<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT (NO. 33-32548) UNDER
THE SECURITIES ACT OF 1933
PRE-EFFECTIVE AMENDMENT NO.
POST-EFFECTIVE AMENDMENT NO. 11
AND
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY
ACT OF 1940
AMENDMENT NO. 14
VANGUARD INTERNATIONAL EQUITY
INDEX FUND, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
P.O. BOX 2600, VALLEY FORGE, PA 19482
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)
REGISTRANT'S TELEPHONE NUMBER (610) 669-1000
RAYMOND J. KLAPINSKY, ESQUIRE
P.O. BOX 876
VALLEY FORGE, PA 19482
IT IS PROPOSED THAT THIS AMENDMENT BECOME EFFECTIVE:
on April 29, 1996, pursuant to Rule 485(b) under the Securities Act of 1933.
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
As soon as practicable after this Registration Statement becomes effective.
REGISTRANT ELECTS TO REGISTER AN INDEFINITE NUMBER OF SHARES PURSUANT TO
REGULATION 24F-2 UNDER THE INVESTMENT COMPANY ACT OF 1940. REGISTRANT FILED ITS
RULE 24F-2 NOTICE FOR THE YEAR ENDED DECEMBER 31, 1995 ON FEBRUARY 28, 1995.
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<PAGE> 2
VANGUARD INTERNATIONAL EQUITY INDEX FUND, INC.
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
FORM N-1A
ITEM NUMBER LOCATION IN PROSPECTUS
<S> <C> <C>
Item 1. Cover Page.................................... Cover Page
Item 2. Synopsis...................................... N/A
Item 3. Condensed Financial Information............... Funds' Expenses; Financial Highlights
Item 4. General Description of Registrant............. Investment Objective; Investment
Limitations; Investment Policies;
General Information
Item 5. Management of the Funds....................... Management of the Funds; General
Information
Item 6. Capital Stock and Other Securities............ Opening an Account and Purchasing
Shares; Selling Your Shares; The
Share Price of Each Portfolio;
Dividends, Capital Gains and Taxes;
General Information
Item 7. Purchase of Securities Being Offered.......... Cover Page; Opening an Account and
Purchasing Shares
Item 8. Redemption or Repurchase...................... Selling Your Shares
Item 9. Pending Legal Proceedings..................... Not Applicable
<CAPTION>
FORM N-1A LOCATION IN STATEMENT
ITEM NUMBER OF ADDITIONAL INFORMATION
<S> <C> <C>
Item 10. Cover Page.................................... Cover Page
Item 11. Table of Contents............................. Cover Page
Item 12. General Information and History............... Investment Objective and Policies
Item 13. Investment Objective and Policies............. Investment Objective and Policies
Item 14. Management of the Fund........................ Management of the Fund
Item 15. Control Persons and Principal Holders of
Securities.................................... Management of the Fund
Item 16. Investment Advisory and Other Services........ Management of the Fund
Item 17. Brokerage Allocation.......................... Not Applicable
Item 18. Capital Stock and Other Securities............ Financial Statements
Item 19. Purchase, Redemption and Pricing of Securities
Being Offered................................. Purchase of Shares; Redemption of
Shares
Item 20. Tax Status.................................... Appendix
Item 21. Underwriters.................................. Not Applicable
Item 22. Calculations of Yield Quotations of Money
Market Fund................................... Not Applicable
Item 23. Financial Statements.......................... Financial Statements
</TABLE>
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[FLAG LOGO]
VANGUARD
INTERNATIONAL INDEX PORTFOLIOS
P R O S P E C T U S
APRIL 29, 1996; REVISED JULY 26, 1996
VANGUARD INTERNATIONAL EQUITY INDEX FUND -- EUROPEAN PORTFOLIO
VANGUARD INTERNATIONAL EQUITY INDEX FUND -- PACIFIC PORTFOLIO
VANGUARD INTERNATIONAL EQUITY INDEX FUND -- EMERGING MARKETS PORTFOLIO
VANGUARD STAR FUND -- TOTAL INTERNATIONAL PORTFOLIO
[VANGUARD GROUP LOGO]
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<PAGE> 4
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PROSPECTUS -- APRIL 29, 1996; REVISED JULY 26, 1996 A Member of The Vanguard
Group
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NEW ACCOUNT INFORMATION: INVESTOR INFORMATION DEPARTMENT -- 1-800-662-7447
(SHIP)
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SHAREHOLDER ACCOUNT SERVICES: CLIENT SERVICES DEPARTMENT -- 1-800-662-2739
(CREW)
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INVESTMENT OBJECTIVE AND POLICIES. Vanguard International Equity Index Fund is
an open-end diversified investment company that consists of three
Portfolios -- European, Pacific, and Emerging Markets. The Total International
Portfolio is part of Vanguard STAR Fund, which is an open-end non-diversified
investment company (information on STAR's other five Portfolios can be obtained
by calling Vanguard). Four Portfolios described in this prospectus are designed
as index Funds.
The European Portfolio seeks investment results that parallel those of the
Morgan Stanley Capital International -- Europe Index, an index of companies in
14 European countries. The Pacific Portfolio seeks investment results that
parallel those of the Morgan Stanley Capital International -- Pacific (Free)
Index, an index of companies in Japan, Australia, New Zealand, Hong Kong,
Singapore and Malaysia. The Emerging Markets Portfolio seeks investment results
that parallel those of the Morgan Stanley Capital International -- Select
Emerging Markets (Free) Index, an index of companies located in 14 Asian, Latin
American, African, and European countries. These Portfolios use statistical
procedures to invest primarily in common stocks found in their indexes.
The Total International Portfolio seeks investment results that parallel
those of the Morgan Stanley Capital International Europe, Australia, and Far
East + Select Emerging Markets (Free) Index by investing in a combination of the
European, Pacific, and Emerging Markets Portfolios.
There is no assurance that any Portfolio will achieve its stated objective.
Shares of the Portfolios are neither insured nor guaranteed by any agency of the
U.S. Government, including the FDIC.
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OPENING AN ACCOUNT. To open a non-retirement account, complete and return an
Account Registration Form. For assistance, call our Investor Information
Department. To open an Individual Retirement Account (IRA), use a Vanguard IRA
Adoption Agreement. To obtain a copy, call 1-800-662-7447, Monday through
Friday, from 8:00 a.m. to 9:00 p.m., and Saturday, from 9:00 a.m. to 4:00 p.m.
(Eastern time). To open an account by wire, call Client Services at
1-800-662-2739. The minimum initial investment for each Portfolio is $3,000
($1,000 for IRAs and Uniform Gifts/Transfers to Minors accounts). The Portfolios
are offered on a no-load basis (i.e., there are no sales commissions or 12b-1
fees). However, the Portfolios incur expenses for investment advisory,
management, administrative and distribution services. Each Portfolio charges a
$10 annual account maintenance fee (waived for balances of $10,000 or more).
Each Portfolio charges a transaction fee on purchases (2% for the Emerging
Markets Portfolio, 1% each for the European, Pacific, and Total International
Portfolios); the Emerging Markets Portfolio charges a 1% transaction fee on
redemptions. These fees are paid to the Portfolios to offset the costs of
trading international securities.
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ABOUT THIS PROSPECTUS. This Prospectus is designed to set forth concisely the
information you should know about the Portfolios before you invest. It should be
retained for future reference. A "Statement of Additional Information"
containing additional information about the Fund has been filed with the
Securities and Exchange Commission. This Statement is dated April 29, 1996 and
has been incorporated by reference into this Prospectus. A copy may be obtained
without charge by writing to the Fund or by calling the Investor Information
Department.
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TABLE OF CONTENTS
<TABLE>
<S> <C> <S> <C> <S> <C>
Portfolio Expenses............... 2 Investment Limitations........... 16 General Information.............. 20
Financial Highlights............. 5 Management of the Fund........... 16 Opening an Account and
Yield and Total Return........... 7 Investment Adviser............... 17 Purchasing Shares.............. 22
Investment Objective............. 7 Dividends, Capital Gains When Your Account Will
Investment Policies.............. 8 and Taxes...................... 17 Be Credited.................... 25
Investment Risks................. 10 The Share Price of Each Selling Your Shares.............. 25
Who Should Invest................ 12 Portfolio...................... 20 Exchanging Your Shares........... 28
Implementation of Policies....... 13 Transferring Registration........ 29
</TABLE>
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
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<PAGE> 5
PORTFOLIO
EXPENSES The following table illustrates ALL expenses and fees
that you would incur as a shareholder of each
Portfolio. The expenses and fees set forth below are
for the 1995 fiscal year.
<TABLE>
<CAPTION>
EMERGING TOTAL
EUROPEAN PACIFIC MARKETS INTERNATIONAL
SHAREHOLDER TRANSACTION EXPENSES PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales Load Imposed on Purchases............ None * None * None * None *
Sales Load Imposed on Reinvested
Dividends................................. None None None None
Redemption Fees............................ None None 1% None
Exchange Fees.............................. None None None None
</TABLE>
* Shareholders are charged a portfolio transaction
fee, payable directly to the Portfolio on each
purchase of shares.
<TABLE>
<CAPTION>
EMERGING TOTAL
EUROPEAN PACIFIC MARKETS INTERNATIONAL
ANNUAL FUND OPERATING EXPENSES PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Management & Administrative
Expenses**....................... 0.26% 0.25% 0.09% 0.24%
Investment Advisory Fees.......... 0.01 0.01 0.03 0.01
12b-1 Fees........................ None None None None
Other Expenses
Distribution Costs............... 0.02% 0.02% 0.02% 0.02%
Miscellaneous Expenses........... 0.06 0.07 0.46 0.11
---- ---- ---- ----
Total Other Expenses.............. 0.08 0.09 0.48 0.13
---- ---- ---- ----
TOTAL OPERATING EXPENSES... 0.35% 0.35% 0.60% .38%
==== ==== ==== ====
</TABLE>
** In addition to these costs, shareholders in each
Portfolio incur an annual account maintenance fee of
$10. This fee will be waived for shareholders with
an account balance of $10,000 or more.
Because it invests in a combination of the European,
Pacific, and Emerging Markets Portfolios, the Total
International Portfolio does not have operating
expenses of its own. However, Total International
Portfolio shareholders bear indirectly the expenses of
the underlying Portfolios. The expenses set forth in
the table above represent an estimate of these expenses
for the Portfolio's first full year of operations. The
purpose of this table is to assist you in understanding
the various costs and expenses that you would bear
directly or indirectly as an investor in the
Portfolios.
EACH PORTFOLIO
CHARGES A
TRANSACTION FEE The Emerging Markets Portfolio assesses a portfolio
transaction fee on purchases of Portfolio shares equal
to 2% of the dollar amount invested; the Total
International Portfolio's transaction fee is passed
directly through to the underlying Portfolios to pay
for the transaction expenses incurred by those
Portfolios; the European, Pacific, and Total
International Portfolios assess a portfolio transaction
fee on purchases of Portfolio shares equal to 1% of the
dollar amount invested. In all four Portfolios, the
Portfolio transaction fee is paid to the respective
Portfolio, not to Vanguard. It is not a sales charge.
The fee applies to an initial investment in the
Portfolio and all subsequent purchases (including
purchases made by exchange from another Vanguard Fund
or from other Portfolios of Vanguard International
Equity Index Fund), but not to reinvested dividend or
capital gains distributions. The Portfolio transaction
fee is deducted automatically from the amount invested;
it cannot be paid separately.
2
<PAGE> 6
EMERGING MARKETS
PORTFOLIO CHARGES
A 1% REDEMPTION
TRANSACTION FEE The Emerging Markets Portfolio also assesses a 1%
redemption transaction fee. This 1% charge applies to
redemptions or exchanges from the Portfolio. The 1% fee
is deducted from redemption or exchange proceeds and is
paid directly to the Portfolio, not to Vanguard. It is
not a contingent deferred sales charge.
The purpose of the purchase and redemption transaction
fees is to allocate transaction costs associated with
purchases and redemptions to investors making those
transactions, thus insulating existing shareholders
from those transaction costs. These costs include: (1)
brokerage costs; (2) market impact costs -- i.e., the
increase in market prices which may result when the
Portfolios purchase or sell thinly traded stocks; and
(3) the effect of the "bid-asked" spread in
international markets.
The fees represent Vanguard's estimate of the brokerage
and other transaction costs incurred by the Portfolios
in purchasing and selling international stocks. Without
the fee, each Portfolio would incur these costs
directly, resulting in reduced investment performance
for all shareholders of the Portfolio. With the fee,
the transaction costs of purchasing and selling
international stocks are borne not by all existing
shareholders, but only by those investors making
transactions. Because the purchaser, not the Portfolio,
bears these costs, the Portfolio is expected to track
its benchmark index more closely.
Transaction costs incurred when purchasing or selling
stocks of companies in emerging market countries are
extremely high. There are three components of
transaction costs -- brokerage fees, the difference
between the bid/asked spread and market impact. Each
one of these factors is significantly more expensive in
emerging market countries than in the United States,
because of less competition among brokers, lower
utilization of technology on the part of the exchanges
and brokers, the lack of derivative instruments and
generally less liquid markets. Consequently, brokerage
commissions are high, bid/asked spreads are wide, and
market impact is significant. In addition to these
customary costs, most foreign countries have exchange
fees or stamp taxes.
EACH PORTFOLIO WILL
CHARGE A $10 ACCOUNT
MAINTENANCE FEE Each Portfolio assesses an annual account maintenance
fee of $10 for each shareholder account. The purpose of
the $10 fee is to allocate part of the costs of
maintaining shareholder accounts equally to all
accounts. This fee, which is paid directly by
shareholders, is deducted from the Fund's annual
dividend. See "Dividends, Capital Gains and Taxes" for
more information on this fee. The $10 fee amounts to
1.00% on a $1,000 investment in the Fund, and 0.33% on
a $3,000 investment. This fee will be waived for
shareholders with an account balance of $10,000 or
more.
The following example illustrates the expenses that you
would incur on a $1,000 investment over various
periods, assuming (1) a 5% annual rate of
3
<PAGE> 7
return and (2) redemption at the end of each period.
The expenses include portfolio transaction fees.
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------- ------- ------- --------
<S> <C> <C> <C> <C>
European Portfolio....... $24 $51 $ 79 $152
Pacific Portfolio........ $24 $51 $ 79 $152
Emerging Markets
Portfolio.............. $46 $79 $ 114 $204
Total International
Portfolio.............. $24 $52 $ 81 $155
</TABLE>
Included in these estimates are account maintenance
fees of $10, $30, $50 and $100, respectively, for the
periods shown. Accordingly, for investments larger than
$1,000, your total expenses will be substantially lower
in percentage terms than this illustration implies.
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION
OF PAST OR FUTURE EXPENSES OR PERFORMANCE. ACTUAL
EXPENSES MAY BE HIGHER OR LOWER THAN THOSE SHOWN.
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4
<PAGE> 8
FINANCIAL
HIGHLIGHTS The following financial highlights of the Portfolios
for a share outstanding throughout each period have
been audited by Price Waterhouse LLP, independent
accountants, whose report on the financial statement
including this information was unqualified. This
information should be read in conjunction with the
Fund's financial statements and notes thereto, which,
together with the remaining portions of the Fund's 1995
Annual Report to Shareholders, are incorporated by
reference in the Statement of Additional Information
and in this Prospectus, and which appear, along with
the report of Price Waterhouse LLP, in the Fund's 1995
Annual Report to Shareholders. For a more complete
discussion of the Fund's performance, please see the
Fund's 1995 Annual Report to Shareholders which may be
obtained without charge by writing to the Fund or by
calling our Investor Information Department at
1-800-662-7447. No information is reported for the
Total International Portfolio since it did not commence
operations until April 29, 1996.
<TABLE>
<CAPTION>
------------------------------------------------------
EUROPEAN PORTFOLIO
------------------------------------------------------
YEAR ENDED DECEMBER 31, MAY 1+ TO
------------------------------------------- DEC. 31,
1995 1994 1993 1992 1991 1990
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD..... $11.76 $11.88 $9.33 $9.92 $9.06 $10.00
------- ------ ----- ----- ----- --------
INVESTMENT OPERATIONS
Net Investment Income.................. .32 .28 .17 .25 .26 .16
Net Realized and Unrealized Gain (Loss)
on Investments....................... 2.30 (.06) 2.55 (.58) .86 (.94)
------ ------ ----- ----- ----- -------
TOTAL FROM INVESTMENT OPERATIONS... 2.62 .22 2.72 (.33) 1.12 (.78)
- -------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income... (.32) (.28) (.17) (.26) (.26) (.16)
Distributions from Realized Capital
Gains................................ (.04) (.06) -- -- -- --
------ ------ ----- ----- ----- -------
TOTAL DISTRIBUTIONS................ (.36) (.34) (.17) (.26) (.26) (.16)
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NET ASSET VALUE, END OF PERIOD........... $14.02 $11.76 $11.88 $9.33 $9.92 $9.06
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TOTAL RETURN(1).......................... 22.28% 1.88% 29.13% (3.32)% 12.40% (7.23)%
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RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions)..... $1,017 $715 $601 $256 $161 $96
Ratio of Expenses to Average Net
Assets................................. .35% .32% .32% .32% .33% .40%*
Ratio of Net Investment Income to Average
Net Assets............................. 2.66% 2.41% 2.05% 3.05% 3.06% 3.68%*
Portfolio Turnover Rate.................. 2% 6% 4% 1% 15%** 3%
* Annualized.
** Portfolio turnover rate for 1991 excluding in-kind redemptions was 3% for the European
Portfolio.
+ Commencement of operations.
(1) Total return figures do not reflect the 1% transaction fee on purchases or the annual
account maintenance fee of $10. Subscription period for Portfolio was May 1, 1990, to June
17, 1990, during which time all assets were held in money market instruments. Performance
measurement begins on June 18, 1990.
</TABLE>
5
<PAGE> 9
<TABLE>
<CAPTION>
--------------------------------------------------------
PACIFIC PORTFOLIO
--------------------------------------------------------
YEAR ENDED DECEMBER 31, MAY 1+ TO
--------------------------------------------- DEC. 31,
1995 1994 1993 1992 1991 1990
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD.... $11.31 $10.13 $7.56 $9.42 $8.56 $10.00
------ ------ ----- ----- ----- --------
INVESTMENT OPERATIONS
Net Investment Income................. .10 .08 .06 .05 .05 .05
Net Realized and Unrealized Gain
(Loss)
on Investments...................... .21 1.24 2.62 (1.76) .86 (1.44)
------ ------ ----- ----- ----- ------
TOTAL FROM INVESTMENT
OPERATIONS..................... .31 1.32 2.68 (1.71) .91 (1.39)
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DISTRIBUTIONS
Dividends from Net Investment
Income.............................. (.12) (.08) (.06) (.05) (.05) (.05)
Distributions from Realized Capital
Gains............................... -- (.06) (.05) (.10) -- --
------ ------ ----- ----- ----- -------
TOTAL DISTRIBUTIONS............... (.12) (.14) (.11) (.15) (.05) (.05)
- ---------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD.......... $11.50 $11.31 $10.13 $7.56 $9.42 $8.56
===================================================================================================
TOTAL RETURN(1)......................... (2.75)% 13.04% 35.46% (18.17)% 10.65% (14.01)%
===================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions).... $831 $697 $493 $207 $84 $31
Ratio of Expenses to Average Net
Assets................................ .35% .32% .32% .32% .32% .35%*
Ratio of Net Investment Income to
Average
Net Assets............................ .97% .71% .75% .92% .70% 1.02%*
Portfolio Turnover Rate................. 1% 4% 7% 3% 21%** 2%
* Annualized.
** Portfolio turnover rate for 1991 excluding in-kind redemptions was 1% for the Pacific
Portfolio.
+ Commencement of operations.
(1) Total return figures do not reflect the 1% transaction fee on purchases or the annual
account maintenance fee of $10. Subscription period for Portfolio was May 1, 1990, to June
17, 1990, during which time all assets were held in money market instruments. Performance
measurement begins on June 18, 1990.
</TABLE>
<TABLE>
<CAPTION>
----------------------------------
EMERGING MARKETS PORTFOLIO
----------------------------------
YEAR ENDED MAY 4, 1994+,
DECEMBER 31, 1995 TO DEC. 31, 1994
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD.......................... $10.87 $10.00
INVESTMENT OPERATIONS
Net Investment Income....................................... .15 .06
Net Realized and Unrealized Gain (Loss) on Investments...... (.09) .92
----------- -----------
TOTAL FROM INVESTMENT OPERATIONS........................ .06 .98
- ---------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income........................ (.18) (.07)
Distributions from Realized Capital Gains................... -- (.04)
----------- -----------
TOTAL DISTRIBUTIONS..................................... (.18) (.11)
- ---------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD................................ $ 10.75 $10.87
===================================================================================================
TOTAL RETURN**................................................ .56% 9.81%
===================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions).......................... $234 $83
Ratio of Expenses to Average Net Assets....................... .60% .60%*
Ratio of Net Investment Income to Average Net Assets.......... 2.00% 1.32%*
Portfolio Turnover Rate....................................... 3% 6%
* Annualized.
** Total return does not reflect the 2% transaction fee on purchases, the 1% transaction fee on
redemptions, or the annual account maintenance fee of $10. Subscription period for Portfolio
was April 18, 1994, to May 3, 1994, during which time all assets were held in money market
instruments. Performance measurement begins on May 4, 1994.
+ Commencement of operations.
</TABLE>
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6
<PAGE> 10
YIELD AND TOTAL
RETURN From time to time each Portfolio may advertise its
yield and total return. Both yield and total return
figures are based on historical earnings and are not
intended to indicate future performance. The "total
return" of a Portfolio refers to the average annual
compounded rates of return over one-, five- and
ten-year periods or for the life of the Portfolio (as
stated in the advertisement) that would equate an
initial amount invested at the beginning of a stated
period to the ending redeemable value of the
investment, assuming the reinvestment of all dividend
and capital gains distributions.
In accordance with industry guidelines set forth by the
U.S. Securities and Exchange Commission, the "30-day
yield" of a Portfolio is calculated by dividing the net
investment income per share earned during a 30-day
period by the net asset value per share on the last day
of the period. Net investment income includes interest
and dividend income earned on a Portfolio's securities;
it is net of all expenses and all recurring and
nonrecurring charges that have been applied to all
shareholder accounts. The yield calculation assumes
that the net investment income earned over 30 days is
compounded monthly for six months and then annualized.
Methods used to calculate advertised yields are
standardized for all stock and bond mutual funds.
However, these methods differ from the accounting
methods used by the Portfolio to maintain its books and
records, and so the advertised 30-day yield may not
fully reflect the income paid to an investor's account.
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INVESTMENT
OBJECTIVE
EACH PORTFOLIO SEEKS
TO MATCH THE
INVESTMENT
PERFORMANCE OF ITS
RESPECTIVE INDEX The European Portfolio attempts to match the
performance of the Morgan Stanley Capital International
(MSCI) -- Europe Index, which is made up of common
stocks of companies located in 14 European countries
(Austria, Belgium, Denmark, Finland, France, Germany,
Ireland, Italy, Netherlands, Norway, Spain, Sweden,
Switzerland, and United Kingdom).
The Pacific Portfolio tries to parallel the performance
of the Morgan Stanley Capital International
(MSCI) -- Pacific (Free) Index, which consists of
common stocks of companies located in Australia, Hong
Kong, Japan, Malaysia, New Zealand, and Singapore.
By combining the European and Pacific Portfolios in the
appropriate proportions, you can create a portfolio
that seeks to match the performance of another
international stock market index. The Morgan Stanley
Capital International (MSCI) -- Europe, Australia, and
Far East (Free) Index, also known as the "EAFE" Index,
is a broad-based benchmark made up of more 1,000
companies in Europe and the Pacific Rim. As of December
31, 1995, the MSCI -- Pacific (Free) Index represented
some 51% of the EAFE, while the MSCI -- Europe Index
represented the remaining 49%.
The Emerging Markets Portfolio seeks to track the
performance of the Morgan Stanley Capital International
(MSCI) -- Select Emerging Markets (Free) Index, which
is made up of common stocks of companies located in 14
emerging markets of Europe, Asia, Africa and Latin
America (Argentina, Brazil, Greece, Hong Kong,
Indonesia, Israel,
7
<PAGE> 11
Malaysia, Mexico, Philippines, Portugal, Singapore,
South Africa, Thailand, and Turkey).
The Total International Portfolio seeks to match the
performance of the Morgan Stanley Capital International
(MSCI) -- Europe, Australia, and Far East + Select
Emerging Markets (Free) Index (the MSCI -- EAFE +
Select EMF Index) by investing in a combination of the
European, Pacific, and Emerging Markets Portfolios.
The Portfolios are neither sponsored by nor affiliated
with Morgan Stanley Capital International.
- --------------------------------------------------------------------------------
INVESTMENT
POLICIES
THE PORTFOLIOS USE A
"PASSIVE" APPROACH TO
INVEST IN INTERNATIONAL
STOCKS The Portfolios are not managed according to traditional
methods of "active" investment management, which
involve the buying and selling of securities based upon
economic, financial and market analysis and investment
judgment. Instead, the Portfolios, utilizing a
"passive" or indexing investment approach, attempt to
approximate the investment performance of their
respective indexes by holding a portfolio of stocks
selected through statistical procedures. The Portfolios
are managed without regard to tax ramifications.
The European Portfolio invests in a statistically
selected sample of the approximately 600 stocks
included in the MSCI -- Europe Index, an index of
equity securities of companies located in fourteen
European countries. Three countries, the United
Kingdom, Germany and France, dominate MSCI -- Europe,
with 34%, 14%, and 13% of the market capitalization of
the Index, respectively, as of December 31, 1995. The
11 other countries are individually much less
significant to the Index and, consequently, the
Portfolio.
The Pacific Portfolio invests in a statistically
selected sample of the more than 500 stocks included in
the MSCI -- Pacific (Free) Index, an index of equity
securities of Pacific Basin companies. The MSCI --
Pacific (Free) Index is dominated by the Japanese stock
market, which represented 81% of the market
capitalization of the Index as of December 31, 1995.
The "Free" Index includes only shares that U.S.
investors are "free" to purchase.
The Emerging Markets Portfolio invests in a
statistically selected sample of the approximately 500
stocks included in the MSCI -- Select Emerging Markets
Free Index, an index of equity securities of companies
located in the countries of 14 emerging markets. Four
countries, Malaysia, South Africa, Hong Kong and
Brazil, represent a majority of the MSCI -- Select
Emerging Markets Free Index, with 17%, 15%, 14% and 11%
of the market capitalization of the Index,
respectively, as of
8
<PAGE> 12
March 31, 1996. The fourteen countries of the Index and
their percentage weightings as of December 31, 1995,
were:
<TABLE>
<S> <C> <C> <C>
Greece................. 1.7% Hong Kong.............. 13.5%
Portugal............... 2.6% Indonesia.............. 7.0%
Turkey................. 1.7% Malaysia............... 20.0%
EUROPE................. 6.0% Philippines (Free)..... 3.9%
Singapore.............. 6.6%
Argentina.............. 4.9% Thailand............... 12.8%
Brazil................. 14.5% Israel................. 0.0%*
Mexico (Free).......... 10.8% ASIA................... 63.8%
LATIN AMERICA.......... 30.2% South Africa........... 0.0%*
</TABLE>
* Israel and South Africa were not included in the
Index as of December 31, 1995. As of March 31, 1996,
they represented approximately 2.4% and 14.7% of the
Index.
The Index includes only shares that U.S. investors are
"free"
or allowed by law, to purchase and sell and that have
sufficient
trading liquidity.
The Pacific, European and Emerging Markets Portfolios
are each expected to invest in approximately 400 stocks
or more. Stocks are selected for inclusion in each
Portfolio based on country, market capitalization,
industry weightings, and fundamental characteristics
such as return variability, earnings valuation, and
yield. Each Portfolio is constructed to have aggregate
investment characteristics similar to those of its
respective index. In order to parallel the performance
of its respective index, each Portfolio will invest in
each country in approximately the same percentage as
the country's weight in the index. The correlation
between the performance of each Portfolio and its
respective index is expected to be at least 0.95. (A
correlation of 1.00 would be perfect correlation).
The Total International Portfolio allocates its assets
among the European, Pacific and Emerging Markets
Portfolios based on each market segment's contribution
to the market capitalization of the MSCI -- EAFE + EMF
Index. As of December 31, 1995, the European and
Pacific markets each contributed approximately 45%, and
the Emerging Markets contributed 10% to the Index's
market capitalization.
The policy of the Pacific, European and Emerging
Markets Portfolios is to remain fully invested in
common stocks. At least 80% of the assets of each
Portfolio will be invested in stocks that are included
in its respective index. Since the Total International
Portfolio will invest primarily in shares of the
underlying Portfolios, at least 80% of its equity
exposure will be to stocks that are included in the
MSCI -- EAFE + Select EMF Index. Each Portfolio may
invest in certain short-term fixed income securities
such as cash reserves, although cash or cash
equivalents are normally expected to represent less
than 1% of each Portfolio's assets. Each Portfolio may
also invest up to 50% of its assets in stock futures
contracts, options, warrants, convertible securities,
and swap agreements in order to invest uncommitted cash
balances, maintain liquidity to meet shareholder
redemptions, or minimize trading costs. Any investment
in futures contracts, options,
9
<PAGE> 13
warrants, convertible securities or swap agreements
over 20% of each Portfolio's assets would be made only
in emergency situations, for short-term purposes.
These Portfolios will not invest in cash reserves,
futures contracts, options or warrants as part of a
temporary defensive strategy, such as lowering a
Portfolio's investment in common stocks, to protect
against potential stock market declines. The Portfolios
intend to remain fully invested, to the extent
practicable, in a pool of securities which will
approximate the investment characteristics of their
respective indexes. The Portfolios may also enter into
forward foreign currency exchange contracts in order to
maintain the same currency exposure as their respective
indexes, but not as part of a defensive strategy to
protect against fluctuations in exchange rates. See
"Implementation of
Policies" for a description of these and other
investment practices
of the Portfolios.
The investment objective and policies of the Fund are
not fundamental and so may be changed by the Board of
Directors without shareholder approval. However,
shareholders would be notified prior to a material
change in either.
- --------------------------------------------------------------------------------
INVESTMENT
RISKS As mutual funds investing in common stocks, the
Portfolios are subject to MARKET RISK -- i.e., the
possibility that stock prices will decline over short
or even extended periods. Both U.S. and foreign stock
markets tend to be cyclical, with periods when stock
prices generally rise and periods when stock prices
generally decline.
INTERNATIONAL STOCKS
MAY EXHIBIT GREATER
VOLATILITY THAN
U.S. STOCKS Investments in foreign stock markets can be as volatile
as, if not more volatile than, investments in U.S.
markets. To illustrate the volatility of foreign stock
market returns for the U.S. dollar-based investor, the
table below sets forth the extremes of foreign stock
market returns, as well as average annual returns, for
the period from 1970 to 1995, as measured by the
MSCI -- Europe, Australia, and Far East Index and as
calculated for a U.S. dollar investor.
<TABLE>
<CAPTION>
AVERAGE INTERNATIONAL STOCK MARKET RETURNS
(1970-1995)
------------------------------------------
MSCI --
EAFE 1 YEAR 5 YEARS 10 YEARS
------ ------- --------
<S> <C> <C> <C>
Best +69.9% +36.5% +22.8%
Worst -23.2 + 1.5 + 7.0
Average +15.3 +14.2 +16.2
</TABLE>
As shown, the MSCI -- EAFE Index has provided annual
total returns, averaging +16.2% for all 10-year periods
from 1970-1995. Note, however, that the period from
1970 to 1995 was a very favorable one for foreign stock
market investing. The figures on total return and stock
market volatility are provided here only as a guide to
potential market risk, and may not be useful for
forecasting future returns in any particular period.
This table on international stock market returns should
not be viewed as a representation of future returns for
international stocks or the
10
<PAGE> 14
Portfolios of the Fund, as historical performance may
be a poor guide to future returns, and the Indexes
shown do not reflect "real world" transaction costs and
other expenses.
THE JAPANESE STOCK
MARKET IS A MAJOR
COMPONENT OF THE
PACIFIC (FREE) INDEX Investors should realize that Japanese securities
comprised 81% of the MSCI -- Pacific (Free) Index as of
December 31, 1995. Therefore stocks of Japanese
companies will represent a correspondingly large
component of the Pacific Portfolio's investment assets.
Such a large investment in the Japanese stock market
may entail a higher degree of risk than with more
diversified international portfolios, especially
considering that by fundamental measures of corporate
valuation, such as its high price-earnings ratios and
low dividend yields, the Japanese market as a whole may
appear expensive relative to other world stock markets.
STOCKS FROM THREE
COUNTRIES DOMINATE
THE EUROPE INDEX Stocks from the United Kingdom, Germany and France
comprised 34%, 14% and 13% of the MSCI -- Europe Index,
respectively, as of December 31, 1995. The remaining 11
countries in the MSCI -- Europe Index have much less
significant capitalization weightings in the Index and
will therefore have much less impact on the total
return of the Index and the European Portfolio.
EMERGING MARKETS
MAY EXHIBIT GREATER
VOLATILITY THAN
DEVELOPED MARKETS Investors should be aware that emerging markets can be
substantially more volatile than both U.S. and more
developed foreign markets. For example, from 1989-1995,
the average positive monthly return for the Wilshire
5000 Index, a broad measure of the U.S. equity market
was +3.1%. The average negative monthly return for the
Wilshire 5000 Index was -2.6%. In contrast, from
1989-1995, the average positive monthly return of the
Morgan Stanley Capital International Emerging Markets
Free Index, a widely quoted emerging market benchmark,
was +5.5%; while the average negative monthly return
was -4.9%.
INVESTMENT ILLIQUIDITY
RISK Volatility in emerging markets may be exacerbated by
illiquidity. Average daily trading volume in all of the
emerging markets combined is a small fraction of the
average daily volume of the U.S. market. Small trading
volumes may result in investors being forced to
purchase securities at substantially higher prices than
the current market, or sell securities at much lower
prices than the current market.
INTERNATIONAL STOCKS
ALSO EXPOSE INVESTORS
TO CURRENCY AND
OTHER RISKS For U.S. investors, the returns of foreign investments,
such as those held by the Portfolios, are influenced by
not only the returns on foreign common stocks
themselves, but also by the returns on the currencies
in which the stocks are denominated. Currency risk is
the risk that changes in foreign exchange rates will
affect, favorably or unfavorably, the value of foreign
securities held by a Portfolio. In a period when the
U.S. dollar generally rises against foreign currencies,
the returns on foreign stocks for a U.S. investor will
be diminished. By contrast, in a period when the U.S.
dollar generally declines, the returns on foreign
stocks will be enhanced.
Other risks and considerations of international
investing include: differences in accounting, auditing
and financial reporting standards; generally higher
transaction costs on foreign portfolio transactions;
small trading volumes and generally lower liquidity of
foreign stock
11
<PAGE> 15
markets, which may result in greater price volatility;
foreign withholding taxes payable on a Portfolio's
foreign securities, which may reduce dividend income
payable to shareholders; the possibility of
expropriation or confiscatory taxation; adverse change
in investment or exchange control regulations;
difficulty in obtaining a judgement from a foreign
court; political instability which could affect U.S.
investment in foreign countries; and potential
restriction on the flow of international capital.
- --------------------------------------------------------------------------------
WHO SHOULD
INVEST
LONG-TERM INVESTORS
SEEKING TO INVEST
IN INTERNATIONAL
COMMON STOCKS The Portfolios are designed for investors who seek a
low-cost "passive" approach for investing in a broadly
diversified portfolio of international common stocks.
Unlike other equity mutual funds, which generally seek
to "beat" market averages with often unpredictable
results, the Portfolios of the Fund seek to "match"
their respective indexes and thus are expected to
provide returns that parallel those of their respective
benchmarks.
The share prices of the Portfolios are expected to be
volatile, and investors should be able to tolerate
sudden, sometimes substantial fluctuations in the value
of their investment. No assurance can be given that a
Portfolio will achieve its stated objective or that
shareholders will be protected from the risks inherent
in equity investing. Investors may wish to minimize the
timing risk of investing in a Portfolio by purchasing
shares on a periodic basis (dollar-cost averaging)
rather than investing in one lump sum.
Because of the risks associated with international
common stock investments, the Fund is intended to be a
long-term investment vehicle and is not designed to
provide investors with a means of speculating on
short-term market movements. Investors who engage in
excessive account activity generate additional costs
which are borne by all of the Portfolio's shareholders.
In order to minimize such costs the Portfolios have
adopted the following policies. The Portfolios reserve
the right to reject any purchase request (including
exchange purchases from other Vanguard portfolios) that
is reasonably deemed to be disruptive to efficient
portfolio management, either because of the timing of
the investment or previous excessive trading by the
investor. Additionally, the Portfolios have adopted
exchange privilege limitations as described in the
section "Exchange Privilege Limitations." Finally, the
Portfolios reserve the right to suspend the offering of
their shares. Investors should not consider the
Portfolios a complete investment program, but should
maintain holdings of securities with different risk
characteristics -- including U.S. common stocks, bonds
and money market instruments.
- --------------------------------------------------------------------------------
12
<PAGE> 16
IMPLEMENTATION
OF POLICIES
The Portfolios utilize a number of investment practices
in an effort to parallel the investment performance of
their respective indexes.
THE PORTFOLIOS INVEST
IN INTERNATIONAL
COMMON STOCKS USING
SAMPLING TECHNIQUES The MSCI -- Europe Index consists of approximately 600
equity securities from Europe, the MSCI -- Pacific
(Free) Index consists of more than 500 equity
securities from Australia and the Far East, and the
MSCI -- Select Emerging Markets (Free) Index consists
of some 500 stocks from Asia, Latin America, Africa and
Europe. The stocks included in each index are chosen by
Morgan Stanley Capital International on a statistical
basis. Each stock in the MSCI -- Europe,
MSCI -- Pacific (Free), and MSCI -- Select Emerging
Markets (Free) Indexes is weighted according to its
market value as a percentage of the total market value
of all stocks in the respective index. (A stock's
market value equals the number of shares outstanding
times the most recent price of the security.) The
inclusion of a stock in the index in no way implies
that Morgan Stanley Capital International believes the
stock to be an attractive investment.
The European, Pacific, and Emerging Markets Portfolios
will be unable to hold all of the issues that comprise
their respective indexes because of the costs involved
and the illiquidity of many of the securities. Instead,
each Portfolio will attempt to hold a representative
sample of approximately 400 or more of the securities
in its respective Index, which will be selected
utilizing a mathematical technique known as "portfolio
optimization." Under this technique, each stock is
considered for inclusion in the Portfolio based on its
contribution to certain country, capitalization,
industry, and fundamental investment characteristics.
Each Portfolio is constructed so that, in the
aggregate, each Portfolio's country, capitalization,
industry, and fundamental investment characteristics
resemble those of its respective Index. Over time,
portfolio composition is altered (or "rebalanced") to
reflect changes in the characteristics of the Indexes.
Due to the use of this sampling or "portfolio
optimization" technique, the Portfolios are not
expected to track their benchmark indexes with the same
degree of accuracy as large capitalization domestic
index funds. Over time, the correlation between the
performance of each Portfolio and its respective index
is expected to be greater than 0.95. A correlation of
1.00 would indicate perfect correlation, which would be
achieved when the net asset value of each Portfolio,
including the value of its dividend and capital gains
distributions, increases or decreases in exact
proportion to changes in its respective index.
EACH PORTFOLIO MAY
INVEST IN SHORT-TERM
FIXED INCOME
SECURITIES Although each Portfolio's policy is to remain
substantially fully invested in common stocks, the
Portfolios may invest temporarily in certain short-term
fixed income securities. Such securities may be used to
invest uncommitted cash balances or to maintain
liquidity to meet shareholder redemptions. These
securities include: obligations of the United States
Government and its agencies or instrumentalities;
commercial paper (rated Prime-1 by Moody's Investors
Services, Inc. or A-1 by Standard & Poor's
Corporation), bank certificates of deposit and bankers'
acceptances; and repurchase agreements collateralized
by these securities.
13
<PAGE> 17
EACH PORTFOLIO MAY
USE FUTURES CONTRACTS,
OPTIONS AND WARRANTS,
CONVERTIBLE SECURITIES
AND SWAP AGREEMENTS The Portfolios may utilize stock futures contracts,
options, warrants, convertible securities and swap
agreements to a limited extent. Such instruments are
commonly referred to as "derivatives," because their
value is based on (or "derived" from) a traditional
security or a market index. Specifically, each
Portfolio may enter into futures contracts and options
provided that not more than 5% of its assets are
required as a margin deposit for futures contracts or
options. Additionally, the Fund's investment in
warrants will not exceed more than 5% of its assets (2%
with respect to warrants not listed on the New York or
American Stock Exchanges). Futures contracts, options,
warrants, convertible securities and swap agreements
may be used for several reasons: to simulate full
investment in the underlying Index while retaining a
cash balance for fund management purposes, to
facilitate trading, to reduce transaction costs or to
seek higher investment returns when a futures contract,
option, warrant, convertible security or swap agreement
is priced more attractively than the underlying equity
security or index. While each of these securities can
be used as leveraged investments, the Portfolios may
not use them to leverage its net assets.
FUTURES CONTRACTS,
OPTIONS, WARRANTS,
CONVERTIBLE SECURITIES
AND SWAP AGREEMENTS
POSE CERTAIN RISKS The risk of loss associated with futures contracts in
some strategies can be substantial due to the leverage
associated with low margin deposits. As a result, a
relatively small price movement in a futures contract
may result in an immediate and substantial loss or
gain. However, the Portfolios will not use futures
contracts, options, warrants, convertible securities
and swap agreements for speculative purposes or to
leverage their net assets. Accordingly, the primary
risks associated with the use of futures contracts,
options, warrants, convertible securities and swap
agreements by the Portfolios are: (i) imperfect
correlation between the change in market value of the
stocks held by a Portfolio and the prices of futures
contracts, options, warrants, convertible securities
and swap agreements; and (ii) possible lack of a liquid
secondary market for a futures contract and the
resulting inability to close a futures position prior
to its maturity date. The risk of imperfect correlation
will be minimized by investing only in those contracts
whose behavior is expected to resemble that of a
Portfolio's underlying securities. The risk that a
Portfolio will be unable to close out a futures
position will be minimized by entering into such
transactions on an exchange with an active and liquid
secondary market. However options, warrants,
convertible securities and swap agreements purchased or
sold over-the-counter may be less liquid than exchange
traded securities. Illiquid securities, in general,
including swap agreements, may not represent more than
15% of the net assets of a Portfolio of the Fund.
Since there are no futures traded on the MSCI indexes,
it will be necessary for the Portfolios to utilize a
composite of other futures contracts to simulate the
performance of the Indexes. This process may magnify
the "tracking error" of a Portfolio's performance
compared to that of its Index, due to lower correlation
of the selected futures with its Index. The investment
adviser will attempt to reduce this tracking error by
investing in futures contracts whose behavior is
expected to
14
<PAGE> 18
resemble that of the underlying securities, although
there can be no assurance that these selected futures
will perfectly correlate with the performance of any
Index.
Swap agreements are contracts between parties in which
one party agrees to make payments to the other party
based on the change in market value of a specified
index or asset. In return, the other party agrees to
make payments to the first party based on the return of
a different specified index or asset. Although swap
agreements entail the risk that a party will default
on its payment obligations thereunder, the portfolios
will minimize this risk by entering into agreements
that mark to market no less frequently than quarterly.
Swap agreements also bear the risk that the
Portfolios will not be able to meet their obligation
to the counterparty. This risk will be mitigated by
investing the Portfolios in the specific asset for
which it is obligated to pay a return.
ALL FOUR PORTFOLIOS MAY
ENTER INTO FORWARD
CURRENCY CONTRACTS Each Portfolio may enter into foreign currency forward
and foreign currency futures contracts in order to
maintain the same currency exposure as its respective
index. A Portfolio may not enter into such contracts
for speculative purposes, or as a way of protecting
against anticipated adverse changes in exchange rates
between foreign currencies and the U.S. dollar. A
foreign currency forward contract is an obligation to
purchase or sell a specific currency at a future date,
which may be any fixed number of days from the date of
the contract agreed upon by the parties, at a price set
at the time of the contract.
THREE PORTFOLIOS MAY
LEND THEIR SECURITIES The European, Pacific and Emerging Markets Portfolios
may lend their investment securities to qualified
institutional investors for either short-term or
long-term purposes of realizing additional income.
Loans of securities by the Portfolios will be
collateralized by cash, letters of credit, or
securities issued or guaranteed by the U.S. Government
or its agencies. The collateral will equal at least
100% of the current market value of the loaned
securities.
PORTFOLIO TURNOVER
IS EXPECTED TO BE LOW Although the Portfolios generally seek to invest for
the long term, the Portfolios retain the right to sell
securities irrespective of how long they have been
held. However, because of the "passive" investment
management approach of the Portfolios, the portfolio
turnover rate for each Portfolio is expected to be
under 50%, a generally lower turnover rate than for
most other investment companies. A portfolio turnover
rate of 50% would occur if one half of a Portfolio's
securities were sold within one year. Ordinarily,
securities will be sold from a Portfolio only to
reflect certain administrative changes in an index
(including mergers or changes in the composition of an
index) or to accommodate cash flows out of the
Portfolio while maintaining the similarity of the
Portfolio to its benchmark index.
EACH PORTFOLIO MAY
BORROW MONEY Each Portfolio may borrow money from a bank up to a
limit of 15% of the market value of its assets, but
only for temporary or emergency purposes. A Portfolio
may borrow money only to meet redemption requests prior
to the settlement of securities already sold or in the
process of being sold
by the Portfolio. To the extent that a Portfolio
borrows money prior to
selling securities, the Portfolio may be leveraged; at
such times, the
15
<PAGE> 19
Portfolio may appreciate or depreciate in value more
rapidly than its benchmark index. Each Portfolio will
repay any money borrowed in excess of 5% of the
market value of its total assets prior to purchasing
additional portfolio securities.
- --------------------------------------------------------------------------------
INVESTMENT
LIMITATIONS
THE FUND HAS ADOPTED
CERTAIN FUNDAMENTAL
LIMITATIONS Each Portfolio has adopted certain limitations on its
investment practices. Specifically, each Portfolio will
not:
(a) with respect to 75% of its assets, purchase
securities of any issuer (except obligations of the
U.S. Government and its instrumentalities) if, as a
result, more than 5% of the value of the
Portfolio's assets would be invested in the
securities of such issuer, except for the Total
International Portfolio, which will normally invest
100% of its assets in the underlying Portfolios of
the Fund.
(b) with respect to 75% of its assets, purchase more
than 10% of the voting securities of any issuer;
(c) invest more than 25% of its assets in any one
industry, except for the Total International
Portfolio which may invest more than 25% of its
assets in investment companies which are the
underlying portfolios of the Fund; and
(d) borrow money except from banks for temporary or
emergency purposes and in no event in excess of 15%
of the market value of its total assets.
These investment limitations are considered at the time
investment securities are purchased. The limitations
described here and in the Statement of Additional
Information for each Fund may be changed only with the
approval of a majority of a Fund's shareholders.
- --------------------------------------------------------------------------------
MANAGEMENT OF
THE FUND
VANGUARD ADMINISTERS
AND DISTRIBUTES
THE PORTFOLIOS Vanguard International Equity Index Fund is a member of
The Vanguard Group of Investment Companies, a family of
more than 30 investment companies with more than 90
distinct investment portfolios and total assets in
excess of $190 billion. Through their jointly-owned
subsidiary, The Vanguard Group, Inc. ("Vanguard"),
the Fund and the other funds in the Group obtain at
cost virtually all of their corporate management,
administrative and distribution services. Vanguard
also provides investment advisory services on an
at-cost basis to certain Vanguard funds. As a result
of Vanguard's unique corporate structure, the Vanguard
Funds have costs substantially lower than those of most
competing mutual funds. In 1995, the average expense
ratio (annual costs including advisory fees divided by
total net assets) for the Vanguard funds amounted to
approximately 0.31% compared to an average of 1.11% for
the mutual fund industry (data provided by Lipper
Analytical Services).
Vanguard Total International Portfolio is an
independent series of Vanguard STAR Fund. The Portfolio
operates under a separate service agreement and, to the
extent that its assets are composed of shares of other
Vanguard Funds, it will bear no direct expenses.
The Officers of the Funds manage their day-to-day
operations and are responsible to the Funds' Board of
Directors (Trustees). The Directors (Trustees) set
broad policies for the Funds and choose the Officers.
16
<PAGE> 20
A list of the Directors (Trustees) and Officers of the
Funds and a statement of their present positions and
principal occupations during the past five years can be
found in the Statement of Additional Information.
Vanguard employs a supporting staff of management and
administrative personnel to provide the requisite
services to the funds and also furnishes the Funds with
necessary office space, furnishings and equipment. Each
Fund pays its share of Vanguard's net expenses, which
are allocated among the Funds under methods approved by
the Board of Directors (Trustees) of each Fund. In
addition, each Fund bears its own direct expenses, such
as legal, auditing and custodian fees.
Vanguard provides distribution and marketing services
to the Funds. The Funds are available on a no-load
basis (i.e., there are no sales commissions or 12b-1
fees). However, each Fund bears its own share of the
Group's distribution costs.
- --------------------------------------------------------------------------------
INVESTMENT
ADVISER
VANGUARD MANAGES
THE FUNDS ON AN
AT-COST BASIS The Vanguard International Equity Index Fund receives
all investment advisory services on an at-cost basis
from Vanguard Core Management Group, which also
provides investment advisory services to Vanguard Index
Trust, the equity portion of Vanguard Balanced Index
Fund, Vanguard Institutional Index Fund, a portion of
the assets of Vanguard/Windsor II and Vanguard/Morgan
Growth Fund, the Equity Index Portfolio of Vanguard
Variable Insurance Fund, Vanguard Tax-Managed Fund, the
Aggressive Growth Portfolio of Vanguard Horizon Fund,
and several indexed separate accounts. Total indexed
assets under management as of December 31, 1995, were
$33 billion. The Portfolios of the Fund are not
actively managed, but are instead administered by the
Core Management Group using computerized, quantitative
techniques. The Group is supervised by the Officers of
the Funds.
In placing portfolio transactions, Vanguard Core
Management Group uses its best judgment to choose the
broker most capable of providing the brokerage services
necessary to obtain the best available price and most
favorable execution at the lowest commission rate. The
full range and quality of brokerage services available
are considered in making these determinations. In those
instances where it is reasonably determined that more
than one broker can offer the services needed to obtain
the best available price and most favorable execution,
consideration may be given to those brokers which
supply statistical information and provide other
services in addition to execution services to the Fund.
The Total International Portfolio does not employ an
investment adviser.
- --------------------------------------------------------------------------------
DIVIDENDS,
CAPITAL GAINS
AND TAXES Each Portfolio intends to distribute substantially all
of its ordinary income in the form of dividends. The
Portfolios pay annual dividends. Capital gains
distributions, if any, are also made annually.
DIVIDENDS AND ANY
CAPITAL GAINS WILL BE
PAID ANNUALLY Each Portfolio's dividend and capital gains
distributions may be reinvested in additional shares or
received in cash. See "Choosing a Distribution Option"
for a description of these distribution methods.
17
<PAGE> 21
In order to satisfy certain distribution requirements
of the Tax Reform Act of 1986, each Portfolio may
declare special year-end dividend and capital gain
distributions during December. Such distributions, if
received by shareholders by January 31, are deemed to
have been paid by each Portfolio and received by
shareholders on December 31 of the prior year.
EACH PORTFOLIO WILL
CHARGE A $10 ACCOUNT
MAINTENANCE FEE Each Portfolio will automatically deduct a $10 annual
account maintenance fee from the dividend income of
each Portfolio account on an annual basis. If the
dividend to be paid to an account is less than the fee
to be deducted, sufficient shares will be redeemed from
an account to make up the difference. The Board of
Directors (Trustees) reserves the right to change the
annual account maintenance fee to reflect the actual
cost of maintaining smaller shareholder accounts. For
federal tax purposes, the account maintenance fee does
not reduce dividend income and may be treated as an
investment expense by each shareholder (subject to
limitations). This fee will be waived for shareholders
with an account balance of $10,000 or more.
Each Portfolio intends to continue to qualify for
taxation as a "regulated investment company" under the
Internal Revenue Code so that it will not be subject to
federal income tax to the extent its income is
distributed to shareholders. Dividends paid by each
Portfolio from net investment income and net short-term
capital gains, whether received in cash or reinvested
in additional shares, will be taxable to shareholders
as ordinary income. For corporate investors, dividends
from net investment income will not generally qualify
for the intercorporate dividends-received deduction.
Distributions paid by a Portfolio from long-term
capital gains, whether received in cash or reinvested
in additional shares, are taxable as long-term capital
gains, regardless of the length of time you have owned
shares in a Portfolio. Capital gains distributions are
made when a Portfolio realizes net capital gains on
sales of portfolio securities during the year or when a
Portfolio receives distributions of long-term capital
gains from investments in other regulated investment
companies. A Portfolio does not seek to realize any
particular amount of capital gains during a year;
rather, realized gains are a by-product of portfolio
management activities. Consequently, capital gains
distributions may be expected to vary considerably from
year to year; there will be no capital gains
distributions in years when a Portfolio realizes net
capital losses.
Note that if you elect to receive capital gains
distributions in cash, instead of reinvesting them in
additional shares, you are in effect reducing the
capital at work for you in a Portfolio. Also, keep in
mind that if you purchase shares in a Portfolio shortly
before the record date for a dividend or capital gains
distribution, a portion of your investment will be
returned to you as a taxable distribution, regardless
of whether you are reinvesting your distributions or
receiving them in cash.
The Fund will notify you annually as to the tax status
of dividend and capital gains distributions paid by
each Portfolio.
18
<PAGE> 22
THREE PORTFOLIOS MAY
"PASS THROUGH"
FOREIGN TAXES The European, Pacific, and Emerging Markets Portfolios
may elect to "pass through" to its shareholders the
amount of foreign income taxes paid by a Portfolio. The
Portfolios will make such an election only if it is
deemed to be in the best interests of the shareholders.
If this election is made, shareholders of a Portfolio
will be required to include in their gross income their
pro rata share of foreign taxes paid by the Portfolio.
However, shareholders will be able to treat their pro
rata share of foreign taxes as either an itemized
deduction or a foreign tax credit against U.S. income
taxes (but not both) on their federal income tax
return.
ANY FOREIGN TAX CREDITS
WOULD NOT "PASS
THROUGH" TO TOTAL
INTERNATIONAL PORTFOLIO
SHAREHOLDERS If the European, Pacific or Emerging Markets Portfolios
elect to pass through foreign taxes to their
shareholders, the foreign tax credit would not pass
through to Total International Portfolio shareholders.
Since the Total International Portfolio holds shares of
the European, Pacific and Emerging Markets Portfolios,
which are U.S. corporations, and does not hold shares
of foreign securities, it cannot pass through the
foreign tax credit to its investors. However, the Total
International Portfolio would claim a deduction for
foreign taxes paid by the underlying funds.
A CAPITAL GAIN OR LOSS
MAY BE REALIZED
UPON EXCHANGE OR
REDEMPTION A sale of shares of a Portfolio is a taxable event, and
may result in a capital gain or loss. A capital gain or
loss may be realized from an ordinary redemption of
shares or an exchange of shares between two mutual
funds (or two portfolios of a mutual fund). You are
responsible for calculating any capital gains or losses
realized upon redemption or exchange of a Portfolio's
shares.
Dividend distributions, capital gains distributions,
and capital gains or losses from redemptions and
exchanges may be subject to state and local taxes.
Each Portfolio is required to withhold 31% of taxable
dividends, capital gains distributions, and redemptions
paid to shareholders who have not complied with IRS
taxpayer identification regulations. You may avoid this
withholding requirement by certifying on your Account
Registration Form your proper Social Security or
Employer Identification number and by certifying that
you are not subject to backup withholding.
Vanguard International Equity Index Fund has obtained a
certificate of authority to do business as a foreign
corporation in Pennsylvania and does business and
maintains an office in that state. In the opinion of
counsel, shares of the Fund will be exempt from
Pennsylvania personal property taxes.
Vanguard Total International Portfolio is part of a
Pennsylvania business trust and, in the opinion of
counsel, is not liable for any income or franchise tax
in the Commonwealth of Pennsylvania. The Portfolio will
be subject to Pennsylvania county personal property tax
in the county which is the site of its principal
office. In the opinion of counsel, shareholders who are
Pennsylvania residents will not be subject to county
personal property taxes, with the exception of non-
19
<PAGE> 23
exempt holders who are residents of the City and School
District of Pittsburgh.
The tax discussion set forth above is included for
general information only. Prospective investors should
consult their own tax advisers concerning the tax
consequences of an investment in the Fund.
- --------------------------------------------------------------------------------
THE SHARE PRICE OF
EACH PORTFOLIO The share price or "net asset value per share" of each
Portfolio is determined by dividing the total market
value of the Portfolio's investments and other assets,
less any liabilities, by the number of outstanding
shares of the Portfolio. "Net asset value" per share is
determined as of the regular close of the New York
Stock Exchange (generally 4:00 p.m. Eastern time) on
each day the exchange is open for trading. Portfolio
securities are valued at the last quoted sales price
available, according to the broadest and most
representative market, at the time the Portfolio's
assets are valued. Price information on listed
securities is taken from the exchange where the
security is primarily traded. Securities regularly
traded in the over-the-counter market are valued at the
latest quoted bid price. Other assets and securities
for which no quotations are readily available are
valued at fair value as determined in good faith by the
Directors (Trustees). Securities may be valued on the
basis of prices provided by a pricing service when such
prices are believed to reflect the fair market value of
such securities. The prices provided by a pricing
service may be determined without regard to bid or last
sale prices of each security but take into account
institutional-size transactions in similar groups of
securities as well as any developments related to
specific securities. All assets and liabilities
initially expressed in foreign currencies will be
converted into U.S. dollars using the officially quoted
daily exchange rates determined by Morgan Stanley
Capital International (MSCI) in the calculation of
their Europe, Australia and Far East Index. This
officially quoted daily exchange rate may be determined
by MSCI prior to or after the close of a particular
foreign securities market. If such quotations are not
available, the rate of exchange will be determined in
accordance with policies established by the Board of
Directors (Trustees).
- --------------------------------------------------------------------------------
GENERAL
INFORMATION Vanguard International Equity Index Fund is organized
as a Maryland corporation. The Articles of
Incorporation permit the Directors to issue
1,500,000,000 shares of common stock with a $.001 par
value. The Board of Directors (Trustees) has the power
to designate one or more classes ("series") of shares
of common stock and to classify or reclassify any
unissued shares with respect to such series. Currently
the Fund is offering shares of three series.
The shares of each series are fully paid and
non-assessable; have no preference as to conversion,
exchange, dividends, retirement or other features; and
have no pre-emptive rights. Such shares have non-
cumulative voting rights, meaning that the holders of
more than 50% of the shares voting for the election of
Directors (Trustees) can elect 100% of the Directors
(Trustees) if they so choose. Annual meetings of
shareholders will not be held except as required by the
Investment Company Act of 1940 and other applicable
law. An annual meeting will
20
<PAGE> 24
be held to vote on the removal of a Director (Trustee)
or Directors (Trustees) of the Fund if requested in
writing by the holders of not less than 10% of the
outstanding shares of the Fund.
The Total International Portfolio is an independent
series of Vanguard STAR Fund, a Pennsylvania business
trust.
All securities and cash for the European, Pacific and
Emerging Markets Portfolios are held by Morgan Stanley
Trust Company. CoreStates Bank, N.A., holds the daily
cash balances that are used by these three Portfolios
to invest in repurchase agreements or securities
acquired in these transactions. Securities and cash for
the Total International Portfolio are held by
CoreStates. The Vanguard Group, Inc., Valley Forge, PA,
serves as the Funds' Transfer and Dividend Disbursing
Agent. Price Waterhouse LLP, serves as independent
accountant for the Funds and will audit their financial
statements annually. The Funds are not involved in any
litigation.
- --------------------------------------------------------------------------------
21
<PAGE> 25
SHAREHOLDER GUIDE
OPENING AN
ACCOUNT AND
PURCHASING
SHARES You may open a regular (non-retirement) account, either
by mail or wire. Simply complete and return an Account
Registration Form and any required legal documentation,
indicating the amount you wish to invest. Your purchase
must be equal to or greater than the $3,000 minimum
initial investment requirement for each Portfolio
($1,000 for Uniform Gifts/Transfers to Minors Act
accounts). To open a new account by wire, you must call
Client Services before initiating the wire transfer.
You must open a new Individual Retirement Account by
mail (IRAs may not be opened by wire) using a Vanguard
IRA Adoption Agreement. Your purchase must be equal to
or greater than the $1,000 minimum initial investment
requirement, but no more than $2,000 if you are making
a regular IRA contribution. Rollover contributions are
generally limited to the amount withdrawn within the
past 60 days from an IRA or other qualified Retirement
Plan. If you need assistance with the forms or have any
questions about the Fund, please call our Investor
Information Department (1-800-662-7447). NOTE: For
other types of account registrations (e.g.,
corporations, associations, other organizations, trusts
or powers of attorney), please call us to determine
which additional forms you may need.
The shares of each Portfolio are purchased at the
next-determined net asset value after your investment
has been received. The Portfolios are offered on a
no-load basis (i.e., there are no sales commissions or
12b-1 fees).
PURCHASE
RESTRICTIONS 1) Because of the risks associated with common stock
investments, the Portfolios are intended to be
long-term investment vehicles and are not designed
to provide investors with a means of speculating on
short-term market movements. Consequently, the
Portfolios reserve the right to reject any specific
purchase (and exchange purchase) request. The
Portfolios also reserve the right to suspend the
offering of shares for a period of time.
2) Vanguard will not accept third-party checks to
purchase shares of the Portfolios. Please be sure
your purchase check is made payable to The Vanguard
Group.
IMPORTANT NOTE
ON EXPENSES The Emerging Markets Portfolio assesses a 1%
transaction fee on redemptions. Each Portfolio assesses
a transaction fee on purchases (2% for the Emerging
Markets Portfolio and 1% for the European, Pacific and
Total International Portfolios) as well as a $10 annual
account maintenance fee. The $10 annual account
maintenance fee will be waived for shareholders with an
account balance of $10,000 or more. See "Portfolio
Expenses."
ADDITIONAL
INVESTMENTS Subsequent investments to regular accounts may be made
by mail ($100 minimum), wire ($1,000 minimum), written
exchange from another Vanguard Fund account ($100
minimum), or Vanguard Fund Express. Subsequent
investments to Individual Retirement Accounts may be
made by mail ($100 minimum) or exchange from another
Vanguard Fund account. In some instances, contributions
may be
22
<PAGE> 26
made by wire or Vanguard Fund Express. Please call us
for more information on these options.
-----------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
ADDITIONAL INVESTMENTS
NEW ACCOUNT TO EXISTING ACCOUNTS
PURCHASING BY MAIL Please include the amount Additional investments
of your initial investment should include the
Complete and sign the on the registration form, Invest-by-Mail remittance
enclosed Account make your check payable to form attached to your Fund
Registration Form The Vanguard confirmation statements.
Group-(Portfolio Number), Please make your check
see below for appropriate payable to The Vanguard
Portfolio number, and mail Group-(Portfolio Number),
to: see below for the
appropriate Portfolio
VANGUARD FINANCIAL CENTER number, write your account
P.O. BOX 2600 number on your check and,
VALLEY FORGE, PA 19482 using the return envelope
provided, mail to the
address indicated on the
Invest-by-Mail Form.
For express or VANGUARD FINANCIAL CENTER All written requests should
registered mail, 455 DEVON PARK DRIVE be mailed to one of the
send to: WAYNE, PA 19087 addresses indicated for new
accounts. Do not send
registered or express mail
to the post office box
address.
European Portfolio -- 79
Emerging Markets Portfolio -- 533
Pacific Portfolio -- 72
Total International Portfolio -- 113
---------------------------
CORESTATES BANK, N.A.
PURCHASING BY WIRE ABA 031000011
CORESTATES NO 01019897
Money should be ATTN VANGUARD
wired to: VANGUARD INTERNATIONAL EQUITY
INDEX FUND
BEFORE Wiring NAME OF PORTFOLIO
ACCOUNT NUMBER (or temporary reference
Please contact number
Client Services for new accounts)
(1-800-662-2739) ACCOUNT REGISTRATION
</TABLE>
You should notify our Client Services Department of
your intended wire purchase by 12:00 noon (Eastern
time). To assure proper receipt, please be sure your
bank includes the Portfolio name, the account number
Vanguard has assigned to you and the eight-digit
CoreStates number. If you are opening a new account,
please complete the Account Registration Form and mail
it to the "New Account" address above after completing
your wire arrangement. Note: Federal Funds wire
purchase orders will be accepted only when the Fund and
Custodian Bank are open for business. Funds must be
received at the Federal Reserve Bank by 4:00 p.m.
Eastern time in order to receive that day's trade date.
-----------------------------------------------------------------------------
PURCHASING BY
EXCHANGE (from a
Vanguard account) Telephone exchanges are not accepted for the Fund. You
may, however, open an account by exchange by providing
the appropriate information on the Account Registration
Form. The new account will have the same
23
<PAGE> 27
registration as the existing account. The Fund reserves
the right to refuse any exchange purchase request.
-----------------------------------------------------------------------------
PURCHASING BY
FUND EXPRESS
Automatic Investment The Fund Express Automatic Investment option lets you
move money automatically from your bank account to your
Vanguard account on the schedule (monthly, bimonthly
[every other month], quarterly or yearly) you select.
To establish this option, please provide the
appropriate information on the Account Registration
Form. We will send you a confirmation of your Fund
Express enrollment; please wait three weeks before
using the service.
- --------------------------------------------------------------------------------
CHOOSING A
DISTRIBUTION
OPTION You must select one of three distribution options:
1. AUTOMATIC REINVESTMENT OPTION -- Both dividends and
capital gains distributions will be reinvested in
additional shares. This option will be selected for
you automatically unless you specify one of the
other options.
2. CASH DIVIDEND OPTION -- Your dividends will be paid
in cash and your capital gains will be reinvested in
additional shares.
3. ALL CASH OPTION -- Both dividend and capital gains
distributions will be paid in cash.
You may change your option by calling our Client
Services Department (1-800-662-2739).
In addition, an option to invest your cash dividends
and/or capital gains distributions in another Vanguard
Fund account is available. Please call our Client
Services Department (1-800-662-2739) for information.
You may also elect Vanguard Dividend Express which
allows you to transfer your cash dividends and/or
capital gains distributions automatically to your bank
account. Please see "Other Vanguard Services" for more
information.
- --------------------------------------------------------------------------------
TAX CAUTION
INVESTORS SHOULD ASK
ABOUT THE TIMING OF
CAPITAL GAINS AND
DIVIDEND DISTRIBUTIONS
BEFORE INVESTING Under Federal tax laws, each Portfolio is required to
distribute net capital gains and dividend income to
Portfolio shareholders. These distributions are made to
all shareholders who own Portfolio shares as of the
distribution's record date, regardless of how long the
shares have been owned. Purchasing shares just prior to
the record date could have a significant impact on your
tax liability for the year. For example, if you
purchase shares immediately prior to the record date of
a sizable capital gain or income dividend distribution,
you will be assessed taxes on the amount of the capital
gain and/or dividend distribution later paid even
though you owned the Portfolio shares for just a short
period of time. (Taxes are due on the distributions
even if the dividend or gain is reinvested in
additional Portfolio shares.) While the total value of
your investment will be the same after the distribution
(assuming there is no market change) -- the amount of
the distribution will offset the drop in the net asset
value of the shares -- you should be aware of the tax
implications the timing of your purchase may have.
Prospective investors should, therefore, inquire about
potential distributions before investing. The
Portfolio's annual dividend and capital gains
distributions normally occur in December. For
additional infor-
24
<PAGE> 28
mation on distributions and taxes, see the section
titled "Dividends, Capital Gains and Taxes."
- --------------------------------------------------------------------------------
IMPORTANT
INFORMATION
ESTABLISHING OPTIONAL
SERVICES The easiest way to establish optional Vanguard services
on your account is to select the options you desire
when you complete your Account Registration Form. IF
YOU WISH TO ADD OPTIONS LATER, YOU MAY NEED TO PROVIDE
VANGUARD WITH ADDITIONAL INFORMATION AND A SIGNATURE
GUARANTEE. PLEASE CALL OUR CLIENT SERVICES DEPARTMENT
(1-800-662-2739) FOR FURTHER ASSISTANCE.
SIGNATURE
GUARANTEES For our mutual protection, we may require a signature
guarantee on certain written transaction requests. A
signature guarantee verifies the authenticity of your
signature and may be obtained from banks, brokers and
any other guarantor that Vanguard deems acceptable. A
SIGNATURE GUARANTEE CANNOT BE PROVIDED BY A NOTARY
PUBLIC.
CERTIFICATES Share certificates for the European and Pacific
Portfolios (but not for the Emerging Markets and Total
International Portfolios) will be issued upon request.
If a certificate is lost, you may incur an expense to
replace it.
BROKER-DEALER
PURCHASES If you purchase shares in Vanguard Funds through a
registered broker-dealer or investment adviser, the
broker-dealer or adviser may charge a service fee.
CANCELLING TRADES The Portfolios will not cancel any trade (e.g.,
purchase, exchange or redemption) believed to be
authentic, received in writing or by telephone, once
the trade request has been received.
ELECTRONIC
PROSPECTUS
DELIVERY If you would prefer to receive a prospectus for the
Portfolios or any of the Vanguard Funds in an
electronic format, please call 1-800-231-7870 for
additional information. If you elect to do so, you may
also receive a paper copy of the prospectus, by calling
1-800-662-7447.
- --------------------------------------------------------------------------------
WHEN YOUR
ACCOUNT WILL
BE CREDITED Your trade date is the date on which your account is
credited. If your purchase is made by check, Federal
Funds wire or exchange, and is received by the close of
the New York Stock Exchange (generally 4:00 p.m.
Eastern time), your trade date is the day of receipt.
If your purchase is received after the close of the
Exchange, your trade date is the next business day. All
four Portfolios charge a transaction fee on purchases
(2% for the Emerging Markets Portfolio and 1% for the
European, Pacific, and Total International Portfolios).
See "Portfolio Expenses."
In order to prevent lengthy processing delays caused by
the clearing of foreign checks, Vanguard will only
accept a foreign check which has been drawn in U.S.
dollars and has been issued by a foreign bank with a
U.S. correspondent bank. The name of the U.S.
correspondent bank must be printed on the face of the
foreign check.
- --------------------------------------------------------------------------------
SELLING YOUR
SHARES You may withdraw any portion of the funds in your
account by redeeming shares at any time. You generally
may initiate a request by writing or by telephoning.
Your redemption proceeds are normally
25
<PAGE> 29
mailed within two business days after the receipt of
the request in Good Order.
-----------------------------------------------------------------------------
SELLING BY MAIL Requests should be mailed to VANGUARD FINANCIAL CENTER,
VANGUARD INTERNATIONAL INDEX PORTFOLIOS, P.O. BOX 1120,
VALLEY FORGE, PA 19482. (For express or registered
mail, send your request to Vanguard Financial Center,
Vanguard International Index Portfolios, 455 Devon Park
Drive, Wayne, PA 19087.)
The Emerging Markets Portfolio charges a 1% transaction
fee on all redemptions (including the sale of shares).
The redemption price of shares will be the Portfolio's
net asset value next determined after Vanguard has
received all required documents in Good Order.
-----------------------------------------------------------------------------
DEFINITION OF
GOOD ORDER GOOD ORDER means that the request includes the
following:
1. The account number and Portfolio name.
2. The amount of the transaction (specified in dollars
or shares).
3. The signatures of all owners EXACTLY as they are
registered on the account.
4. Any required signature guarantees.
5. Other supporting legal documentation that might be
required in the case of estates, corporations,
trusts and certain other accounts.
6. Any certificates that you are holding for the
account.
IF YOU HAVE QUESTIONS ABOUT THIS DEFINITION AS IT
PERTAINS TO YOUR REQUEST, PLEASE CALL OUR CLIENT
SERVICES DEPARTMENT (1-800-662-2739).
-----------------------------------------------------------------------------
SELLING BY TELEPHONE To sell shares by telephone, you or your pre-authorized
representative may call our Client Services Department
at 1-800-662-2739. The proceeds will be sent to you by
mail. PLEASE NOTE: As a protection against fraud, your
telephone mail redemption privilege will be suspended
for 15 calendar days following any expedited address
change to your account. An expedited address change is
one that is made by telephone, by Vanguard Online or,
in writing, without the signatures of all account
owners. Please see "Important Information About
Telephone Transactions."
-----------------------------------------------------------------------------
SELLING BY FUND
EXPRESS
Automatic
Withdrawal With the Fund Express Automatic Withdrawal option,
money will be automatically moved from your Vanguard
Fund account to your bank account according to the
schedule you have selected. You may elect Fund Express
on the Account Registration Form or call our Investor
Information Department (1-800-662-7447) for a Fund
Express Application.
-----------------------------------------------------------------------------
SELLING BY EXCHANGE You may sell shares by making an exchange to another
Vanguard Fund account. Exchanges to or from the
Portfolios may be made only by mail. Please see
"Exchanging Your Shares" for details.
-----------------------------------------------------------------------------
26
<PAGE> 30
IMPORTANT
REDEMPTION
INFORMATION Shares purchased by check or Fund Express may be
redeemed at any time. However, your redemption proceeds
will not be paid until payment for the purchase is
collected, which may take up to ten calendar days.
-----------------------------------------------------------------------------
DELIVERY OF
REDEMPTION
PROCEEDS Redemption requests received by telephone prior to the
close of the New York Stock Exchange (generally 4:00
p.m. Eastern time) are processed on the day of receipt
and the redemption proceeds are normally sent on the
following business day.
Redemption requests received by telephone after the
close of the Exchange are processed on the business day
following receipt and the proceeds are normally sent on
the second business day following receipt.
Redemption proceeds must be sent to you within seven
days of receipt of your request in Good Order, except
as described in "Important Redemption Information."
If you experience difficulty in making a telephone
redemption during periods of drastic economic or market
changes, your redemption request may be made by regular
or express mail. It will be implemented at the net
asset value next determined after your request has been
received by Vanguard in Good Order. The Fund reserves
the right to revise or terminate the telephone
redemption privilege at any time.
Each Portfolio may suspend the redemption right or
postpone payment at times when the New York Stock
Exchange is closed or under any emergency circumstances
as determined by the United States Securities and
Exchange Commission.
If the Board of Directors determines that it would be
detrimental to the best interests of a Portfolio's
remaining shareholders to make payment in cash, a
Portfolio may pay redemption proceeds in whole or in
part by a distribution in kind of readily marketable
securities.
-----------------------------------------------------------------------------
VANGUARD'S AVERAGE
COST STATEMENT If you make a redemption from a qualifying account,
Vanguard will send you an Average Cost Statement which
provides you with the tax basis of the shares you
redeemed. Please see "Statements and Reports" for
additional information.
-----------------------------------------------------------------------------
LOW BALANCE FEE AND
MINIMUM ACCOUNT
BALANCE REQUIREMENT Due to the relatively high cost of maintaining smaller
accounts, each Portfolio will automatically deduct a
$10 annual fee from non-retirement accounts with
balances falling below $2,500 ($500 for Uniform
Gifts/Transfers to Minors Act accounts). This fee
deduction will occur mid-year, beginning in 1996. The
fee generally will be waived for investors whose
aggregate Vanguard assets exceed $50,000.
In addition, each Portfolio reserves the right to
liquidate any non-retirement account that is below the
minimum initial investment amount of $3,000. If at any
time your total investment does not have a value of at
least $3,000, you may be notified that your account is
below the Fund's minimum account balance requirement.
You would then be allowed
27
<PAGE> 31
60 days to make an additional investment before the
account is liquidated. Proceeds would be promptly paid
to the registered shareholder.
Vanguard will not liquidate your account if it has
fallen below $3,000 solely as a result of declining
markets (i.e., a decline in a Portfolio's net asset
value).
- --------------------------------------------------------------------------------
EXCHANGING YOUR
SHARES Should your investment goals change, you may exchange
your shares of a Portfolio for those of other available
Vanguard Funds. Exchanges to or from a Portfolio may be
made only by mail. TELEPHONE EXCHANGES BETWEEN
NON-RETIREMENT ACCOUNTS ARE NOT ACCEPTED FOR THE FUND.
Note, too, that the Emerging Markets Portfolio charges
a 1% transaction fee on all redemptions (including the
exchange of shares).
-----------------------------------------------------------------------------
EXCHANGING BY MAIL Please be sure to include on your exchange request the
name and account number of your current Portfolio, the
name of the Fund you wish to exchange into, the amount
you wish to exchange, and the signatures of all
registered account holders. Send your request to
VANGUARD FINANCIAL CENTER, VANGUARD INTERNATIONAL INDEX
PORTFOLIOS, P.O. BOX 1120, VALLEY FORGE, PA 19482. (For
express or registered mail, send your request to
Vanguard Financial Center, Vanguard International
Equity Index Fund, 455 Devon Park Drive, Wayne, PA
19087.)
-----------------------------------------------------------------------------
IMPORTANT EXCHANGE
INFORMATION Before you make an exchange, you should consider the
following:
- Please read the Fund's prospectus before making an
exchange. For an additional copy and for answers to
any questions you may have, call our Investor
Information Department (1-800-662-7447).
- An exchange is treated as a redemption and a
purchase. Therefore, you could realize a taxable gain
or loss on the transaction.
- Exchanges are accepted only if the registrations and
the Taxpayer Identification numbers of the two
accounts are identical.
- The shares to be exchanged must be on deposit and not
held in certificate form.
- New accounts are not currently accepted in
Vanguard/Windsor Fund or Vanguard/PRIMECAP Fund.
- The redemption price of shares redeemed by exchange
is the net asset value next determined after Vanguard
has received all required documentation in Good
Order.
- When opening a new account by exchange, you must meet
the minimum investment requirement of the new Fund.
Every effort will be made to maintain the exchange
privilege. However, the Fund reserves the right to
revise or terminate its provisions, limit the amount of
or reject any exchange as deemed necessary, at any
time.
The exchange privilege is only available in states in
which the shares of the Fund are registered for sale.
The Fund's shares are currently
28
<PAGE> 32
registered for sale in all 50 states and the Fund
intends to maintain such registration.
- --------------------------------------------------------------------------------
EXCHANGE
PRIVILEGE
LIMITATIONS The Fund's exchange privilege is not intended to afford
shareholders a way to speculate on short-term movements
in the market. Accordingly, in order to prevent
excessive use of the exchange privilege that may
potentially disrupt the management of the Fund and
increase transaction costs, the Fund has established a
policy of limiting excessive exchange activity.
Exchange activity generally will not be deemed
excessive if limited to TWO SUBSTANTIVE EXCHANGE
REDEMPTIONS (AT LEAST 30 DAYS APART) from a Portfolio
during any twelve-month period. Notwithstanding these
limitations, the Fund reserves the right to reject any
purchase request (including exchange purchases from
other Vanguard port-folios) that is reasonably deemed
to be disruptive to efficient portfolio management.
- --------------------------------------------------------------------------------
IMPORTANT
INFORMATION
ABOUT TELEPHONE
TRANSACTIONS The ability to initiate redemptions (except wire
redemptions) by telephone is automatically established
on your account unless you request in writing that
telephone transactions on your account not be
permitted.
To protect your account from losses resulting from
unauthorized or fraudulent telephone instructions,
Vanguard adheres to the following security procedures:
1. SECURITY CHECK. To request a transaction by
telephone, the caller must know (i) the name of the
Portfolio; (ii) the 10-digit account number; (iii)
the exact name and address used in the registration;
and (iv) the Social Security or Employer
Identification number listed on the account.
2. PAYMENT POLICY. The proceeds of any telephone
redemption by mail will be made payable to the
registered shareowner and mailed to the address of
record, only.
Neither the Fund nor Vanguard will be responsible for
the authenticity of transaction instructions received
by telephone, provided that reasonable security
procedures have been followed. Vanguard believes that
the security procedures described above are reasonable,
and that if such procedures are followed, you will bear
the risk of any losses resulting from unauthorized or
fraudulent telephone transactions on your account. If
Vanguard fails to follow reasonable security
procedures, it may be liable for any losses resulting
from unauthorized or fraudulent telephone transactions
on your account.
- --------------------------------------------------------------------------------
TRANSFERRING
REGISTRATION You may transfer the registration of any of your Fund
shares to another person by completing a transfer form
and sending it to: VANGUARD FINANCIAL CENTER, P.O. BOX
1110, VALLEY FORGE, PA 19482 ATTENTION: TRANSFER
DEPARTMENT. The request must be in Good Order. To
obtain a transfer form and full instructions, please
call our Client Services Department (1-800-662-2739).
- --------------------------------------------------------------------------------
29
<PAGE> 33
STATEMENTS AND
REPORTS Vanguard will send you a confirmation statement each
time you initiate a transaction in your account except
for checkwriting redemptions from Vanguard money market
accounts. You will also receive a comprehensive account
statement at the end of each calendar quarter. The
fourth-quarter statement will be a year-end statement,
listing all transaction activity for the entire
calendar year.
Vanguard's Average Cost Statement provides you with the
average cost of shares redeemed from your account,
using the average cost single category method. This
service is available for most taxable accounts opened
since January 1, 1986. In general, investors who
redeemed shares from a qualifying Vanguard account
during the most recent quarter may expect to receive an
Average Cost Statement along with their quarterly
Portfolio Summary Statement. Please call our Client
Services Department (1-800-662-2739) for information.
Financial reports on the Fund will be mailed to you
semiannually, according to the Fund's fiscal year-end.
- --------------------------------------------------------------------------------
OTHER VANGUARD
SERVICES For more information about any of these services,
please call our Investor Information Department at
1-800-662-7447.
VANGUARD DIRECT
DEPOSIT SERVICE With Vanguard Direct Deposit Service, most U.S.
Government checks (including Social Security and
military pension checks) and private payroll checks may
be automatically deposited into your Vanguard Fund
account. Separate brochures and forms are available for
direct deposit of U.S. Government and private payroll
checks.
VANGUARD AUTOMATIC
EXCHANGE SERVICE Vanguard Automatic Exchange Service allows you to move
money automatically among your Vanguard Fund accounts.
For instance, the service can be used to "dollar cost
average" from a money market portfolio into a stock or
bond fund or to contribute to an IRA or other
retirement plan. Please contact our Client Services
Department at 1-800-662-2739 for additional
information.
VANGUARD FUND
EXPRESS Vanguard Fund Express allows you to transfer money
between your Fund account and your account at a bank,
savings and loan association, or a credit union that is
a member of the Automated Clearing House (ACH) system.
You may elect this service on the Account Registration
Form or call our Investor Information Department
(1-800-662-7447) for a Fund Express application.
Special rules govern how your Fund Express purchases or
redemptions are credited to your account. In addition,
some services of Fund Express cannot be used with
specific Vanguard Funds. For more information, please
refer to the Vanguard Fund Express brochure.
VANGUARD DIVIDEND
EXPRESS Vanguard Dividend Express allows you to transfer your
dividends and/or capital gains distributions
automatically from your Fund account, one business day
after the Fund's payable date, to your account at a
bank, savings and loan association, or a credit union
that is a member of the Automated Clearing House (ACH)
system. You may elect this service on the Account
Registration Form or call our Investor Information
Department (1-800-662-7447) for a Vanguard Dividend
Express application.
30
<PAGE> 34
VANGUARD
TELE-ACCOUNT Vanguard Tele-Account is a convenient, automated
service that provides share price, price change and
yield quotations on Vanguard Funds through any
TouchToneTM telephone. This service also lets you
obtain information about your account balance, your
last transaction, and your most recent dividend or
capital gains payment. To contact Vanguard Tele-Account
service, dial 1-800-ON-BOARD (1-800-662-6273). A
brochure offering detailed operating instructions is
available from our Investor Information Department
(1-800-662-7447).
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<PAGE> 36
THE VANGUARD GROUP
OF INVESTMENT
COMPANIES
Vanguard Financial Center
P.O. Box 2600
Valley Forge, PA 19482
INVESTOR INFORMATION
DEPARTMENT:
1-800-662-7447 (SHIP)
CLIENT SERVICES
DEPARTMENT:
1-800-662-2739 (CREW)
TELE-ACCOUNT FOR
24-HOUR ACCESS:
1-800-662-6273 (ON-BOARD)
TELECOMMUNICATION SERVICE
FOR THE HEARING-IMPAIRED:
1-800-662-2738
TRANSFER AGENT:
The Vanguard Group, Inc.
Vanguard Financial Center
Valley Forge, PA 19482
P072
