period. Adjustments may be made for subsequent re-characterizations of
distributions.
2. Calculate the taxes due on distributions by the Fund by applying the
highest federal marginal tax rates to each component of the distributions
on the reinvestment date (e.g., ordinary income, short-term capital gain,
long-term capital gain, etc.). For periods after December 31, 1997, the
federal marginal tax rates used for the calculations are 39.6% for ordinary
income and short-term capital gains and 20% for long-term capital gains.
Note that the applicable tax rates may vary over the measurement period.
Assume no taxes are due on the portions of any distributions classified as
exempt interest or non-taxable (i.e., return of capital). Ignore any
potential tax liabilities other than federal tax liabilities (e.g., state
and local taxes).
3. Include all recurring fees that are charged to all shareholder accounts.
For any account fees that vary with the size of the account, assume an
account size equal to the Fund's mean (or median) account size. Assume that
no additional taxes or tax credits result from any redemption of shares
required to pay such fees.
4. State the total return quotation to the nearest hundredth of one percent.
CUMULATIVE TOTAL RETURN
Cumulative total return is the cumulative rate of return on a hypothetical
initial investment of $1,000 for a specified period. Cumulative total return
quotations reflect changes in the price of the Fund's shares and assume that all
dividends and capital gains distributions during the period were reinvested in
Fund shares. Cumulative total return is calculated by finding the cumulative
rates of a return of a hypothetical investment over such periods, according to
the following formula (cumulative total return is then expressed as a
percentage):
C = (ERV/P) - 1
Where:
C =cumulative total return
P =a hypothetical initial investment of $1,000
ERV =ending redeemable value: ERV is the value, at the end
of the applicable period, of a hypothetical $1,000
investment made at the beginning of the applicable
period
SEC YIELDS
Yield is the net annualized yield based on a specified 30-day (or one
month) period assuming semiannual compounding of income. Yield is calculated by
dividing the net investment income per share earned during the period by the
maximum offering price per share on the last day of the period, according to the
following formula:
YIELD = 2[((A-B)/CD+1)6 - 1]
Where:
a =dividends and interest earned during the period
b =expenses accrued for the period (net of reimbursements)
c =the average daily number of shares outstanding during
the period that were entitled to receive dividends
d =the maximum offering price per share on the last day of
the period
B-23
<PAGE>
COMPARATIVE INDEXES
Vanguard may use reprinted material discussing The Vanguard Group, Inc. or
any of the member funds of The Vanguard Group of Investment Companies.
Each of the investment company members of The Vanguard Group may from time
to time use one or more of the following unmanaged indexes for comparative
performance purposes.
GROWTH FUND STOCK INDEX--The Index is composed of the various common stocks that
are held in the 50 largest growth stock mutual funds, using year-end assets,
monitored by Morningstar, Inc. Under an agreement with Vanguard Morgan Growth
Fund, Morningstar, Inc. determines the composition of the Index and Vestek
Systems calculates the monthly total return. Neither The Vanguard Group, Inc.,
nor its advisers are affiliated with Morningstar or Vestek Systems in any way.
SMALL COMPANY GROWTH FUND STOCK INDEX--The Index is composed of the various
domestic common stocks that are held in the 25 largest small company stock
mutual funds, using year-end assets, monitored by Morningstar, Inc. Under an
agreement with Vanguard Explorer Fund, Morningstar, Inc. determines the
composition of the Index and Vestek Systems calculates the monthly total return.
Neither The Vanguard Group, Inc., nor its advisers are affiliated with
Morningstar or Vestek Systems in any way.
STANDARD AND POOR'S 500 COMPOSITE STOCK PRICE INDEX--includes stocks selected by
Standard & Poor's Index Committee to include leading companies in leading
industries and to reflect the U.S. stock market.
STANDARD AND POOR'S 500/BARRA VALUE INDEX--consists of the stocks in the
Standard and Poor's 500 Composite Stock Price Index (S&P 500) with the lowest
price-to-book ratios, comprising 50% of the market capitalization of the S&P
500.
STANDARD & POOR'S MIDCAP 400 INDEX--is composed of 400 medium sized domestic
stocks.
STANDARD & POOR'S SMALLCAP 600/BARRA VALUE INDEX--contains stocks of the S&P
SmallCap 600 Index which have a lower than average price-to-book ratio.
STANDARD & POOR'S SMALLCAP 600/BARRA GROWTH INDEX--contains stocks of the S&P
SmallCap 600 Index which have a higher than average price-to-book ratio.
RUSSELL 1000 VALUE INDEX--consists of the stocks in the Russell 1000 Index
(comprising the 1,000 largest U.S.-based companies measured by total market
capitalization) with the lowest price-to-book ratios, comprising 50% of the
market capitalization of the Russell 1000.
WILSHIRE 5000 TOTAL MARKET INDEX--consists of more than 7,000 common equity
securities, covering all stocks in the U.S. for which daily pricing is
available.
WILSHIRE 4500 COMPLETION INDEX--consists of all stocks in the Wilshire 5000
except for the 500 stocks in the Standard and Poor's 500 Index.
MORGAN STANLEY CAPITAL INTERNATIONAL EUROPE, AUSTRALASIA, FAR EAST INDEX--is an
arithmetic, market value-weighted average of the performance of over 900
securities listed on the stock exchanges of countries in Europe, Australia,
Asia, and the Far East.
MORGAN STANLEY CAPITAL INTERNATIONAL EMERGING MARKETS FREE INDEX--an arithmetic,
market value-weighted average of the performance of securities listed on the
stock exchanges of twenty-two developing countries.
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 BROTHERS LONG-TERM TREASURY BOND INDEX--is a market weighted index that
contains individually priced U.S. Treasury securities with maturities of ten
years or greater.
B-24
<PAGE>
MERRILL LYNCH CORPORATE & GOVERNMENT BOND INDEX--consists of over 4,500 U.S.
Treasury, agency, and investment grade corporate bonds.
LEHMAN BROTHERS 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.
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 Brothers
Corporate A or Better Bond Index.
COMPOSITE INDEX--65% Lehman Brothers Corporate A or Better Bond Index and a 35%
weighting in a blended equity composite (75% Standard & Poor's/BARRA Value
Index, 12.5% Standard & Poor's Utilities Index, and 12.5% Standard & Poor's
Telephone Index).
LEHMAN BROTHERS LONG-TERM CORPORATE AA OR BETTER BOND INDEX--consists of all
publicly issued, fixed rate, nonconvertible investment grade,
dollar-denominated, SEC-registered corporate debt rated AA or AAA.
LEHMAN BROTHERS CORPORATE A OR BETTER BOND INDEX--consists of all publicly
issued, investment grade corporate bonds rated A or better, of all maturity
levels.
LEHMAN BROTHERS AGGREGATE BOND INDEX--is a market weighted index that contains
individually priced U.S. Treasury, agency, corporate, and mortgage pass-through
securities corporate rated BBB- 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.
RUSSELL 2000 STOCK INDEX--consists of the smallest 2,000 stocks within the
Russell 3000; a widely-used benchmark for small capitalization common stocks.
IBBOTSON ASSOCIATES YEARBOOK--various mutual fund performance data.
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.
B-25
<PAGE>
LIPPER SMALL CAP FUND AVERAGE--the average performance of 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.)
RUSSELL 3000 INDEX--consists of approximately the 3,000 largest stocks of U.S.
domiciled companies commonly traded on the New York and American Stock Exchanges
or the NASDAQ over-the-counter market, accounting for over 90% of the market
value of publicly traded stocks in the U.S.
DESCRIPTION OF BOND CREDIT RATINGS
Excerpts from Moody's Investors Service, Inc. description of its four highest
bond ratings:
AAA--judged to be of the best quality. AA--judged to be of high quality by
all standards. Together with the Aaa group they comprise what are generally
known as high-grade bonds. A--possess many favorable investment attributes and
are to be considered as "upper-medium-grade obligations." BAA--considered as
medium-grade obligations (i.e., they are neither highly protected nor poorly
secured). Interest payments and principal security appear adequate for the
present but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such bonds lack
outstanding investment characteristics and in fact have speculative
characteristics as well.
Moody's applies numerical modifiers 1, 2, and 3 in each generic rating
classification from AA through B. The modifier 1 indicates that the obligation
ranks in the higher end of its generic rating category; the modifier 2 indicates
a mid-range ranking; and 3 indicates a ranking in the lower end of that generic
rating category.
Excerpts from Standard & Poor's Corporation description of its four highest bond
ratings:
AAA--highest rating assigned. Capacity to pay interest and repay principal
is extremely strong. AA--a very strong capacity to pay interest and repay
principal and differs from the highest rated issues only in small degree. A--has
a strong capacity to pay interest and repay principal although it is somewhat
more susceptible to the adverse effects of changes in circumstances and economic
conditions than debt in higher rated categories. BBB--regarded as having an
adequate capacity to pay interest and repay principal. Whereas it normally
exhibits adequate protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay interest and
repay principal for debt in this category than in higher rated categories.
Standard & Poor's may apply indicators "+", no character, and "-" to its
rating categories from AA to CCC. The indicators show relative standing within
the major rating categories.
FINANCIAL STATEMENTS
The Funds' financial statements (except for Vanguard Developed Markets
Index Fund and Vanguard Institutional Developed Markets Index Fund) for the year
ended December 31, 1999, appearing in the Funds' 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.
SAI056-04/28/2000
B-26
