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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. 19
AND
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 22
VANGUARD INTERNATIONAL EQUITY INDEX FUNDS
(EXACT NAME OF REGISTRANT AS SPECIFIED IN DECLARATION OF TRUST)
P.O. BOX 2600, VALLEY FORGE, PA 19482
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)
REGISTRANT'S TELEPHONE NUMBER (610) 669-1000
R. GREGORY BARTON, ESQUIRE
P.O. BOX 876
VALLEY FORGE, PA 19482
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
IT IS PROPOSED THAT THIS AMENDMENT BECOME EFFECTIVE ON APRIL 28, 2000, PURSUANT
TO PARAGRAPH (B) OF RULE 485.
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<PAGE>
VANGUARD(R)
INTERNATIONAL STOCK
INDEX FUNDS
Prospectus
April 28, 2000
This prospectus contains
financial data for the
Funds through the
fiscal year ended
December 31, 1999.
VANGUARD EUROPEAN
STOCK INDEX FUND
VANGUARD PACIFIC STOCK
INDEX FUND
VANGUARD EMERGING
MARKETS STOCK INDEX
FUND
VANGUARD DEVELOPED
MARKETS INDEX FUND
VANGUARD TOTAL
INTERNATIONAL STOCK
INDEX FUND
[MEMBERS OF THE VANGUARD GROUP(R) LOGO]
<PAGE>
VANGUARD INTERNATIONAL STOCK INDEX FUNDS
Prospectus
April 28, 2000
A Group of International Stock Index Mutual Funds
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CONTENTS
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1 AN INTRODUCTION TO INDEX FUNDS
2 FUND PROFILES
2 Vanguard European Stock Index Fund
5 Vanguard Pacific Stock Index Fund
8 Vanguard Emerging Markets Stock Index Fund
12 Vanguard Developed Markets Index Fund
14 Vanguard Total International Stock Index Fund
14 MORE ON THE FUNDS
24 THE FUNDS AND VANGUARD
25 INVESTMENT ADVISER
26 DIVIDENDS, CAPITAL GAINS, AND TAXES
27 SHARE PRICE
28 FINANCIAL HIGHLIGHTS
32 INVESTING WITH VANGUARD
32 Services and Account Features
33 Types of Accounts
34 Buying Shares
36 Redeeming Shares
40 Transferring Registration
40 Fund and Account Updates
GLOSSARY (inside back cover)
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WHY READING THIS PROSPECTUS IS IMPORTANT
This prospectus explains the objective, risks, and strategies of each of the
Vanguard International Stock Index Funds. To highlight terms and concepts
important to mutual fund investors, we have provided "Plain Talk(R)"
explanations along the way. Reading the prospectus will help you to decide which
Fund, if any, is the right investment for you. We suggest that you keep it for
future reference.
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IMPORTANT NOTE
The Vanguard European, Pacific, and Emerging Markets Stock Index Funds each
offer two separate classes of shares: Investor and Institutional. This
prospectus offers the Funds' Investor Shares, which have an investment minimum
of $3,000 ($1,000 for IRAs) and are intended for individual investors. Please
call Vanguard's Institutional Investor Group at 1-800-523-1036 to obtain a
separate prospectus that offers the Funds' Institutional Shares as well as the
institutional version of Vanguard Developed Markets Index Fund. These
institutional options have an investment minimum of $10 million and generally
are not available to investors who require special employee benefit plan
services.
The Funds' separate share classes have different expenses; as a result,
their investment performances will vary. UNLESS OTHERWISE NOTED, ALL REFERENCES
IN THIS PROSPECTUS TO FEES, EXPENSES, AND INVESTMENT PERFORMANCE RELATE
SPECIFICALLY TO INVESTOR SHARES.
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NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE>
1
AN INTRODUCTION TO INDEX FUNDS
WHAT IS INDEXING?
An index is an unmanaged group of securities whose overall performance is used
as a standard to measure investment performance. An index (or "passively
managed") fund tries to track, as closely as possible, the performance of an
established target index. The fund does this by holding all, or a representative
sample, of the securities that comprise the index. Keep in mind that an index
fund has operating expenses and transaction costs, while a market index does
not. Therefore, an index fund, while expected to track its target index closely,
typically will be unable to match the performance of the index exactly.
Stock index funds may seek to track indexes that hold a certain type of
stock--such as growth or value, small-cap or large-cap, or those from just one
industry--or they may seek to track indexes that consist of a broader range of
stocks--for example, the entire foreign stock market.
Index funds are not actively managed by investment advisers who buy and
sell securities based on research and analysis in an attempt to outperform a
particular benchmark or the market as a whole. Rather, index funds simply
attempt to mirror what the target index does, for better or worse.
WHAT INDEX FUNDS DOES VANGUARD OFFER?
Vanguard offers a variety of stock (both U.S. and international), bond, and
balanced index funds. This prospectus provides information about Vanguard's
International Stock Index Funds. There are five such Funds offered in this
prospectus, each of which seeks to track a different segment of the
international stock market:
- --------------------------------------------------------------------------------
FUND SEEKS TO TRACK
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Vanguard European Stock Index Fund European stock markets
Vanguard Pacific Stock Index Fund Australian and Far East
stock markets
Vanguard Emerging Markets Stock 13 emerging stock markets in
Index Fund Europe, Asia, Africa, and
Latin America
Vanguard Developed Markets Index Fund European, Australian, and Far
East stock markets
Vanguard Total International Stock European, Australian, Far East,
Index Fund and 13 emerging stock
markets in Europe, Asia,
Africa, and Latin America
- --------------------------------------------------------------------------------
This prospectus contains profiles that summarize key features of each Fund.
Following the profiles, there is important additional information about the
Funds.
<PAGE>
2
FUND PROFILE--
VANGUARD(R) EUROPEAN STOCK INDEX FUND
The following profile summarizes key features of Vanguard European Stock Index
Fund.
INVESTMENT OBJECTIVE
The Fund seeks to match the performance of the Morgan Stanley Capital
International (MSCI) Europe Index.
INVESTMENT STRATEGIES
The Fund employs a "passively managed"--or index--investment approach, by
investing all or substantially all of its assets in a representative sample of
the common stocks included in the MSCI Europe Index. The MSCI Europe Index is
made up of approximately 550 common stocks of companies located in 15 European
countries--mostly in the United Kingdom, France, Germany, and the Netherlands,
(which comprised 29%, 15%, 14%, and 8% of the Index's market capitalization,
respectively, as of March 31, 2000), as well as in Austria, Belgium, Denmark,
Finland, Ireland, Italy, Norway, Portugal, Spain, Sweden, and Switzerland. For
more information about passive management, see "Indexing Methods" under MORE ON
THE FUNDS.
PRIMARY RISKS
THE FUND'S TOTAL RETURN, LIKE STOCK PRICES GENERALLY, WILL FLUCTUATE WITHIN A
WIDE RANGE, SO AN INVESTOR COULD LOSE MONEY OVER SHORT OR EVEN LONG PERIODS. The
Fund is also subject to:
- - Country risk, which is the chance that a country's economy will be hurt by
political troubles, financial problems, or natural disasters. The Index's,
and therefore the Fund's, heavy exposure to four countries (United Kingdom,
France, Germany, and the Netherlands) involves a higher degree of country
risk than that of more geographically diversified international funds.
- - Regional risk, which is the chance that an entire region--namely
Europe--will be hurt by political troubles, financial problems, or natural
disasters.
- - Currency risk, which is the chance that returns will be hurt by a rise in
the value of the U.S. dollar versus foreign currencies.
- - Investment style risk, which is the chance that returns from foreign stocks
will trail returns from other asset classes or the overall stock market.
PERFORMANCE/RISK INFORMATION
The bar chart and table below provide an indication of the risk of investing in
the Fund. The bar chart shows the Fund's performance in each calendar year since
inception. The table shows how the Fund's average annual total returns for one
and five calendar years and since inception compare with those of a broad-based
securities market index. Keep in mind that the Fund's past performance does not
indicate how it will perform in the future.
<PAGE>
3
----------------------------------------------------
ANNUAL TOTAL RETURNS
----------------------------------------------------
1991 12.40%
1992 -3.32%
1993 29.13%
1994 1.88%
1995 22.28%
1996 21.26%
1997 24.23%
1998 28.86%
1999 16.62%
----------------------------------------------------
Return figures do not reflect the annual account
maintenance fee imposed on accounts with balances of
less than $10,000, or the transaction fee imposed on
purchases prior to April 1, 2000. If these amounts
were reflected, returns would be less than those
shown.
----------------------------------------------------
During the period shown in the bar chart, the highest return for a calendar
quarter was 20.37% (quarter ended March 31, 1998) and the lowest return for a
quarter was -14.41% (quarter ended September 30, 1998).
-------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS FOR YEARS ENDED DECEMBER 31, 1999
-------------------------------------------------------------------------
1 YEAR 5 YEARS SINCE INCEPTION*
-------------------------------------------------------------------------
Vanguard European Stock
Index Fund** 16.62% 22.58% 14.61%
MSCI Europe Index 15.77 22.27 14.78
-------------------------------------------------------------------------
*June 18, 1990.
**Return figures do not reflect the annual account maintenance fee
imposed on accounts with balances of less than $10,000, or the
transaction fee imposed on purchases prior to April 1, 2000.
-------------------------------------------------------------------------
FEES AND EXPENSES
The following table describes the fees and expenses you may pay if you buy and
hold shares of the Fund. The expenses shown under Annual Fund Operating Expenses
are based upon those incurred in the fiscal year ended December 31, 1999.
SHAREHOLDER FEES (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None
Transaction Fee on Purchases: None
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fee: None
Exchange Fee: None
Account Maintenance Fee (for accounts under $10,000): $10/year*
ANNUAL FUND OPERATING EXPENSES (expenses deducted from the Fund's assets)
Management Expenses: 0.22%
12b-1 Distribution Fee: None
Other Expenses: 0.07%
TOTAL ANNUAL FUND OPERATING EXPENSES: 0.29%
*The account maintenance fee will be deducted from your annual
distribution of the Fund's dividends. If your distribution is less
than the fee, fractional shares will be automatically redeemed to make
up the difference.
<PAGE>
4
The following example is intended to help you compare the cost of investing
in the Fund with the cost of investing in other mutual funds. It illustrates the
hypothetical expenses that you would incur over various periods if you invest
$10,000 in the Fund. This example assumes that the Fund provides a return of 5%
a year, and that operating expenses remain the same. The results apply whether
or not you redeem your investment at the end of each period.
- -------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- -------------------------------------------------
$30 $93 $163 $368
- -------------------------------------------------
THIS EXAMPLE SHOULD NOT BE CONSIDERED TO REPRESENT ACTUAL EXPENSES OR
PERFORMANCE FROM THE PAST OR FOR THE FUTURE. ACTUAL FUTURE EXPENSES MAY BE
HIGHER OR LOWER THAN THOSE SHOWN.
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION
DIVIDENDS AND CAPITAL GAINS MINIMUM INITIAL INVESTMENT
Distributed annually in December $3,000; $1,000 for IRAs and custodial
accounts for minors
INVESTMENT ADVISER
The Vanguard Group, Valley Forge, NEWSPAPER ABBREVIATION
Pa., since inception Europe
INCEPTION DATE VANGUARD FUND NUMBER
June 18, 1990 079
NET ASSETS AS OF DECEMBER 31, 1999 CUSIP NUMBER
$6.1 billion 922042205
SUITABLE FOR IRAS TICKER SYMBOL
Yes VEURX
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<PAGE>
5
FUND PROFILE--
VANGUARD(R) PACIFIC STOCK INDEX FUND
The following profile summarizes key features of Vanguard Pacific Stock Index
Fund.
INVESTMENT OBJECTIVE
The Fund seeks to match the performance of the MSCI Pacific Free Index.*
*The designation "Free" in the name of the Index refers to the securities that
the Index tracks. Some countries restrict foreign investment in certain
industries, so only stocks that can be bought freely by a fund are tracked.
INVESTMENT STRATEGIES
The Fund employs a "passively managed"--or index--investment approach, by
investing all or substantially all of its assets in a representative sample of
the common stocks included in the MSCI Pacific Free Index. The MSCI Pacific Free
Index consists of approximately 420 common stocks of companies located in Japan
(which comprised 82% of the Index's market capitalization as of March 31, 2000),
Australia, Hong Kong, New Zealand, and Singapore. For more information about
passive management, see "Indexing Methods" under MORE ON THE FUNDS.
PRIMARY RISKS
THE FUND'S TOTAL RETURN, LIKE STOCK PRICES GENERALLY, WILL FLUCTUATE WITHIN A
WIDE RANGE, SO AN INVESTOR COULD LOSE MONEY OVER SHORT OR EVEN LONG PERIODS. The
Fund is also subject to:
- - Country risk, which is the chance that a country's economy will be hurt by
political troubles, financial problems, or natural disasters. The Index's,
and therefore the Fund's, heavy exposure to Japan involves a higher degree
of country risk than that of more geographically diversified international
funds.
- - Regional risk, which is the chance that an entire region--namely the
Pacific region--will be hurt by political troubles, financial problems, or
natural disasters.
- - Currency risk, which is the chance that returns will be hurt by a rise in
the value of the U.S. dollar versus foreign currencies.
- - Investment style risk, which is the chance that returns from foreign stocks
will trail returns from other asset classes or the overall stock market.
PERFORMANCE/RISK INFORMATION
The bar chart and table below provide an indication of the risk of investing in
the Fund. The bar chart shows the Fund's performance in each calendar year since
inception. The table shows how the Fund's average annual total returns for one
and five years and since inception compare with those of a broad-based
securities market index. Keep in mind that the Fund's past performance does not
indicate how it will perform in the future.
<PAGE>
6
----------------------------------------------------
ANNUAL TOTAL RETURNS
----------------------------------------------------
1991 10.65%
1992 -18.17%
1993 35.46%
1994 13.04%
1995 2.75%
1996 -7.82%
1997 -25.67%
1998 2.41%
1999 57.05%
----------------------------------------------------
Return figures do not reflect the annual account
maintenance fee imposed on accounts with balances of
less than $10,000, or the transaction fee imposed on
purchases prior to April 1, 2000. If these amounts
were reflected, returns would be less than those
shown.
----------------------------------------------------
During the period shown in the bar chart, the highest return for a calendar
quarter was 26.50% (quarter ended December 31, 1998) and the lowest return for a
quarter was -20.69% (quarter ended December 31, 1997).
-------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS FOR YEARS ENDED DECEMBER 31, 1999
-------------------------------------------------------------------------
1 YEAR 5 YEARS SINCE INCEPTION*
-------------------------------------------------------------------------
Vanguard Pacific Stock
Index Fund** 57.05% 2.52% 3.20%
MSCI Pacific Free Index 56.38 2.39 3.08
-------------------------------------------------------------------------
*June 18, 1990.
**Return figures do not reflect the annual account maintenance fee
imposed on accounts with balances of less than $10,000, or the
transaction fee imposed on purchases prior to April 1, 2000.
-------------------------------------------------------------------------
FEES AND EXPENSES
The following table describes the fees and expenses you may pay if you buy and
hold shares of the Fund. The expenses shown under Annual Fund Operating Expenses
are based upon those incurred in the fiscal year ended December 31, 1999.
SHAREHOLDER FEES (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None
Transaction Fee on Purchases: None
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fee: None
Exchange Fee: None
Account Maintenance Fee (for accounts under $10,000): $10/year*
ANNUAL FUND OPERATING EXPENSES (expenses deducted from the Fund's assets)
Management Expenses: 0.31%
12b-1 Distribution Fee: None
Other Expenses: 0.06%
TOTAL ANNUAL FUND OPERATING EXPENSES: 0.37%
*The account maintenance fee will be deducted from your annual
distribution of the Fund's dividends. If your distribution is less
than the fee, fractional shares will be automatically redeemed to make
up the difference.
<PAGE>
7
The following example is intended to help you compare the cost of investing
in the Fund with the cost of investing in other mutual funds. It illustrates the
hypothetical expenses that you would incur over various periods if you invest
$10,000 in the Fund. This example assumes that the Fund provides a return of 5%
a year, and that operating expenses remain the same. The results apply whether
or not you redeem your investment at the end of each period.
- -------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- -------------------------------------------------
$38 $119 $208 $468
- -------------------------------------------------
THIS EXAMPLE SHOULD NOT BE CONSIDERED TO REPRESENT ACTUAL EXPENSES OR
PERFORMANCE FROM THE PAST OR FOR THE FUTURE. ACTUAL FUTURE EXPENSES MAY BE
HIGHER OR LOWER THAN THOSE SHOWN.
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION
DIVIDENDS AND CAPITAL GAINS MINIMUM INITIAL INVESTMENT
Distributed annually in December $3,000; $1,000 for IRAs and custodial
accounts for minors
INVESTMENT ADVISER
The Vanguard Group, Valley Forge, NEWSPAPER ABBREVIATION
Pa., since inception Pacific
INCEPTION DATE VANGUARD FUND NUMBER
June 18, 1990 072
NET ASSETS AS OF DECEMBER 31, 1999 CUSIP NUMBER
$2.5 billion 922042106
SUITABLE FOR IRAS TICKER SYMBOL
Yes VPACX
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<PAGE>
8
FUND PROFILE--
VANGUARD(R) EMERGING MARKETS STOCK INDEX FUND
The following profile summarizes key features of Vanguard Emerging Markets Stock
Index Fund.
INVESTMENT OBJECTIVE
The Fund seeks to match the performance of the Select Emerging Markets Free
Index.*
*The designation "Free" in the name of the Index refers to the securities that
the Index tracks. Some countries restrict foreign investment in certain
industries, so only stocks that can be bought freely are tracked.
INVESTMENT STRATEGIES
The Fund employs a "passively managed"--or index--investment approach, by
investing all or substantially all of its assets in a representative sample of
the common stocks included in the Select Emerging Markets Free Index. The Select
Emerging Markets Free Index includes approximately 500 common stocks of
companies located in emerging markets around the world. As of March 31, 2000,
the largest markets covered in the Index were Mexico, Brazil, and South Africa
(which comprised 16%, 14%, and 13% of the Index's market capitalization,
respectively). Other countries represented in the Index included Argentina, the
Czech Republic, Greece, Hungary, Indonesia, Israel, the Philippines, Poland,
Thailand, Turkey, Hong Kong, and Singapore. MSCI administers the Select Index
exclusively for Vanguard. For more information about passive management, see
"Indexing Methods" under MORE ON THE FUNDS.
PRIMARY RISKS
THE FUND'S TOTAL RETURN, LIKE STOCK PRICES GENERALLY, WILL FLUCTUATE WITHIN A
WIDE RANGE, SO AN INVESTOR COULD LOSE MONEY OVER SHORT OR EVEN LONG PERIODS. The
Fund is also subject to:
- - Country risk, which is the chance that a country's economy will be hurt by
political troubles, financial problems, or natural disasters. Country risk
is especially high for funds that focus on stocks in emerging markets. The
Index's, and therefore the Fund's, heavy exposure to Mexico, Brazil, and
South Africa involves a higher degree of country risk than that of more
geographically diversified international funds.
- - Currency risk, which is the chance that returns will be hurt by a rise in
the value of the U.S. dollar versus foreign currencies.
- - Investment style risk, which is the chance that returns from foreign stocks
will trail returns from other asset classes or the overall stock market.
PERFORMANCE/RISK INFORMATION
The bar chart and table below provide an indication of the risk of investing in
the Fund. The bar chart shows the Fund's performance in each calendar year since
inception. The table shows how the Fund's average annual total returns for one
and five calendar years and since inception compare with those of both a
broad-based securities market index and the Fund's target index. Keep in mind
that the Fund's past performance does not indicate how it will perform in the
future.
<PAGE>
9
----------------------------------------------------
ANNUAL TOTAL RETURNS
----------------------------------------------------
1995 0.56%
1996 15.83%
1997 -16.82%
1998 -18.12%
1999 61.57%
----------------------------------------------------
Return figures do not reflect the annual account
maintenance fee imposed on accounts with balances of
less than $10,000, or the transaction fee imposed on
purchases and redemptions. If these amounts were
reflected, returns would be less than those shown.
----------------------------------------------------
During the period shown in the bar chart, the highest return for a calendar
quarter was 28.32% (quarter ended December 31, 1999) and the lowest return for a
quarter was -21.52% (quarter ended June 30, 1998).
-------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS FOR YEARS ENDED DECEMBER 31, 1999
-------------------------------------------------------------------------
1 YEAR 5 YEARS SINCE INCEPTION*
-------------------------------------------------------------------------
Vanguard Emerging Markets
Stock Index Fund** 59.96% 4.88% 6.03%
MSCI Emerging Markets
Free Index 66.40 2.00 3.69
Select Emerging Markets
Free Index+ 60.86 4.81 4.93
-------------------------------------------------------------------------
*May 4, 1994.
**Return figures do not reflect the annual account maintenance fee
imposed on accounts with balances of less than $10,000, but do
reflect the 0.5% transaction fee imposed on purchases and redemptions.
+The Select Emerging Markets Free Index is administered by MSCI
exclusively by Vanguard.
-------------------------------------------------------------------------
<PAGE>
10
FEES AND EXPENSES
The following table describes the fees and expenses you may pay if you buy and
hold shares of the Fund. The expenses shown under Annual Fund Operating Expenses
are based upon those incurred in the fiscal year ended December 31, 1999.
SHAREHOLDER FEES (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None
Transaction Fee on Purchases: 0.5%*
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fee: 0.5%**
Exchange Fee: None
Account Maintenance Fee (for accounts under $10,000): $10/year+
ANNUAL FUND OPERATING EXPENSES (expenses deducted from the Fund's assets)
Management Expenses: 0.32%
12b-1 Distribution Fee: None
Other Expenses: 0.26%
TOTAL ANNUAL FUND OPERATING EXPENSES: 0.58%
*The transaction fee on purchases is deducted from all purchases
(including exchanges from other Vanguard funds) but not from
reinvested dividends and capital gains.
**The redemption fee applies to all redemptions (sales or exchanges);
it is deducted from redemption proceeds, and retained by the Fund.
+The account maintenance fee will be deducted from your annual
distribution of the Fund's dividends. If your distribution is less
than the fee, fractional shares will be automatically redeemed to make
up the difference.
The following example is intended to help you compare the cost of investing
in the Fund with the cost of investing in other mutual funds. It illustrates the
hypothetical expenses that you would incur over various periods if you invest
$10,000 in the Fund. This example assumes that the Fund provides a return of 5%
a year, that operating expenses remain the same, and that you redeem all your
shares at the end of each period.
- -------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- -------------------------------------------------
$161 $292 $434 $849
- -------------------------------------------------
You would pay the following expenses if you did not redeem your shares (the
difference being that the Fund's 0.5% redemption fee would not apply to any of
the periods below, as it would to those above):
- -------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- -------------------------------------------------
$109 $235 $372 $772
- -------------------------------------------------
THESE EXAMPLES SHOULD NOT BE CONSIDERED TO REPRESENT ACTUAL EXPENSES OR
PERFORMANCE FROM THE PAST OR FOR THE FUTURE. ACTUAL FUTURE EXPENSES MAY BE
HIGHER OR LOWER THAN THOSE SHOWN.
<PAGE>
11
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION
DIVIDENDS AND CAPITAL GAINS MINIMUM INITIAL INVESTMENT
Distributed annually in December $3,000; $1,000 for IRAs and custodial
accounts for minors
INVESTMENT ADVISER
The Vanguard Group, Valley Forge, NEWSPAPER ABBREVIATION
Pa., since inception EmerMkt
INCEPTION DATE VANGUARD FUND NUMBER
May 4, 1994 533
NET ASSETS AS OF DECEMBER 31, 1999 CUSIP NUMBER
$1.1 billion 922042304
SUITABLE FOR IRAS TICKER SYMBOL
Yes VEIEX
- --------------------------------------------------------------------------------
<PAGE>
12
FUND PROFILE--
VANGUARD(R) DEVELOPED MARKETS INDEX FUND
The following profile summarizes key features of Vanguard Developed Markets
Index Fund.
INVESTMENT OBJECTIVE
The Fund seeks to track the performance of the MSCI Europe, Australasia, Far
East (EAFE) Index.
INVESTMENT STRATEGIES
The Fund employs a "passively managed"--or index--investment approach. The Fund
seeks to track the performance of the MSCI EAFE Index by investing in two other
Vanguard funds--the European Stock Index Fund and the Pacific Stock Index Fund.
These other Vanguard funds have the respective objectives of tracking the MSCI
Europe Index and the MSCI Pacific Free Index, which together comprise the MSCI
EAFE Index. The Fund allocates all or substantially all of its assets between
the European Stock Index Fund and the Pacific Stock Index Fund based on the
market capitalization of European and Pacific stocks in the MSCI EAFE Index. The
MSCI EAFE Index includes approximately 1,000 common stocks of companies located
in Europe, Australia, Asia, and the Far East. For more information about passive
management, see "Indexing Methods" under MORE ON THE FUNDS.
PRIMARY RISKS
THE FUND'S TOTAL RETURN, LIKE STOCK PRICES GENERALLY, WILL FLUCTUATE WITHIN A
WIDE RANGE, SO AN INVESTOR COULD LOSE MONEY OVER SHORT OR EVEN LONG PERIODS. The
Fund is also subject to:
- - Country risk, which is the chance that a country's economy will be hurt by
political troubles, financial problems, or natural disasters.
- - Regional risk, which is the chance that an entire region--either Europe or
the Far East--will be hurt by political troubles, financial problems, or
natural disasters.
- - Currency risk, which is the chance that returns will be hurt by a rise in
the value of the U.S. dollar versus foreign currencies.
- - Investment style risk, which is the chance that returns from foreign stocks
will trail returns from other asset classes or the overall stock market.
PERFORMANCE/RISK INFORMATION
The Fund began operations on May 5, 2000, so performance information (including
annual total returns and average annual total returns) for a full calendar year
is not yet available.
<PAGE>
13
FEES AND EXPENSES
The following table describes the fees and expenses you may pay if you buy and
hold shares of the Fund. The expenses shown under Annual Fund Operating Expenses
are based on estimated amounts for the current fiscal year.
SHAREHOLDER FEES (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None
Transaction Fee on Purchases: None
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fee: None
Exchange Fee: None
Account Maintenance Fee (for accounts under $10,000): $10/year*
ANNUAL FUND OPERATING EXPENSES (expenses deducted from the Fund's assets)
Indirect Operating Expenses: **
*The account maintenance fee will be deducted from your annual
distribution of the Fund's dividends. If your distribution is less
than the fee, fractional shares will be automatically redeemed to make
up the difference.
**Although Developed Markets Index Fund is not expected to incur any net
expenses directly, the Fund's shareholders indirectly bear the expenses
of the underlying Vanguard funds in which the Fund invests. See THE
FUNDS AND VANGUARD. It is estimated that the Fund's indirect expense
ratio for its first fiscal year, based on its underlying investments,
will be 0.30%.
The following example is intended to help you compare the cost of investing
in the Fund with the cost of investing in other mutual funds. It illustrates the
hypothetical expenses that you would incur over various periods if you invest
$10,000 in the Fund. This example assumes that the Fund provides a return of 5%
a year, and that operating expenses remain the same. The results apply whether
or not you redeem your investment at the end of each period.
- ------------------------
1 YEAR 3 YEARS
- ------------------------
$35 $110
- ------------------------
THIS EXAMPLE SHOULD NOT BE CONSIDERED TO REPRESENT ACTUAL EXPENSES OR
PERFORMANCE FROM THE PAST OR FOR THE FUTURE. ACTUAL FUTURE EXPENSES MAY BE
HIGHER OR LOWER THAN THOSE SHOWN.
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION
DIVIDENDS AND CAPITAL GAINS MINIMUM INITIAL INVESTMENT
Distributed annually in December $3,000; $1,000 for IRAs and custodial
accounts for minors
INVESTMENT ADVISER
The Vanguard Group, Valley Forge, NEWSPAPER ABBREVIATION
Pa., since inception DevMkt
INCEPTION DATE VANGUARD FUND NUMBER
May 5, 2000 227
SUITABLE FOR IRAS CUSIP NUMBER
Yes 921909701
- --------------------------------------------------------------------------------
<PAGE>
14
FUND PROFILE--
VANGUARD(R) TOTAL INTERNATIONAL STOCK INDEX FUND
The following profile summarizes key features of Vanguard Total International
Stock Index Fund.
INVESTMENT OBJECTIVE
The Fund seeks to match the performance of the Total International Composite
Index. The Total International Composite Index is a combination of the indexes
tracked by the European, Pacific, and Emerging Markets Stock Index Funds.
INVESTMENT STRATEGIES
The Fund seeks to track the performance of the Total International Composite
Index by investing in three other Vanguard funds--the European Stock Index Fund,
the Pacific Stock Index Fund, and the Emerging Markets Stock Index Fund. These
other Vanguard funds have the respective objectives of tracking the MSCI Europe
Index, the MSCI Pacific Free Index, and the Select Emerging Markets Free Index,
which together comprise the Total International Composite Index. The Fund
allocates all or substantially all of its assets between the European Stock
Index Fund, the Pacific Stock Index Fund, and the Emerging Markets Stock Index
Fund based on the market capitalization of European, Pacific, and emerging
markets stocks in the Total International Composite Index. The Index is a market
capitalization weighted index that combines the MSCI Europe Index, the MSCI
Pacific Free Index, and the Select Emerging Markets Free Index. MSCI administers
the Index exclusively for Vanguard. For more information about passive
management, see "Indexing Methods" under MORE ON THE FUNDS.
PRIMARY RISKS
THE FUND'S TOTAL RETURN, LIKE STOCK PRICES GENERALLY, WILL FLUCTUATE WITHIN A
WIDE RANGE, SO AN INVESTOR COULD LOSE MONEY OVER SHORT OR EVEN LONG PERIODS. The
Fund is also subject to:
- - Country risk, which is the chance that a country's economy will be hurt by
political troubles, financial problems, or natural disasters.
- - Currency risk, which is the chance that returns will be hurt by a rise in
the value of the U.S. dollar versus foreign currencies.
- - Investment style risk, which is the chance that returns from foreign stocks
will trail returns from other asset classes or the overall stock market.
PERFORMANCE/RISK INFORMATION
The bar chart and table below provide an indication of the risk of investing in
the Fund. The bar chart shows the Fund's performance in each calendar year since
inception. The table shows how the Fund's average annual total returns for one
calendar year and since inception compare with those of both a broad-based
securities market index and the Fund's target index. Keep in mind that the
Fund's past performance does not indicate how it will perform in the future.
<PAGE>
15
----------------------------------------------------
ANNUAL TOTAL RETURNS
----------------------------------------------------
1997 -0.77%
1998 15.60%
1999 29.92%
----------------------------------------------------
Return figures do not reflect the annual account
maintenance fee imposed on accounts with balances of
less than $10,000, or the transaction fee imposed on
purchases prior to April 1, 2000. If these amounts
were reflected, returns would be less than those
shown.
----------------------------------------------------
During the period shown in the bar chart, the highest return for a calendar
quarter was 20.49% (quarter ended December 31, 1998) and the lowest return for a
quarter was -14.53% (quarter ended September 30, 1998).
-------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS FOR YEARS ENDED DECEMBER 31, 1999
-------------------------------------------------------------------------
1 YEAR SINCE INCEPTION*
-------------------------------------------------------------------------
Vanguard Total International
Stock Index Fund** 29.92% 11.64%
MSCI EAFE + Emerging Markets
Free Index 30.33 12.11
Total International Composite
Index+ 28.13 11.30
-------------------------------------------------------------------------
*April 29, 1996.
**Return figures do not reflect the annual account maintenance fee
imposed on accounts with balances of less than $10,000, or the
transaction fee imposed on purchases prior to April 1, 2000.
+Consists of the MSCI EAFE Index and the Select Emerging Markets Free
Index. This index is administered by MSCI exclusively for Vanguard.
-------------------------------------------------------------------------
<PAGE>
16
FEES AND EXPENSES
The following table describes the fees and expenses you may pay if you buy and
hold shares of the Fund. The expenses shown under Annual Fund Operating Expenses
are based upon those incurred in the fiscal year ended December 31, 1999.
SHAREHOLDER FEES (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None
Transaction Fee on Purchases: None
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fee: None
Exchange Fee: None
Account Maintenance Fee (for accounts under $10,000): $10/year*
ANNUAL FUND OPERATING EXPENSES (expenses deducted from the Fund's assets)
Indirect Operating Expenses: **
*The account maintenance fee will be deducted from your annual
distribution of the Fund's dividends. If your distribution is less
than the fee, fractional shares will be automatically redeemed to make
up the difference.
**Although Total International Stock Index Fund is not expected to incur
any net expenses directly, the Fund's shareholders indirectly bear the
expenses of the underlying Vanguard funds in which the Fund invests.
See THE FUNDS AND VANGUARD. The Fund's indirect expense ratio, based
on its underlying investments, was 0.34% as of December 31, 1999.
The following example is intended to help you compare the cost of investing
in the Fund with the cost of investing in other mutual funds. It illustrates the
hypothetical expenses that you would incur over various periods if you invest
$10,000 in the Fund. This example assumes that the Fund provides a return of 5%
a year, and that operating expenses remain the same. The results apply whether
or not you redeem your investment at the end of each period.
- -------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- -------------------------------------------------
$35 $110 $193 $434
- -------------------------------------------------
THIS EXAMPLE SHOULD NOT BE CONSIDERED TO REPRESENT ACTUAL EXPENSES OR
PERFORMANCE FROM THE PAST OR FOR THE FUTURE. ACTUAL FUTURE EXPENSES MAY BE
HIGHER OR LOWER THAN THOSE SHOWN.
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION
DIVIDENDS AND CAPITAL GAINS MINIMUM INITIAL INVESTMENT
Distributed annually in December $3,000; $1,000 for IRAs and custodial
accounts for minors
INVESTMENT ADVISER
The Vanguard Group, Valley Forge, NEWSPAPER ABBREVIATION
Pa., since inception TotIntl
INCEPTION DATE VANGUARD FUND NUMBER
April 29, 1996 113
NET ASSETS AS OF DECEMBER 31, 1999 CUSIP NUMBER
$2.6 billion 921909602
SUITABLE FOR IRAS TICKER SYMBOL
Yes VGTSX
- --------------------------------------------------------------------------------
<PAGE>
17
MORE ON THE FUNDS
The following sections discuss other important features of Vanguard
International Stock Index Funds, including indexing methods, fund
characteristics, costs and market-timing, fund turnover, and other investment
policies and risks.
WHY INVEST IN INDEX FUNDS?
Index funds appeal to many investors for a number of reasons:
- - Diversification. Index funds generally invest in a diversified mix of
companies and industries.
- - Relative consistency. Index funds typically track the performance of
relevant market benchmarks more closely than comparable actively managed
funds do.
- - Low cost. Index funds do not have many of the expenses of an actively
managed fund--such as research--and keep trading activity, and thus
brokerage commissions, to a minimum.
- - Low realization of capital gains. Because an index fund typically sells
securities only to respond to redemption requests or to adjust the number
of shares it holds to reflect a change in its target index, the fund's
turnover rate--and thus its realization of capital gains--is usually very
low.
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
THE COSTS OF INVESTING
Costs are an important consideration in choosing a mutual fund. That's because
you, as a shareholder, pay the costs of operating a fund, plus any transaction
costs associated with the fund's buying and selling of securities. These costs
can erode a substantial portion of the gross income or capital appreciation a
fund achieves. Even seemingly small differences in expenses can, over time, have
a dramatic effect on a fund's performance.
- --------------------------------------------------------------------------------
INDEXING METHODS
Some index funds hold each stock found in their target indexes in about the
same proportions as represented in the indexes themselves.
Other index funds may use a different selection process. Because it would
be very expensive to buy all of the stocks held in certain indexes (the Select
Emerging Markets Free Index, for example, includes approximately 500 stocks),
funds tracking these larger indexes use a "sampling" technique. Using a
sophisticated computer program, these funds invest in stocks that will, in the
aggregate, recreate the key characteristics of their target indexes. For
instance, if 10% of the market capitalization of the MSCI Europe Index were
attributed to companies in Germany, Vanguard European Stock Index Fund would
invest about 10% of its assets in stocks of German issuers. Furthermore, the
Fund would construct a German portfolio whose size and industry weightings, as
well as average financial characteristics, approximated the German component of
the MSCI Europe Index. The European, Pacific, and Emerging Markets Stock Index
Funds each employ this sampling method of indexing.
While each Fund attempts to track the performance of its target index,
there is no guarantee that securities selected for the Fund will provide
investment performance exactly matching that of the index.
Yet another indexing approach is to invest in other index funds that seek
to track subsets of a target index. The Total International Stock Index Fund and
Developed Markets Index Fund both use this "fund of funds" approach, which can
be very cost-effective and efficient
<PAGE>
18
when starting an index fund from scratch. For example, the Developed Markets
Index Fund seeks to track the performance of the MSCI EAFE Index by investing in
two other Vanguard funds--the European Stock Index Fund and the Pacific Stock
Index Fund. These other Vanguard funds have the respective objectives of
tracking the MSCI Europe Index and the MSCI Pacific Free Index, which together
comprise the MSCI EAFE Index. The Fund allocates its assets between the European
Stock Index Fund and the Pacific Stock Index Fund based on the market
capitalization of European and Pacific stocks in the MSCI EAFE Index.
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
"FUND OF FUNDS"
The term "fund of funds" is used to describe a mutual fund that pursues its
objective by investing in other mutual funds rather than in individual stocks or
bonds. A fund of funds may charge for its own direct expenses, in addition to
bearing a proportionate share of the expenses charged by the underlying funds in
which it invests. Funds of funds are best suited for long-term investors.
- --------------------------------------------------------------------------------
To track their target indexes as closely as possible, the European and
Pacific Stock Index Funds attempt to remain fully invested in foreign stocks
included in their particular indexes. Each Fund intends to invest at least 95%
of its total assets in the stocks of its target index. The Emerging Markets
Stock Index Fund normally invests 95% of its total assets in stocks of its
target index, holding the remaining 5% in cash reserves to meet daily redemption
requests. The Total International Stock and Developed Markets Index Funds
normally hold 100% of their assets in shares of their underlying funds
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
THE RISKS OF INTERNATIONAL INVESTING
Because foreign stock markets operate differently from the U.S. market,
Americans investing abroad will encounter risks not typically associated with
U.S. companies. For instance, foreign companies are not subject to the same
accounting, auditing, and financial reporting standards and practices as U.S.
companies; and their stocks may not be as liquid as those of similar U.S.
companies. In addition, foreign stock exchanges, brokers, and companies
generally have less government supervision and regulation than their
counterparts in the United States. These factors, among others, could negatively
impact the returns Americans receive from foreign investments.
- --------------------------------------------------------------------------------
[FLAG] EACH FUND IS SUBJECT TO STOCK MARKET RISK, WHICH IS THE CHANCE THAT STOCK
PRICES OVERALL WILL DECLINE OVER SHORT OR EVEN LONG PERIODS. STOCK MARKETS
TEND TO MOVE IN CYCLES, WITH PERIODS OF RISING PRICES AND PERIODS OF
FALLING PRICES.
IN ADDITION, INVESTMENTS IN FOREIGN STOCK MARKETS CAN BE RISKIER THAN
U.S. STOCK INVESTMENTS. THE PRICES OF INTERNATIONAL STOCKS AND THE PRICES
OF U.S. STOCKS HAVE OFTEN MOVED IN OPPOSITE DIRECTIONS. THESE PERIODS HAVE,
IN THE PAST, LASTED FOR AS LONG AS SEVERAL YEARS.
<PAGE>
19
To illustrate the volatility of international stock prices, the following
table shows the best, worst, and average total returns for foreign stock markets
over various periods as measured by the MSCI EAFE Index, a widely used barometer
of international market activity. (Total returns consist of dividend income plus
change in market price.) Note that the returns shown do not include the costs of
buying and selling stocks or other expenses that a real-world investment
portfolio would incur. Note, also, that the gap between best and worst tends to
narrow over the long term.
- ----------------------------------------------------------
INTERNATIONAL STOCK MARKET RETURNS (1969-1999)
- ----------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS 20 YEARS
- ----------------------------------------------------------
Best 69.9% 36.5% 22.8% 16.3%
Worst -23.2 1.5 5.9 12.0
Average 15.2 13.6 14.5 14.7
- ----------------------------------------------------------
The table covers all of the 1-, 5-, 10-, and 20-year periods from 1969
through 1999. Keep in mind that this was a particularly favorable period for all
stock markets. These average returns reflect past performance on international
stocks; you should not regard them as an indication of future returns from
either foreign markets as a whole or any of the Funds in particular.
Note that the preceding chart does not take into account returns measured
by the MSCI Emerging Markets Free Index, a widely used barometer of less
developed stock markets. Emerging markets can be substantially more volatile
than more developed foreign markets. In addition, because the MSCI EAFE Index
tracks the European and Pacific markets collectively, the above returns do not
reflect the variability of returns from year to year for these markets
individually, or the variability across these and other geographic regions or
market sectors. To illustrate this variability, the following table shows
returns for different international markets--as well as the U.S. market for
comparison--from 1990 to 1999, as measured by their respective indexes. Note
that the returns shown do not include the costs of buying and selling stocks or
other expenses that a real-world investment portfolio would incur.
<PAGE>
20
- --------------------------------------------------------------------------------
STOCK MARKET RETURNS FOR DIFFERENT INTERNATIONAL MARKETS*
- --------------------------------------------------------------------------------
EUROPEAN PACIFIC EMERGING U.S.
MARKET MARKET MARKETS MARKETS
- --------------------------------------------------------------------------------
1990 -2.00% -34.43% -10.55% -3.10%
1991 14.12 11.51 59.91 30.47
1992 -3.92 -18.51 11.40 7.62
1993 29.25 36.15 74.84 10.08
1994 2.82 12.82 -7.31 1.32
1995 22.08 2.89 0.01** 37.58
1996 21.42 -8.23 15.19 22.96
1997 23.75 -25.74 -16.37 33.36
1998 28.68 2.64 -18.39 28.58
1999 15.77 56.38 60.86 21.04
- --------------------------------------------------------------------------------
* European market returns are measured by the MSCI Europe Index; Pacific
market returns are measured by the MSCI Pacific Free Index; emerging
markets returns are measured by the Select Emerging Markets Free Index;
and U.S. market returns are measured by the Standard & Poor's 500 Index.
** The inception date of the Select Emerging Markets Free Index was May 4,
1994; returns shown for 1990 to 1994 are measured by the MSCI Emerging
Markets Free Index.
- --------------------------------------------------------------------------------
Keep in mind, however, that these average returns reflect past performance
of the various indexes; you should not consider them as an indication of future
returns from the indexes, or from any of the Funds in particular.
[FLAG] EACH FUND IS SUBJECT TO COUNTRY RISK, WHICH IS THE CHANCE THAT POLITICAL
EVENTS (A WAR, NATIONAL ELECTIONS), FINANCIAL PROBLEMS (RISING INFLATION,
GOVERNMENT DEFAULT), OR NATURAL DISASTERS (AN EARTHQUAKE, A FLOOD) WILL
WEAKEN A COUNTRY'S ECONOMY AND CAUSE INVESTMENTS IN THAT COUNTRY TO LOSE
MONEY.
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
REGIONAL VERSUS BROAD INTERNATIONAL INVESTING
Regional funds are international funds that invest in a particular geographical
region, such as Europe or the Pacific Basin. Because they concentrate their
holdings in a single region, these funds typically have higher share price
volatility than broadly diversified international stock funds (which, by
investing in many different foreign markets, may offset losses from one country
with gains from another at any given time).
- --------------------------------------------------------------------------------
EUROPEAN STOCK INDEX FUND. Stocks from the United Kingdom, France, Germany,
and the Netherlands comprised 29%, 15%, 14%, and 8% of the MSCI Europe Index,
respectively, as of March 31, 2000; stocks from the remaining 11 countries in
the Index have much less significant market capitalization weightings in the
Index and thus much less impact on the Fund's total return. The Fund's heavy
exposure to just four countries involves a higher degree of country risk than
that of more geographically diversified international funds.
PACIFIC STOCK INDEX FUND. Japanese stocks comprised 82% of the MSCI Pacific
Free Index as of March 31, 2000. Therefore, Japanese stocks represent a
correspondingly large component of the Pacific Stock Index Fund's assets. The
Fund's large investment in the
<PAGE>
21
Japanese stock market involves a higher degree of country risk than that of more
geographically diversified international funds.
EMERGING MARKETS STOCK INDEX FUND. As discussed above, emerging markets can
be substantially more volatile than both U.S. and more developed foreign
markets. Therefore, the Emerging Markets Stock Index Fund may expose investors
to a higher degree of volatility than funds that invest in more developed
markets.
DEVELOPED MARKETS INDEX FUND. As a fund of funds, the Developed Markets
Index Fund intends to invest all of its assets in shares of the European and
Pacific Stock Index Funds; indirectly, its country risk will proportionately
mirror that of the European and Pacific Stock Index Funds.
TOTAL INTERNATIONAL STOCK INDEX FUND. As a fund of funds, the Total
International Stock Index Fund intends to invest all of its assets in shares of
the European, Pacific, and Emerging Markets Stock Index Funds; indirectly, its
country risk will proportionately mirror that of the underlying funds. As of
March 31, 2000, the Fund's assets were invested as follows: 60% in the European
Stock Index Fund; 30% in the Pacific Stock Index Fund; and 10% in the Emerging
Markets Stock Index Fund.
[FLAG]EACH FUND IS SUBJECT TO CURRENCY RISK, WHICH IS THE CHANCE THAT A STRONGER
U.S. DOLLAR WILL REDUCE RETURNS FOR AMERICANS INVESTING OVERSEAS.
GENERALLY, WHEN THE DOLLAR RISES IN VALUE AGAINST ANOTHER COUNTRY'S
CURRENCY, YOUR INVESTMENT IN THAT COUNTRY LOSES VALUE BECAUSE ITS CURRENCY
IS WORTH FEWER U.S. DOLLARS. ON THE OTHER HAND, A WEAKER U.S. DOLLAR
GENERALLY LEADS TO HIGHER RETURNS FOR AMERICANS HOLDING FOREIGN
INVESTMENTS.
SECURITY SELECTION
In seeking to track its target index, the European Stock Index, Pacific Stock
Index, and Emerging Markets Stock Index Funds each invest in a portfolio of
foreign stocks selected in a manner that mirrors the weightings of their target
indexes. The Total International Stock Index Fund simply invests in shares of
the European, Pacific, and Emerging Markets Stock Index Funds. Likewise, the
Developed Markets Index Fund will simply invest in shares of the European and
Pacific Stock Index Funds. Each Fund seeks to provide investment results that
correspond to its target index. The correlation between the performance of a
Fund and its target index is expected to be at least 95%. (A correlation of 100%
would indicate perfect correlation.)
EUROPEAN STOCK INDEX FUND. The Fund invests in a statistically selected
sample of approximately 550 common stocks included in the MSCI Europe Index,
which is made up of the stocks of companies located in 15 European countries.
Four countries--the United Kingdom, France, Germany, and the
Netherlands--dominate the Index, with 29%, 15%, 14%, and 8% of the market
capitalization of the Index, respectively, as of March 31, 2000. The other 11
countries, which include Austria, Belgium, Denmark, Finland, Ireland, Italy,
Norway, Portugal, Spain, Sweden, and Switzerland, are much less significant to
the Index and, consequently, the Fund.
PACIFIC STOCK INDEX FUND. The Fund invests in a statistically selected
sample of the approximately 420 common stocks included in the MSCI Pacific Free
Index, which is comprised of the stocks of Pacific Basin companies. The Index is
dominated by the Japanese stock market, which represented 82% of the market
capitalization of the Index as of March 31, 2000. The other four countries
represented in the Index are Australia, Hong Kong, New Zealand, and Singapore.
<PAGE>
22
EMERGING MARKETS STOCK INDEX FUND. The Fund invests in a statistically
selected sample of the approximately 500 common stocks included in the Select
Emerging Markets Free Index, which is made up of the stocks of companies located
in 13 emerging markets of Europe, Asia, Africa, and Latin America. Three
countries--Mexico, Brazil, and South Africa--represent a majority of the Index,
with 16%, 14%, and 13% of the market capitalization of the Index, respectively,
as of March 31, 2000. The other 10 countries include Argentina, the Czech
Republic, Greece, Hungary, Indonesia, Israel, Philippines, Poland, Thailand, and
Turkey. The developed countries of Hong Kong and Singapore are included in the
Index to broaden diversification and ensure adequate liquidity. The Index is
called "select" because it is modeled on a larger index--the MSCI Emerging
Markets Free Index--but with certain adjustments designed to reduce risk. For
instance, MSCI considers the Hong Kong and Singapore markets too mature to
include in its index, but they are part of the Select Index. Conversely, as of
March 31, 2000, the Select Index excluded certain countries found in the MSCI
Emerging Markets Free Index--Chile, China, Colombia, India, Jordan, Korea,
Pakistan, Peru, Russia, Sri Lanka, and Taiwan--due to concerns about liquidity
or entry barriers in those markets. MSCI administers the Select Index
exclusively for Vanguard, and periodically adjusts the included countries to
keep pace with evolution in world markets. (Such adjustments are made on a
forward-looking basis, so past performance of the Select Index always reflects
actual country representation during the relevant period.)
Although index funds, by their nature, tend to be tax-efficient investment
vehicles, the Funds are generally managed without regard to tax ramifications.
TRANSACTION FEES AND ACCOUNT MAINTENANCE FEES
Some of Vanguard's index funds charge a transaction fee on purchases of fund
shares to offset the higher costs of trading certain securities, particularly
small-company and international stocks. The transaction fee ensures that these
higher costs are borne by the investors making the transactions--and not by
shareholders already in the fund who do not generate the costs. In addition,
most of Vanguard's index funds charge an account maintenance fee on accounts
under $10,000 to divide the costs of maintaining accounts equitably among
shareholders.
All transaction fees are paid directly to the fund itself (unlike a sales
charge or load that non-Vanguard funds may impose to compensate their sales
representatives). Without transaction fees, some index funds would have trouble
tracking their target indexes.
Vanguard assesses an account maintenance fee on index fund shareholders
whose account balances are below $10,000 (for any reason, including a decline in
the value of a fund's shares) on the date a dividend is distributed. This fee is
intended to allocate the costs of maintaining accounts more equitably among
shareholders. For funds that distribute dividends annually, the account
maintenance fee is $10 per year, deducted from the annual dividend, which
usually is distributed during the last two weeks of the calendar year. If the
fee is deducted from your dividend distribution, you will still be taxed on the
full amount of your dividend (unless you hold your shares through a nontaxable
account). If you are due a dividend that is less than the fee, fractional shares
will be automatically redeemed to make up the difference. This fee cannot be
prepaid.
COSTS AND MARKET-TIMING
Some investors try to profit from a strategy called market-timing--switching
money into investments when they expect prices to rise, and taking money out
when they expect prices to fall. As money is shifted in and out, a fund incurs
expenses for buying and selling
<PAGE>
23
securities. These costs are borne by all fund shareholders, including the
long-term investors who do not generate the costs. Therefore, the Vanguard
International Stock Index Funds have adopted the following policies, among
others, designed to discourage short-term trading:
- - Each Fund reserves the right to reject any purchase request--including
exchanges from other Vanguard funds--that it regards as disruptive to the
efficient management of the Fund. A purchase request could be rejected
because of the timing of the investment or because of a history of
excessive trading by the investor.
- - The Emerging Markets Stock Index Fund charges a transaction fee on
purchases and redemptions.
- - Telephone and online exchanges are not accepted for non-IRA accounts.
- - There is a limit on the number of times you can exchange into and out of a
Fund (see "Redeeming Shares" in the INVESTING WITH VANGUARD section).
- - Each Fund reserves the right to stop offering shares at any time.
THE VANGUARD FUNDS DO NOT PERMIT MARKET-TIMING. DO NOT INVEST IN THESE
FUNDS IF YOU ARE A MARKET-TIMER.
TURNOVER RATE
Although each Fund seeks to invest for the long term, the Funds retain the right
to sell securities regardless of how long the securities have been held.
Generally, a passively- managed fund sells securities only to respond to
redemption requests or to adjust the number of shares held to reflect a change
in the fund's target index. Because of this, the turnover rate for each Fund has
been extremely low. The Financial Highlights tables beginning on page 29 show
historic turnover rates for each Fund.
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
TURNOVER RATE
Before investing in a mutual fund, you should review its turnover rate. This
gives an indication of how transaction costs could affect the fund's future
returns. In general, the greater the volume of buying and selling by the fund,
the greater the impact that brokerage commissions and other transaction costs
will have on its return. Also, funds with high turnover rates may be more likely
to generate capital gains that must be distributed to shareholders as income
subject to taxes. The average turnover rate for passively managed foreign stock
index funds in 1999 was roughly 17%; for all foreign stock funds, the average
turnover was approximately 76%, according to Morningstar, Inc. (A turnover rate
of 100% would occur, for example, if a fund sold and replaced securities valued
at 100% of its net assets within a one-year period.)
- --------------------------------------------------------------------------------
OTHER INVESTMENT POLICIES AND RISKS
Besides investing in common stocks of foreign companies, each Fund may make
certain other kinds of investments to achieve its objective. Each Fund may
change its objective without shareholder approval.
The Funds may also invest, to a limited extent, in futures and options
contracts, warrants, convertible securities, and swap agreements, which are
types of derivatives. Losses (or gains) involving futures contracts can
sometimes be substantial--in part because a relatively small price movement in a
futures contract may result in an immediate and substantial loss (or gain) for a
fund. Similar risks exist for warrants (securities that permit their
<PAGE>
24
owners to purchase a specific number of shares of stock at a predetermined
price), convertible securities (securities that may be exchanged for another
asset), and swap agreements (contracts between two parties in which each agrees
to make payments to the other based on the return of a specified index or
asset).
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
DERIVATIVES
A derivative is a financial contract whose value is based on (or "derived" from)
a traditional security (such as a stock or a bond), an asset (such as a
commodity like gold), or a market index (such as the S&P 500 Index). Futures and
options are derivatives that have been trading on regulated exchanges for more
than two decades. These "traditional" derivatives are standardized contracts
that can easily be bought and sold, and whose market values are determined and
published daily. It is these characteristics that differentiate futures and
options from the relatively new types of derivatives. If used for speculation or
as leveraged investments, derivatives can carry considerable risks.
- --------------------------------------------------------------------------------
For this reason, the Funds will not use futures, options, warrants,
convertible securities, or swap agreements for speculative purposes or as
leveraged investments that magnify the gains or losses of an investment. A
Fund's obligation under futures contracts will not exceed 20% of its total
assets.
The reasons for which a Fund will invest in futures and options are:
- - To keep cash on hand to meet shareholder redemptions or other needs while
simulating full investment in stocks.
- - To reduce the Fund's transaction costs or add value when these instruments
are favorably priced.
Each Fund may also enter into forward foreign currency contracts in order
to maintain the same currency exposure as its respective Index. A forward
foreign currency contract is an agreement to buy or sell a country's currency at
a specific price on a specific date, usually 30, 60, or 90 days in the future.
In other words, the contract guarantees an exchange rate on a given date.
Managers of international stock funds typically use these contracts to guard
against sudden, unfavorable changes in U.S. dollar/foreign currency exchange
rates. However, the Funds will use these contracts for different reasons:
- - To gain currency exposure when investing in futures.
- - To settle trades in a foreign currency.
THE FUNDS AND VANGUARD
Vanguard International Stock Index Funds are offered by The Vanguard Group, a
family of more than 35 investment companies with more than 100 funds holding
assets worth more than $550 billion. All of the Vanguard funds share in the
expenses associated with business operations, such as personnel, office space,
equipment, and advertising.
Vanguard also provides marketing services to the funds. Although
shareholders do not pay sales commissions or 12b-1 distribution fees, each fund
pays its allocated share of The Vanguard Group's marketing costs.
Total International Stock and Developed Markets Index Funds will indirectly
bear a proportionate share of the expenses of the underlying funds in which they
invest. However, their direct expenses are expected to be very low or zero. For
example, Total International
<PAGE>
25
Stock Index Fund has incurred no direct expenses since its inception in 1996.
Total International Stock and Developed Markets Index Funds may operate without
incurring direct expenses because Vanguard will reimburse them for (i) their
contributions to the cost of operating the underlying funds in which they
invest, and (ii) savings in administrative and marketing costs that Vanguard
expects to derive from their operations.
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
VANGUARD'S UNIQUE CORPORATE STRUCTURE
The Vanguard Group is truly a MUTUAL mutual fund company. It is owned jointly by
the funds it oversees and thus indirectly by the shareholders in those funds.
Most other mutual funds are operated by for-profit management companies that may
be owned by one person, by a group of individuals, or by investors who own the
management company's stock. By contrast, Vanguard provides its services on an
"at-cost" basis, and the funds' expense ratios reflect only these costs. No
separate management company reaps profits or absorbs losses from operating the
funds.
- --------------------------------------------------------------------------------
INVESTMENT ADVISER
The Vanguard Group (Vanguard), P.O. Box 2600, Valley Forge, PA 19482, founded in
1975, serves as the Funds' adviser through its Quantitative Equity Group. (The
Developed Markets and Total International Stock Index Funds receive advisory
services indirectly, by investing in other funds.) Vanguard manages the Funds on
an at-cost basis, subject to the control of the Trustees and officers of the
Funds. For the fiscal year ended December 31, 1999, the advisory fees
represented an effective annual rate of less than 0.01% each for the European,
Pacific, and Emerging Markets Stock Index Funds.
The Funds have authorized Vanguard to choose brokers or dealers to handle
the purchase and sale of securities for the Funds, and to get the best available
price and most favorable execution from these brokers or dealers with respect to
all transactions. The Funds may direct Vanguard to use a particular broker for
certain transactions in exchange for commission rebates or research services
provided to the Funds.
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
THE FUNDS' ADVISER
The Vanguard Group provides investment advisory services to many Vanguard funds;
as of December 31, 1999, the Group managed more than $371 billion in total
assets. The individual responsible for overseeing the European, Pacific, and
Emerging Markets Stock Index Funds' investments is:
GEORGE U. SAUTER, Managing Director of Vanguard, and head of Vanguard's
Quantitative Equity Group; has worked in investment management since 1985;
primary responsibility for Vanguard's stock indexing policy and strategy since
joining the company in 1987; A.B., Dartmouth College; M.B.A., University of
Chicago.
- --------------------------------------------------------------------------------
<PAGE>
26
DIVIDENDS, CAPITAL GAINS, AND TAXES
FUND DISTRIBUTIONS
Each Fund distributes to shareholders virtually all of its net income (interest
and dividends, less expenses), as well as any capital gains realized from the
sale of its holdings. Distributions generally occur in December. In addition, a
Fund may occasionally be required to make supplemental dividend or capital gains
distributions at some other time during the year. You can receive distributions
of income dividends or capital gains in cash, or you can have them automatically
reinvested in more shares of the Fund.
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
DISTRIBUTIONS
As a shareholder, you are entitled to your share of the fund's income from
interest and dividends, and gains from the sale of investments. You receive such
earnings as either an income dividend or a capital gains distribution. Income
dividends come from both the dividends that the fund earns from its holdings and
the interest it receives from its money market and bond investments. Capital
gains are realized whenever the fund sells securities for higher prices than it
paid for them. These capital gains are either short-term or long-term, depending
on whether the fund held the securities for one year or less, or more than one
year.
- --------------------------------------------------------------------------------
BASIC TAX POINTS
Vanguard will send you a statement each year showing the tax status of all your
distributions. In addition, taxable investors should be aware of the following
basic tax points:
- - Distributions are taxable to you whether or not you reinvest these amounts
in additional Fund shares.
- - Distributions declared in December--if paid to you by the end of
January--are taxable for federal income tax purposes as if received in
December.
- - Any dividends and short-term capital gains that you receive are taxable to
you as ordinary income for federal income tax purposes.
- - Any distributions of net long-term capital gains are taxable to you as
long-term capital gains for federal income tax purposes, no matter how long
you've owned shares in the Fund.
- - Capital gains distributions may vary considerably from year to year as a
result of the Funds' normal investment activities and cash flows.
- - A sale or exchange of Fund shares is a taxable event. This means that you
may have a capital gain to report as income, or a capital loss to report as
a deduction, when you complete your federal income tax return.
- - Dividend and capital gains distributions that you receive, as well as your
gains or losses from any sale or exchange of Fund shares, may be subject to
state and local income taxes.
- - The European, Pacific, and Emerging Markets Stock Index Funds may be
subject to foreign taxes or foreign tax withholding on dividends, interest,
and some capital gains that they receive on foreign securities. You may
qualify for an offsetting credit or deduction under U.S. tax laws for your
portion of a Fund's foreign tax obligations, provided that you meet certain
requirements. Because the Total International Stock and Developed Markets
Index Funds invest in foreign stocks indirectly through other funds, their
investors are not able to take advantage of foreign tax credits or
deductions. See your tax adviser or IRS publications for more information.
<PAGE>
27
GENERAL INFORMATION
BACKUP WITHHOLDING. By law, Vanguard must withhold 31% of any taxable
distributions or redemptions from your account if you do not:
- - provide us with your correct taxpayer identification number;
- - certify that the taxpayer identification number is correct; and
- - confirm that you are not subject to backup withholding.
Similarly, Vanguard must withhold from your account if the IRS instructs us to
do so.
FOREIGN INVESTORS. The Vanguard funds generally do not offer their shares for
sale outside of the United States. Foreign investors should be aware that U.S.
withholding and estate taxes may apply to any investments in Vanguard funds.
INVALID ADDRESSES. If a dividend or capital gains distribution check mailed to
your address of record is returned as undeliverable, Vanguard will automatically
reinvest all future distributions until you provide us with a valid mailing
address.
TAX CONSEQUENCES. This prospectus provides general tax information only. If you
are investing through a tax-deferred retirement account, such as an IRA, special
tax rules apply. Please consult your tax adviser for detailed information about
a fund's tax consequences for you.
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
"BUYING A DIVIDEND"
Unless you are investing through a tax-deferred retirement account (such as an
IRA), you should avoid buying shares of a fund shortly before it makes a
distribution, because doing so can cost you money in taxes. This is known as
"buying a dividend." For example: On December 15, you invest $5,000, buying 250
shares for $20 each. If the fund pays a distribution of $1 per share on December
16, its share price would drop to $19 (not counting market change). You still
have only $5,000 (250 shares x $19 = $4,750 in share value, plus 250 shares x $1
= $250 in distributions), but you owe tax on the $250 distribution you
received--even if you reinvest it in more shares. To avoid "buying a dividend,"
check a fund's distribution schedule before you invest.
- --------------------------------------------------------------------------------
SHARE PRICE
Each Fund's share price, called its net asset value, or NAV, is calculated each
business day after the close of regular trading on the New York Stock Exchange
(the NAV is not calculated on holidays or other days when the Exchange is
closed). Net asset value per share for the Developed Markets and Total
International Stock Index Funds is computed by adding up the total value of the
Fund's investments (i.e., shares of the underlying funds) and other assets,
subtracting any of its liabilities (debts), and then dividing by the number of
Fund shares outstanding:
TOTAL ASSETS - LIABILITIES
NET ASSET VALUE = --------------------------------
NUMBER OF SHARES OUTSTANDING
Net asset value per share for the European, Pacific, and Emerging Markets
Stock Index Funds is computed in a similar way, by dividing the net assets
attributed to each class by the number of Fund shares outstanding for that
class.
<PAGE>
28
Knowing the daily net asset value is useful to you as a shareholder because
it indicates the current value of your investment. The Fund's NAV, multiplied by
the number of shares you own, gives you the dollar amount you would have
received had you sold all of your shares back to the Fund that day. Because
foreign securities markets may operate on days which are not business days in
the United States, the value of a Fund's holdings may change on days when
shareholders will not be able to purchase or redeem the Fund's shares.
A NOTE ON PRICING: A Fund's investments will be priced at their market
value when market quotations are readily available. When these quotations are
not readily available, investments will be priced at their fair value,
calculated according to procedures adopted by the Funds' Board of Trustees. A
Fund also may use fair value pricing if the value of a security held by the Fund
is materially affected by events occurring after the close of the primary
markets or exchanges on which such security is traded. In these situations,
prices used by the Fund to calculate its net asset value may differ from quoted
or published prices for the underlying securities.
Each Fund's share price can be found daily in the mutual fund listings of
most major newspapers under the heading "Vanguard Index Funds." Different
newspapers use different abbreviations for each Fund, but the most common are
EUROPE, PACIFIC, EMERMKT, DEVMKT, and TOTINTL for the European, Pacific,
Emerging Markets, Developed Markets, and Total International Stock Index Funds,
respectively.
FINANCIAL HIGHLIGHTS
The following financial highlights tables are intended to help you understand
each Fund's financial performance for the past five years or since inception
(except for the Developed Markets Index Fund, which did not start operations
until May 5, 2000), and certain information reflects financial results for a
single Fund share. The total returns in each table represent the rate that an
investor would have earned or lost each year on an investment in the Fund
(assuming reinvestment of all dividend and capital gains distributions). This
information has been derived from the financial statements audited by
PricewaterhouseCoopers LLP, independent accountants, whose report--along with
each Fund's financial statements--is included in the Funds' most recent annual
report to shareholders. You may have the annual report sent to you without
charge by contacting Vanguard.
<PAGE>
29
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
HOW TO READ THE FINANCIAL HIGHLIGHTS TABLE
This explanation uses the European Stock Index Fund as an example. The Fund
began fiscal 1999 with a net asset value (price) of $25.28 per share. During the
year, the Fund earned $0.50 per share from investment income (interest and
dividends) and $3.69 per share from investments that had appreciated in value or
that were sold for higher prices than the Fund paid for them.
Shareholders received $0.65 per share in the form of dividend and capital gains
distributions. A portion of each year's distributions may come from the prior
year's income or capital gains.
The earnings ($4.19 per share) minus the distributions ($0.65 per share)
resulted in a share price of $28.82 at the end of the year. This was an increase
of $3.54 per share (from $25.28 at the beginning of the year to $28.82 at the
end of the year). For a shareholder who reinvested the distributions in the
purchase of more shares, the total return from the Fund was 16.62% for the year.
As of December 31, 1999, the Fund had $6.1 billion in net assets. For the year,
its expense ratio was 0.29% ($2.90 per $1,000 of net assets); and its net
investment income amounted to 1.99% of its average net assets. It sold and
replaced securities valued at 7% of its net assets.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
VANGUARD EUROPEAN STOCK INDEX FUND
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------
NET ASSET VALUE,
BEGINNING OF YEAR $25.28 $20.13 $16.57 $14.02 $11.76
- --------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .50 .41 .38 .34 .32
Net Realized and
Unrealized Gain
(Loss) on Investments 3.69 5.40 3.63 2.63 2.30
--------------------------------------------------------
Total from Investment
Operations 4.19 5.81 4.01 2.97 2.62
--------------------------------------------------------
DISTRIBUTIONS
Dividends from Net
Investment Income (.50) (.52) (.37) (.36) (.32)
Distributions from
Realized Capital Gains (.15) (.14) (.08) (.06) (.04)
--------------------------------------------------------
Total Distributions (.65) (.66) (.45) (.42) (.36)
- --------------------------------------------------------------------------------
NET ASSET VALUE, END
OF YEAR $28.82 $25.28 $20.13 $16.57 $14.02
================================================================================
TOTAL RETURN* 16.62% 28.86% 24.23% 21.26% 22.28%
================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of
Year (Millions) $6,106 $4,479 $2,432 $1,595 $1,017
Ratio of Total
Expenses to Average
Net Assets 0.29% 0.29% 0.31% 0.35% 0.35%
Ratio of Net
Investment Income to
Average Net Assets 1.99% 1.97% 2.19% 2.45% 2.66%
Turnover Rate 7% 7% 3% 4% 2%
================================================================================
*Total return figures do not reflect the transaction fee on purchases imposed
prior to 4/1/2000 or the annual account maintenance fee.
<PAGE>
30
FINANCIAL HIGHLIGHTS (CONTINUED)
- --------------------------------------------------------------------------------
VANGUARD PACIFIC STOCK INDEX FUND
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------
NET ASSET VALUE,
BEGINNING OF YEAR $ 7.84 $7.72 $10.51 $11.50 $11.31
- --------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .08 .085 .09 .10 .10
Net Realized and
Unrealized Gain
(Loss) on Investments 4.39 .100 (2.79) (1.00) .21
--------------------------------------------------------
Total from Investment
Operations 4.47 .185 (2.70) (.90) .31
--------------------------------------------------------
DISTRIBUTIONS
Dividends from Net
Investment Income (.09) (.065) (.09) (.09) (.12)
Distributions from
Realized Capital Gains -- -- -- -- --
--------------------------------------------------------
Total Distributions (.09) (.065) (.09) (.09) (.12)
- --------------------------------------------------------------------------------
NET ASSET VALUE, END
OF YEAR $12.22 $7.84 $ 7.72 $10.51 $11.50
================================================================================
TOTAL RETURN* 57.05% 2.41% -25.67% -7.82% 2.75%
================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of
Year (Millions) $2,526 $1,033 $827 $978 $831
Ratio of Total
Expenses to Average
Net Assets 0.37% 0.40% 0.35% 0.35% 0.35%
Ratio of Net
Investment Income to
Average Net Assets 0.95% 1.17% 1.03% 0.89% 0.97%
Turnover Rate 6% 4% 8% 9% 1%
================================================================================
*Total return figures do not reflect the transaction fee on purchases imposed
prior to 4/1/2000 or the annual account maintenance fee.
- --------------------------------------------------------------------------------
VANGUARD EMERGING MARKETS STOCK INDEX FUND
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------
NET ASSET VALUE,
BEGINNING OF YEAR $ 7.91 $9.98 $12.28 $10.75 $10.87
- --------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .24 .27 .24 .18 .15
Net Realized and
Unrealized Gain
(Loss) on Investments 4.62 (2.08) (2.31) 1.52 (.09)
--------------------------------------------------------
Total from Investment
Operations 4.86 (1.81) (2.07) 1.70 .06
--------------------------------------------------------
DISTRIBUTIONS
Dividends from Net
Investment Income (.27) (.26) (.23) (.17) (.18)
Distributions from
Realized Capital Gains -- -- -- -- --
--------------------------------------------------------
Total Distributions (.27) (.26) (.23) (.17) (.18)
- --------------------------------------------------------------------------------
NET ASSET VALUE, END
OF YEAR $21.50 $7.91 $ 9.98 $12.28 $10.75
================================================================================
TOTAL RETURN* 61.57% -18.12% -16.82% 15.83% 0.56%
================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of
Year (Millions) $1,138 $577 $660 $637 $234
Ratio of Total
Expenses to Average
Net Assets 0.58% 0.61% 0.57% 0.60% 0.60%
Ratio of Net
Investment Income to
Average Net Assets 2.55% 2.99% 1.96% 1.69% 2.00%
Turnover Rate 22% 22% 19% 1% 3%
================================================================================
*Total return figures do not reflect the transaction fee on purchases (0.5%
beginning 4/1/2000, 1.0% from 11/3/1997 to 3/31/2000, 1.5% from 1/1/1997 to
11/2/1997, 2.0% in 1995 through 1996), the transaction fee on redemptions
(0.5% beginning 4/1/2000, 1.0% through 3/31/2000), or the annual account
maintenance fee.
<PAGE>
31
- --------------------------------------------------------------------------------
VANGUARD TOTAL INTERNATIONAL
STOCK INDEX FUND
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1999 1998 1997 1996*
- --------------------------------------------------------------------------------
NET ASSET VALUE,
BEGINNING OF PERIOD $11.19 $ 9.87 $10.14 $10.26
- --------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .21 .21 .18 .150
Capital Gain Distributions
Received .04 .02 .02 .015
Net Realized and
Unrealized Gain
(Loss) on Investments 3.09 1.31 (.28) (.110)
--------------------------------------------------------
Total from Investment
Operations 3.34 1.54 (.08) .055
--------------------------------------------------------
DISTRIBUTIONS
Dividends from Net
Investment Income (.21) (.21) (.17) (.160)
Distributions from
Realized Capital Gains (.01) (.01) (.02) (.015)
--------------------------------------------------------
Total Distributions (.22) (.22) (.19) (.175)
- --------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $14.31 $11.19 $ 9.87 $10.14
================================================================================
TOTAL RETURN** 29.92% 15.60% -0.77% 0.55%
================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of
Period (Millions) $2,570 $1,375 $903 $280
Ratio of Total
Expenses to Average
Net Assets 0% 0% 0% 0%
Ratio of Net
Investment Income to
Average Net Assets 2.04% 2.18% 2.19% 1.51%+
Turnover Rate 1% 2% 0% 0%
================================================================================
*April 29 (inception) through December 31, 1996.
**Total return figures do not reflect the transaction fee on purchases imposed
prior to April 1, 2000 or the annual account maintenance fee.
+Annualized.
The Funds are not sponsored, sold, promoted, or endorsed by Morgan Stanley
Capital International. Standard & Poor's(R)," "S&P(R)," "S&P 500(R)," "Standard
& Poor's 500," and "500," are trademarks of The McGraw-Hill Companies, Inc., and
have been licensed for use by The Vanguard Group.
<PAGE>
32
- --------------------------------------------------------------------------------
INVESTING WITH VANGUARD
Are you looking for the most convenient way to open or add money to a Vanguard
account? Obtain instant access to fund information? Establish an account for a
minor child or for your retirement savings?
Vanguard can help. Our goal is to make it easy and pleasant for you to do
business with us.
The following sections of the prospectus briefly explain the many services
we offer. Booklets providing detailed information are available on the services
marked with a [BOOK ICON]. Please call us to request copies.
- --------------------------------------------------------------------------------
SERVICES AND ACCOUNT FEATURES
Vanguard offers many services that make it convenient to buy, sell, or exchange
shares, or to obtain fund or account information.
- --------------------------------------------------------------------------------
TELEPHONE REDEMPTIONS (SALES AND EXCHANGES)
Automatically set up for these Funds unless you notify us otherwise. Note:
Limitations do apply; see page 37.
- --------------------------------------------------------------------------------
VANGUARD(R) DIRECT DEPOSIT SERVICE [BOOK ICON]
Automatic method for depositing your paycheck or U.S. government payment
(including Social Security and government pension checks) into your account.
- --------------------------------------------------------------------------------
VANGUARD(R) AUTOMATIC EXCHANGE SERVICE [BOOK ICON]
Automatic method for moving a fixed amount of money from one Vanguard fund
account to another.
- --------------------------------------------------------------------------------
VANGUARD FUND EXPRESS(R) [BOOK ICON]
Electronic method for buying or selling shares. You can transfer money between
your Vanguard fund account and an account at your bank, savings and loan, or
credit union on a systematic schedule.
- --------------------------------------------------------------------------------
VANGUARD DIVIDEND EXPRESS(R) [BOOK ICON]
Electronic method for transferring dividend and/or capital gains distributions
directly from your Vanguard fund account to your bank, savings and loan, or
credit union account.
- --------------------------------------------------------------------------------
VANGUARD TELE-ACCOUNT(R) 1-800-662-6273 (ON-BOARD) [BOOK ICON]
Toll-free 24-hour access to Vanguard fund and account information--as well as
some transactions--by using any touch-tone phone. Tele-Account provides total
return, share price, price change, and yield quotations for all Vanguard funds;
gives your account balances and history (e.g., last transaction, latest dividend
distribution); and allows you to sell or exchange shares to and from most
Vanguard funds.
- --------------------------------------------------------------------------------
ACCESS VANGUARD(TM) www.vanguard.com [BOOK ICON]
You can use your personal computer to perform certain transactions for most
Vanguard funds by accessing our website. To establish this service, you must
register through our website. We will then mail you an account access password
that allows you to process the following financial and administrative
transactions online:
- - Open a new account.*
- - Buy, sell, or exchange shares of most funds.
- - Change your name/address.
<PAGE>
33
- - Add/change fund options (including dividend options, Vanguard Fund Express,
bank instructions, checkwriting, and Vanguard Automatic Exchange Service).
(Some restrictions may apply.) Please call our Client Services Department
for assistance.
*Only current Vanguard shareholders can open a new account online, by exchanging
shares from other existing Vanguard accounts.
- --------------------------------------------------------------------------------
INVESTOR INFORMATION DEPARTMENT: 1-800-662-7447 (SHIP) TEXT TELEPHONE:
1-800-952-3335
Call Vanguard for information on our funds, fund services, and retirement
accounts, and to request literature.
- --------------------------------------------------------------------------------
CLIENT SERVICES DEPARTMENT: 1-800-662-2739 (CREW) TEXT TELEPHONE: 1-800-749-7273
Call Vanguard for information on your account, account transactions, and account
statements.
- --------------------------------------------------------------------------------
SERVICES FOR CLIENTS OF VANGUARD'S INSTITUTIONAL DIVISION: 1-888-809-8102
Vanguard's Institutional Division offers a variety of specialized services for
large institutional investors, including the ability to effect account
transactions through private electronic networks and third-party recordkeepers.
- --------------------------------------------------------------------------------
TYPES OF ACCOUNTS
Individuals and institutions can establish a variety of accounts with Vanguard.
- --------------------------------------------------------------------------------
FOR ONE OR MORE PEOPLE
Open an account in the name of one (individual) or more (joint tenants) people.
- --------------------------------------------------------------------------------
FOR HOLDING PERSONAL TRUST ASSETS [BOOK ICON]
Invest assets held in an existing personal trust.
- --------------------------------------------------------------------------------
FOR INDIVIDUAL RETIREMENT ACCOUNTS [BOOK ICON]
Open a traditional IRA account or a Roth IRA account. Eligibility and other
requirements are established by federal law and Vanguard custodial account
agreements. For more information, please call 1-800-662-7447 (SHIP).
- --------------------------------------------------------------------------------
FOR AN ORGANIZATION [BOOK ICON]
Open an account as a corporation, partnership, endowment, foundation, or other
entity.
- --------------------------------------------------------------------------------
FOR THIRD-PARTY TRUSTEE RETIREMENT INVESTMENTS
Open an account as a retirement trust or plan based on an existing corporate or
institutional plan. These accounts are established by the trustee of the
existing plan.
- --------------------------------------------------------------------------------
VANGUARD PROTOTYPE PLANS
Open a variety of retirement accounts using Vanguard prototype plans for
individuals, sole proprietorships, and small businesses. For more information,
please call 1-800-662-2003.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
A NOTE ON INVESTING WITH VANGUARD THROUGH OTHER FIRMS
You may purchase or sell Fund shares through a financial intermediary such as a
bank, broker, or investment adviser. If you invest with Vanguard through an
intermediary, please read that firm's program materials carefully to learn of
any special rules that may apply. For example, special terms may apply to
additional service features, fees, or other policies. Consult your intermediary
to determine when your order will be priced.
- --------------------------------------------------------------------------------
<PAGE>
34
BUYING SHARES
You buy your shares at a Fund's next-determined net asset value after Vanguard
receives your request. As long as your request is received before the close of
regular trading on the New York Stock Exchange, generally 4 p.m. Eastern time,
you will buy your shares at that day's net asset value.
- --------------------------------------------------------------------------------
MINIMUM INVESTMENT TO . . .
open a new account
$3,000 (regular account); $1,000 (traditional IRAs and Roth IRAs).
add to an existing account
$100 by mail or exchange; $1,000 by wire.
- --------------------------------------------------------------------------------
A NOTE ON LOW BALANCES
Each Fund reserves the right to close any nonretirement fund account whose
balance falls below the minimum initial investment. The Fund will deduct a $10
annual fee in June if your nonretirement account balance at that time is below
$2,500. The low balance fee is waived for investors who have aggregate Vanguard
account assets of $50,000 or more.
- --------------------------------------------------------------------------------
A NOTE ON PURCHASE FEES
Emerging Markets Stock Index Fund deducts a 0.5% fee from all purchases
(including exchanges from other Vanguard funds), but not from reinvested
dividends or capital gains.
- --------------------------------------------------------------------------------
BY MAIL TO . . . [ENVELOPE ICON]
open a new account
Complete and sign the account registration form and enclose your check.
add to an existing account
Mail your check with an Invest-By-Mail form detached from your confirmation
statement to the address listed on the form. Please do not alter Invest-By-Mail
forms, since they are fund- and account-specific.
Make your check payable to: The Vanguard Group-(insert appropriate Fund number;
see below)
European Stock Index Fund-79
Pacific Stock Index Fund-72
Emerging Markets Stock Index Fund-533
Developed Markets Index Fund-227
Total International Stock Index Fund-113
All purchases must be made in U.S. dollars, and checks must be drawn on U.S.
banks.
First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 1110 455 Devon Park Drive
Valley Forge, PA 19482-1110 Wayne, PA 19087-1815
For clients of Vanguard's Institutional Division . . .
First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 2900 455 Devon Park Drive
Valley Forge, PA 19482-2900 Wayne, PA 19087-1815
<PAGE>
35
- --------------------------------------------------------------------------------
IMPORTANT NOTE: To prevent check fraud, Vanguard will not accept checks made
payable to third parties.
- --------------------------------------------------------------------------------
BY TELEPHONE TO . . . [TELEPHONE ICON]
open a new account
Call Vanguard Tele-Account* 24 hours a day--or Client Services during business
hours--to exchange from another Vanguard fund account with the same registration
(name, address, taxpayer identification number, and account type). (Note that
some restrictions apply to index fund accounts.)
add to an existing account
Call Vanguard Tele-Account* 24 hours a day--or Client Services during business
hours--to exchange from another Vanguard fund account with the same registration
(name, address, taxpayer identification number, and account type). (Note that
some restrictions apply to index fund accounts.) Use Vanguard Fund Express (see
"Services and Account Features") to transfer assets from your bank account. Call
Client Services before your first use to verify that this option is available.
Vanguard Tele-Account Client Services
1-800-662-6273 1-800-662-2739
*You must obtain a Personal Identification Number (PIN) through Tele-Account at
least seven days before you request your first exchange.
- --------------------------------------------------------------------------------
IMPORTANT NOTE: Once you have initiated a telephone transaction and a
confirmation number has been assigned, the transaction cannot be revoked. We
reserve the right to refuse any purchase request.
- --------------------------------------------------------------------------------
BY WIRE TO OPEN A NEW ACCOUNT OR ADD TO AN EXISTING ACCOUNT [WIRE ICON]
Call Client Services to arrange your wire transaction. Wire transactions to
retirement accounts are only available for asset transfers and rollovers from
other financial institutions. Individual IRA contributions will not be accepted
by wire.
Wire to:
FRB ABA 021001088
HSBC Bank USA
For credit to:
Account: 000112046
Vanguard Incoming Wire Account
In favor of:
European Stock Index Fund-79
Pacific Stock Index Fund-72
Emerging Markets Stock Index Fund-533
Developed Markets Index Fund-227
Total International Stock Index Fund-113
[Account number, or temporary number for a new account]
[Registered account owner(s)]
[Registered address]
- --------------------------------------------------------------------------------
<PAGE>
36
- --------------------------------------------------------------------------------
You can redeem (that is, sell or exchange) shares purchased by check or Vanguard
Fund Express at any time. However, while your redemption request will be
processed at the next-determined net asset value after it is received, your
redemption proceeds will not be available until payment for your purchase is
collected, which may take up to ten calendar days.
- --------------------------------------------------------------------------------
A NOTE ON LARGE PURCHASES
It is important that you call Vanguard before you invest a large dollar amount.
It is our responsibility to consider the interests of all Fund shareholders, and
so we reserve the right to refuse any purchase that may disrupt a Fund's
operation or performance.
- --------------------------------------------------------------------------------
REDEEMING SHARES
This section describes how you can redeem--that is, sell or exchange--a Fund's
shares.
When Selling Shares:
- - Vanguard sends the redemption proceeds to you or a designated third party.*
- - You can sell all or part of your Fund shares at any time.
*May require a signature guarantee; see footnote on page 39.
When Exchanging Shares:
- - The redemption proceeds are used to purchase shares of a different Vanguard
fund.
- - You must meet the receiving fund's minimum investment requirements.
- - Vanguard reserves the right to revise or terminate the exchange privilege,
limit the amount of an exchange, or reject an exchange at any time, without
notice.
- - In order to exchange into an account with a different registration
(including a different name, address, or taxpayer identification number),
you must include the guaranteed signature of all current account owners on
your written instructions.
In both cases, your transaction will be based on the Fund's next-determined
share price, subject to any special rules described in this "Redeeming Shares"
section of the prospectus.
- --------------------------------------------------------------------------------
A NOTE ON REDEMPTION FEES
Emerging Markets Stock Index Fund imposes a 0.5% redemption fee on all share
redemptions. Currently, redemption fees do not apply to Fund shares held through
Vanguard's separate recordkeeping system for employee benefit plan accounts, due
to certain economies associated with these accounts. However, the Fund reserves
the right to impose redemption fees on its shares at any time if warranted by
the Fund's future costs of processing redemptions from these accounts.
- --------------------------------------------------------------------------------
NOTE: Once a redemption is initiated and a confirmation number given, the
transaction CANNOT be canceled.
- --------------------------------------------------------------------------------
<PAGE>
37
HOW TO REQUEST A REDEMPTION
You can request a redemption from your Fund account in any one of three ways:
online, by telephone, or by mail.
The Vanguard funds whose shares you cannot exchange online or by telephone
are: VANGUARD U.S. STOCK INDEX FUNDS, VANGUARD BALANCED INDEX FUND, VANGUARD
INTERNATIONAL STOCK INDEX FUNDS, VANGUARD REIT INDEX FUND, and VANGUARD GROWTH
AND INCOME FUND. These funds do, however, permit online and telephone exchanges
within IRAs and some other retirement accounts. If you sell shares of these
funds online, you will receive a redemption check at your address of record.
- --------------------------------------------------------------------------------
ONLINE REQUESTS [COMPUTER ICON]
ACCESS VANGUARD at www.vanguard.com
You can use your personal computer to sell or exchange shares of most Vanguard
funds by accessing our website. To establish this service, you must register
through our website. We will then mail you an account access password that will
enable you to sell or exchange shares online (as well as perform other
transactions).
- --------------------------------------------------------------------------------
TELEPHONE REQUESTS [TELEPHONE ICON]
All Account Types Except Retirement:
Call Vanguard Tele-Account 24 hours a day--or Client Services during business
hours--to sell shares.
Retirement Accounts:
You can exchange--but not sell--shares by calling Tele-Account or Client
Services.
Vanguard Tele-Account Client Services
1-800-662-6273 1-800-662-2739
- --------------------------------------------------------------------------------
SPECIAL INFORMATION: We will automatically establish the telephone redemption
option for your account, unless you instruct us otherwise in writing. While
telephone redemption is easy and convenient, this account feature involves a
risk of loss from unauthorized or fraudulent transactions. Vanguard will take
reasonable precautions to protect your account from fraud. You should do the
same by keeping your account information private and immediately reviewing any
account statements that we send to you. Make sure to contact Vanguard
immediately about any transaction you believe to be unauthorized.
- --------------------------------------------------------------------------------
We reserve the right to refuse a telephone redemption if the caller is unable to
provide:
- - The ten-digit account number.
- - The name and address exactly as registered on the account.
- - The primary Social Security or employer identification number as registered
on the account.
- - The Personal Identification Number (PIN), if applicable (for instance,
Tele-Account).
Please note that Vanguard will not be responsible for any account losses
due to telephone fraud, so long as we have taken reasonable steps to verify the
caller's identity. If you wish to remove the telephone redemption feature from
your account, please notify us in writing.
- --------------------------------------------------------------------------------
A NOTE ON UNUSUAL CIRCUMSTANCES
Vanguard reserves the right to revise or terminate the telephone redemption
privilege at any time, without notice. In addition, Vanguard can stop selling
shares or postpone payment at times when the New York Stock Exchange is closed
or under any emergency circumstances as determined by the U.S. Securities and
Exchange Commission. If you
<PAGE>
38
experience difficulty making a telephone redemption during periods of drastic
economic or market change, you can send us your request by regular or express
mail. Follow the instructions on selling or exchanging shares by mail in this
section.
- --------------------------------------------------------------------------------
MAIL REQUESTS [ENVELOPE ICON]
All Account Types Except Retirement:
Send a letter of instruction signed by all registered account holders. Include
the fund name and account number and (if you are selling) a dollar amount or
number of shares OR (if you are exchanging) the name of the fund you want to
exchange into and a dollar amount or number of shares. To exchange into an
account with a different registration (including a different name, address,
taxpayer identification number, or account type), you must provide Vanguard with
written instructions that include the guaranteed signatures of all current
owners of the fund from which you wish to redeem.
Vanguard Retirement Accounts:
For information on how to request distributions from:
- - Traditional IRAs and Roth IRAs--call Client Services.
- - SEP-IRAs, SIMPLE IRAs, 403(b)(7) custodial accounts, and Profit-Sharing and
Money Purchase Pension (Keogh) Plans--call Individual Retirement Plans at
1-800-662-2003.
Depending on your account registration type, additional documentation may be
required.
First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 1110 455 Devon Park Drive
Valley Forge, PA 19482-1110 Wayne, PA 19087-1815
For clients of Vanguard's Institutional Division . . .
First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 2900 455 Devon Park Drive
Valley Forge, PA 19482-2900 Wayne, PA 19087-1815
- --------------------------------------------------------------------------------
A NOTE ON LARGE REDEMPTIONS
It is important that you call Vanguard before you redeem a large dollar amount.
It is our responsibility to consider the interests of all fund shareholders, and
so we reserve the right to delay delivery of your redemption proceeds--up to
seven days--if the amount may disrupt a Fund's operation or performance.
If you redeem more than $250,000 worth of Fund shares within any 90-day
period, the Fund reserves the right to pay part or all of the redemption
proceeds above $250,000 in-kind, i.e., in securities, rather than in cash. If
payment is made in-kind, you may incur brokerage commissions if you elect to
sell the securities for cash.
- --------------------------------------------------------------------------------
OPTIONS FOR REDEMPTION PROCEEDS
You may receive your redemption proceeds in one of three ways: check, exchange
to another Vanguard fund, or Fund Express redemption.
- --------------------------------------------------------------------------------
CHECK REDEMPTIONS
Normally, Vanguard will mail your check within two business days of a
redemption.
- --------------------------------------------------------------------------------
<PAGE>
39
EXCHANGE REDEMPTIONS
As described above, an exchange involves using the proceeds of your redemption
to purchase shares of another Vanguard fund.
- --------------------------------------------------------------------------------
FUND EXPRESS REDEMPTIONS
Vanguard will electronically transfer funds to your pre-linked checking or
savings account.
- --------------------------------------------------------------------------------
FOR OUR MUTUAL PROTECTION
For your best interests and ours, Vanguard applies these additional requirements
to redemptions:
REQUEST IN "GOOD ORDER"
All redemption requests must be received by Vanguard in "good order." This means
that your request must include:
- - The Fund name and account number.
- - The amount of the transaction (in dollars or shares).
- - Signatures of all owners exactly as registered on the account (for mail
requests).
- - Signature guarantees (if required).*
- - Any supporting legal documentation that may be required.
- - Any outstanding certificates representing shares to be redeemed.
*For instance, a signature guarantee must be provided by all registered account
shareholders when redemption proceeds are to be sent to a different person or
address. A signature guarantee can be obtained from most commercial and savings
banks, credit unions, trust companies, or member firms of a U.S. stock
exchange.
TRANSACTIONS ARE PROCESSED AT THE NEXT-DETERMINED SHARE PRICE AFTER VANGUARD HAS
RECEIVED ALL REQUIRED INFORMATION.
- --------------------------------------------------------------------------------
LIMITS ON ACCOUNT ACTIVITY
Because excessive account transactions can disrupt the management of a Fund and
increase the Fund's costs for all shareholders, Vanguard limits account activity
as follows:
- - You may make no more than TWO SUBSTANTIVE "ROUND TRIPS" THROUGH A FUND
during any 12-month period.
- - Your round trips through a Fund must be at least 30 days apart.
- - A Fund may refuse a share purchase at any time, for any reason.
- - Vanguard may revoke an investor's telephone exchange privilege at any time,
for any reason.
A "round trip" is a redemption from a Fund followed by a purchase back into
the Fund. Also a "round trip" covers transactions accomplished by any
combination of methods, including transactions conducted by check, wire, or
exchange to/from another Vanguard fund. "Substantive" means a dollar amount that
Vanguard determines, in its sole discretion, could adversely affect the
management of a Fund.
- --------------------------------------------------------------------------------
RETURN YOUR SHARE CERTIFICATES
Any portion of your account represented by share certificates cannot be redeemed
until you return the certificates to Vanguard. Certificates must be returned
(unsigned), along with a letter requesting the sale or exchange you wish to
process, via certified mail to:
The Vanguard Group
455 Devon Park Drive
Wayne, PA 19087-1815
<PAGE>
40
- --------------------------------------------------------------------------------
ALL TRADES ARE FINAL
Vanguard will not cancel any transaction request (including any purchase or
redemption) that we believe to be authentic once the request has been initiated
and a confirmation number assigned.
- --------------------------------------------------------------------------------
UNCASHED CHECKS
Please cash your distribution or redemption checks promptly. Vanguard will not
pay interest on uncashed checks.
- --------------------------------------------------------------------------------
TRANSFERRING REGISTRATION
You can transfer the registration of your Fund shares to another owner by
completing a transfer form and sending it to Vanguard.
First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 1110 455 Devon Park Drive
Valley Forge, PA 19482-1110 Wayne, PA 19087-1815
For clients of Vanguard's Institutional Division . . .
First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 2900 455 Devon Park Drive
Valley Forge, PA 19482-2900 Wayne, PA 19087-1815
- --------------------------------------------------------------------------------
FUND AND ACCOUNT UPDATES
STATEMENTS AND REPORTS
We will send you account and tax statements to help you keep track of your Fund
account throughout the year as well as when you are preparing your income tax
returns.
In addition, you will receive financial reports about your Fund twice a
year. These comprehensive reports include an assessment of the Fund's
performance (and a comparison to its industry benchmark), an overview of the
financial markets, a report from the adviser, and the Fund's financial
statements which include a listing of the Fund's holdings.
To keep each Fund's costs as low as possible (so that you and other
shareholders can keep more of the Fund's investment earnings), Vanguard attempts
to eliminate duplicate mailings to the same address. When two or more Fund
shareholders have the same last name and address, we send just one Fund report
to that address--instead of mailing separate reports to each shareholder. If you
want us to send separate reports, notify our Client Services Department at
1-800-662-2739.
- --------------------------------------------------------------------------------
CONFIRMATION STATEMENT
Sent each time you buy, sell, or exchange shares; confirms the trade date and
the amount of your transaction.
- --------------------------------------------------------------------------------
PORTFOLIO SUMMARY [BOOK ICON]
Mailed quarterly for most accounts; shows the market value of your account at
the close of the statement period, as well as distributions, purchases, sales,
and exchanges for the current calendar year.
<PAGE>
41
- --------------------------------------------------------------------------------
FUND FINANCIAL REPORTS
Mailed in February and August for these Funds.
- --------------------------------------------------------------------------------
TAX STATEMENTS
Generally mailed in January; report previous year's dividend and capital gains
distributions, proceeds from the sale of shares, and distributions from IRAs or
other retirement accounts.
- --------------------------------------------------------------------------------
AVERAGE COST REVIEW STATEMENT [BOOK ICON]
Issued quarterly for most taxable accounts (accompanies your Portfolio Summary);
shows the average cost of shares that you redeemed during the calendar year,
using only the average cost single category method.
- --------------------------------------------------------------------------------
<PAGE>
(THIS PAGE INTENTIONALLY LEFT BLANK.)
<PAGE>
(THIS PAGE INTENTIONALLY LEFT BLANK.)
<PAGE>
(THIS PAGE INTENTIONALLY LEFT BLANK.)
<PAGE>
GLOSSARY OF INVESTMENT TERMS
ACTIVE MANAGEMENT
An investment approach that seeks to exceed the average returns of the financial
markets. Active managers rely on research, market forecasts, and their own
judgment and experience in selecting securities to buy and sell.
CAPITAL GAINS DISTRIBUTION
Payment to mutual fund shareholders of gains realized on securities that a fund
has sold at a profit, minus any realized losses.
CASH RESERVES
Cash deposits, short-term bank deposits, and money market instruments which
include U.S. Treasury bills, bank certificates of deposit (CDs), repurchase
agreements, commercial paper, and banker's acceptances.
COMMON STOCK
A security representing ownership rights in a corporation. A stockholder is
entitled to share in the company's profits, some of which may be paid out as
dividends.
COUNTRY RISK
The chance that domestic events--such as political upheaval, financial troubles,
or a natural disaster--will weaken a country's securities markets.
CURRENCY RISK
The chance that a foreign investment will decrease in value because of
unfavorable changes in currency exchange rates.
DIVIDEND INCOME
Payment to shareholders of income from interest or dividends generated by a
fund's investments.
EXPENSE RATIO
The percentage of a fund's average net assets used to pay its expenses. The
expense ratio includes management fees, administrative fees, and any 12b-1
distribution fees.
INDEX
An unmanaged group of securities whose overall performance is used as a standard
to measure investment performance.
INTERNATIONAL STOCK FUND
A mutual fund that invests in the stocks of companies located outside the United
States.
INVESTMENT ADVISER
An organization that makes the day-to-day decisions regarding a fund's
investments.
MUTUAL FUND
An investment company that pools the money of many people and invests it in a
variety of securities in an effort to achieve a specific objective over time.
NET ASSET VALUE (NAV)
The market value of a mutual fund's total assets, minus liabilities, divided by
the number of shares outstanding. The value of a single share is called its
share value or share price.
PASSIVE MANAGEMENT
A low-cost investment strategy in which a mutual fund attempts to match--rather
than outperform--a particular stock or bond market index. Also known as
indexing.
PRINCIPAL
The amount of money you put into an investment.
TOTAL RETURN
A percentage change, over a specified time period, in a mutual fund's net asset
value, with the ending net asset value adjusted to account for the reinvestment
of all distributions of dividends and capital gains.
VOLATILITY
The fluctuations in value of a mutual fund or other security. The greater a
fund's volatility, the wider the fluctuations between its high and low prices.
YIELD
Income (interest or dividends) earned by an investment, expressed as a
percentage of the investment's price.
<PAGE>
[LOGO]
[THE VANGUARD GROUP(R) LOGO]
Post Office Box 2600
Valley Forge, PA 19482-2600
FOR MORE INFORMATION
If you'd like more information about
Vanguard International Stock Index
Funds, the following documents are
available free upon request:
ANNUAL/SEMIANNUAL REPORT TO
SHAREHOLDERS
Additional information about the
Funds' investments is available in
the Funds' annual and semiannual
reports to shareholders.
STATEMENT OF ADDITIONAL
INFORMATION (SAI)
The SAI provides more detailed
information about the Funds (there
is a separate SAI for Vanguard
Developed Markets and Total
International Stock Index Funds,
which are legally a part of Vanguard
STAR Funds).
The current annual and semiannual
reports and each SAI are
incorporated by reference into
(and are thus legally a part of)
this prospectus.
To receive a free copy of the latest
annual or semiannual report or the
SAI, or to request additional
information about the Funds or other
Vanguard funds, please contact us
as follows:
THE VANGUARD GROUP
INVESTOR INFORMATION
DEPARTMENT
P.O. BOX 2600
VALLEY FORGE, PA
19482-2600
TELEPHONE:
1-800-662-7447 (SHIP)
TEXT TELEPHONE:
1-800-952-3335
WORLD WIDE WEB:
WWW.VANGUARD.COM
If you are a current Fund shareholder
and would like information about
your account, account transactions,
and/or account statements,
please call:
CLIENT SERVICES DEPARTMENT
TELEPHONE:
1-800-662-2739 (CREW)
TEXT TELEPHONE:
1-800-749-7273
INFORMATION PROVIDED BY THE
SECURITIES AND EXCHANGE
COMMISSION (SEC)
You can review and copy
information about the Funds
(including the SAI) at the SEC's
Public Reference Room in
Washington, DC. To find out more
about this public service, call the
SEC at 1-202-942-8090. Reports and
other information about the Funds
are also available on the SEC's
website (www.sec.gov), or you can
receive copies of this information,
for a fee, by electronic request at
the following e-mail address:
[email protected], or by writing
the Public Reference Section,
Securities and Exchange
Commission, Washington, DC
20549-0102.
Funds' Investment Company Act
file number: 811-5972 (811-3919)
for Developed Markets and Total
International Stock Index Funds)
(C) 2000 The Vanguard Group, Inc.
All rights reserved.
Vanguard Marketing Corporation,
Distributor.
P072N-04/28/2000
<PAGE>
VANGUARD(R)
INTERNATIONAL STOCK
INDEX FUNDS
Participant Prospectus
April 28, 2000
This prospectus contains
financial data for the
Funds through the
fiscal year ended
December 31, 1999.
VANGUARD EUROPEAN
STOCK INDEX FUND
VANGUARD PACIFIC STOCK
INDEX FUND
VANGUARD EMERGING
MARKETS STOCK INDEX
FUND
VANGUARD DEVELOPED
MARKETS INDEX FUND
VANGUARD TOTAL
INTERNATIONAL STOCK
INDEX FUND
[MEMBERS OF THE VANGUARD GROUP(R) LOGO]
<PAGE>
VANGUARD INTERNATIONAL STOCK INDEX FUNDS
Participant Prospectus
April 28, 2000
A Group of International Stock Index Mutual Funds
- --------------------------------------------------------------------------------
CONTENTS
- --------------------------------------------------------------------------------
1 AN INTRODUCTION TO INDEX FUNDS
2 FUND PROFILES
2 Vanguard European Stock Index Fund
5 Vanguard Pacific Stock Index Fund
8 Vanguard Emerging Markets Stock Index Fund
11 Vanguard Developed Markets Index Fund
13 Vanguard Total International Stock Index Fund
16 MORE ON THE FUNDS
23 THE FUNDS AND VANGUARD
24 INVESTMENT ADVISER
25 DIVIDENDS, CAPITAL GAINS, AND TAXES
25 SHARE PRICE
26 FINANCIAL HIGHLIGHTS
29 INVESTING WITH VANGUARD
30 ACCESSING FUND INFORMATION BY COMPUTER
GLOSSARY (inside back cover)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
WHY READING THIS PROSPECTUS IS IMPORTANT
This prospectus explains the objective, risks, and strategies of each of the
Vanguard International Stock Index Funds. To highlight terms and concepts
important to mutual fund investors, we have provided "Plain Talk(R)"
explanations along the way. Reading the prospectus will help you to decide which
Fund, if any, is the right investment for you. We suggest that you keep it for
future reference.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
IMPORTANT NOTE
The Vanguard European, Pacific, and Emerging Markets Stock Index Funds each
offer two separate classes of shares: Investor and Institutional. This
prospectus offers the Funds' Investor Shares to participants in
employer-sponsored retirement or savings plans. Please call Vanguard to obtain
separate prospectuses that offer:
- - Investor Shares for private investors ($3,000 minimum)--1-800-662-7447
- - Institutional Shares for very large investors ($10 million
minimum)--1-800-523-1036
The Funds' separate share classes have different expenses; as a result,
their investment performances will vary. UNLESS OTHERWISE NOTED, ALL REFERENCES
IN THIS PROSPECTUS TO FEES, EXPENSES, AND INVESTMENT PERFORMANCE RELATE
SPECIFICALLY TO INVESTOR SHARES.
- --------------------------------------------------------------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE>
1
AN INTRODUCTION TO INDEX FUNDS
WHAT IS INDEXING?
An index is an unmanaged group of securities whose overall performance is used
as a standard to measure investment performance. An index (or "passively
managed") fund tries to track, as closely as possible, the performance of an
established target index. The fund does this by holding all, or a representative
sample, of the securities that comprise the index. Keep in mind that an index
fund has operating expenses and transaction costs, while a market index does
not. Therefore, an index fund, while expected to track its target index closely,
typically will be unable to match the performance of the index exactly.
Stock index funds may seek to track indexes that hold a certain type of
stock--such as growth or value, small-cap or large-cap, or those from just one
industry--or they may seek to track indexes that consist of a broader range of
stocks--for example, the entire foreign stock market.
Index funds are not actively managed by investment advisers who buy and
sell securities based on research and analysis in an attempt to outperform a
particular benchmark or the market as a whole. Rather, index funds simply
attempt to mirror what the target index does, for better or worse.
WHAT INDEX FUNDS DOES VANGUARD OFFER?
Vanguard offers a variety of stock (both U.S. and international), bond, and
balanced index funds. This prospectus provides information about Vanguard's
International Stock Index Funds. There are five such Funds offered in this
prospectus, each of which seeks to track a different segment of the
international stock market:
- --------------------------------------------------------------------------------
FUND SEEKS TO TRACK
- --------------------------------------------------------------------------------
Vanguard European Stock Index Fund European stock markets
Vanguard Pacific Stock Index Fund Australian and Far East
stock markets
Vanguard Emerging Markets Stock 13 emerging stock markets in
Index Fund Europe, Asia, Africa, and
Latin America
Vanguard Developed Markets Index Fund European, Australian, and Far
East stock markets
Vanguard Total International Stock European, Australian, Far East,
Index Fund and 13 emerging stock
markets in Europe, Asia,
Africa, and Latin America
- --------------------------------------------------------------------------------
This prospectus contains profiles that summarize key features of each Fund.
Following the profiles, there is important additional information about the
Funds.
<PAGE>
2
FUND PROFILE--
VANGUARD(R) EUROPEAN STOCK INDEX FUND
The following profile summarizes key features of Vanguard European Stock Index
Fund.
INVESTMENT OBJECTIVE
The Fund seeks to match the performance of the Morgan Stanley Capital
International (MSCI) Europe Index.
INVESTMENT STRATEGIES
The Fund employs a "passively managed"--or index--investment approach, by
investing all or substantially all of its assets in a representative sample of
the common stocks included in the MSCI Europe Index. The MSCI Europe Index is
made up of approximately 550 common stocks of companies located in 15 European
countries--mostly in the United Kingdom, France, Germany, and the Netherlands,
(which comprised 29%, 15%, 14%, and 8% of the Index's market capitalization,
respectively, as of March 31, 2000), as well as in Austria, Belgium, Denmark,
Finland, Ireland, Italy, Norway, Portugal, Spain, Sweden, and Switzerland. For
more information about passive management, see "Indexing Methods" under MORE ON
THE FUNDS.
PRIMARY RISKS
THE FUND'S TOTAL RETURN, LIKE STOCK PRICES GENERALLY, WILL FLUCTUATE WITHIN A
WIDE RANGE, SO AN INVESTOR COULD LOSE MONEY OVER SHORT OR EVEN LONG PERIODS. The
Fund is also subject to:
- - Country risk, which is the chance that a country's economy will be hurt by
political troubles, financial problems, or natural disasters. The Index's,
and therefore the Fund's, heavy exposure to four countries (United Kingdom,
France, Germany, and the Netherlands) involves a higher degree of country
risk than that of more geographically diversified international funds.
- - Regional risk, which is the chance that an entire region--namely
Europe--will be hurt by political troubles, financial problems, or natural
disasters.
- - Currency risk, which is the chance that returns will be hurt by a rise in
the value of the U.S. dollar versus foreign currencies.
- - Investment style risk, which is the chance that returns from foreign stocks
will trail returns from other asset classes or the overall stock market.
PERFORMANCE/RISK INFORMATION
The bar chart and table below provide an indication of the risk of investing in
the Fund. The bar chart shows the Fund's performance in each calendar year since
inception. The table shows how the Fund's average annual total returns for one
and five calendar years and since inception compare with those of a broad-based
securities market index. Keep in mind that the Fund's past performance does not
indicate how it will perform in the future.
<PAGE>
3
----------------------------------------------------
ANNUAL TOTAL RETURNS
----------------------------------------------------
1991 12.40%
1992 -3.32%
1993 29.13%
1994 1.88%
1995 22.28%
1996 21.26%
1997 24.23%
1998 28.86%
1999 16.62%
----------------------------------------------------
Return figures do not reflect the transaction fee
imposed on purchases prior to April 1, 2000. If the
fee was reflected, returns would be less than those
shown.
----------------------------------------------------
During the period shown in the bar chart, the highest return for a calendar
quarter was 20.37% (quarter ended March 31, 1998) and the lowest return for a
quarter was -14.41% (quarter ended September 30, 1998).
-------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS FOR YEARS ENDED DECEMBER 31, 1999
-------------------------------------------------------------------------
1 YEAR 5 YEARS SINCE INCEPTION*
-------------------------------------------------------------------------
Vanguard European Stock
Index Fund** 16.62% 22.58% 14.61%
MSCI Europe Index 15.77 22.27 14.78
-------------------------------------------------------------------------
*June 18, 1990.
**Return figures do not reflect the transaction fee imposed on purchases
prior to April 1, 2000.
-------------------------------------------------------------------------
FEES AND EXPENSES
The following table describes the fees and expenses you may pay if you buy and
hold shares of the Fund. The expenses shown under Annual Fund Operating Expenses
are based upon those incurred in the fiscal year ended December 31, 1999.
SHAREHOLDER FEES (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None
Transaction Fee on Purchases: None
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fee: None
Exchange Fee: None
ANNUAL FUND OPERATING EXPENSES (expenses deducted from the Fund's assets)
Management Expenses: 0.22%
12b-1 Distribution Fee: None
Other Expenses: 0.07%
TOTAL ANNUAL FUND OPERATING EXPENSES: 0.29%
<PAGE>
4
The following example is intended to help you compare the cost of investing
in the Fund with the cost of investing in other mutual funds. It illustrates the
hypothetical expenses that you would incur over various periods if you invest
$10,000 in the Fund. This example assumes that the Fund provides a return of 5%
a year, and that operating expenses remain the same. The results apply whether
or not you redeem your investment at the end of each period.
- -------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- -------------------------------------------------
$30 $93 $163 $368
- -------------------------------------------------
THIS EXAMPLE SHOULD NOT BE CONSIDERED TO REPRESENT ACTUAL EXPENSES OR
PERFORMANCE FROM THE PAST OR FOR THE FUTURE. ACTUAL FUTURE EXPENSES MAY BE
HIGHER OR LOWER THAN THOSE SHOWN.
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION
DIVIDENDS AND CAPITAL GAINS NEWSPAPER ABBREVIATION
Distributed annually in December Europe
INVESTMENT ADVISER VANGUARD FUND NUMBER
The Vanguard Group, Valley Forge, 079
Pa., since inception
CUSIP NUMBER
INCEPTION DATE 922042205
June 18, 1990
NET ASSETS AS OF DECEMBER 31, 1999 TICKER SYMBOL
$6.1 billion VEURX
- --------------------------------------------------------------------------------
<PAGE>
5
FUND PROFILE--
VANGUARD(R) PACIFIC STOCK INDEX FUND
The following profile summarizes key features of Vanguard Pacific Stock Index
Fund.
INVESTMENT OBJECTIVE
The Fund seeks to match the performance of the MSCI Pacific Free Index.*
*The designation "Free" in the name of the Index refers to the securities that
the Index tracks. Some countries restrict foreign investment in certain
industries, so only stocks that can be bought freely by a fund are tracked.
INVESTMENT STRATEGIES
The Fund employs a "passively managed"--or index--investment approach, by
investing all or substantially all of its assets in a representative sample of
the common stocks included in the MSCI Pacific Free Index. The MSCI Pacific Free
Index consists of approximately 420 common stocks of companies located in Japan
(which comprised 82% of the Index's market capitalization as of March 31, 2000),
Australia, Hong Kong, New Zealand, and Singapore. For more information about
passive management, see "Indexing Methods" under MORE ON THE FUNDS.
PRIMARY RISKS
THE FUND'S TOTAL RETURN, LIKE STOCK PRICES GENERALLY, WILL FLUCTUATE WITHIN A
WIDE RANGE, SO AN INVESTOR COULD LOSE MONEY OVER SHORT OR EVEN LONG PERIODS. The
Fund is also subject to:
- - Country risk, which is the chance that a country's economy will be hurt by
political troubles, financial problems, or natural disasters. The Index's,
and therefore the Fund's, heavy exposure to Japan involves a higher degree
of country risk than that of more geographically diversified international
funds.
- - Regional risk, which is the chance that an entire region--namely the
Pacific region--will be hurt by political troubles, financial problems, or
natural disasters.
- - Currency risk, which is the chance that returns will be hurt by a rise in
the value of the U.S. dollar versus foreign currencies.
- - Investment style risk, which is the chance that returns from foreign stocks
will trail returns from other asset classes or the overall stock market.
PERFORMANCE/RISK INFORMATION
The bar chart and table below provide an indication of the risk of investing in
the Fund. The bar chart shows the Fund's performance in each calendar year since
inception. The table shows how the Fund's average annual total returns for one
and five years and since inception compare with those of a broad-based
securities market index. Keep in mind that the Fund's past performance does not
indicate how it will perform in the future.
<PAGE>
6
----------------------------------------------------
ANNUAL TOTAL RETURNS
----------------------------------------------------
1991 10.65%
1992 -18.17%
1993 35.46%
1994 13.04%
1995 2.75%
1996 -7.82%
1997 -25.67%
1998 2.41%
1999 57.05%
----------------------------------------------------
Return figures do not reflect the transaction fee
imposed on purchases prior to April 1, 2000. If the
fee was reflected, returns would be less than those
shown.
----------------------------------------------------
During the period shown in the bar chart, the highest return for a calendar
quarter was 26.50% (quarter ended December 31, 1998) and the lowest return for a
quarter was -20.69% (quarter ended December 31, 1997).
-------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS FOR YEARS ENDED DECEMBER 31, 1999
-------------------------------------------------------------------------
1 YEAR 5 YEARS SINCE INCEPTION*
-------------------------------------------------------------------------
Vanguard Pacific Stock
Index Fund** 57.05% 2.52% 3.20%
MSCI Pacific Free Index 56.38 2.39 3.08
-------------------------------------------------------------------------
*June 18, 1990.
**Return figures do not reflect the transaction fee imposed on purchases
prior to April 1, 2000.
-------------------------------------------------------------------------
FEES AND EXPENSES
The following table describes the fees and expenses you may pay if you buy and
hold shares of the Fund. The expenses shown under Annual Fund Operating Expenses
are based upon those incurred in the fiscal year ended December 31, 1999.
SHAREHOLDER FEES (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None
Transaction Fee on Purchases: None
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fee: None
Exchange Fee: None
ANNUAL FUND OPERATING EXPENSES (expenses deducted from the Fund's assets)
Management Expenses: 0.31%
12b-1 Distribution Fee: None
Other Expenses: 0.06%
TOTAL ANNUAL FUND OPERATING EXPENSES: 0.37%
<PAGE>
7
The following example is intended to help you compare the cost of investing
in the Fund with the cost of investing in other mutual funds. It illustrates the
hypothetical expenses that you would incur over various periods if you invest
$10,000 in the Fund. This example assumes that the Fund provides a return of 5%
a year, and that operating expenses remain the same. The results apply whether
or not you redeem your investment at the end of each period.
- -------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- -------------------------------------------------
$38 $119 $208 $468
- -------------------------------------------------
THIS EXAMPLE SHOULD NOT BE CONSIDERED TO REPRESENT ACTUAL EXPENSES OR
PERFORMANCE FROM THE PAST OR FOR THE FUTURE. ACTUAL FUTURE EXPENSES MAY BE
HIGHER OR LOWER THAN THOSE SHOWN.
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION
DIVIDENDS AND CAPITAL GAINS NEWSPAPER ABBREVIATION
Distributed annually in December Pacific
INVESTMENT ADVISER VANGUARD FUND NUMBER
The Vanguard Group, Valley Forge, 072
Pa., since inception
INCEPTION DATE CUSIP NUMBER
June 18, 1990 922042106
NET ASSETS AS OF DECEMBER 31, 1999 TICKER SYMBOL
$2.5 billion VPACX
- --------------------------------------------------------------------------------
<PAGE>
8
FUND PROFILE--
VANGUARD(R) EMERGING MARKETS STOCK INDEX FUND
The following profile summarizes key features of Vanguard Emerging Markets Stock
Index Fund.
INVESTMENT OBJECTIVE
The Fund seeks to match the performance of the Select Emerging Markets Free
Index.*
*The designation "Free" in the name of the Index refers to the securities that
the Index tracks. Some countries restrict foreign investment in certain
industries, so only stocks that can be bought freely are tracked.
INVESTMENT STRATEGIES
The Fund employs a "passively managed"--or index--investment approach, by
investing all or substantially all of its assets in a representative sample of
the common stocks included in the Select Emerging Markets Free Index. The Select
Emerging Markets Free Index includes approximately 500 common stocks of
companies located in emerging markets around the world. As of March 31, 2000,
the largest markets covered in the Index were Mexico, Brazil, and South Africa
(which comprised 16%, 14%, and 13% of the Index's market capitalization,
respectively). Other countries represented in the Index included Argentina, the
Czech Republic, Greece, Hungary, Indonesia, Israel, the Philippines, Poland,
Thailand, Turkey, Hong Kong, and Singapore. MSCI administers the Select Index
exclusively for Vanguard. For more information about passive management, see
"Indexing Methods" under MORE ON THE FUNDS.
PRIMARY RISKS
THE FUND'S TOTAL RETURN, LIKE STOCK PRICES GENERALLY, WILL FLUCTUATE WITHIN A
WIDE RANGE, SO AN INVESTOR COULD LOSE MONEY OVER SHORT OR EVEN LONG PERIODS. The
Fund is also subject to:
- - Country risk, which is the chance that a country's economy will be hurt by
political troubles, financial problems, or natural disasters. Country risk
is especially high for funds that focus on stocks in emerging markets. The
Index's, and therefore the Fund's, heavy exposure to Mexico, Brazil, and
South Africa involves a higher degree of country risk than that of more
geographically diversified international funds.
- - Currency risk, which is the chance that returns will be hurt by a rise in
the value of the U.S. dollar versus foreign currencies.
- - Investment style risk, which is the chance that returns from foreign stocks
will trail returns from other asset classes or the overall stock market.
PERFORMANCE/RISK INFORMATION
The bar chart and table below provide an indication of the risk of investing in
the Fund. The bar chart shows the Fund's performance in each calendar year since
inception. The table shows how the Fund's average annual total returns for one
and five calendar years and since inception compare with those of both a
broad-based securities market index and the Fund's target index. Keep in mind
that the Fund's past performance does not indicate how it will perform in the
future.
<PAGE>
9
----------------------------------------------------
ANNUAL TOTAL RETURNS
----------------------------------------------------
1995 0.56%
1996 15.83%
1997 -16.82%
1998 -18.12%
1999 61.57%
----------------------------------------------------
Return figures do not reflect the transaction fee
imposed on purchases and redemptions. If these
amounts were reflected, returns would be less than
those shown.
----------------------------------------------------
During the period shown in the bar chart, the highest return for a calendar
quarter was 28.32% (quarter ended December 31, 1999) and the lowest return for a
quarter was -21.52% (quarter ended June 30, 1998).
-------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS FOR YEARS ENDED DECEMBER 31, 1999
-------------------------------------------------------------------------
1 YEAR 5 YEARS SINCE INCEPTION*
-------------------------------------------------------------------------
Vanguard Emerging Markets
Stock Index Fund** 59.96% 4.88% 6.03%
MSCI Emerging Markets
Free Index 66.40 2.00 3.69
Select Emerging Markets
Free Index+ 60.86 4.81 4.93
-------------------------------------------------------------------------
*May 4, 1994.
**Return figures reflect the 0.5% transaction fee imposed on purchases
and redemptions.
+The Select Emerging Markets Free Index is administered by MSCI
exclusively by Vanguard.
-------------------------------------------------------------------------
FEES AND EXPENSES
The following table describes the fees and expenses you may pay if you buy and
hold shares of the Fund. The expenses shown under Annual Fund Operating Expenses
are based upon those incurred in the fiscal year ended December 31, 1999.
SHAREHOLDER FEES (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None
Transaction Fee on Purchases: 0.5%*
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fee: 0.5%**
Exchange Fee: None
ANNUAL FUND OPERATING EXPENSES (expenses deducted from the Fund's assets)
Management Expenses: 0.32%
12b-1 Distribution Fee: None
Other Expenses: 0.26%
TOTAL ANNUAL FUND OPERATING EXPENSES: 0.58%
*The transaction fee on purchases is deducted from all purchases
(including exchanges from other Vanguard funds) but not from
reinvested dividends and capital gains.
**The redemption fee applies to all redemptions (sales or exchanges);
it is deducted from redemption proceeds, and retained by the Fund.
<PAGE>
10
The following example is intended to help you compare the cost of investing
in the Fund with the cost of investing in other mutual funds. It illustrates the
hypothetical expenses that you would incur over various periods if you invest
$10,000 in the Fund. This example assumes that the Fund provides a return of 5%
a year, that operating expenses remain the same, and that you redeem all your
shares at the end of each period.
- -------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- -------------------------------------------------
$161 $292 $434 $849
- -------------------------------------------------
You would pay the following expenses if you did not redeem your shares (the
difference being that the Fund's 0.5% redemption fee would not apply to any of
the periods below, as it would to those above):
- -------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- -------------------------------------------------
$109 $235 $372 $772
- -------------------------------------------------
THESE EXAMPLES SHOULD NOT BE CONSIDERED TO REPRESENT ACTUAL EXPENSES OR
PERFORMANCE FROM THE PAST OR FOR THE FUTURE. ACTUAL FUTURE EXPENSES MAY BE
HIGHER OR LOWER THAN THOSE SHOWN.
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION
DIVIDENDS AND CAPITAL GAINS NEWSPAPER ABBREVIATION
Distributed annually in December EmerMkt
INVESTMENT ADVISER VANGUARD FUND NUMBER
The Vanguard Group, Valley Forge, 533
Pa., since inception
INCEPTION DATE CUSIP NUMBER
May 4, 1994 922042304
NET ASSETS AS OF DECEMBER 31, 1999 TICKER SYMBOL
$1.1 billion VEIEX
- --------------------------------------------------------------------------------
<PAGE>
11
FUND PROFILE--
VANGUARD(R) DEVELOPED MARKETS INDEX FUND
The following profile summarizes key features of Vanguard Developed Markets
Index Fund.
INVESTMENT OBJECTIVE
The Fund seeks to track the performance of the MSCI Europe, Australasia, Far
East (EAFE) Index.
INVESTMENT STRATEGIES
The Fund employs a "passively managed"--or index--investment approach. The Fund
seeks to track the performance of the MSCI EAFE Index by investing in two other
Vanguard funds--the European Stock Index Fund and the Pacific Stock Index Fund.
These other Vanguard funds have the respective objectives of tracking the MSCI
Europe Index and the MSCI Pacific Free Index, which together comprise the MSCI
EAFE Index. The Fund allocates all or substantially all of its assets between
the European Stock Index Fund and the Pacific Stock Index Fund based on the
market capitalization of European and Pacific stocks in the MSCI EAFE Index. The
MSCI EAFE Index includes approximately 1,000 common stocks of companies located
in Europe, Australia, Asia, and the Far East. For more information about passive
management, see "Indexing Methods" under MORE ON THE FUNDS.
PRIMARY RISKS
THE FUND'S TOTAL RETURN, LIKE STOCK PRICES GENERALLY, WILL FLUCTUATE WITHIN A
WIDE RANGE, SO AN INVESTOR COULD LOSE MONEY OVER SHORT OR EVEN LONG PERIODS. The
Fund is also subject to:
- - Country risk, which is the chance that a country's economy will be hurt by
political troubles, financial problems, or natural disasters.
- - Regional risk, which is the chance that an entire region--either Europe or
the Far East--will be hurt by political troubles, financial problems, or
natural disasters.
- - Currency risk, which is the chance that returns will be hurt by a rise in
the value of the U.S. dollar versus foreign currencies.
- - Investment style risk, which is the chance that returns from foreign stocks
will trail returns from other asset classes or the overall stock market.
PERFORMANCE/RISK INFORMATION
The Fund began operations on May 5, 2000, so performance information (including
annual total returns and average annual total returns) for a full calendar year
is not yet available.
<PAGE>
12
FEES AND EXPENSES
The following table describes the fees and expenses you may pay if you buy and
hold shares of the Fund. The expenses shown under Annual Fund Operating Expenses
are based on estimated amounts for the current fiscal year.
SHAREHOLDER FEES (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None
Transaction Fee on Purchases: None
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fee: None
Exchange Fee: None
ANNUAL FUND OPERATING EXPENSES (expenses deducted from the Fund's assets)
Indirect Operating Expenses: +
+Although Developed Markets Index Fund is not expected to incur any net
expenses directly, the Fund's shareholders indirectly bear the expenses
of the underlying Vanguard funds in which the Fund invests. See THE
FUNDS AND VANGUARD. It is estimated that the Fund's indirect expense
ratio for its first fiscal year, based on its underlying investments,
will be 0.30%.
The following example is intended to help you compare the cost of investing
in the Fund with the cost of investing in other mutual funds. It illustrates the
hypothetical expenses that you would incur over various periods if you invest
$10,000 in the Fund. This example assumes that the Fund provides a return of 5%
a year, and that operating expenses remain the same. The results apply whether
or not you redeem your investment at the end of each period.
- ------------------------
1 YEAR 3 YEARS
- ------------------------
$35 $110
- ------------------------
THIS EXAMPLE SHOULD NOT BE CONSIDERED TO REPRESENT ACTUAL EXPENSES OR
PERFORMANCE FROM THE PAST OR FOR THE FUTURE. ACTUAL FUTURE EXPENSES MAY BE
HIGHER OR LOWER THAN THOSE SHOWN.
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION
DIVIDENDS AND CAPITAL GAINS NEWSPAPER ABBREVIATION
Distributed annually in December DevMkt
INVESTMENT ADVISER VANGUARD FUND NUMBER
The Vanguard Group, Valley Forge, 227
Pa., since inception
INCEPTION DATE CUSIP NUMBER
May 5, 2000 921909701
- --------------------------------------------------------------------------------
<PAGE>
13
FUND PROFILE--
VANGUARD(R) TOTAL INTERNATIONAL STOCK INDEX FUND
The following profile summarizes key features of Vanguard Total International
Stock Index Fund.
INVESTMENT OBJECTIVE
The Fund seeks to match the performance of the Total International Composite
Index. The Total International Composite Index is a combination of the indexes
tracked by the European, Pacific, and Emerging Markets Stock Index Funds.
INVESTMENT STRATEGIES
The Fund seeks to track the performance of the Total International Composite
Index by investing in three other Vanguard funds--the European Stock Index Fund,
the Pacific Stock Index Fund, and the Emerging Markets Stock Index Fund. These
other Vanguard funds have the respective objectives of tracking the MSCI Europe
Index, the MSCI Pacific Free Index, and the Select Emerging Markets Free Index,
which together comprise the Total International Composite Index. The Fund
allocates all or substantially all of its assets between the European Stock
Index Fund, the Pacific Stock Index Fund, and the Emerging Markets Stock Index
Fund based on the market capitalization of European, Pacific, and emerging
markets stocks in the Total International Composite Index. The Index is a market
capitalization weighted index that combines the MSCI Europe Index, the MSCI
Pacific Free Index, and the Select Emerging Markets Free Index. MSCI administers
the Index exclusively for Vanguard. For more information about passive
management, see "Indexing Methods" under MORE ON THE FUNDS.
PRIMARY RISKS
THE FUND'S TOTAL RETURN, LIKE STOCK PRICES GENERALLY, WILL FLUCTUATE WITHIN A
WIDE RANGE, SO AN INVESTOR COULD LOSE MONEY OVER SHORT OR EVEN LONG PERIODS. The
Fund is also subject to:
- - Country risk, which is the chance that a country's economy will be hurt by
political troubles, financial problems, or natural disasters.
- - Currency risk, which is the chance that returns will be hurt by a rise in
the value of the U.S. dollar versus foreign currencies.
- - Investment style risk, which is the chance that returns from foreign stocks
will trail returns from other asset classes or the overall stock market.
PERFORMANCE/RISK INFORMATION
The bar chart and table below provide an indication of the risk of investing in
the Fund. The bar chart shows the Fund's performance in each calendar year since
inception. The table shows how the Fund's average annual total returns for one
calendar year and since inception compare with those of both a broad-based
securities market index and the Fund's target index. Keep in mind that the
Fund's past performance does not indicate how it will perform in the future.
<PAGE>
14
----------------------------------------------------
ANNUAL TOTAL RETURNS
----------------------------------------------------
1997 -0.77%
1998 15.60%
1999 29.92%
----------------------------------------------------
Return figures do not reflect the transaction fee
imposed on purchases prior to April 1, 2000. If the
fee was reflected, returns would be less than those
shown.
----------------------------------------------------
During the period shown in the bar chart, the highest return for a calendar
quarter was 20.49% (quarter ended December 31, 1998) and the lowest return for a
quarter was -14.53% (quarter ended September 30, 1998).
-------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS FOR YEARS ENDED DECEMBER 31, 1999
-------------------------------------------------------------------------
1 YEAR SINCE INCEPTION*
-------------------------------------------------------------------------
Vanguard Total International
Stock Index Fund** 29.92% 11.64%
MSCI EAFE + Emerging Markets
Free Index 30.33 12.11
Total International Composite
Index+ 28.13 11.30
-------------------------------------------------------------------------
*April 29, 1996.
**Return figures do not reflect the transaction fee imposed on purchases
prior to April 1, 2000.
+Consists of the MSCI EAFE Index and the Select Emerging Markets Free
Index. This index is administered by MSCI exclusively for Vanguard.
-------------------------------------------------------------------------
FEES AND EXPENSES
The following table describes the fees and expenses you may pay if you buy and
hold shares of the Fund. The expenses shown under Annual Fund Operating Expenses
are based upon those incurred in the fiscal year ended December 31, 1999.
SHAREHOLDER FEES (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None
Transaction Fee on Purchases: None
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fee: None
Exchange Fee: None
ANNUAL FUND OPERATING EXPENSES (expenses deducted from the Fund's assets)
Indirect Operating Expenses: +
+Although Total International Stock Index Fund is not expected to incur
any net expenses directly, the Fund's shareholders indirectly bear the
expenses of the underlying Vanguard funds in which the Fund invests.
See THE FUNDS AND VANGUARD. The Fund's indirect expense ratio, based
on its underlying investments, was 0.34% as of December 31, 1999.
<PAGE>
15
The following example is intended to help you compare the cost of investing
in the Fund with the cost of investing in other mutual funds. It illustrates the
hypothetical expenses that you would incur over various periods if you invest
$10,000 in the Fund. This example assumes that the Fund provides a return of 5%
a year, and that operating expenses remain the same. The results apply whether
or not you redeem your investment at the end of each period.
- -------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- -------------------------------------------------
$35 $110 $193 $434
- -------------------------------------------------
THIS EXAMPLE SHOULD NOT BE CONSIDERED TO REPRESENT ACTUAL EXPENSES OR
PERFORMANCE FROM THE PAST OR FOR THE FUTURE. ACTUAL FUTURE EXPENSES MAY BE
HIGHER OR LOWER THAN THOSE SHOWN.
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION
DIVIDENDS AND CAPITAL GAINS NEWSPAPER ABBREVIATION
Distributed annually in December TotIntl
INVESTMENT ADVISER VANGUARD FUND NUMBER
The Vanguard Group, Valley Forge, 113
Pa., since inception
INCEPTION DATE CUSIP NUMBER
April 29, 1996 921909602
NET ASSETS AS OF DECEMBER 31, 1999 TICKER SYMBOL
$2.6 billion VGTSX
- --------------------------------------------------------------------------------
<PAGE>
16
MORE ON THE FUNDS
The following sections discuss other important features of Vanguard
International Stock Index Funds, including indexing methods, fund
characteristics, costs and market-timing, fund turnover, and other investment
policies and risks.
WHY INVEST IN INDEX FUNDS?
Index funds appeal to many investors for a number of reasons:
- - Diversification. Index funds generally invest in a diversified mix of
companies and industries.
- - Relative consistency. Index funds typically track the performance of
relevant market benchmarks more closely than comparable actively managed
funds do.
- - Low cost. Index funds do not have many of the expenses of an actively
managed fund--such as research--and keep trading activity, and thus
brokerage commissions, to a minimum.
- - Low realization of capital gains. Because an index fund typically sells
securities only to respond to redemption requests or to adjust the number
of shares it holds to reflect a change in its target index, the fund's
turnover rate--and thus its realization of capital gains--is usually very
low.
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
THE COSTS OF INVESTING
Costs are an important consideration in choosing a mutual fund. That's because
you, as a shareholder, pay the costs of operating a fund, plus any transaction
costs associated with the fund's buying and selling of securities. These costs
can erode a substantial portion of the gross income or capital appreciation a
fund achieves. Even seemingly small differences in expenses can, over time, have
a dramatic effect on a fund's performance.
- --------------------------------------------------------------------------------
INDEXING METHODS
Some index funds hold each stock found in their target indexes in about the
same proportions as represented in the indexes themselves.
Other index funds may use a different selection process. Because it would
be very expensive to buy all of the stocks held in certain indexes (the Select
Emerging Markets Free Index, for example, includes approximately 500 stocks),
funds tracking these larger indexes use a "sampling" technique. Using a
sophisticated computer program, these funds invest in stocks that will, in the
aggregate, recreate the key characteristics of their target indexes. For
instance, if 10% of the market capitalization of the MSCI Europe Index were
attributed to companies in Germany, Vanguard European Stock Index Fund would
invest about 10% of its assets in stocks of German issuers. Furthermore, the
Fund would construct a German portfolio whose size and industry weightings, as
well as average financial characteristics, approximated the German component of
the MSCI Europe Index. The European, Pacific, and Emerging Markets Stock Index
Funds each employ this sampling method of indexing.
While each Fund attempts to track the performance of its target index,
there is no guarantee that securities selected for the Fund will provide
investment performance exactly matching that of the index.
Yet another indexing approach is to invest in other index funds that seek
to track subsets of a target index. The Total International Stock Index Fund and
Developed Markets Index Fund both use this "fund of funds" approach, which can
be very cost-effective and efficient
<PAGE>
17
when starting an index fund from scratch. For example, the Developed Markets
Index Fund seeks to track the performance of the MSCI EAFE Index by investing in
two other Vanguard funds--the European Stock Index Fund and the Pacific Stock
Index Fund. These other Vanguard funds have the respective objectives of
tracking the MSCI Europe Index and the MSCI Pacific Free Index, which together
comprise the MSCI EAFE Index. The Fund allocates its assets between the European
Stock Index Fund and the Pacific Stock Index Fund based on the market
capitalization of European and Pacific stocks in the MSCI EAFE Index.
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
"FUND OF FUNDS"
The term "fund of funds" is used to describe a mutual fund that pursues its
objective by investing in other mutual funds rather than in individual stocks or
bonds. A fund of funds may charge for its own direct expenses, in addition to
bearing a proportionate share of the expenses charged by the underlying funds in
which it invests. Funds of funds are best suited for long-term investors.
- --------------------------------------------------------------------------------
To track their target indexes as closely as possible, the European and
Pacific Stock Index Funds attempt to remain fully invested in foreign stocks
included in their particular indexes. Each Fund intends to invest at least 95%
of its total assets in the stocks of its target index. The Emerging Markets
Stock Index Fund normally invests 95% of its total assets in stocks of its
target index, holding the remaining 5% in cash reserves to meet daily redemption
requests. The Total International Stock and Developed Markets Index Funds
normally hold 100% of their assets in shares of their underlying funds
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
THE RISKS OF INTERNATIONAL INVESTING
Because foreign stock markets operate differently from the U.S. market,
Americans investing abroad will encounter risks not typically associated with
U.S. companies. For instance, foreign companies are not subject to the same
accounting, auditing, and financial reporting standards and practices as U.S.
companies; and their stocks may not be as liquid as those of similar U.S.
companies. In addition, foreign stock exchanges, brokers, and companies
generally have less government supervision and regulation than their
counterparts in the United States. These factors, among others, could negatively
impact the returns Americans receive from foreign investments.
- --------------------------------------------------------------------------------
[FLAG] EACH FUND IS SUBJECT TO STOCK MARKET RISK, WHICH IS THE CHANCE THAT STOCK
PRICES OVERALL WILL DECLINE OVER SHORT OR EVEN LONG PERIODS. STOCK MARKETS
TEND TO MOVE IN CYCLES, WITH PERIODS OF RISING PRICES AND PERIODS OF
FALLING PRICES.
IN ADDITION, INVESTMENTS IN FOREIGN STOCK MARKETS CAN BE RISKIER THAN
U.S. STOCK INVESTMENTS. THE PRICES OF INTERNATIONAL STOCKS AND THE PRICES
OF U.S. STOCKS HAVE OFTEN MOVED IN OPPOSITE DIRECTIONS. THESE PERIODS HAVE,
IN THE PAST, LASTED FOR AS LONG AS SEVERAL YEARS.
<PAGE>
18
To illustrate the volatility of international stock prices, the following
table shows the best, worst, and average total returns for foreign stock markets
over various periods as measured by the MSCI EAFE Index, a widely used barometer
of international market activity. (Total returns consist of dividend income plus
change in market price.) Note that the returns shown do not include the costs of
buying and selling stocks or other expenses that a real-world investment
portfolio would incur. Note, also, that the gap between best and worst tends to
narrow over the long term.
- ----------------------------------------------------------
INTERNATIONAL STOCK MARKET RETURNS (1969-1999)
- ----------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS 20 YEARS
- ----------------------------------------------------------
Best 69.9% 36.5% 22.8% 16.3%
Worst -23.2 1.5 5.9 12.0
Average 15.2 13.6 14.5 14.7
- ----------------------------------------------------------
The table covers all of the 1-, 5-, 10-, and 20-year periods from 1969
through 1999. Keep in mind that this was a particularly favorable period for all
stock markets. These average returns reflect past performance on international
stocks; you should not regard them as an indication of future returns from
either foreign markets as a whole or any of the Funds in particular.
Note that the preceding chart does not take into account returns measured
by the MSCI Emerging Markets Free Index, a widely used barometer of less
developed stock markets. Emerging markets can be substantially more volatile
than more developed foreign markets. In addition, because the MSCI EAFE Index
tracks the European and Pacific markets collectively, the above returns do not
reflect the variability of returns from year to year for these markets
individually, or the variability across these and other geographic regions or
market sectors. To illustrate this variability, the following table shows
returns for different international markets--as well as the U.S. market for
comparison--from 1990 to 1999, as measured by their respective indexes. Note
that the returns shown do not include the costs of buying and selling stocks or
other expenses that a real-world investment portfolio would incur.
<PAGE>
19
- --------------------------------------------------------------------------------
STOCK MARKET RETURNS FOR DIFFERENT INTERNATIONAL MARKETS*
- --------------------------------------------------------------------------------
EUROPEAN PACIFIC EMERGING U.S.
MARKET MARKET MARKETS MARKETS
- --------------------------------------------------------------------------------
1990 -2.00% -34.43% -10.55% -3.10%
1991 14.12 11.51 59.91 30.47
1992 -3.92 -18.51 11.40 7.62
1993 29.25 36.15 74.84 10.08
1994 2.82 12.82 -7.31 1.32
1995 22.08 2.89 0.01** 37.58
1996 21.42 -8.23 15.19 22.96
1997 23.75 -25.74 -16.37 33.36
1998 28.68 2.64 -18.39 28.58
1999 15.77 56.38 60.86 21.04
- --------------------------------------------------------------------------------
* European market returns are measured by the MSCI Europe Index; Pacific
market returns are measured by the MSCI Pacific Free Index; emerging
markets returns are measured by the Select Emerging Markets Free Index;
and U.S. market returns are measured by the Standard & Poor's 500 Index.
** The inception date of the Select Emerging Markets Free Index was May 4,
1994; returns shown for 1990 to 1994 are measured by the MSCI Emerging
Markets Free Index.
- --------------------------------------------------------------------------------
Keep in mind, however, that these average returns reflect past performance
of the various indexes; you should not consider them as an indication of future
returns from the indexes, or from any of the Funds in particular.
[FLAG] EACH FUND IS SUBJECT TO COUNTRY RISK, WHICH IS THE CHANCE THAT POLITICAL
EVENTS (A WAR, NATIONAL ELECTIONS), FINANCIAL PROBLEMS (RISING INFLATION,
GOVERNMENT DEFAULT), OR NATURAL DISASTERS (AN EARTHQUAKE, A FLOOD) WILL
WEAKEN A COUNTRY'S ECONOMY AND CAUSE INVESTMENTS IN THAT COUNTRY TO LOSE
MONEY.
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
REGIONAL VERSUS BROAD INTERNATIONAL INVESTING
Regional funds are international funds that invest in a particular geographical
region, such as Europe or the Pacific Basin. Because they concentrate their
holdings in a single region, these funds typically have higher share price
volatility than broadly diversified international stock funds (which, by
investing in many different foreign markets, may offset losses from one country
with gains from another at any given time).
- --------------------------------------------------------------------------------
EUROPEAN STOCK INDEX FUND. Stocks from the United Kingdom, France, Germany,
and the Netherlands comprised 29%, 15%, 14%, and 8% of the MSCI Europe Index,
respectively, as of March 31, 2000; stocks from the remaining 11 countries in
the Index have much less significant market capitalization weightings in the
Index and thus much less impact on the Fund's total return. The Fund's heavy
exposure to just four countries involves a higher degree of country risk than
that of more geographically diversified international funds.
PACIFIC STOCK INDEX FUND. Japanese stocks comprised 82% of the MSCI Pacific
Free Index as of March 31, 2000. Therefore, Japanese stocks represent a
correspondingly large component of the Pacific Stock Index Fund's assets. The
Fund's large investment in the
<PAGE>
20
Japanese stock market involves a higher degree of country risk than that of more
geographically diversified international funds.
EMERGING MARKETS STOCK INDEX FUND. As discussed above, emerging markets can
be substantially more volatile than both U.S. and more developed foreign
markets. Therefore, the Emerging Markets Stock Index Fund may expose investors
to a higher degree of volatility than funds that invest in more developed
markets.
DEVELOPED MARKETS INDEX FUND. As a fund of funds, the Developed Markets
Index Fund intends to invest all of its assets in shares of the European and
Pacific Stock Index Funds; indirectly, its country risk will proportionately
mirror that of the European and Pacific Stock Index Funds.
TOTAL INTERNATIONAL STOCK INDEX FUND. As a fund of funds, the Total
International Stock Index Fund intends to invest all of its assets in shares of
the European, Pacific, and Emerging Markets Stock Index Funds; indirectly, its
country risk will proportionately mirror that of the underlying funds. As of
March 31, 2000, the Fund's assets were invested as follows: 60% in the European
Stock Index Fund; 30% in the Pacific Stock Index Fund; and 10% in the Emerging
Markets Stock Index Fund.
[FLAG]EACH FUND IS SUBJECT TO CURRENCY RISK, WHICH IS THE CHANCE THAT A STRONGER
U.S. DOLLAR WILL REDUCE RETURNS FOR AMERICANS INVESTING OVERSEAS.
GENERALLY, WHEN THE DOLLAR RISES IN VALUE AGAINST ANOTHER COUNTRY'S
CURRENCY, YOUR INVESTMENT IN THAT COUNTRY LOSES VALUE BECAUSE ITS CURRENCY
IS WORTH FEWER U.S. DOLLARS. ON THE OTHER HAND, A WEAKER U.S. DOLLAR
GENERALLY LEADS TO HIGHER RETURNS FOR AMERICANS HOLDING FOREIGN
INVESTMENTS.
SECURITY SELECTION
In seeking to track its target index, the European Stock Index, Pacific Stock
Index, and Emerging Markets Stock Index Funds each invest in a portfolio of
foreign stocks selected in a manner that mirrors the weightings of their target
indexes. The Total International Stock Index Fund simply invests in shares of
the European, Pacific, and Emerging Markets Stock Index Funds. Likewise, the
Developed Markets Index Fund will simply invest in shares of the European and
Pacific Stock Index Funds. Each Fund seeks to provide investment results that
correspond to its target index. The correlation between the performance of a
Fund and its target index is expected to be at least 95%. (A correlation of 100%
would indicate perfect correlation.)
EUROPEAN STOCK INDEX FUND. The Fund invests in a statistically selected
sample of approximately 550 common stocks included in the MSCI Europe Index,
which is made up of the stocks of companies located in 15 European countries.
Four countries--the United Kingdom, France, Germany, and the
Netherlands--dominate the Index, with 29%, 15%, 14%, and 8% of the market
capitalization of the Index, respectively, as of March 31, 2000. The other 11
countries, which include Austria, Belgium, Denmark, Finland, Ireland, Italy,
Norway, Portugal, Spain, Sweden, and Switzerland, are much less significant to
the Index and, consequently, the Fund.
PACIFIC STOCK INDEX FUND. The Fund invests in a statistically selected
sample of the approximately 420 common stocks included in the MSCI Pacific Free
Index, which is comprised of the stocks of Pacific Basin companies. The Index is
dominated by the Japanese stock market, which represented 82% of the market
capitalization of the Index as of March 31, 2000. The other four countries
represented in the Index are Australia, Hong Kong, New Zealand, and Singapore.
<PAGE>
21
EMERGING MARKETS STOCK INDEX FUND. The Fund invests in a statistically
selected sample of the approximately 500 common stocks included in the Select
Emerging Markets Free Index, which is made up of the stocks of companies located
in 13 emerging markets of Europe, Asia, Africa, and Latin America. Three
countries--Mexico, Brazil, and South Africa--represent a majority of the Index,
with 16%, 14%, and 13% of the market capitalization of the Index, respectively,
as of March 31, 2000. The other 10 countries include Argentina, the Czech
Republic, Greece, Hungary, Indonesia, Israel, Philippines, Poland, Thailand, and
Turkey. The developed countries of Hong Kong and Singapore are included in the
Index to broaden diversification and ensure adequate liquidity. The Index is
called "select" because it is modeled on a larger index--the MSCI Emerging
Markets Free Index--but with certain adjustments designed to reduce risk. For
instance, MSCI considers the Hong Kong and Singapore markets too mature to
include in its index, but they are part of the Select Index. Conversely, as of
March 31, 2000, the Select Index excluded certain countries found in the MSCI
Emerging Markets Free Index--Chile, China, Colombia, India, Jordan, Korea,
Pakistan, Peru, Russia, Sri Lanka, and Taiwan--due to concerns about liquidity
or entry barriers in those markets. MSCI administers the Select Index
exclusively for Vanguard, and periodically adjusts the included countries to
keep pace with evolution in world markets. (Such adjustments are made on a
forward-looking basis, so past performance of the Select Index always reflects
actual country representation during the relevant period.)
Although index funds, by their nature, tend to be tax-efficient investment
vehicles, the Funds are generally managed without regard to tax ramifications.
TRANSACTION FEES
Some of Vanguard's index funds charge a transaction fee on purchases of fund
shares to offset the higher costs of trading certain securities, particularly
small-company and international stocks. The transaction fee ensures that these
higher costs are borne by the investors making the transactions--and not by
shareholders already in the fund who do not generate the costs. All transaction
fees are paid directly to the fund itself (unlike a sales charge or load that
non-Vanguard funds may impose to compensate their sales representatives).
Without transaction fees, some index funds would have trouble tracking their
target indexes.
COSTS AND MARKET-TIMING
Some investors try to profit from a strategy called market-timing--switching
money into investments when they expect prices to rise, and taking money out
when they expect prices to fall. As money is shifted in and out, a fund incurs
expenses for buying and selling securities. These costs are borne by all fund
shareholders, including the long-term investors who do not generate the costs.
Therefore, the Vanguard International Stock Index Funds have adopted the
following policies, among others, designed to discourage short-term trading:
- - Each Fund reserves the right to reject any purchase request--including
exchanges from other Vanguard funds--that it regards as disruptive to the
efficient management of the Fund. A purchase request could be rejected
because of the timing of the investment or because of a history of
excessive trading by the investor.
- - The Emerging Markets Stock Index Fund charges a transaction fee on
purchases and redemptions.
<PAGE>
22
- - Telephone and online exchanges are not accepted for non-IRA accounts.
- - There is a limit on the number of times you can exchange into and out of a
Fund (see "Exchanges" in the INVESTING WITH VANGUARD section).
- - Each Fund reserves the right to stop offering shares at any time.
THE VANGUARD FUNDS DO NOT PERMIT MARKET-TIMING. DO NOT INVEST IN THESE
FUNDS IF YOU ARE A MARKET-TIMER.
TURNOVER RATE
Although each Fund seeks to invest for the long term, the Funds retain the right
to sell securities regardless of how long the securities have been held.
Generally, a passively- managed fund sells securities only to respond to
redemption requests or to adjust the number of shares held to reflect a change
in the fund's target index. Because of this, the turnover rate for each Fund has
been extremely low. The Financial Highlights tables beginning on page 27 show
historic turnover rates for each Fund.
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
TURNOVER RATE
Before investing in a mutual fund, you should review its turnover rate. This
gives an indication of how transaction costs could affect the fund's future
returns. In general, the greater the volume of buying and selling by the fund,
the greater the impact that brokerage commissions and other transaction costs
will have on its return. Also, funds with high turnover rates may be more likely
to generate capital gains that must be distributed to shareholders as income
subject to taxes. The average turnover rate for passively managed foreign stock
index funds in 1999 was roughly 17%; for all foreign stock funds, the average
turnover was approximately 76%, according to Morningstar, Inc. (A turnover rate
of 100% would occur, for example, if a fund sold and replaced securities valued
at 100% of its net assets within a one-year period.)
- --------------------------------------------------------------------------------
OTHER INVESTMENT POLICIES AND RISKS
Besides investing in common stocks of foreign companies, each Fund may make
certain other kinds of investments to achieve its objective. Each Fund may
change its objective without shareholder approval.
The Funds may also invest, to a limited extent, in futures and options
contracts, warrants, convertible securities, and swap agreements, which are
types of derivatives. Losses (or gains) involving futures contracts can
sometimes be substantial--in part because a relatively small price movement in a
futures contract may result in an immediate and substantial loss (or gain) for a
fund. Similar risks exist for warrants (securities that permit their owners to
purchase a specific number of shares of stock at a predetermined price),
convertible securities (securities that may be exchanged for another asset), and
swap agreements (contracts between two parties in which each agrees to make
payments to the other based on the return of a specified index or asset).
<PAGE>
23
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
DERIVATIVES
A derivative is a financial contract whose value is based on (or "derived" from)
a traditional security (such as a stock or a bond), an asset (such as a
commodity like gold), or a market index (such as the S&P 500 Index). Futures and
options are derivatives that have been trading on regulated exchanges for more
than two decades. These "traditional" derivatives are standardized contracts
that can easily be bought and sold, and whose market values are determined and
published daily. It is these characteristics that differentiate futures and
options from the relatively new types of derivatives. If used for speculation or
as leveraged investments, derivatives can carry considerable risks.
- --------------------------------------------------------------------------------
For this reason, the Funds will not use futures, options, warrants,
convertible securities, or swap agreements for speculative purposes or as
leveraged investments that magnify the gains or losses of an investment. A
Fund's obligation under futures contracts will not exceed 20% of its total
assets.
The reasons for which a Fund will invest in futures and options are:
- - To keep cash on hand to meet shareholder redemptions or other needs while
simulating full investment in stocks.
- - To reduce the Fund's transaction costs or add value when these instruments
are favorably priced.
Each Fund may also enter into forward foreign currency contracts in order
to maintain the same currency exposure as its respective Index. A forward
foreign currency contract is an agreement to buy or sell a country's currency at
a specific price on a specific date, usually 30, 60, or 90 days in the future.
In other words, the contract guarantees an exchange rate on a given date.
Managers of international stock funds typically use these contracts to guard
against sudden, unfavorable changes in U.S. dollar/foreign currency exchange
rates. However, the Funds will use these contracts for different reasons:
- - To gain currency exposure when investing in futures.
- - To settle trades in a foreign currency.
THE FUNDS AND VANGUARD
Vanguard International Stock Index Funds are offered by The Vanguard Group, a
family of more than 35 investment companies with more than 100 funds holding
assets worth more than $550 billion. All of the Vanguard funds share in the
expenses associated with business operations, such as personnel, office space,
equipment, and advertising.
Vanguard also provides marketing services to the funds. Although
shareholders do not pay sales commissions or 12b-1 distribution fees, each fund
pays its allocated share of The Vanguard Group's marketing costs.
Total International Stock and Developed Markets Index Funds will indirectly
bear a proportionate share of the expenses of the underlying funds in which they
invest. However, their direct expenses are expected to be very low or zero. For
example, Total International Stock Index Fund has incurred no direct expenses
since its inception in 1996. Total International Stock and Developed Markets
Index Funds may operate without incurring direct expenses because Vanguard will
reimburse them for (i) their contributions to the cost of operating the
underlying funds in which they invest, and (ii) savings in administrative and
marketing costs that Vanguard expects to derive from their operations.
<PAGE>
24
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
VANGUARD'S UNIQUE CORPORATE STRUCTURE
The Vanguard Group is truly a MUTUAL mutual fund company. It is owned jointly by
the funds it oversees and thus indirectly by the shareholders in those funds.
Most other mutual funds are operated by for-profit management companies that may
be owned by one person, by a group of individuals, or by investors who own the
management company's stock. By contrast, Vanguard provides its services on an
"at-cost" basis, and the funds' expense ratios reflect only these costs. No
separate management company reaps profits or absorbs losses from operating the
funds.
- --------------------------------------------------------------------------------
INVESTMENT ADVISER
The Vanguard Group (Vanguard), P.O. Box 2600, Valley Forge, PA 19482, founded in
1975, serves as the Funds' adviser through its Quantitative Equity Group. (The
Developed Markets and Total International Stock Index Funds receive advisory
services indirectly, by investing in other funds.) Vanguard manages the Funds on
an at-cost basis, subject to the control of the Trustees and officers of the
Funds. For the fiscal year ended December 31, 1999, the advisory fees
represented an effective annual rate of less than 0.01% each for the European,
Pacific, and Emerging Markets Stock Index Funds.
The Funds have authorized Vanguard to choose brokers or dealers to handle
the purchase and sale of securities for the Funds, and to get the best available
price and most favorable execution from these brokers or dealers with respect to
all transactions. The Funds may direct Vanguard to use a particular broker for
certain transactions in exchange for commission rebates or research services
provided to the Funds.
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
THE FUNDS' ADVISER
The Vanguard Group provides investment advisory services to many Vanguard funds;
as of December 31, 1999, the Group managed more than $371 billion in total
assets. The individual responsible for overseeing the European, Pacific, and
Emerging Markets Stock Index Funds' investments is:
GEORGE U. SAUTER, Managing Director of Vanguard, and head of Vanguard's
Quantitative Equity Group; has worked in investment management since 1985;
primary responsibility for Vanguard's stock indexing policy and strategy since
joining the company in 1987; A.B., Dartmouth College; M.B.A., University of
Chicago.
- --------------------------------------------------------------------------------
<PAGE>
25
DIVIDENDS, CAPITAL GAINS, AND TAXES
Each Fund distributes to shareholders virtually all of its net income (interest
and dividends, less expenses), as well as any capital gains realized from the
sale of its holdings. Distributions generally occur in December. In addition,
the Fund may occasionally be required to make supplemental dividend or capital
gains distributions at some other time during the year.
Your dividend and capital gains distributions will be reinvested in
additional Fund shares and accumulate on a tax-deferred basis if you are
investing through an employer-sponsored retirement or savings plan. You will not
owe taxes on these distributions until you begin withdrawals from the plan. You
should consult your plan administrator, your plan's Summary Plan Description, or
your tax adviser about the tax consequences of plan withdrawals.
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
DISTRIBUTIONS
As a shareholder, you are entitled to your share of the fund's income from
interest and dividends, and gains from the sale of investments. You receive such
earnings as either an income dividend or a capital gains distribution. Income
dividends come from both the dividends that the fund earns from its holdings and
the interest it receives from its money market and bond investments. Capital
gains are realized whenever the fund sells securities for higher prices than it
paid for them. These capital gains are either short-term or long-term, depending
on whether the fund held the securities for one year or less, or more than one
year.
- --------------------------------------------------------------------------------
SHARE PRICE
Each Fund's share price, called its net asset value, or NAV, is calculated each
business day after the close of regular trading on the New York Stock Exchange
(the NAV is not calculated on holidays or other days when the Exchange is
closed). Net asset value per share for the Developed Markets and Total
International Stock Index Funds is computed by adding up the total value of the
Fund's investments (i.e., shares of the underlying funds) and other assets,
subtracting any of its liabilities (debts), and then dividing by the number of
Fund shares outstanding:
TOTAL ASSETS - LIABILITIES
NET ASSET VALUE = --------------------------------
NUMBER OF SHARES OUTSTANDING
Net asset value per share for the European, Pacific, and Emerging Markets
Stock Index Funds is computed in a similar way, by dividing the net assets
attributed to each class by the number of Fund shares outstanding for that
class.
Knowing the daily net asset value is useful to you as a shareholder because
it indicates the current value of your investment. The Fund's NAV, multiplied by
the number of shares you own, gives you the dollar amount you would have
received had you sold all of your shares back to the Fund that day. Because
foreign securities markets may operate on days which are not business days in
the United States, the value of a Fund's holdings may change on days when
shareholders will not be able to purchase or redeem the Fund's shares.
<PAGE>
26
A NOTE ON PRICING: A Fund's investments will be priced at their market
value when market quotations are readily available. When these quotations are
not readily available, investments will be priced at their fair value,
calculated according to procedures adopted by the Funds' Board of Trustees. A
Fund also may use fair value pricing if the value of a security held by the Fund
is materially affected by events occurring after the close of the primary
markets or exchanges on which such security is traded. In these situations,
prices used by the Fund to calculate its net asset value may differ from quoted
or published prices for the underlying securities.
Each Fund's share price can be found daily in the mutual fund listings of
most major newspapers under the heading "Vanguard Index Funds." Different
newspapers use different abbreviations for each Fund, but the most common are
EUROPE, PACIFIC, EMERMKT, DEVMKT, and TOTINTL for the European, Pacific,
Emerging Markets, Developed Markets, and Total International Stock Index Funds,
respectively.
FINANCIAL HIGHLIGHTS
The following financial highlights tables are intended to help you understand
each Fund's financial performance for the past five years or since inception
(except for the Developed Markets Index Fund, which did not start operations
until May 5, 2000), and certain information reflects financial results for a
single Fund share. The total returns in each table represent the rate that an
investor would have earned or lost each year on an investment in the Fund
(assuming reinvestment of all dividend and capital gains distributions). This
information has been derived from the financial statements audited by
PricewaterhouseCoopers LLP, independent accountants, whose report--along with
each Fund's financial statements--is included in the Funds' most recent annual
report to shareholders. You may have the annual report sent to you without
charge by contacting Vanguard.
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
HOW TO READ THE FINANCIAL HIGHLIGHTS TABLE
This explanation uses the European Stock Index Fund as an example. The Fund
began fiscal 1999 with a net asset value (price) of $25.28 per share. During the
year, the Fund earned $0.50 per share from investment income (interest and
dividends) and $3.69 per share from investments that had appreciated in value or
that were sold for higher prices than the Fund paid for them.
Shareholders received $0.65 per share in the form of dividend and capital gains
distributions. A portion of each year's distributions may come from the prior
year's income or capital gains.
The earnings ($4.19 per share) minus the distributions ($0.65 per share)
resulted in a share price of $28.82 at the end of the year. This was an increase
of $3.54 per share (from $25.28 at the beginning of the year to $28.82 at the
end of the year). For a shareholder who reinvested the distributions in the
purchase of more shares, the total return from the Fund was 16.62% for the year.
As of December 31, 1999, the Fund had $6.1 billion in net assets. For the year,
its expense ratio was 0.29% ($2.90 per $1,000 of net assets); and its net
investment income amounted to 1.99% of its average net assets. It sold and
replaced securities valued at 7% of its net assets.
- --------------------------------------------------------------------------------
<PAGE>
27
- --------------------------------------------------------------------------------
VANGUARD EUROPEAN STOCK INDEX FUND
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------
NET ASSET VALUE,
BEGINNING OF YEAR $25.28 $20.13 $16.57 $14.02 $11.76
- --------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .50 .41 .38 .34 .32
Net Realized and
Unrealized Gain
(Loss) on Investments 3.69 5.40 3.63 2.63 2.30
--------------------------------------------------------
Total from Investment
Operations 4.19 5.81 4.01 2.97 2.62
--------------------------------------------------------
DISTRIBUTIONS
Dividends from Net
Investment Income (.50) (.52) (.37) (.36) (.32)
Distributions from
Realized Capital Gains (.15) (.14) (.08) (.06) (.04)
--------------------------------------------------------
Total Distributions (.65) (.66) (.45) (.42) (.36)
- --------------------------------------------------------------------------------
NET ASSET VALUE, END
OF YEAR $28.82 $25.28 $20.13 $16.57 $14.02
================================================================================
TOTAL RETURN* 16.62% 28.86% 24.23% 21.26% 22.28%
================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of
Year (Millions) $6,106 $4,479 $2,432 $1,595 $1,017
Ratio of Total
Expenses to Average
Net Assets 0.29% 0.29% 0.31% 0.35% 0.35%
Ratio of Net
Investment Income to
Average Net Assets 1.99% 1.97% 2.19% 2.45% 2.66%
Turnover Rate 7% 7% 3% 4% 2%
================================================================================
*Total return figures do not reflect the transaction fee on purchases imposed
prior to 4/1/2000.
- --------------------------------------------------------------------------------
VANGUARD PACIFIC STOCK INDEX FUND
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------
NET ASSET VALUE,
BEGINNING OF YEAR $ 7.84 $7.72 $10.51 $11.50 $11.31
- --------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .08 .085 .09 .10 .10
Net Realized and
Unrealized Gain
(Loss) on Investments 4.39 .100 (2.79) (1.00) .21
--------------------------------------------------------
Total from Investment
Operations 4.47 .185 (2.70) (.90) .31
--------------------------------------------------------
DISTRIBUTIONS
Dividends from Net
Investment Income (.09) (.065) (.09) (.09) (.12)
Distributions from
Realized Capital Gains -- -- -- -- --
--------------------------------------------------------
Total Distributions (.09) (.065) (.09) (.09) (.12)
- --------------------------------------------------------------------------------
NET ASSET VALUE, END
OF YEAR $12.22 $7.84 $ 7.72 $10.51 $11.50
================================================================================
TOTAL RETURN* 57.05% 2.41% -25.67% -7.82% 2.75%
================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of
Year (Millions) $2,526 $1,033 $827 $978 $831
Ratio of Total
Expenses to Average
Net Assets 0.37% 0.40% 0.35% 0.35% 0.35%
Ratio of Net
Investment Income to
Average Net Assets 0.95% 1.17% 1.03% 0.89% 0.97%
Turnover Rate 6% 4% 8% 9% 1%
================================================================================
*Total return figures do not reflect the transaction fee on purchases imposed
prior to 4/1/2000.
<PAGE>
28
FINANCIAL HIGHLIGHTS (CONTINUED)
- --------------------------------------------------------------------------------
VANGUARD EMERGING MARKETS STOCK INDEX FUND
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------
NET ASSET VALUE,
BEGINNING OF YEAR $ 7.91 $9.98 $12.28 $10.75 $10.87
- --------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .24 .27 .24 .18 .15
Net Realized and
Unrealized Gain
(Loss) on Investments 4.62 (2.08) (2.31) 1.52 (.09)
--------------------------------------------------------
Total from Investment
Operations 4.86 (1.81) (2.07) 1.70 .06
--------------------------------------------------------
DISTRIBUTIONS
Dividends from Net
Investment Income (.27) (.26) (.23) (.17) (.18)
Distributions from
Realized Capital Gains -- -- -- -- --
--------------------------------------------------------
Total Distributions (.27) (.26) (.23) (.17) (.18)
- --------------------------------------------------------------------------------
NET ASSET VALUE, END
OF YEAR $21.50 $7.91 $ 9.98 $12.28 $10.75
================================================================================
TOTAL RETURN* 61.57% -18.12% -16.82% 15.83% 0.56%
================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of
Year (Millions) $1,138 $577 $660 $637 $234
Ratio of Total
Expenses to Average
Net Assets 0.58% 0.61% 0.57% 0.60% 0.60%
Ratio of Net
Investment Income to
Average Net Assets 2.55% 2.99% 1.96% 1.69% 2.00%
Turnover Rate 22% 22% 19% 1% 3%
================================================================================
*Total return figures do not reflect the transaction fee on purchases (0.5%
beginning 4/1/2000, 1.0% from 11/3/1997 to 3/31/2000, 1.5% from 1/1/1997 to
11/2/1997, 2.0% in 1995 through 1996), or the transaction fee on redemptions
(0.5% beginning 4/1/2000, 1.0% through 3/31/2000).
- --------------------------------------------------------------------------------
VANGUARD TOTAL INTERNATIONAL
STOCK INDEX FUND
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1999 1998 1997 1996*
- --------------------------------------------------------------------------------
NET ASSET VALUE,
BEGINNING OF PERIOD $11.19 $ 9.87 $10.14 $10.26
- --------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .21 .21 .18 .150
Capital Gain Distributions
Received .04 .02 .02 .015
Net Realized and
Unrealized Gain
(Loss) on Investments 3.09 1.31 (.28) (.110)
--------------------------------------------------------
Total from Investment
Operations 3.34 1.54 (.08) .055
--------------------------------------------------------
DISTRIBUTIONS
Dividends from Net
Investment Income (.21) (.21) (.17) (.160)
Distributions from
Realized Capital Gains (.01) (.01) (.02) (.015)
--------------------------------------------------------
Total Distributions (.22) (.22) (.19) (.175)
- --------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $14.31 $11.19 $ 9.87 $10.14
================================================================================
TOTAL RETURN** 29.92% 15.60% -0.77% 0.55%
================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of
Period (Millions) $2,570 $1,375 $903 $280
Ratio of Total
Expenses to Average
Net Assets 0% 0% 0% 0%
Ratio of Net
Investment Income to
Average Net Assets 2.04% 2.18% 2.19% 1.51%+
Turnover Rate 1% 2% 0% 0%
================================================================================
*April 29 (inception) through December 31, 1996.
**Total return figures do not reflect the transaction fee on purchases imposed
prior to April 1, 2000.
+Annualized.
The Funds are not sponsored, sold, promoted, or endorsed by Morgan Stanley
Capital International. Standard & Poor's(R)," "S&P(R)," "S&P 500(R)," "Standard
& Poor's 500," and "500," are trademarks of The McGraw-Hill Companies, Inc., and
have been licensed for use by The Vanguard Group.
<PAGE>
29
INVESTING WITH VANGUARD
One or more of the Funds is an investment option in your retirement or savings
plan. Your plan administrator or your employee benefits office can provide you
with detailed information on how to participate in your plan and how to elect
any of the Funds as an investment option.
- - If you have any questions about a Fund or Vanguard, including those about
the Fund's investment objective, strategies, or risks, contact Vanguard's
Participant Access Center, toll-free, at 1-800-523-1188.
- - If you have questions about your account, contact your plan administrator
or the organization that provides recordkeeping services for your plan.
INVESTMENT OPTIONS AND ALLOCATIONS
Your plan's specific provisions may allow you to change your investment
selections, the amount of your contributions, or how your contributions are
allocated among the investment choices available to you. Contact your plan
administrator or employee benefits office for more details.
TRANSACTIONS
Contributions, exchanges, or redemptions of a Fund's shares are processed as
soon as they have been received by Vanguard in good order. Good order means that
your request includes complete information on your contribution, exchange, or
redemption, and that Vanguard has received the appropriate assets.
In all cases, your transaction will be based on the Fund's next-determined
net asset value after Vanguard receives your request (or, in the case of new
contributions, the next-determined net asset value after Vanguard receives the
order from your plan administrator). As long as this request is received before
the close of regular trading on the New York Stock Exchange, generally 4 p.m.
Eastern time, you will receive that day's net asset value.
EXCHANGES
The exchange privilege (your ability to redeem shares from one fund to purchase
shares of another fund) may be available to you through your plan. Although we
make every effort to maintain the exchange privilege, Vanguard reserves the
right to revise or terminate this privilege, limit the amount of an exchange or
reject any exchange, at any time, without notice. Because excessive exchanges
can potentially disrupt the management of a Fund and increase its transaction
costs, Vanguard limits participant exchange activity to no more than FOUR
SUBSTANTIVE "ROUND TRIPS" THROUGH THE FUND (at least 90 days apart) during any
12-month period. A "round trip" is a redemption from the Fund followed by a
purchase back into the Fund. "Substantive" means a dollar amount that Vanguard
determines, in its sole discretion, could adversely affect the management of the
Fund.
Before making an exchange to or from another fund available in your plan,
consider the following:
- - Certain investment options, particularly funds made up of company stock or
investment contracts, may be subject to unique restrictions.
- - Make sure to read that fund's prospectus. Contact Vanguard Participant
Access Center, toll-free, at 1-800-523-1188 for a copy.
- - Vanguard can accept exchanges only as permitted by your plan. Contact your
plan administrator for details on the exchange policies that apply to your
plan.
<PAGE>
30
- --------------------------------------------------------------------------------
A NOTE ON REDEMPTION FEES: The Emerging Markets Stock Index Fund imposes a 0.5%
redemption fee on all share redemptions. Currently, redemption fees do not apply
to Fund shares held through Vanguard's separate recordkeeping system for
employee benefit plan accounts, due to certain economies associated with these
accounts. However, the Fund reserves the right to impose redemption fees on its
shares at any time if warranted by the Fund's future costs of processing
redemptions from these accounts.
- --------------------------------------------------------------------------------
ACCESSING FUND INFORMATION BY COMPUTER
- --------------------------------------------------------------------------------
VANGUARD ON THE WORLD WIDE WEB WWW.VANGUARD.COM
Use your personal computer to visit Vanguard's education-oriented website, which
provides timely news and information about Vanguard funds and services; an
online "university" that offers a variety of mutual fund classes; and
easy-to-use, interactive tools to help you create your own investment and
retirement strategies.
- --------------------------------------------------------------------------------
<PAGE>
(THIS PAGE INTENTIONALLY LEFT BLANK.)
<PAGE>
(THIS PAGE INTENTIONALLY LEFT BLANK.)
<PAGE>
GLOSSARY OF INVESTMENT TERMS
ACTIVE MANAGEMENT
An investment approach that seeks to exceed the average returns of the financial
markets. Active managers rely on research, market forecasts, and their own
judgment and experience in selecting securities to buy and sell.
CAPITAL GAINS DISTRIBUTION
Payment to mutual fund shareholders of gains realized on securities that a fund
has sold at a profit, minus any realized losses.
CASH RESERVES
Cash deposits, short-term bank deposits, and money market instruments which
include U.S. Treasury bills, bank certificates of deposit (CDs), repurchase
agreements, commercial paper, and banker's acceptances.
COMMON STOCK
A security representing ownership rights in a corporation. A stockholder is
entitled to share in the company's profits, some of which may be paid out as
dividends.
COUNTRY RISK
The chance that domestic events--such as political upheaval, financial troubles,
or a natural disaster--will weaken a country's securities markets.
CURRENCY RISK
The chance that a foreign investment will decrease in value because of
unfavorable changes in currency exchange rates.
DIVIDEND INCOME
Payment to shareholders of income from interest or dividends generated by a
fund's investments.
EXPENSE RATIO
The percentage of a fund's average net assets used to pay its expenses. The
expense ratio includes management fees, administrative fees, and any 12b-1
distribution fees.
INDEX
An unmanaged group of securities whose overall performance is used as a standard
to measure investment performance.
INTERNATIONAL STOCK FUND
A mutual fund that invests in the stocks of companies located outside the United
States.
INVESTMENT ADVISER
An organization that makes the day-to-day decisions regarding a fund's
investments.
MUTUAL FUND
An investment company that pools the money of many people and invests it in a
variety of securities in an effort to achieve a specific objective over time.
NET ASSET VALUE (NAV)
The market value of a mutual fund's total assets, minus liabilities, divided by
the number of shares outstanding. The value of a single share is called its
share value or share price.
PASSIVE MANAGEMENT
A low-cost investment strategy in which a mutual fund attempts to match--rather
than outperform--a particular stock or bond market index. Also known as
indexing.
PRINCIPAL
The amount of money you put into an investment.
TOTAL RETURN
A percentage change, over a specified time period, in a mutual fund's net asset
value, with the ending net asset value adjusted to account for the reinvestment
of all distributions of dividends and capital gains.
VOLATILITY
The fluctuations in value of a mutual fund or other security. The greater a
fund's volatility, the wider the fluctuations between its high and low prices.
YIELD
Income (interest or dividends) earned by an investment, expressed as a
percentage of the investment's price.
<PAGE>
[LOGO]
[THE VANGUARD GROUP(R) LOGO]
Institutional Division
Post Office Box 2900
Valley Forge, PA 19482-2900
FOR MORE INFORMATION
If you'd like more information about
Vanguard International Stock Index
Funds, the following documents are
available free upon request:
ANNUAL/SEMIANNUAL REPORTS
TO SHAREHOLDERS
Additional information about the
Funds' investments is available in
the Funds' annual and semiannual
reports to shareholders.
STATEMENT OF ADDITIONAL
INFORMATION (SAI)
The SAI provides more detailed
information about the Funds (there
is a separate SAI for Vanguard
Developed Markets and Total
International Stock Index Funds,
which are legally a part of Vanguard
STAR Funds).
The current annual and semiannual
reports and each SAI are
incorporated by reference into
(and are thus legally a part of)
this prospectus.
To receive a free copy of the latest
annual or semiannual report or the
SAI, or to request additional
information about the Funds or other
Vanguard funds, please contact us
as follows:
THE VANGUARD GROUP
PARTICIPANT ACCESS CENTER
P.O. BOX 2900
VALLEY FORGE, PA 19482-2900
TELEPHONE:
1-800-523-1188
TEXT TELEPHONE:
1-800-523-8004
WORLD WIDE WEB:
WWW.VANGUARD.COM
INFORMATION PROVIDED BY THE
SECURITIES AND EXCHANGE
COMMISSION (SEC)
You can review and copy
information about the Funds
(including the SAI) at the SEC's
Public Reference Room in
Washington, DC. To find out more
about this public service, call the
SEC at 1-202-942-8090. Reports and
other information about the Funds
are also available on the SEC's
website (www.sec.gov), or you can
receive copies of this information,
for a fee, by electronic request at
the following e-mail address:
[email protected], or by writing
the Public Reference Section,
Securities and Exchange
Commission, Washington, DC
20549-0102.
Funds' Investment Company Act
file number: 811-5972 (811-3919)
for Developed Markets and Total
International Stock Index Funds)
(C) 2000 The Vanguard Group, Inc.
All rights reserved.
Vanguard Marketing Corporation,
Distributor.
I072N-04/28/2000
<PAGE>
VANGUARD(R) INTERNATIONAL
STOCK INDEX FUNDS
INSTITUTIONAL SHARES
VANGUARD(R) INSTITUTIONAL
DEVELOPED MARKETS
INDEX FUND
Prospectus
April 28, 2000
This prospectus contains
financial data for the
Funds through the
fiscal year ended
December 31, 1999.
VANGUARD INTERNATIONAL
STOCK INDEX FUNDS
INSTITUTIONAL SHARES OF:
VANGUARD EUROPEAN
STOCK INDEX FUND
VANGUARD PACIFIC
STOCK INDEX FUND
VANGUARD EMERGING
MARKETS STOCK INDEX
FUND
VANGUARD INSTITUTIONAL
DEVELOPED MARKETS
INDEX FUND
[MEMBERS OF THE VANGUARD GROUP(R) LOGO]
<PAGE>
VANGUARD INTERNATIONAL STOCK INDEX FUNDS INSTITUTIONAL SHARES
VANGUARD INSTITUTIONAL DEVELOPED MARKETS INDEX FUND
Prospectus
April 28, 2000
A Group of International Stock Index Mutual Funds
- --------------------------------------------------------------------------------
CONTENTS
- --------------------------------------------------------------------------------
1 AN INTRODUCTION TO INDEX FUNDS
2 FUND PROFILES
2 Vanguard European Stock Index Fund Institutional Shares
5 Vanguard Pacific Stock Index Fund Institutional Shares
8 Vanguard Emerging Markets Stock Index Fund Institutional Shares
12 Vanguard Institutional Developed Markets Index Fund
14 MORE ON THE FUNDS
21 THE FUNDS AND VANGUARD
22 INVESTMENT ADVISER
22 DIVIDENDS, CAPITAL GAINS, AND TAXES
24 SHARE PRICE
25 FINANCIAL HIGHLIGHTS
28 INVESTING WITH VANGUARD
28 Services and Account Features
29 Types of Accounts
29 Buying Shares
31 Redeeming Shares
34 Transferring Registration
34 Fund and Account Updates
35 Mandatory Conversion to Investor Shares
GLOSSARY (inside back cover)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
WHY READING THIS PROSPECTUS IS IMPORTANT
This prospectus explains the objective, risks, and strategies of each of the
Vanguard International Stock Index Funds Institutional Shares and Vanguard
Institutional Developed Markets Index Fund. To highlight terms and concepts
important to mutual fund investors, we have provided "Plain Talk(R)"
explanations along the way. Reading the prospectus will help you to decide which
Fund, if any, is the right investment for you. We suggest that you keep it for
future reference.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
IMPORTANT NOTE
The Vanguard European, Pacific, and Emerging Markets Stock Index Funds each
offer two separate classes of shares: Investor and Institutional. This
prospectus offers the Funds' Institutional Shares, which have an investment
minimum of $10 million and generally are not available to investors who require
special employee benefit plan services. Please call Vanguard at 1-800-662-7447
to obtain a separate prospectus that offers the Funds' Investor Shares as well
as the investor version of Vanguard Institutional Developed Markets Fund. These
options have an investment minimum of $3,000 ($1,000 for IRAs).
The Funds' separate share classes have different expenses; as a result,
their investment performances will vary. UNLESS OTHERWISE NOTED, ALL REFERENCES
IN THIS PROSPECTUS TO FEES, EXPENSES, AND INVESTMENT PERFORMANCE RELATE
SPECIFICALLY TO INSTITUTIONAL SHARES.
- --------------------------------------------------------------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE>
1
AN INTRODUCTION TO INDEX FUNDS
WHAT IS INDEXING?
An index is an unmanaged group of securities whose overall performance is used
as a standard to measure investment performance. An index (or "passively
managed") fund tries to track, as closely as possible, the performance of an
established target index. The fund does this by holding all, or a representative
sample, of the securities that comprise the index. Keep in mind that an index
fund has operating expenses and transaction costs, while a market index does
not. Therefore, an index fund, while expected to track its target index closely,
typically will be unable to match the performance of the index exactly.
Stock index funds may seek to track indexes that hold a certain type of
stock--such as growth or value, small-cap or large-cap, or those from just one
industry--or they may seek to track indexes that consist of a broader range of
stocks--for example, the entire foreign stock market.
Index funds are not actively managed by investment advisers who buy and
sell securities based on research and analysis in an attempt to outperform a
particular benchmark or the market as a whole. Rather, index funds simply
attempt to mirror what the target index does, for better or worse.
WHAT INDEX FUNDS DOES VANGUARD OFFER?
Vanguard offers a variety of stock (both U.S. and international), bond, and
balanced index funds. This prospectus provides information about Vanguard's
International Stock Index Funds Institutional Shares and Vanguard Institutional
Developed Markets Index Fund. There are four such funds, each of which seeks to
track a different segment of the international stock market:
- --------------------------------------------------------------------------------
FUND SEEKS TO TRACK
- --------------------------------------------------------------------------------
Vanguard European Stock Index Fund European stock markets
Vanguard Pacific Stock Index Fund Australian and Far East stock
markets
Vanguard Emerging Markets Stock 13 emerging stock markets in
Index Fund Europe, Asia, Africa, and
Latin America
Vanguard Institutional Developed European, Australian, and Far
Markets Index Fund East stock markets
- --------------------------------------------------------------------------------
This prospectus contains profiles that summarize key features of each Fund.
Following the profiles, there is important additional information about the
Funds.
<PAGE>
2
FUND PROFILE--VANGUARD(R) EUROPEAN STOCK
INDEX FUND INSTITUTIONAL SHARES
The following profile provides you with a summary of the key features of
Vanguard European Stock Index Fund Institutional Shares.
INVESTMENT OBJECTIVE
The Fund seeks to match the performance of the Morgan Stanley Capital
International (MSCI) Europe Index.
INVESTMENT STRATEGIES
The Fund employs a "passively managed"--or index--investment approach, by
investing all or substantially all of its assets in a representative sample of
the common stocks included in the MSCI Europe Index. The MSCI Europe Index is
made up of approximately 550 common stocks of companies located in 15 European
countries--mostly in the United Kingdom, France, Germany, and the Netherlands,
(which comprised 29%, 15%, 14%, and 8% of the Index's market capitalization,
respectively, as of March 31, 2000), as well as in Austria, Belgium, Denmark,
Finland, Ireland, Italy, Norway, Portugal, Spain, Sweden, and Switzerland. For
more information about passive management, see "Indexing Methods" under MORE ON
THE FUNDS.
PRIMARY RISKS
THE FUND'S TOTAL RETURN, LIKE STOCK PRICES GENERALLY, WILL FLUCTUATE WITHIN A
WIDE RANGE, SO AN INVESTOR COULD LOSE MONEY OVER SHORT OR EVEN LONG PERIODS. The
Fund is also subject to:
- - Country risk, which is the chance that a country's economy will be hurt by
political troubles, financial problems, or natural disasters. The Index's,
and therefore the Fund's, heavy exposure to four countries (United Kingdom,
France, Germany, and the Netherlands) involves a higher degree of country
risk than that of more geographically diversified international funds.
- - Regional risk, which is the chance that an entire region--namely
Europe--will be hurt by political troubles, financial problems, or natural
disasters.
- - Currency risk, which is the chance that returns will be hurt by a rise in
the value of the U.S. dollar versus foreign currencies.
- - Investment style risk, which is the chance that returns from foreign stocks
will trail returns from other asset classes or the overall stock market.
PERFORMANCE/RISK INFORMATION
The bar chart and table below provide an indication of the risk of investing in
the Fund. The bar chart shows the performance of the Investor Shares of the Fund
in each calendar year since inception. The table shows how the average annual
total returns of the Fund's Investor Shares for one and five calendar years and
since inception compare with those of a broad-based securities market index.
Keep in mind that the Fund's past performance does not indicate how it will
perform in the future.
<PAGE>
3
----------------------------------------------------
ANNUAL TOTAL RETURNS FOR INVESTOR SHARES
----------------------------------------------------
1991 12.40%
1992 -3.32%
1993 29.13%
1994 1.88%
1995 22.28%
1996 21.26%
1997 24.23%
1998 28.86%
1999 16.62%
----------------------------------------------------
Return figures do not reflect the transaction fee
imposed on purchases prior to April 1, 2000.
Note: This prospectus offers the Fund's Institutional
Shares, not the Investor Shares. Performance for the
Investor Shares is shown here because the Fund's
Institutional Shares are new and don't have a full
calendar year of performance. However, the two share
classes are invested in the same portfolio of
securities and will have the same returns except
that their operating expenses differ.
----------------------------------------------------
During the period shown in the bar chart, the highest return for a calendar
quarter was 20.37% (quarter ended March 31, 1998) and the lowest return for a
quarter was -14.41% (quarter ended September 30, 1998).
-------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS FOR YEARS ENDED DECEMBER 31, 1999
-------------------------------------------------------------------------
1 YEAR 5 YEARS SINCE INCEPTION*
-------------------------------------------------------------------------
Vanguard European Stock
Index Fund Investor
Shares** 16.62% 22.58% 14.61%
MSCI Europe Index 15.77 22.27 14.78
-------------------------------------------------------------------------
*June 18, 1990.
**Return figures do not reflect the transaction fee imposed on purchases
prior to April 1, 2000.
-------------------------------------------------------------------------
FEES AND EXPENSES
The following table describes the fees and expenses you may pay if you buy and
hold Institutional Shares of the Fund. Since the Fund did not begin offering
Institutional Shares until May 5, 2000, the expenses shown under Annual Fund
Operating Expenses are based upon estimated amounts for the current fiscal year.
SHAREHOLDER FEES (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None
Transaction Fee on Purchases: None
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fee: None
Exchange Fee: None
ANNUAL FUND OPERATING EXPENSES (expenses deducted from the Fund's assets)
Management Expenses: 0.11%
12b-1 Distribution Fee: None
Other Expenses: 0.07%
TOTAL ANNUAL FUND OPERATING EXPENSES: 0.18%
<PAGE>
4
The following example is intended to help you compare the cost of investing
in the Fund with the cost of investing in other mutual funds. It illustrates the
hypothetical expenses that you would incur over various periods if you invest
$10,000 in the Fund's Institutional Shares. This example assumes that the Fund
provides a return of 5% a year, and that operating expenses remain the same. The
results apply whether or not you redeem your investment at the end of each
period.
- -------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- -------------------------------------------------
$20 $64 $113 $255
- -------------------------------------------------
THIS EXAMPLE SHOULD NOT BE CONSIDERED TO REPRESENT ACTUAL EXPENSES OR
PERFORMANCE FROM THE PAST OR FOR THE FUTURE. ACTUAL FUTURE EXPENSES MAY BE
HIGHER OR LOWER THAN THOSE SHOWN.
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION
DIVIDENDS AND CAPITAL GAINS MINIMUM INITIAL INVESTMENT
Distributed annually in December $10 million
INVESTMENT ADVISER
The Vanguard Group, Valley Forge, NEWSPAPER ABBREVIATION
Pa., since inception EuroInst
INCEPTION DATE VANGUARD FUND NUMBER
May 5, 2000 235
NET ASSETS (INVESTOR SHARES) AS OF CUSIP NUMBER
DECEMBER 31, 1999 922042502
$6.1 billion
- --------------------------------------------------------------------------------
<PAGE>
5
FUND PROFILE--VANGUARD(R) PACIFIC STOCK
INDEX FUND INSTITUTIONAL SHARES
The following profile summarizes key features of Vanguard Pacific Stock Index
Fund Institutional Shares.
INVESTMENT OBJECTIVE
The Fund seeks to match the performance of the MSCI Pacific Free Index.*
*The designation "Free" in the name of the Index refers to the securities that
the Index tracks. Some countries restrict foreign investment in certain
industries, so only stocks that can be bought freely by a fund are tracked.
INVESTMENT STRATEGIES
The Fund employs a "passively managed"--or index--investment approach, by
investing all or substantially all of its assets in a representative sample of
the common stocks included in the MSCI Pacific Free Index. The MSCI Pacific Free
Index consists of approximately 420 common stocks of companies located in Japan
(which comprised 82% of the Index's market capitalization as of March 31, 2000),
Australia, Hong Kong, New Zealand, and Singapore. For more information about
passive management, see "Indexing Methods" under MORE ON THE FUNDS.
PRIMARY RISKS
THE FUND'S TOTAL RETURN, LIKE STOCK PRICES GENERALLY, WILL FLUCTUATE WITHIN A
WIDE RANGE, SO AN INVESTOR COULD LOSE MONEY OVER SHORT OR EVEN LONG PERIODS. The
Fund is also subject to:
- - Country risk, which is the chance that a country's economy will be hurt by
political troubles, financial problems, or natural disasters. The Index's,
and therefore the Fund's, heavy exposure to Japan involves a higher degree
of country risk than that of more geographically diversified international
funds.
- - Regional risk, which is the chance that an entire region--namely the
Pacific region--will be hurt by political troubles, financial problems, or
natural disasters.
- - Currency risk, which is the chance that returns will be hurt by a rise in
the value of the U.S. dollar versus foreign currencies.
- - Investment style risk, which is the chance that returns from foreign stocks
will trail returns from other asset classes or the overall stock market.
PERFORMANCE/RISK INFORMATION
The bar chart and table below provide an indication of the risk of investing in
the Fund. The bar chart shows the performance of the Investor Shares of the Fund
in each calendar year since inception. The table shows how the average annual
total returns of the Fund's Investor Shares for one and five calendar years and
since inception compare with those of a broad-based securities market index.
Keep in mind that the Fund's past performance does not indicate how it will
perform in the future.
<PAGE>
6
----------------------------------------------------
ANNUAL TOTAL RETURNS FOR INVESTOR SHARES
----------------------------------------------------
1991 10.65%
1992 -18.17%
1993 35.46%
1994 13.04%
1995 2.75%
1996 -7.82%
1997 -25.67%
1998 2.41%
1999 57.05%
----------------------------------------------------
Return figures do not reflect the transaction fee
imposed on purchases prior to April 1, 2000.
Note: This prospectus offers the Fund's Institutional
Shares, not the Investor Shares. Performance for the
Investor Shares is shown here because the Fund's
Institutional Shares are new and don't have a full
calendar year of performance. However, the two share
classes are invested in the same portfolio of
securities and will have the same returns except
that their operating expenses differ.
----------------------------------------------------
During the period shown in the bar chart, the highest return for a calendar
quarter was 26.50% (quarter ended December 31, 1998) and the lowest return for a
quarter was -20.69% (quarter ended December 31, 1997).
-------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS FOR YEARS ENDED DECEMBER 31, 1999
-------------------------------------------------------------------------
1 YEAR 5 YEARS SINCE INCEPTION*
-------------------------------------------------------------------------
Vanguard Pacific Stock Index
Fund Investor Shares** 57.05% 2.52% 3.20%
MSCI Pacific Free Index 56.38 2.39 3.08
-------------------------------------------------------------------------
*June 18, 1990.
**Return figures do not reflect the transaction fee imposed on purchases
prior to April 1, 2000.
-------------------------------------------------------------------------
FEES AND EXPENSES
The following table describes the fees and expenses you may pay if you buy and
hold Institutional Shares of the Fund. Since the Fund did not begin offering
Institutional Shares until May 5, 2000, the expenses shown under Annual Fund
Operating Expenses are based upon estimated amounts for the current fiscal year.
SHAREHOLDER FEES (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None
Transaction Fee on Purchases: None
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fee: None
Exchange Fee: None
ANNUAL FUND OPERATING EXPENSES (expenses deducted from the Fund's assets)
Management Expenses: 0.18%
12b-1 Distribution Fee: None
Other Expenses: 0.06%
TOTAL ANNUAL FUND OPERATING EXPENSES: 0.24%
<PAGE>
7
The following example is intended to help you compare the cost of investing in
the Fund with the cost of investing in other mutual funds. It illustrates the
hypothetical expenses that you would incur over various periods if you invest
$10,000 in the Fund's Institutional Shares. This example assumes that the Fund
provides a return of 5% a year, and that operating expenses remain the same. The
results apply whether or not you redeem your investment at the end of each
period.
- -------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- -------------------------------------------------
$30 $93 $163 $368
- -------------------------------------------------
THIS EXAMPLE SHOULD NOT BE CONSIDERED TO REPRESENT ACTUAL EXPENSES OR
PERFORMANCE FROM THE PAST OR FOR THE FUTURE. ACTUAL FUTURE EXPENSES MAY BE
HIGHER OR LOWER THAN THOSE SHOWN.
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION
DIVIDENDS AND CAPITAL GAINS MINIMUM INITIAL INVESTMENT
Distributed annually in December $10 million
INVESTMENT ADVISER
The Vanguard Group, Valley Forge, NEWSPAPER ABBREVIATION
Pa., since inception PacInst
INCEPTION DATE VANGUARD FUND NUMBER
May 5, 2000 237
NET ASSETS (INVESTOR SHARES) AS OF CUSIP NUMBER
DECEMBER 31, 1999 922042403
$2.5 billion
- --------------------------------------------------------------------------------
<PAGE>
8
FUND PROFILE--VANGUARD(R) EMERGING MARKETS
STOCK INDEX FUND INSTITUTIONAL SHARES
The following profile summarizes key features of Vanguard Emerging Markets Stock
Index Fund Institutional Shares.
INVESTMENT OBJECTIVE
The Fund seeks to match the performance of the Select Emerging Markets Free
Index.*
*The designation "Free" in the name of the Index refers to the securities that
the Index tracks. Some countries restrict foreign investment in certain
industries, so only stocks that can be bought freely are tracked.
INVESTMENT STRATEGIES
The Fund employs a "passively managed"--or index--investment approach, by
investing all or substantially all of its assets in a representative sample of
the common stocks included in the Select Emerging Markets Free Index. The Select
Emerging Markets Free Index includes approximately 500 common stocks of
companies located in emerging markets around the world. As of March 31, 2000,
the largest markets covered in the Index were Mexico, Brazil, and South Africa
(which comprised 16%, 14%, and 13% of the Index's market capitalization,
respectively). Other countries represented in the Index included Argentina, the
Czech Republic, Greece, Hungary, Indonesia, Israel, the Philippines, Poland,
Thailand, Turkey, Hong Kong, and Singapore. MSCI administers the Select Index
exclusively for Vanguard. For more information about passive management, see
"Indexing Methods" under MORE ON THE FUNDS.
PRIMARY RISKS
THE FUND'S TOTAL RETURN, LIKE STOCK PRICES GENERALLY, WILL FLUCTUATE WITHIN A
WIDE RANGE, SO AN INVESTOR COULD LOSE MONEY OVER SHORT OR EVEN LONG PERIODS. The
Fund is also subject to:
- - Country risk, which is the chance that a country's economy will be hurt by
political troubles, financial problems, or natural disasters. Country risk
is especially high for funds that focus on stocks in emerging markets. The
Index's, and therefore the Fund's, heavy exposure to Mexico, Brazil, and
South Africa involves a higher degree of country risk than that of more
geographically diversified international funds.
- - Currency risk, which is the chance that returns will be hurt by a rise in
the value of the U.S. dollar versus foreign currencies.
- - Investment style risk, which is the chance that returns from foreign stocks
will trail returns from other asset classes or the overall stock market.
PERFORMANCE/RISK INFORMATION
The bar chart and table below provide an indication of the risk of investing in
the Fund. The bar chart shows the performance of the Investor Shares of the Fund
in each calendar year since inception. The table shows how the average annual
total returns of the Fund's Investor Shares for one and five calendar years and
since inception compare with those of both a broad-based securities market index
and the Fund's target index. Keep in mind that the Fund's past performance does
not indicate how it will perform in the future.
<PAGE>
9
----------------------------------------------------
ANNUAL TOTAL RETURNS FOR INVESTOR SHARES
----------------------------------------------------
1995 0.56%
1996 15.83%
1997 -16.82%
1998 -18.12%
1999 61.57%
----------------------------------------------------
Return figures do not reflect the transaction fee
imposed on purchases and redemptions. If these
amounts were reflected, returns would be less than
those shown.
Note: This prospectus offers the Fund's Institutional
Shares, not the Investor Shares. Performance for the
Investor Shares is shown here because the Fund's
Institutional Shares are new and don't have a full
calendar year of performance. However, the two share
classes are invested in the same portfolio of
securities and will have the same returns except
that their operating expenses differ.
----------------------------------------------------
During the period shown in the bar chart, the highest return for a calendar
quarter was 28.32% (quarter ended December 31, 1999) and the lowest return for a
quarter was -21.52% (quarter ended June 30, 1998).
-------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS FOR YEARS ENDED DECEMBER 31, 1999
-------------------------------------------------------------------------
1 YEAR 5 YEARS SINCE INCEPTION*
-------------------------------------------------------------------------
Vanguard Emerging Markets
Stock Index Fund
Investor Shares** 59.96% 4.88% 6.03%
MSCI Emerging Markets
Free Index 66.40 2.00 3.69
Select Emerging Markets
Free Index+ 60.86 4.81 4.93
-------------------------------------------------------------------------
*May 4, 1994.
**Return figures reflect the 0.5% transaction fee imposed on purchases
and redemptions.
+The Select Emerging Markets Free Index is administered by MSCI
exclusively for Vanguard.
-------------------------------------------------------------------------
<PAGE>
10
FEES AND EXPENSES
The following table describes the fees and expenses you may pay if you buy and
hold Institutional Shares of the Fund. Since the Fund did not begin offering
Institutional Shares until May 5, 2000, the expenses shown under Annual Fund
Operating Expenses are based upon estimated amounts for the current fiscal year.
SHAREHOLDER FEES (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None
Transaction Fee on Purchases: 0.5%*
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fee: 0.5%**
Exchange Fee: None
ANNUAL FUND OPERATING EXPENSES (expenses deducted from the Fund's assets)
Management Expenses: 0.25%
12b-1 Distribution Fee: None
Other Expenses: 0.20%
TOTAL ANNUAL FUND OPERATING EXPENSES: 0.45%
*The transaction fee on purchases is deducted from all purchases
(including exchanges from other Vanguard funds) but not from
reinvested dividends and capital gains.
**The redemption fee applies to all redemptions (sales or exchanges);
it is deducted from redemption proceeds, and retained by the Fund.
The following example is intended to help you compare the cost of investing
in the Fund with the cost of investing in other mutual funds. It illustrates the
hypothetical expenses that you would incur over various periods if you invest
$10,000 in the Fund's Institutional Shares. This example assumes that the Fund
provides a return of 5% a year, that operating expenses remain the same, and
that you redeem all your shares at the end of each period.
- -------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- -------------------------------------------------
$148 $251 $363 $692
- -------------------------------------------------
You would pay the following expenses if you did not redeem your shares (the
difference being that the Fund's 0.5% redemption fee would not apply to any of
the periods below, as it would to those above):
- -------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- -------------------------------------------------
$96 $194 $301 $614
- -------------------------------------------------
THESE EXAMPLES SHOULD NOT BE CONSIDERED TO REPRESENT ACTUAL EXPENSES OR
PERFORMANCE FROM THE PAST OR FOR THE FUTURE. ACTUAL FUTURE EXPENSES MAY BE
HIGHER OR LOWER THAN THOSE SHOWN.
<PAGE>
11
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION
DIVIDENDS AND CAPITAL GAINS MINIMUM INITIAL INVESTMENT
Distributed annually in December $10 million
INVESTMENT ADVISER
The Vanguard Group, Valley Forge, NEWSPAPER ABBREVIATION
Pa., since inception EmergInst
INCEPTION DATE VANGUARD FUND NUMBER
May 5, 2000 239
NET ASSETS (INVESTOR SHARES) AS OF CUSIP NUMBER
DECEMBER 31, 1999 922042601
$1.1 billion
- --------------------------------------------------------------------------------
<PAGE>
12
FUND PROFILE--VANGUARD(R) INSTITUTIONAL DEVELOPED
MARKETS INDEX FUND
The following profile summarizes key features of Vanguard Institutional
Developed Markets Index Fund.
INVESTMENT OBJECTIVE
The Fund seeks to track the performance of the MSCI Europe, Australasia, Far
East (EAFE) Index.
INVESTMENT STRATEGIES
The Fund employs a "passively managed"--or index--investment approach. The Fund
seeks to track the performance of the MSCI EAFE Index by investing in two other
Vanguard funds--the European Stock Index Fund Institutional Shares and the
Pacific Stock Index Fund Institutional Shares. These other Vanguard funds have
the respective objectives of tracking the MSCI Europe Index and the MSCI Pacific
Free Index, which together comprise the MSCI EAFE Index. The Fund allocates all
or substantially all of its assets between the European Stock Index Fund
Institutional Shares and the Pacific Stock Index Fund Institutional Shares based
on the market capitalization of European and Pacific stocks in the MSCI EAFE
Index. The MSCI EAFE Index includes approximately 1,000 common stocks of
companies located in Europe, Australia, Asia, and the Far East. For more
information about passive management, see "Indexing Methods" under MORE ON THE
FUNDS.
PRIMARY RISKS
THE FUND'S TOTAL RETURN, LIKE STOCK PRICES GENERALLY, WILL FLUCTUATE WITHIN A
WIDE RANGE, SO AN INVESTOR COULD LOSE MONEY OVER SHORT OR EVEN LONG PERIODS. The
Fund is also subject to:
- - Country risk, which is the chance that a country's economy will be hurt by
political troubles, financial problems, or natural disasters.
- - Regional risk, which is the chance that an entire region--either Europe or
the Far East--will be hurt by political troubles, financial problems, or
natural disasters.
- - Currency risk, which is the chance that returns will be hurt by a rise in
the value of the U.S. dollar versus foreign currencies.
- - Investment style risk, which is the chance that returns from foreign stocks
will trail returns from other asset classes or the overall stock market.
PERFORMANCE/RISK INFORMATION
The Fund began operations on May 5, 2000, so performance information (including
annual total returns and average annual total returns) for a full calendar year
is not yet available.
<PAGE>
13
FEES AND EXPENSES
The following table describes the fees and expenses you may pay if you buy and
hold shares of the Fund. The expenses shown under Annual Fund Operating Expenses
are based on estimated amounts for the current fiscal year.
SHAREHOLDER FEES (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None
Transaction Fee on Purchases: None
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fee: None
Exchange Fee: None
ANNUAL FUND OPERATING EXPENSES (expenses deducted from the Fund's assets)
Indirect Operating Expenses: +
+Although Developed Markets Index Fund is not expected to incur any net
expenses directly, the Fund's shareholders indirectly bear the expenses
of the underlying Vanguard funds in which the Fund invests. See
THE FUNDS AND VANGUARD. It is estimated that the Fund's indirect
expense ratio for its first fiscal year, based on its underlying
investments, will be 0.20%.
The following example is intended to help you compare the cost of investing
in the Fund with the cost of investing in other mutual funds. It illustrates the
hypothetical expenses that you would incur over various periods if you invest
$10,000 in the Fund. This example assumes that the Fund provides a return of 5%
a year, and that operating expenses remain the same. The results apply whether
or not you redeem your investment at the end of each period.
- ------------------------
1 YEAR 3 YEARS
- ------------------------
$24 $74
- ------------------------
THIS EXAMPLE SHOULD NOT BE CONSIDERED TO REPRESENT ACTUAL EXPENSES OR
PERFORMANCE FROM THE PAST OR FOR THE FUTURE. ACTUAL FUTURE EXPENSES MAY BE
HIGHER OR LOWER THAN THOSE SHOWN.
- --------------------------------------------------------------------------------
ADDITIONAL INFORMATION
DIVIDENDS AND CAPITAL GAINS MINIMUM INITIAL INVESTMENT
Distributed annually in December $10 million
INVESTMENT ADVISER
The Vanguard Group, Valley Forge, NEWSPAPER ABBREVIATION
Pa., since inception DevMktInst
INCEPTION DATE VANGUARD FUND NUMBER
May 5, 2000 234
CUSIP NUMBER
921909800
- --------------------------------------------------------------------------------
<PAGE>
14
MORE ON THE FUNDS
The following sections discuss other important features of Vanguard
International Stock Index Funds and Vanguard Institutional Developed Markets
Index Fund, including indexing methods, fund characteristics, costs and
market-timing, fund turnover, and other investment policies and risks.
WHY INVEST IN INDEX FUNDS?
Index funds appeal to many investors for a number of reasons:
- - Diversification. Index funds generally invest in a diversified mix of
companies and industries.
- - Relative consistency. Index funds typically track the performance of
relevant market benchmarks more closely than comparable actively managed
funds do.
- - Low cost. Index funds do not have many of the expenses of an actively
managed fund--such as research--and keep trading activity, and thus
brokerage commissions, to a minimum.
- - Low realization of capital gains. Because an index fund typically sells
securities only to respond to redemption requests or to adjust the number
of shares it holds to reflect a change in its target index, the fund's
turnover rate--and thus its realization of capital gains--is usually very
low.
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
THE COSTS OF INVESTING
Costs are an important consideration in choosing a mutual fund. That's because
you, as a shareholder, pay the costs of operating a fund, plus any transaction
costs associated with the fund's buying and selling of securities. These costs
can erode a substantial portion of the gross income or capital appreciation a
fund achieves. Even seemingly small differences in expenses can, over time, have
a dramatic effect on a fund's performance.
- --------------------------------------------------------------------------------
INDEXING METHODS
Some index funds hold each stock found in their target indexes in about the same
proportions as represented in the indexes themselves.
Other index funds may use a different selection process. Because it would
be very expensive to buy all of the stocks held in certain indexes (the Select
Emerging Markets Free Index, for example, includes approximately 500 stocks),
funds tracking these larger indexes use a "sampling" technique. Using a
sophisticated computer program, these funds invest in stocks that will, in the
aggregate, recreate the key characteristics of their target indexes. For
instance, if 10% of the market capitalization of the MSCI Europe Index were
attributed to companies in Germany, Vanguard European Stock Index Fund would
invest about 10% of its assets in stocks of German issuers. Furthermore, the
Fund would construct a German portfolio whose size and industry weightings, as
well as average financial characteristics, approximated the German component of
the MSCI Europe Index. The European, Pacific, and Emerging Markets Stock Index
Funds each employ this sampling method of indexing.
While each Fund attempts to track the performance of its target index,
there is no guarantee that securities selected for the Fund will provide
investment performance exactly matching that of the index.
Yet another indexing approach is to invest in other index funds that seek
to track subsets of a target index. The Institutional Developed Markets Index
Fund uses this "fund of funds"
<PAGE>
15
approach, which can be very cost-effective and efficient when starting an index
fund from scratch. For example, the Institutional Developed Markets Index Fund
seeks to track the performance of the MSCI EAFE Index by investing in two other
Vanguard funds--the European Stock Index Fund Institutional Shares and the
Pacific Stock Index Fund Institutional Shares. These other Vanguard funds have
the respective objectives of tracking the MSCI Europe Index and the MSCI Pacific
Free Index, which together comprise the MSCI EAFE Index. The Fund allocates its
assets between the European Stock Index Fund Institutional Shares and the
Pacific Stock Index Fund Institutional Shares based on the market capitalization
of European and Pacific stocks in the MSCI EAFE Index.
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
"FUND OF FUNDS"
The term "fund of funds" is used to describe a mutual fund that pursues its
objective by investing in other mutual funds rather than in individual stocks or
bonds. A fund of funds may charge for its own direct expenses, in addition to
bearing a proportionate share of the expenses charged by the underlying funds in
which it invests. Funds of funds are best suited for long-term investors.
- --------------------------------------------------------------------------------
To track their target indexes as closely as possible, the European and
Pacific Stock Index Funds attempt to remain fully invested in foreign stocks
included in their particular indexes. Each Fund intends to invest at least 95%
of its total assets in the stocks of its target index. The Emerging Markets
Stock Index Fund normally invests 95% of its total assets in stocks of its
target index, holding the remaining 5% in cash reserves to meet daily redemption
requests. Institutional Developed Markets Index Fund normally holds100% of its
assets in shares of its underlying funds.
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
THE RISKS OF INTERNATIONAL INVESTING
Because foreign stock markets operate differently from the U.S. market,
Americans investing abroad will encounter risks not typically associated with
U.S. companies. For instance, foreign companies are not subject to the same
accounting, auditing, and financial reporting standards and practices as U.S.
companies; and their stocks may not be as liquid as those of similar U.S.
companies. In addition, foreign stock exchanges, brokers, and companies
generally have less government supervision and regulation than their
counterparts in the United States. These factors, among others, could negatively
impact the returns Americans receive from foreign investments.
- --------------------------------------------------------------------------------
[FLAG] EACH FUND IS SUBJECT TO STOCK MARKET RISK, WHICH IS THE CHANCE THAT STOCK
PRICES OVERALL WILL DECLINE OVER SHORT OR EVEN LONG PERIODS. STOCK MARKETS
TEND TO MOVE IN CYCLES, WITH PERIODS OF RISING PRICES AND PERIODS OF
FALLING PRICES.
IN ADDITION, INVESTMENTS IN FOREIGN STOCK MARKETS CAN BE RISKIER THAN
U.S. STOCK INVESTMENTS. THE PRICES OF INTERNATIONAL STOCKS AND THE PRICES
OF U.S. STOCKS HAVE OFTEN MOVED IN OPPOSITE DIRECTIONS. THESE PERIODS HAVE,
IN THE PAST, LASTED FOR AS LONG AS SEVERAL YEARS.
<PAGE>
16
To illustrate the volatility of international stock prices, the following
table shows the best, worst, and average total returns for foreign stock markets
over various periods as measured by the MSCI EAFE Index, a widely used barometer
of international market activity. (Total returns consist of dividend income plus
change in market price.) Note that the returns shown do not include the costs of
buying and selling stocks or other expenses that a real-world investment
portfolio would incur. Note, also, that the gap between best and worst tends to
narrow over the long term.
- ----------------------------------------------------------
INTERNATIONAL STOCK MARKET RETURNS (1969-1999)
- ----------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS 20 YEARS
- ----------------------------------------------------------
Best 69.9% 36.5% 22.8% 16.3%
Worst -23.2 1.5 5.9 12.0
Average 15.2 13.6 14.5 14.7
- ----------------------------------------------------------
The table covers all of the 1-, 5-, 10-, and 20-year periods from 1969
through 1999. Keep in mind that this was a particularly favorable period for all
stock markets. These average returns reflect past performance on international
stocks; you should not regard them as an indication of future returns from
either foreign markets as a whole or any of the Funds in particular.
Note that the preceding chart does not take into account returns measured
by the MSCI Emerging Markets Free Index, a widely used barometer of less
developed stock markets. Emerging markets can be substantially more volatile
than more developed foreign markets. In addition, because the MSCI EAFE Index
tracks the European and Pacific markets collectively, the above returns do not
reflect the variability of returns from year to year for these markets
individually, or the variability across these and other geographic regions or
market sectors. To illustrate this variability, the following table shows
returns for different international markets--as well as the U.S. market for
comparison--from 1990 to 1999, as measured by their respective indexes. Note
that the returns shown do not include the costs of buying and selling stocks or
other expenses that a real-world investment portfolio would incur.
<PAGE>
17
- --------------------------------------------------------------------------------
STOCK MARKET RETURNS FOR DIFFERENT INTERNATIONAL MARKETS*
- --------------------------------------------------------------------------------
EUROPEAN PACIFIC EMERGING U.S.
MARKET MARKET MARKETS MARKETS
- --------------------------------------------------------------------------------
1990 -2.00% -34.43% -10.55% -3.10%
1991 14.12 11.51 59.91 30.47
1992 -3.92 -18.51 11.40 7.62
1993 29.25 36.15 74.84 10.08
1994 2.82 12.82 -7.31 1.32
1995 22.08 2.89 0.01** 37.58
1996 21.42 -8.23 15.19 22.96
1997 23.75 -25.74 -16.37 33.36
1998 28.68 2.64 -18.39 28.58
1999 15.77 56.38 60.86 21.04
- --------------------------------------------------------------------------------
* European market returns are measured by the MSCI Europe Index; Pacific
market returns are measured by the MSCI Pacific Free Index; emerging
markets returns are measured by the Select Emerging Markets Free Index;
and U.S. market returns are measured by the Standard & Poor's 500 Index.
** The inception date of the Select Emerging Markets Free Index was May 4,
1994; returns shown for 1990 to 1994 are measured by the MSCI Emerging
Markets Free Index.
- --------------------------------------------------------------------------------
Keep in mind, however, that these average returns reflect past performance
of the various indexes; you should not consider them as an indication of future
returns from the indexes, or from any of the Funds in particular.
[FLAG] EACH FUND IS SUBJECT TO COUNTRY RISK, WHICH IS THE CHANCE THAT POLITICAL
EVENTS (A WAR, NATIONAL ELECTIONS), FINANCIAL PROBLEMS (RISING INFLATION,
GOVERNMENT DEFAULT), OR NATURAL DISASTERS (AN EARTHQUAKE, A FLOOD) WILL
WEAKEN A COUNTRY'S ECONOMY AND CAUSE INVESTMENTS IN THAT COUNTRY TO LOSE
MONEY.
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
REGIONAL VERSUS BROAD INTERNATIONAL INVESTING
Regional funds are international funds that invest in a particular geographical
region, such as Europe or the Pacific Basin. Because they concentrate their
holdings in a single region, these funds typically have higher share price
volatility than broadly diversified international stock funds (which, by
investing in many different foreign markets, may offset losses from one country
with gains from another at any given time).
- --------------------------------------------------------------------------------
EUROPEAN STOCK INDEX FUND. Stocks from the United Kingdom, France, Germany,
and the Netherlands comprised 29%, 15%, 14%, and 8% of the MSCI Europe Index,
respectively, as of March 31, 2000; stocks from the remaining 11 countries in
the Index have much less significant market capitalization weightings in the
Index and thus much less impact on the Fund's total return. The Fund's heavy
exposure to just four countries involves a higher degree of country risk than
that of more geographically diversified international funds.
PACIFIC STOCK INDEX FUND. Japanese stocks comprised 82% of the MSCI Pacific
Free Index as of March 31, 2000. Therefore, Japanese stocks represent a
correspondingly large component of the Pacific Stock Index Fund's assets. The
Fund's large investment in the
<PAGE>
18
Japanese stock market involves a higher degree of country risk than that of more
geographically diversified international funds.
EMERGING MARKETS STOCK INDEX FUND. As discussed above, emerging markets can
be substantially more volatile than both U.S. and more developed foreign
markets. Therefore, the Emerging Markets Stock Index Fund may expose investors
to a higher degree of volatility than funds that invest in more developed
markets.
INSTITUTIONAL DEVELOPED MARKETS INDEX FUND. As a fund of funds, the
Institutional Developed Markets Index Fund intends to invest all of its assets
in shares of the European and Pacific Stock Index Funds Institutional Shares;
indirectly, its country risk will proportionately mirror that of the European
and Pacific Stock Index Funds.
[FLAG] EACH FUND IS SUBJECT TO CURRENCY RISK, WHICH IS THE CHANCE THAT A
STRONGER U.S. DOLLAR WILL REDUCE RETURNS FOR AMERICANS INVESTING OVERSEAS.
GENERALLY, WHEN THE DOLLAR RISES IN VALUE AGAINST ANOTHER COUNTRY'S
CURRENCY, YOUR INVESTMENT IN THAT COUNTRY LOSES VALUE BECAUSE ITS CURRENCY
IS WORTH FEWER U.S. DOLLARS. ON THE OTHER HAND, A WEAKER U.S. DOLLAR
GENERALLY LEADS TO HIGHER RETURNS FOR AMERICANS HOLDING FOREIGN
INVESTMENTS.
SECURITY SELECTION
In seeking to track its target index, the European Stock Index, Pacific Stock
Index, and Emerging Markets Stock Index Funds each invest in a portfolio of
foreign stocks selected in a manner that mirrors the weightings of their target
indexes. The Institutional Developed Markets Index Fund simply invests in the
Institutional Shares of the European and Pacific Stock Index Funds. Each Fund
seeks to provide investment results that correspond to its target index. The
correlation between the performance of a Fund and its target index is expected
to be at least 95%. (A correlation of 100% would indicate perfect correlation.)
EUROPEAN STOCK INDEX FUND. The Fund invests in a statistically selected
sample of approximately 550 common stocks included in the MSCI Europe Index,
which is made up of the stocks of companies located in 15 European countries.
Four countries--the United Kingdom, France, Germany, and the
Netherlands--dominate the Index, with 29%, 15%, 14%, and 8% of the market
capitalization of the Index, respectively, as of March 31, 2000. The other 11
countries, which include Austria, Belgium, Denmark, Finland, Ireland, Italy,
Norway, Portugal, Spain, Sweden, and Switzerland, are much less significant to
the Index and, consequently, the Fund.
PACIFIC STOCK INDEX FUND. The Fund invests in a statistically selected
sample of the approximately 420 common stocks included in the MSCI Pacific Free
Index, which is comprised of the stocks of Pacific Basin companies. The Index is
dominated by the Japanese stock market, which represented 82% of the market
capitalization of the Index as of March 31, 2000. The other four countries
represented in the Index are Australia, Hong Kong, New Zealand, and Singapore.
EMERGING MARKETS STOCK INDEX FUND. The Fund invests in a statistically
selected sample of the approximately 500 common stocks included in the Select
Emerging Markets Free Index, which is made up of the stocks of companies located
in 13 emerging markets of Europe, Asia, Africa, and Latin America. Three
countries--Mexico, Brazil, and South Africa--represent a majority of the Index,
with 16%, 14%, and 13% of the market capitalization of the Index, respectively,
as of March 31, 2000. The other 10 countries include Argentina, the Czech
Republic, Greece, Hungary, Indonesia, Israel, Philippines, Poland, Thailand, and
Turkey. The developed countries of Hong Kong and Singapore are included in
<PAGE>
19
the Index to broaden diversification and ensure adequate liquidity. The Index is
called "select" because it is modeled on a larger index--the MSCI Emerging
Markets Free Index--but with certain adjustments designed to reduce risk. For
instance, MSCI considers the Hong Kong and Singapore markets too mature to
include in its index, but they are part of the Select Index. Conversely, as of
March 31, 2000, the Select Index excluded certain countries found in the MSCI
Emerging Markets Free Index--Chile, China, Colombia, India, Jordan, Korea,
Pakistan, Peru, Russia, Sri Lanka, and Taiwan--due to concerns about liquidity
or entry barriers in those markets. MSCI administers the Select Index
exclusively for Vanguard, and periodically adjusts the included countries to
keep pace with evolution in world markets. (Such adjustments are made on a
forward-looking basis, so past performance of the Select Index always reflects
actual country representation during the relevant period.)
Although index funds, by their nature, tend to be tax-efficient investment
vehicles, the Funds are generally managed without regard to tax ramifications.
TRANSACTION FEES
Some of Vanguard's index funds charge a transaction fee on purchases of fund
shares to offset the higher costs of trading certain securities, particularly
small-company and international stocks. The transaction fee ensures that these
higher costs are borne by the investors making the transactions--and not by
shareholders already in the fund who do not generate the costs. All transaction
fees are paid directly to the fund itself (unlike a sales charge or load that
non-Vanguard funds may impose to compensate their sales representatives).
Without transaction fees, some index funds would have trouble tracking their
target indexes.
COSTS AND MARKET-TIMING
Some investors try to profit from a strategy called market-timing--switching
money into investments when they expect prices to rise, and taking money out
when they expect prices to fall. As money is shifted in and out, a fund incurs
expenses for buying and selling securities. These costs are borne by all fund
shareholders, including the long-term investors who do not generate the costs.
Therefore, the Vanguard International and Vanguard Institutional Developed
Markets Index Funds have adopted the following policies, among others, designed
to discourage short-term trading:
- - Each Fund reserves the right to reject any purchase request--including
exchanges from other Vanguard funds--that it regards as disruptive to the
efficient management of the Fund. A purchase request could be rejected
because of the timing of the investment or because of a history of
excessive trading by the investor.
- - The Emerging Markets Stock Index Fund charges a transaction fee on
purchases and redemptions.
- - Telephone and online exchanges are not accepted for non-IRA accounts.
- - There is a limit on the number of times you can exchange into and out of a
Fund (see "Redeeming Shares" in the INVESTING WITH VANGUARD section).
- - Each Fund reserves the right to stop offering shares at any time.
THE VANGUARD FUNDS DO NOT PERMIT MARKET-TIMING. DO NOT INVEST IN THESE
FUNDS IF YOU ARE A MARKET-TIMER.
<PAGE>
20
TURNOVER RATE
Although each Fund seeks to invest for the long term, the Funds retain the right
to sell securities regardless of how long the securities have been held.
Generally, a passively-managed fund sells securities only to respond to
redemption requests or to adjust the number of shares held to reflect a change
in the fund's target index. Because of this, the turnover rate for each Fund has
been extremely low. The Financial Highlights tables beginning on page 26 show
historic turnover rates for each Fund.
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
TURNOVER RATE
Before investing in a mutual fund, you should review its turnover rate. This
gives an indication of how transaction costs could affect the fund's future
returns. In general, the greater the volume of buying and selling by the fund,
the greater the impact that brokerage commissions and other transaction costs
will have on its return. Also, funds with high turnover rates may be more likely
to generate capital gains that must be distributed to shareholders as income
subject to taxes. The average turnover rate for passively managed foreign stock
index funds in 1999 was roughly 17%; for all foreign stock funds, the average
turnover was approximately 76%, according to Morningstar, Inc. (A turnover rate
of 100% would occur, for example, if a fund sold and replaced securities valued
at 100% of its net assets within a one-year period.)
- --------------------------------------------------------------------------------
OTHER INVESTMENT POLICIES AND RISKS
Besides investing in common stocks of foreign companies, each Fund may make
certain other kinds of investments to achieve its objective. Each Fund may
change its objective without shareholder approval.
The Funds may also invest, to a limited extent, in futures and options
contracts, warrants, convertible securities, and swap agreements, which are
types of derivatives. Losses (or gains) involving futures contracts can
sometimes be substantial--in part because a relatively small price movement in a
futures contract may result in an immediate and substantial loss (or gain) for a
fund. Similar risks exist for warrants (securities that permit their owners to
purchase a specific number of shares of stock at a predetermined price),
convertible securities (securities that may be exchanged for another asset), and
swap agreements (contracts between two parties in which each agrees to make
payments to the other based on the return of a specified index or asset).
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
DERIVATIVES
A derivative is a financial contract whose value is based on (or "derived" from)
a traditional security (such as a stock or a bond), an asset (such as a
commodity like gold), or a market index (such as the S&P 500 Index). Futures and
options are derivatives that have been trading on regulated exchanges for more
than two decades. These "traditional" derivatives are standardized contracts
that can easily be bought and sold, and whose market values are determined and
published daily. It is these characteristics that differentiate futures and
options from the relatively new types of derivatives. If used for speculation or
as leveraged investments, derivatives can carry considerable risks.
- --------------------------------------------------------------------------------
<PAGE>
21
For this reason, the Funds will not use futures, options, warrants,
convertible securities, or swap agreements for speculative purposes or as
leveraged investments that magnify the gains or losses of an investment. A
Fund's obligation under futures contracts will not exceed 20% of its total
assets.
The reasons for which a Fund will invest in futures and options are:
- - To keep cash on hand to meet shareholder redemptions or other needs while
simulating full investment in stocks.
- - To reduce the Fund's transaction costs or add value when these instruments
are favorably priced.
Each Fund may also enter into forward foreign currency contracts in order
to maintain the same currency exposure as its respective Index. A forward
foreign currency contract is an agreement to buy or sell a country's currency at
a specific price on a specific date, usually 30, 60, or 90 days in the future.
In other words, the contract guarantees an exchange rate on a given date.
Managers of international stock funds typically use these contracts to guard
against sudden, unfavorable changes in U.S. dollar/foreign currency exchange
rates. However, the Funds will use these contracts for different reasons:
- - To gain currency exposure when investing in futures.
- - To settle trades in a foreign currency.
THE FUNDS AND VANGUARD
The Funds are offered by The Vanguard Group, a family of more than 35 investment
companies with more than 100 funds holding assets worth more than $550 billion.
All of the Vanguard funds share in the expenses associated with business
operations, such as personnel, office space, equipment, and advertising.
Vanguard also provides marketing services to the funds. Although
shareholders do not pay sales commissions or 12b-1 distribution fees, each fund
pays its allocated share of The Vanguard Group's marketing costs.
Vanguard Institutional Developed Markets Index Fund will indirectly bear a
proportionate share of the expenses of the underlying funds in which it invests.
However, the Fund's direct expenses are expected to be very low or zero. The
Fund may operate without incurring direct expenses because Vanguard will
reimburse it for (i) its contributions to the cost of operating the underlying
funds in which it invests, and (ii) savings in administrative and marketing
costs that Vanguard expects to derive from its operations.
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
VANGUARD'S UNIQUE CORPORATE STRUCTURE
The Vanguard Group is truly a MUTUAL mutual fund company. It is owned jointly by
the funds it oversees and thus indirectly by the shareholders in those funds.
Most other mutual funds are operated by for-profit management companies that may
be owned by one person, by a group of individuals, or by investors who own the
management company's stock. By contrast, Vanguard provides its services on an
"at-cost" basis, and the funds' expense ratios reflect only these costs. No
separate management company reaps profits or absorbs losses from operating the
funds.
- --------------------------------------------------------------------------------
<PAGE>
22
INVESTMENT ADVISER
The Vanguard Group (Vanguard), P.O. Box 2600, Valley Forge, PA 19482, founded in
1975, serves as the Funds' adviser through its Quantitative Equity Group.
(Institutional Developed Markets Index Fund receives advisory services
indirectly, by investing in the European and Pacific Stock Index Funds
Institutional Shares.) Vanguard manages the Funds on an at-cost basis, subject
to the control of the Trustees and officers of the Funds. The Funds began
operations on May 5, 2000. Advisory fees for the first fiscal year of the
European, Pacific, and Emerging Markets Stock Index Funds Institutional Shares
is estimated at an effective annual rate of less than 0.01% each.
The Funds have authorized Vanguard to choose brokers or dealers to handle
the purchase and sale of securities for the Funds, and to get the best available
price and most favorable execution from these brokers or dealers with respect to
all transactions. The Funds may direct Vanguard to use a particular broker for
certain transactions in exchange for commission rebates or research services
provided to the Funds.
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
THE FUNDS' ADVISER
The Vanguard Group provides investment advisory services to many Vanguard funds;
as of December 31, 1999, the Group managed more than $371 billion in total
assets. The individual responsible for overseeing the European, Pacific, and
Emerging Markets Stock Index Funds' investments is:
GEORGE U. SAUTER, Managing Director of Vanguard, and head of Vanguard's
Quantitative Equity Group; has worked in investment management since 1985;
primary responsibility for Vanguard's stock indexing policy and strategy since
joining the company in 1987; A.B., Dartmouth College; M.B.A., University of
Chicago.
- --------------------------------------------------------------------------------
DIVIDENDS, CAPITAL GAINS, AND TAXES
FUND DISTRIBUTIONS
Each Fund distributes to shareholders virtually all of its net income (interest
and dividends, less expenses), as well as any capital gains realized from the
sale of its holdings. Distributions generally occur in December. In addition, a
Fund may occasionally be required to make supplemental dividend or capital gains
distributions at some other time during the year. You can receive distributions
of income dividends or capital gains in cash, or you can have them automatically
reinvested in more shares of the Fund.
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
DISTRIBUTIONS
As a shareholder, you are entitled to your share of the fund's income from
interest and dividends, and gains from the sale of investments. You receive such
earnings as either an income dividend or a capital gains distribution. Income
dividends come from both the dividends that the fund earns from its holdings and
the interest it receives from its money market and bond investments. Capital
gains are realized whenever the fund sells securities for higher prices than it
paid for them. These capital gains are either short-term or long-term, depending
on whether the fund held the securities for one year or less, or more than one
year.
- --------------------------------------------------------------------------------
<PAGE>
23
BASIC TAX POINTS
Vanguard will send you a statement each year showing the tax status of all your
distributions. In addition, taxable investors should be aware of the following
basic tax points:
- - Distributions are taxable to you for federal income tax purposes whether or
not you reinvest these amounts in additional Fund shares.
- - Distributions declared in December--if paid to you by the end of
January--are taxable for federal income tax purposes as if received in
December.
- - Any dividends and short-term capital gains that you receive are taxable to
you as ordinary income for federal income tax purposes.
- - Any distributions of net long-term capital gains are taxable to you as
long-term capital gains for federal income tax purposes, no matter how long
you've owned shares in the Fund.
- - Capital gains distributions may vary considerably from year to year as a
result of the Funds' normal investment activities and cash flows.
- - A sale or exchange of Fund shares is a taxable event. This means that you
may have a capital gain to report as income, or a capital loss to report as
a deduction, when you complete your federal income tax return.
- - State and local income taxes may apply to any dividend or capital gains
distributions that you receive, as well as to your gains or losses from any
sale or exchange of Fund shares.
- - The European, Pacific, and Emerging Markets Stock Index Funds may be
subject to foreign taxes or foreign tax withholding on dividends, interest,
and some capital gains that they receive on foreign securities. You may
qualify for an offsetting credit or deduction under U.S. tax laws for your
portion of a Fund's foreign tax obligations, provided that you meet certain
requirements. Because the Institutional Developed Markets Index Fund
invests in foreign stocks indirectly through the European and Pacific Stock
Index Funds, its investors are not able to take advantage of foreign tax
credits or deductions. See your tax adviser or IRS publications for more
information.
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
"BUYING A DIVIDEND"
Unless you are investing through a tax-deferred retirement account (such as an
IRA), you should avoid buying shares of a fund shortly before it makes a
distribution, because doing so can cost you money in taxes. This is known as
"buying a dividend." For example: On December 15, you invest $5,000, buying 250
shares for $20 each. If the fund pays a distribution of $1 per share on December
16, its share price would drop to $19 (not counting market change). You still
have only $5,000 (250 shares x $19 = $4,750 in share value, plus 250 shares x $1
= $250 in distributions), but you owe tax on the $250 distribution you
received--even if you reinvest it in more shares. To avoid "buying a dividend,"
check a fund's distribution schedule before you invest.
- --------------------------------------------------------------------------------
GENERAL INFORMATION
BACKUP WITHHOLDING. By law, Vanguard must withhold 31% of any taxable
distributions or redemptions from your account if you do not:
- - provide us with your correct taxpayer identification number;
- - certify that the taxpayer identification number is correct; and
- - confirm that you are not subject to backup withholding.
Similarly, Vanguard must withhold from your account if the IRS instructs us to
do so.
<PAGE>
24
FOREIGN INVESTORS. The Vanguard funds generally do not offer their shares for
sale outside of the United States. Foreign investors should be aware that U.S.
withholding and estate taxes may apply to any investments in Vanguard funds.
INVALID ADDRESSES. If a dividend or capital gains distribution check mailed to
your address of record is returned as undeliverable, Vanguard will automatically
reinvest all future distributions until you provide us with a valid mailing
address.
TAX CONSEQUENCES. This prospectus provides general tax information only. If you
are investing through a tax-deferred retirement account, such as an IRA, special
tax rules apply. Please consult your tax adviser for detailed information about
a fund's tax consequences for you.
SHARE PRICE
Each Fund's share price, called its net asset value, or NAV, is calculated each
business day after the close of regular trading on the New York Stock Exchange
(the NAV is not calculated on holidays or other days when the Exchange is
closed). Net asset value per share for the Institutional Developed Markets Index
Fund is computed by adding up the total value of the Fund's investments (i.e.,
shares of the underlying funds) and other assets, subtracting any of its
liabilities (debts), and then dividing by the number of Fund shares outstanding:
TOTAL ASSETS - LIABILITIES
NET ASSET VALUE = --------------------------------
NUMBER OF SHARES OUTSTANDING
Net asset value per share for the European, Pacific, and Emerging Markets
Stock Index Funds is computed in a similar way, by dividing the net assets
attributed to each class by the number of Fund shares outstanding for that
class.
Knowing the daily net asset value is useful to you as a shareholder because
it indicates the current value of your investment. The Fund's NAV, multiplied by
the number of shares you own, gives you the dollar amount you would have
received had you sold all of your shares back to the Fund that day. Because
foreign securities markets may operate on days which are not business days in
the United States, the value of a Fund's holdings may change on days when
shareholders will not be able to purchase or redeem the Fund's shares.
A NOTE ON PRICING: A Fund's investments will be priced at their market
value when market quotations are readily available. When these quotations are
not readily available, investments will be priced at their fair value,
calculated according to procedures adopted by the Funds' Board of Trustees. A
Fund also may use fair value pricing if the value of a security held by the Fund
is materially affected by events occurring after the close of the primary
markets or exchanges on which such security is traded. In these situations,
prices used by the Fund to calculate its net asset value may differ from quoted
or published prices for the underlying securities.
Each Fund's share price can be found daily in the mutual fund listings of
most major newspapers under the heading "Vanguard Index Funds." Different
newspapers use different abbreviations for each Fund, but the most common are
EUROINST, PACINST, EMERGINST, and DEVMKTINST for the Institutional Shares of the
European, Pacific, and Emerging Markets Stock Index Funds, and the Institutional
Developed Markets Index Fund, respectively.
<PAGE>
25
FINANCIAL HIGHLIGHTS
The following financial highlights tables are intended to help you understand
each Fund's financial performance for the past five years or since inception
(except for Institutional Developed Markets Index Fund, which did not start
operations until May 5, 2000), and certain information reflects financial
results for a single Fund share. The total returns in each table represent the
rate that an investor would have earned or lost each year on an investment in
the Fund (assuming reinvestment of all dividend and capital gains
distributions). This information has been derived from the financial statements
audited by PricewaterhouseCoopers LLP, independent accountants, whose
report--along with each Fund's financial statements--is included in the Funds'
most recent annual report to shareholders. You may have the annual report sent
to you without charge by contacting Vanguard.
NOTE: This prospectus offers the Funds' Institutional Shares, not the Investor
Shares. Information for the Investor Shares is shown here because each of the
Fund's Institutional Shares are new. However, the two share classes are invested
in the same portfolio of securities and will have the same financial performance
except to the extent that their operating expenses differ.
- --------------------------------------------------------------------------------
PLAIN TALK ABOUT
HOW TO READ THE FINANCIAL HIGHLIGHTS TABLE
This explanation uses the European Stock Index Fund Investor Shares as an
example. The Fund began fiscal 1999 with a net asset value (price) of $25.28 per
share. During the year, the Fund earned $0.50 per share from investment income
(interest and dividends) and $3.69 per share from investments that had
appreciated in value or that were sold for higher prices than the Fund paid for
them.
Shareholders received $0.65 per share in the form of dividend and capital gains
distributions. A portion of each year's distributions may come from the prior
year's income or capital gains.
The earnings ($4.19 per share) minus the distributions ($0.65 per share)
resulted in a share price of $28.82 at the end of the year. This was an increase
of $3.54 per share (from $25.28 at the beginning of the year to $28.82 at the
end of the year). For a shareholder who reinvested the distributions in the
purchase of more shares, the total return from the Fund was 16.62% for the year.
As of December 31, 1999, the Fund had $6.1 billion in net assets. For the year,
its expense ratio was 0.29% ($2.90 per $1,000 of net assets); and its net
investment income amounted to 1.99% of its average net assets. It sold and
replaced securities valued at 7% of its net assets.
- --------------------------------------------------------------------------------
<PAGE>
26
FINANCIAL HIGHLIGHTS (CONTINUED)
- --------------------------------------------------------------------------------
VANGUARD EUROPEAN STOCK INDEX FUND
INVESTOR SHARES
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------
NET ASSET VALUE,
BEGINNING OF YEAR $25.28 $20.13 $16.57 $14.02 $11.76
- --------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .50 .41 .38 .34 .32
Net Realized and
Unrealized Gain
(Loss) on Investments 3.69 5.40 3.63 2.63 2.30
--------------------------------------------------------
Total from Investment
Operations 4.19 5.81 4.01 2.97 2.62
--------------------------------------------------------
DISTRIBUTIONS
Dividends from Net
Investment Income (.50) (.52) (.37) (.36) (.32)
Distributions from
Realized Capital Gains (.15) (.14) (.08) (.06) (.04)
--------------------------------------------------------
Total Distributions (.65) (.66) (.45) (.42) (.36)
- --------------------------------------------------------------------------------
NET ASSET VALUE, END
OF YEAR $28.82 $25.28 $20.13 $16.57 $14.02
================================================================================
TOTAL RETURN* 16.62% 28.86% 24.23% 21.26% 22.28%
================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of
Year (Millions) $6,106 $4,479 $2,432 $1,595 $1,017
Ratio of Total
Expenses to Average
Net Assets 0.29% 0.29% 0.31% 0.35% 0.35%
Ratio of Net
Investment Income to
Average Net Assets 1.99% 1.97% 2.19% 2.45% 2.66%
Turnover Rate 7% 7% 3% 4% 2%
================================================================================
*Total return figures do not reflect the transaction fee on purchases imposed
prior to 4/1/2000.
- --------------------------------------------------------------------------------
VANGUARD PACIFIC STOCK INDEX FUND
INVESTOR SHARES
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------
NET ASSET VALUE,
BEGINNING OF YEAR $ 7.84 $7.72 $10.51 $11.50 $11.31
- --------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .08 .085 .09 .10 .10
Net Realized and
Unrealized Gain
(Loss) on Investments 4.39 .100 (2.79) (1.00) .21
--------------------------------------------------------
Total from Investment
Operations 4.47 .185 (2.70) (.90) .31
--------------------------------------------------------
DISTRIBUTIONS
Dividends from Net
Investment Income (.09) (.065) (.09) (.09) (.12)
Distributions from
Realized Capital Gains -- -- -- -- --
--------------------------------------------------------
Total Distributions (.09) (.065) (.09) (.09) (.12)
- --------------------------------------------------------------------------------
NET ASSET VALUE, END
OF YEAR $12.22 $7.84 $ 7.72 $10.51 $11.50
================================================================================
TOTAL RETURN* 57.05% 2.41% -25.67% -7.82% 2.75%
================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of
Year (Millions) $2,526 $1,033 $827 $978 $831
Ratio of Total
Expenses to Average
Net Assets 0.37% 0.40% 0.35% 0.35% 0.35%
Ratio of Net
Investment Income to
Average Net Assets 0.95% 1.17% 1.03% 0.89% 0.97%
Turnover Rate 6% 4% 8% 9% 1%
================================================================================
*Total return figures do not reflect the transaction fee on purchases imposed
prior to 4/1/2000.
<PAGE>
27
- --------------------------------------------------------------------------------
VANGUARD EMERGING MARKETS STOCK INDEX FUND
INVESTOR SHARES
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------
NET ASSET VALUE,
BEGINNING OF YEAR $ 7.91 $9.98 $12.28 $10.75 $10.87
- --------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .24 .27 .24 .18 .15
Net Realized and
Unrealized Gain
(Loss) on Investments 4.62 (2.08) (2.31) 1.52 (.09)
--------------------------------------------------------
Total from Investment
Operations 4.86 (1.81) (2.07) 1.70 .06
--------------------------------------------------------
DISTRIBUTIONS
Dividends from Net
Investment Income (.27) (.26) (.23) (.17) (.18)
Distributions from
Realized Capital Gains -- -- -- -- --
--------------------------------------------------------
Total Distributions (.27) (.26) (.23) (.17) (.18)
- --------------------------------------------------------------------------------
NET ASSET VALUE, END
OF YEAR $21.50 $7.91 $ 9.98 $12.28 $10.75
================================================================================
TOTAL RETURN* 61.57% -18.12% -16.82% 15.83% 0.56%
================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of
Year (Millions) $1,138 $577 $660 $637 $234
Ratio of Total
Expenses to Average
Net Assets 0.58% 0.61% 0.57% 0.60% 0.60%
Ratio of Net
Investment Income to
Average Net Assets 2.55% 2.99% 1.96% 1.69% 2.00%
Turnover Rate 22% 22% 19% 1% 3%
================================================================================
*Total return figures do not reflect the transaction fee on purchases (0.5%
beginning 4/1/2000, 1.0% from 11/3/1997 to 3/31/2000, 1.5% from 1/1/1997 to
11/2/1997, 2.0% in 1995 through 1996), or the transaction fee on redemptions
(0.5% beginning 4/1/2000, 1.0% through 3/31/2000).
The Funds are not sponsored, sold, promoted, or endorsed by Morgan Stanley
Capital International. Standard & Poor's(R)," "S&P(R)," "S&P 500(R)," "Standard
& Poor's 500," and "500," are trademarks of The McGraw-Hill Companies, Inc., and
have been licensed for use by The Vanguard Group.
<PAGE>
28
- --------------------------------------------------------------------------------
INVESTING WITH VANGUARD
Are you looking for the most convenient way to open or add money to a Vanguard
account? Obtain instant access to fund information? Establish an account for a
minor child or for your retirement savings?
Vanguard can help. Our goal is to make it easy and pleasant for you to do
business with us.
The following sections of the prospectus briefly explain the many services
we offer. Booklets providing detailed information are available on the services
marked with a [BOOK ICON]. Please call us to request copies.
- --------------------------------------------------------------------------------
SERVICES AND ACCOUNT FEATURES
Vanguard offers many services that make it convenient to buy, sell, or exchange
shares, or to obtain fund or account information.
- --------------------------------------------------------------------------------
TELEPHONE REDEMPTIONS (SALES AND EXCHANGES)
Automatically set up for this Fund unless you notify us otherwise.
Note: Limitations do apply; see page 32.
- --------------------------------------------------------------------------------
VANGUARD(R) AUTOMATIC EXCHANGE SERVICE [BOOK ICON]
Automatic method for moving a fixed amount of money from one Vanguard fund
account to another.
- --------------------------------------------------------------------------------
VANGUARD TELE-ACCOUNT(R) 1-800-662-6273 (ON-BOARD) [BOOK ICON]
Toll-free 24-hour access to Vanguard fund and account information--as well as
some transactions--by using any touch-tone phone. Tele-Account provides total
return, share price, price change, and yield quotations for all Vanguard funds;
gives your account balances and history (e.g., last transaction, latest dividend
distribution); and allows you to sell or exchange shares to and from most
Vanguard funds.
- --------------------------------------------------------------------------------
ACCESS VANGUARD(TM) www.vanguard.com [BOOK ICON]
You can use your personal computer to perform certain transactions for most
Vanguard funds by accessing our website. To establish this service, you must
register through our website. We will then mail you an account access password
that allows you to process the following financial and administrative
transactions online:
- - Open a new account.*
- - Buy, sell, or exchange shares of most funds.
- - Change your name/address.
- - Add/change fund options (including dividend options, Vanguard Fund Express,
bank instructions, checkwriting, and Vanguard Automatic Exchange Service).
(Some restrictions may apply.) Please call our Client Services Department
for assistance.
*Only current Vanguard shareholders can open a new account online, by exchanging
shares from other existing Vanguard accounts.
- --------------------------------------------------------------------------------
SERVICES FOR CLIENTS OF VANGUARD'S INSTITUTIONAL DIVISION: 1-888-809-8102
Vanguard's Institutional Division offers a variety of specialized services for
large institutional investors, including the ability to effect account
transactions through private electronic networks and third-party recordkeepers.
- --------------------------------------------------------------------------------
<PAGE>
29
TYPES OF ACCOUNTS
Individuals and institutions can establish a variety of accounts with Vanguard.
- --------------------------------------------------------------------------------
FOR ONE OR MORE PEOPLE
Open an account in the name of one (individual) or more (joint tenants) people.
- --------------------------------------------------------------------------------
FOR HOLDING PERSONAL TRUST ASSETS [BOOK ICON]
Invest assets held in an existing personal trust.
- --------------------------------------------------------------------------------
FOR AN ORGANIZATION [BOOK ICON]
Open an account as a corporation, partnership, endowment, foundation, or other
entity.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
A NOTE ON INVESTING WITH VANGUARD THROUGH OTHER FIRMS
You may purchase or sell Fund shares through a financial intermediary such as a
bank, broker, or investment adviser. If you invest with Vanguard through an
intermediary, please read that firm's program materials carefully to learn of
any special rules that may apply. For example, special terms may apply to
additional service features, fees, or other policies. Consult your intermediary
to determine when your order will be priced.
- --------------------------------------------------------------------------------
BUYING SHARES
You buy your shares at a Fund's next-determined net asset value after Vanguard
receives your request. As long as your request is received before the close of
regular trading on the New York Stock Exchange, generally 4 p.m. Eastern time,
you will buy your shares at that day's net asset value. You may convert the
Investor Shares of European, Pacific, and Emerging Markets Stock Index Funds
into Institutional Shares of the same Fund provided that you meet the minimum
initial investment requirements for such Shares.
- --------------------------------------------------------------------------------
MINIMUM INVESTMENT TO . . .
open a new account
$10 million
add to an existing account
$100 by mail or exchange; $1,000 by wire.
- --------------------------------------------------------------------------------
A NOTE ON PURCHASE FEES
Emerging Markets Stock Index Fund deducts a 0.5% fee from all purchases
(including exchanges from other Vanguard funds), but not from reinvested
dividends or capital gains.
- --------------------------------------------------------------------------------
BY WIRE TO OPEN A NEW ACCOUNT OR ADD TO AN EXISTING ACCOUNT [WIRE ICON]
Call your assigned Service Associate to arrange your wire transaction.
Wire to:
FRB ABA 021001088
HSBC Bank USA
For credit to:
Account: 000112046
Vanguard Incoming Wire Account
<PAGE>
30
In favor of:
European Stock Index Fund Institutional Shares-235
Pacific Stock Index Fund Institutional Shares-237
Emerging Markets Stock Index Fund Institutional Shares-239
Institutional Developed Markets Index Fund-234
In favor of:
[Account number, or temporary number for a new account]
[Registered account owner(s)]
[Registered address]
- --------------------------------------------------------------------------------
BY MAIL TO . . . [ENVELOPE ICON]
open a new account
Complete and sign the account registration form and enclose your check.
add to an existing account
Mail your check with an Invest-By-Mail form detached from your confirmation
statement to the address listed on the form. Please do not alter Invest-By-Mail
forms, since they are fund- and account-specific.
Make your check payable to: The Vanguard Group-(insert appropriate Fund number;
see below)
European Stock Index Fund Institutional Shares-235
Pacific Stock Index Fund Institutional Shares-237
Emerging Markets Stock Index Fund Institutional Shares-239
Institutional Developed Markets Index Fund-234
All purchases must be made in U.S. dollars, and checks must be drawn on U.S.
banks.
For clients of Vanguard's Institutional Division . . .
First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 2900 100 Vanguard Boulevard
Valley Forge, PA 19482-2900 Malvern, PA 19355-2331
- --------------------------------------------------------------------------------
IMPORTANT NOTE: To prevent check fraud, Vanguard will not accept checks made
payable to third parties.
- --------------------------------------------------------------------------------
BY TELEPHONE TO . . . [TELEPHONE ICON]
open a new account
Call Vanguard Tele-Account* 24 hours a day--or your assigned Service Associate
during business hours--to exchange from another Vanguard fund account with the
same registration (name, address, taxpayer identification number, and account
type).
add to an existing account
Call Vanguard Tele-Account* 24 hours a day--or your assigned Service Associate
during business hours--to exchange from another Vanguard fund account with the
same registration (name, address, taxpayer identification number, and account
type). (Note that some restrictions apply to index fund accounts.)
Vanguard Tele-Account
1-800-662-6273
*You must obtain a Personal Identification Number (PIN) through Tele-Account at
least seven days before you request your first exchange.
<PAGE>
31
- --------------------------------------------------------------------------------
IMPORTANT NOTE: Once you have initiated a telephone transaction and a
confirmation number has been assigned, the transaction cannot be revoked. We
reserve the right to refuse any purchase request.
- --------------------------------------------------------------------------------
You can redeem (that is, sell or exchange) shares purchased by check at any
time. However, while your redemption request will be processed at the
next-determined net asset value after it is received, your redemption proceeds
will not be available until payment for your purchase is collected, which may
take up to ten calendar days.
- --------------------------------------------------------------------------------
A NOTE ON LARGE PURCHASES
It is important that you call Vanguard before you invest a large dollar amount.
It is our responsibility to consider the interests of all Fund shareholders, and
so we reserve the right to refuse any purchase that may disrupt the Fund's
operation or performance.
- --------------------------------------------------------------------------------
REDEEMING SHARES
This section describes how you can redeem--that is, sell or exchange--the Fund's
shares.
When Selling Shares:
- - Vanguard sends the redemption proceeds to you or a designated third party.*
- - You can sell all or part of your Fund shares at any time.
*May require a signature guarantee; see footnote on page 33.
When Exchanging Shares:
- - The redemption proceeds are used to purchase shares of a different Vanguard
fund.
- - You must meet the receiving fund's minimum investment requirements.
- - Vanguard reserves the right to revise or terminate the exchange privilege,
limit the amount of an exchange, or reject an exchange at any time, without
notice.
- - In order to exchange into an account with a different registration
(including a different name, address, or taxpayer identification number),
you must include the guaranteed signature of all current account owners on
your written instructions.
In both cases, your transaction will be based on the Fund's next-determined
share price, subject to any special rules described in this "Redeeming Shares"
section of the prospectus.
- --------------------------------------------------------------------------------
A NOTE ON REDEMPTION FEES
Emerging Markets Stock Index Fund Institutional Shares imposes a 0.5% redemption
fee on all share redemptions. Currently, redemption fees do not apply to Fund
shares held through Vanguard's separate recordkeeping system for employee
benefit plan accounts, due to certain economies associated with these accounts.
However, the Fund reserves the right to impose redemption fees on its shares at
any time if warranted by the Fund's future costs of processing redemptions from
these accounts.
- --------------------------------------------------------------------------------
NOTE: Once a redemption is initiated and a confirmation number given, the
transaction CANNOT be canceled.
- --------------------------------------------------------------------------------
<PAGE>
32
HOW TO REQUEST A REDEMPTION
You can request a redemption from your Fund account in any one of three ways:
online, by telephone, or by mail.
The Vanguard funds whose shares you cannot exchange by telephone are
VANGUARD U.S. STOCK INDEX FUNDS, VANGUARD BALANCED INDEX FUND, VANGUARD
INTERNATIONAL STOCK INDEX FUNDS, VANGUARD REIT INDEX FUND, and VANGUARD GROWTH
AND INCOME FUND. These funds do, however, permit telephone exchanges within IRAs
and some other retirement accounts.
- --------------------------------------------------------------------------------
TELEPHONE REQUESTS [TELEPHONE ICON]
Call Vanguard Tele-Account 24 hours a day--or your assigned Service Associate
during business hours--to sell shares.
- --------------------------------------------------------------------------------
SPECIAL INFORMATION: We will automatically establish the telephone redemption
option for your account, unless you instruct us otherwise in writing. While
telephone redemption is easy and convenient, this account feature involves a
risk of loss from unauthorized or fraudulent transactions. Vanguard will take
reasonable precautions to protect your account from fraud. You should do the
same by keeping your account information private and immediately reviewing any
account statements that we send to you. Make sure to contact Vanguard
immediately about any transaction you believe to be unauthorized.
- --------------------------------------------------------------------------------
We reserve the right to refuse a telephone redemption if the caller is unable to
provide:
- - The ten-digit account number.
- - The name and address exactly as registered on the account.
- - The primary Social Security or employer identification number as registered
on the account.
- - The Personal Identification Number (PIN), if applicable (for instance,
Tele-Account).
Please note that Vanguard will not be responsible for any account losses
due to telephone fraud, so long as we have taken reasonable steps to verify the
caller's identity. If you wish to remove the telephone redemption feature from
your account, please notify us in writing.
- --------------------------------------------------------------------------------
A NOTE ON UNUSUAL CIRCUMSTANCES
Vanguard reserves the right to revise or terminate the telephone redemption
privilege at any time, without notice. In addition, Vanguard can stop selling
shares or postpone payment at times when the New York Stock Exchange is closed
or under any emergency circumstances as determined by the U.S. Securities and
Exchange Commission. If you experience difficulty making a telephone redemption
during periods of drastic economic or market change, you can send us your
request by regular or express mail. Follow the instructions on selling or
exchanging shares by mail in this section.
- --------------------------------------------------------------------------------
MAIL REQUESTS [ENVELOPE ICON]
Send a letter of instruction signed by all registered account holders. Include
the fund name and account number and (if you are selling) a dollar amount or
number of shares OR (if you are exchanging) the name of the fund you want to
exchange into and a dollar amount or number of shares. To exchange into an
account with a different registration (including a different name, address,
taxpayer identification number, or account type), you must provide Vanguard with
written instructions that include the guaranteed signatures of all current
owners of the fund from which you wish to redeem.
<PAGE>
33
First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 2900 100 Vanguard Boulevard
Valley Forge, PA 19482-2900 Malvern, PA 19355-2331
- --------------------------------------------------------------------------------
A NOTE ON LARGE REDEMPTIONS
It is important that you call Vanguard before you redeem a large dollar amount.
It is our responsibility to consider the interests of all fund shareholders, and
so we reserve the right to delay delivery of your redemption proceeds--up to
seven days--if the amount may disrupt the Fund's operation or performance.
If you redeem more than $250,000 worth of fund shares within any 90-day
period, the fund reserves the right to pay part or all of the redemption
proceeds above $250,000 in-kind, i.e., in securities, rather than in cash. If
payment is made in-kind, you may incur brokerage commissions if you elect to
sell the securities for cash.
- --------------------------------------------------------------------------------
OPTIONS FOR REDEMPTION PROCEEDS
You may receive your redemption proceeds in one of three ways: check or exchange
to another Vanguard fund.
- --------------------------------------------------------------------------------
CHECK REDEMPTIONS
Normally, Vanguard will mail your check within two business days of a
redemption.
- --------------------------------------------------------------------------------
EXCHANGE REDEMPTIONS
As described above, an exchange involves using the proceeds of your redemption
to purchase shares of another Vanguard fund.
- --------------------------------------------------------------------------------
FOR OUR MUTUAL PROTECTION
For your best interests and ours, Vanguard applies these additional requirements
to redemptions:
REQUEST IN "GOOD ORDER"
All redemption requests must be received by Vanguard in "good order." This means
that your request must include:
- - The Fund name and account number.
- - The amount of the transaction (in dollars or shares).
- - Signatures of all owners exactly as registered on the account (for mail
requests).
- - Signature guarantees (if required).*
- - Any supporting legal documentation that may be required.
- - Any outstanding certificates representing shares to be redeemed.
*For instance, a signature guarantee must be provided by all registered account
shareholders when redemption proceeds are to be sent to a different person or
address. A signature guarantee may be obtained from most commercial and savings
banks, credit unions, trust companies, or member firms of a U.S. stock
exchange.
TRANSACTIONS ARE PROCESSED AT THE NEXT-DETERMINED SHARE PRICE AFTER VANGUARD HAS
RECEIVED ALL REQUIRED INFORMATION.
- --------------------------------------------------------------------------------
LIMITS ON ACCOUNT ACTIVITY
Because excessive account transactions can disrupt the management of a Fund and
increase the Fund's costs for all shareholders, Vanguard limits account activity
as follows:
- - You may make no more than TWO SUBSTANTIVE "ROUND TRIPS" THROUGH A FUND
during any 12-month period.
- - Your round trips through a Fund must be at least 30 days apart.
- - A Fund may refuse a share purchase at any time, for any reason.
<PAGE>
34
- - Vanguard may revoke an investor's telephone exchange privilege at any time,
for any reason.
A "round trip" is a redemption from the Fund followed by a purchase back into
the Fund. Also a "round trip" covers transactions accomplished by any
combination of methods, including transactions conducted by check, wire, or
exchange to/from another Vanguard fund. "Substantive" means a dollar amount that
Vanguard determines, in its sole discretion, could adversely affect the
management of a Fund.
- --------------------------------------------------------------------------------
ALL TRADES ARE FINAL
Vanguard will not cancel any transaction request (including any purchase or
redemption) that we believe to be authentic once the request has been initiated
and a confirmation number assigned.
- --------------------------------------------------------------------------------
UNCASHED CHECKS
Please cash your distribution or redemption checks promptly. Vanguard will not
pay interest on uncashed checks.
- --------------------------------------------------------------------------------
TRANSFERRING REGISTRATION
You can transfer the registration of your Fund shares to another owner by
completing a transfer form and sending it to Vanguard.
First-class mail to: Express or Registered mail to:
The Vanguard Group The Vanguard Group
P.O. Box 2900 100 Vanguard Boulevard
Valley Forge, PA 19482-2900 Malvern, PA 19355-2331
- --------------------------------------------------------------------------------
FUND AND ACCOUNT UPDATES
STATEMENTS AND REPORTS
We will send you account and tax statements to help you keep track of your Fund
account throughout the year as well as when you are preparing your income tax
returns.
In addition, you will receive financial reports about your Fund twice a
year. These comprehensive reports include an assessment of the Fund's
performance (and a comparison to its industry benchmark), an overview of the
financial markets, a report from the adviser, and the Fund's financial
statements which include a listing of the Fund's holdings.
To keep each Fund's costs as low as possible (so that you and other shareholders
can keep more of the Fund's investment earnings), Vanguard attempts to eliminate
duplicate mailings to the same address. When two or more Fund shareholders have
the same last name and address, we send just one Fund report to that
address--instead of mailing separate reports to each shareholder. If you want us
to send separate reports, notify our Institutional Division at 1-888-809-8102.
- --------------------------------------------------------------------------------
CONFIRMATION STATEMENT
Sent each time you buy, sell, or exchange shares; confirms the trade date and
the amount of your transaction.
- --------------------------------------------------------------------------------
<PAGE>
35
- --------------------------------------------------------------------------------
PORTFOLIO SUMMARY [BOOK ICON]
Mailed quarterly for most accounts; shows the market value of your account at
the close of the statement period, as well as distributions, purchases, sales,
and exchanges for the current calendar year.
- --------------------------------------------------------------------------------
FUND FINANCIAL REPORTS
Mailed in February and August for these Funds.
- --------------------------------------------------------------------------------
TAX STATEMENTS
Generally mailed in January; report previous year's dividend and capital gains
distributions, and proceeds from the sale of shares.
- --------------------------------------------------------------------------------
MANDATORY CONVERSION TO INVESTOR SHARES
Vanguard European, Pacific, and Emerging Markets Stock Index Funds each reserve
the right to convert an investor's Institutional Shares into Investor Shares of
the same Fund if the investor's account balance falls below $10 million. In
addition, Vanguard Institutional Developed Markets Index Fund reserves the right
to redeem an investor's shares if the investor's account balance falls below $10
million. Any such conversion or redemption will be preceded by written notice to
the investor. No transaction fee will be imposed on share-class conversions.
<PAGE>
(THIS PAGE INTENTIONALLY LEFT BLANK.)
<PAGE>
GLOSSARY OF INVESTMENT TERMS
ACTIVE MANAGEMENT
An investment approach that seeks to exceed the average returns of the financial
markets. Active managers rely on research, market forecasts, and their own
judgment and experience in selecting securities to buy and sell.
CAPITAL GAINS DISTRIBUTION
Payment to mutual fund shareholders of gains realized on securities that a fund
has sold at a profit, minus any realized losses.
CASH RESERVES
Cash deposits, short-term bank deposits, and money market instruments which
include U.S. Treasury bills, bank certificates of deposit (CDs), repurchase
agreements, commercial paper, and banker's acceptances.
COMMON STOCK
A security representing ownership rights in a corporation. A stockholder is
entitled to share in the company's profits, some of which may be paid out as
dividends.
COUNTRY RISK
The chance that domestic events--such as political upheaval, financial troubles,
or a natural disaster--will weaken a country's securities markets.
CURRENCY RISK
The chance that a foreign investment will decrease in value because of
unfavorable changes in currency exchange rates.
DIVIDEND INCOME
Payment to shareholders of income from interest or dividends generated by a
fund's investments.
EXPENSE RATIO
The percentage of a fund's average net assets used to pay its expenses. The
expense ratio includes management fees, administrative fees, and any 12b-1
distribution fees.
INDEX
An unmanaged group of securities whose overall performance is used as a standard
to measure investment performance.
INTERNATIONAL STOCK FUND
A mutual fund that invests in the stocks of companies located outside the United
States.
INVESTMENT ADVISER
An organization that makes the day-to-day decisions regarding a fund's
investments.
MUTUAL FUND
An investment company that pools the money of many people and invests it in a
variety of securities in an effort to achieve a specific objective over time.
NET ASSET VALUE (NAV)
The market value of a mutual fund's total assets, minus liabilities, divided by
the number of shares outstanding. The value of a single share is called its
share value or share price.
PASSIVE MANAGEMENT
A low-cost investment strategy in which a mutual fund attempts to match--rather
than outperform--a particular stock or bond market index. Also known as
indexing.
PRINCIPAL
The amount of money you put into an investment.
TOTAL RETURN
A percentage change, over a specified time period, in a mutual fund's net asset
value, with the ending net asset value adjusted to account for the reinvestment
of all distributions of dividends and capital gains.
VOLATILITY
The fluctuations in value of a mutual fund or other security. The greater a
fund's volatility, the wider the fluctuations between its high and low prices.
YIELD
Income (interest or dividends) earned by an investment, expressed as a
percentage of the investment's price.
<PAGE>
[LOGO]
[THE VANGUARD GROUP(R) LOGO]
Institutional Division
Post Office Box 2600
Valley Forge, PA 19482-2600
FOR MORE INFORMATION
If you'd like more information about
Vanguard International Stock Index
Funds, the following documents are
available free upon request:
ANNUAL/SEMIANNUAL REPORTS
TO SHAREHOLDERS
Additional information about the
Funds' investments is available in
the Funds' annual and semiannual
reports to shareholders.
STATEMENT OF ADDITIONAL
INFORMATION (SAI)
The SAI provides more detailed
information about the Funds (there
is a separate SAI for Vanguard
Institutional Developed Markets
Index Fund, which is legally a part of
Vanguard STAR Funds).
The current annual and semiannual
reports and each SAI are
incorporated by reference into
(and are thus legally a part of)
this prospectus.
To receive a free copy of the latest
annual or semiannual report or the
SAI, or to request additional
information about the Funds or other
Vanguard funds, please contact us
as follows:
If you are an Individual Investor:
THE VANGUARD GROUP
INVESTOR INFORMATION
DEPARTMENT
P.O. BOX 2900
VALLEY FORGE, PA 19482-2900
TELEPHONE:
1-800-662-7447 (SHIP)
TEXT TELEPHONE:
1-800-952-3335
If you are a client of Vanguard's
Institutional Division:
THE VANGUARD GROUP
INSTITUTIONAL INVESTOR
INFORMATION DEPARTMENT
P.O. BOX 2900
VALLEY FORGE, PA 19482-2900
TELEPHONE:
1-888-809-8102
WORLD WIDE WEB:
WWW.VANGUARD.COM
If you are a current Fund shareholder
and would like information about
your account, account transactions,
and/or account statements,
please call:
CLIENT SERVICES DEPARTMENT
TELEPHONE:
1-800-662-2739 (CREW)
TEXT TELEPHONE:
1-800-749-7273
INFORMATION PROVIDED BY THE
SECURITIES AND EXCHANGE
COMMISSION (SEC)
You can review and copy
information about the Funds
(including the SAI) at the SEC's
Public Reference Room in
Washington, DC. To find out more
about this public service, call the
SEC at 1-202-942-8090. Reports and
other information about the Funds
are also available on the SEC's
website (www.sec.gov), or you can
receive copies of this information,
for a fee, by electronic request at
the following e-mail address:
[email protected], or by writing
the Public Reference Section,
Securities and Exchange
Commission, Washington, DC
20549-0102.
Funds' Investment Company Act
file number: 811-5972 (811-3919
for Institutional Developed Markets
Index Fund)
(C) 2000 The Vanguard Group, Inc.
All rights reserved.
Vanguard Marketing Corporation,
Distributor.
I235N-04/28/2000
<PAGE>
PART B
VANGUARD(R) INTERNATIONAL EQUITY INDEX FUNDS
(THE TRUST)
STATEMENT OF ADDITIONAL INFORMATION
APRIL 28, 2000
This Statement is not a prospectus, but should be read in conjunction with
the Trust's current Prospectuses (dated April 28, 2000). To obtain a Prospectus
or the most recent Annual Report to Shareholders, which contains the Funds'
Financial Statements as hereby incorporated by reference, please call:
INVESTOR INFORMATION DEPARTMENT
1-800-662-7447(SHIP)
TABLE OF CONTENTS
PAGE
----
DESCRIPTION OF THE TRUST.....................................................B-1
INVESTMENT POLICIES..........................................................B-3
FUNDAMENTAL INVESTMENT LIMITATIONS...........................................B-8
SHARE PRICE..................................................................B-9
PURCHASE OF SHARES..........................................................B-10
REDEMPTION OF SHARES........................................................B-10
MANAGEMENT OF THE FUNDS.....................................................B-10
PORTFOLIO TRANSACTIONS......................................................B-14
TOTAL RETURN................................................................B-14
COMPARATIVE INDEXES.........................................................B-16
FINANCIAL STATEMENTS........................................................B-18
DESCRIPTION OF THE TRUST
ORGANIZATION
The Trust was organized as a Maryland corporation in 1989, and was
reorganized as a Delaware business trust in July, 1998. Prior to its
reorganization as a Delaware business trust, the Trust was known as Vanguard
International Equity Index Fund, Inc. The Trust is registered with the United
States Securities and Exchange Commission (the Commission) under the Investment
Company Act of 1940 (the 1940 Act) as an open-end, diversified management
investment company. It currently offers the following diversified funds:
European Stock Index Fund
Pacific Stock Index Fund
Emerging Markets Stock Index Fund
(individually, a Fund; collectively, the Funds)
Each of the Funds offers two classes of shares, Investor Shares and
Institutional Shares. Institutional Shares of a Fund are available only to those
investing at least $10 million in the Fund.
The Trust has the ability to offer additional funds or classes of shares.
There is no limit on the number of full and fractional shares that each fund or
share class may issue.
SERVICE PROVIDERS
CUSTODIAN. Brown Brothers Harriman & Co., 40 Water Street, Boston,
Massachusetts 02109 serves as the Funds' custodian. The custodian is responsible
for maintaining each Fund's assets and keeping all necessary accounts and
records of Fund assets.
B-1
<PAGE>
INDEPENDENT ACCOUNTANTS. PricewaterhouseCoopers LLP, 30 South 17th Street,
Philadelphia, Pennsylvania 19103, serves as the Funds' independent accountants.
The accountants audit financial statements for the Funds and provide other
related services.
TRANSFER AND DIVIDEND-PAYING AGENT. The Funds' transfer agent and
dividend-paying agent is The Vanguard Group, Inc., 100 Vanguard Boulevard,
Malvern, Pennsylvania 19355.
CHARACTERISTICS OF THE FUNDS' SHARES
RESTRICTIONS ON HOLDING OR DISPOSING OF SHARES. There are no restrictions
on the right of shareholders to retain or dispose of each Fund's shares, other
than the possible future termination of a Fund. The Funds may be terminated by
reorganization into another mutual fund or by liquidation and distribution of
the assets of the affected Fund. Unless terminated by reorganization or
liquidation, the Funds will continue indefinitely.
SHAREHOLDER LIABILITY. The Trust is organized under Delaware law, which
provides that shareholders of a business trust are entitled to the same
limitations of personal liability as shareholders of a corporation organized
under Delaware law. Effectively, this means that a fund shareholder will not be
personally liable for payment of the fund's debts except by reason of his or her
own conduct or acts. In addition, a shareholder could incur a financial loss on
account of a fund obligation only if the fund itself had no remaining assets
with which to meet such obligation. We believe that the possibility of such a
situation arising is extremely remote.
DIVIDEND RIGHTS. The shareholders of a Fund are entitled to receive any
dividends or other distributions declared for such Fund. No shares have priority
or preference over any other shares of the same Fund with respect to
distributions. Distributions will be made from the assets of a Fund, and will be
paid ratably to all shareholders of the Fund (or class) according to the number
of shares of such Fund (or class) held by shareholders on the record date. The
amount of income dividends per share may vary between separate share classes of
the same Fund based upon differences in the way that expenses are allocated
between share classes pursuant to a multiple class plan.
VOTING RIGHTS. Shareholders are entitled to vote on a matter if: (i) a
shareholder vote is required under the 1940 Act; (ii) the matter concerns an
amendment of the Declaration of Trust that would adversely affect to a material
degree the rights and preferences of the shares of any class or Fund; or (iii)
the Trustees determine that it is necessary or desirable to obtain a shareholder
vote. The 1940 Act requires a shareholder vote under various circumstances,
including to elect or remove Trustees upon written request of shareholders
representing 10% or more of a fund's net assets, and to change any fundamental
policy of the fund. Fund shareholders receive one vote for each dollar of net
asset value owned on the record date, and a fractional vote for each fractional
dollar of net asset value owned on the record date. However, only the shares of
a Fund affected by a particular matter are entitled to vote on that matter.
Voting rights are non-cumulative and cannot be modified without a majority vote.
LIQUIDATION RIGHTS. In the event of Fund liquidation, shareholders will be
entitled to receive a pro rata share of the applicable Fund's net assets.
PREEMPTIVE RIGHTS. There are no preemptive rights associated with shares of
each Fund.
CONVERSION RIGHTS. Shareholders of a Fund may convert their shares into
another clss of shares of the same Fund upon the satisfaction of any then
applicable eligibility requirements.
REDEMPTION PROVISIONS. The Funds' redemption provisions are described in
their current prospectuses and elsewhere in this Statement of Additional
Information.
SINKING FUND PROVISIONS. The Funds have no sinking fund provisions.
CALLS OR ASSESSMENTS. Each Fund's shares, when issued, are fully paid and
non-assessable.
TAX STATUS OF THE FUNDS
Each Fund intends to qualify as a "regulated investment company" under
Subchapter M of the Internal Revenue Code. This special tax status means that a
Fund will not be liable for federal tax on income and capital gains distributed
to shareholders. In order to preserve its tax status, each Fund must comply with
certain requirements. If a Fund fails to meet these requirements in any taxable
year, it will be subject to tax on its taxable income at corporate rates, and
all distributions from earnings and profits, including any distributions of
B-2
<PAGE>
net tax-exempt income and net long-term capital gains, will be taxable to
shareholders as ordinary income. In addition, the Fund could be required to
recognize unrealized gains, pay substantial taxes and interest, and make
substantial distributions before regaining its tax status as a regulated
investment company.
INVESTMENT POLICIES
The following policies supplement the investment policies set forth in the
Funds' Prospectuses.
FOREIGN INVESTMENTS. Each Fund invests virtually all of its assets in
foreign securities under normal circumstances. Investors should recognize that
investing in securities of foreign companies involves certain special
considerations which are not typically associated with investing in U.S.
companies.
CURRENCY RISK. The stocks of foreign companies are frequently denominated
in foreign currencies, and the Funds may temporarily hold uninvested reserves in
bank deposits in foreign currencies. As such, the Funds will be affected
favorably or unfavorably by changes in currency rates and in exchange control
regulations, and may incur costs in connection with conversions between various
currencies. The investment policies of the Funds permit them to enter into
forward foreign currency exchange contracts in order to hedge holdings and
commitments against changes in the level of future currency rates. Such
contracts involve an obligation to purchase or sell a specific currency at a
future date at a price set at the time of the contract.
Country Risk. As foreign companies are not generally subject to uniform
accounting, auditing and financial reporting standards and practices comparable
to those applicable to domestic companies, there may be less publicly available
information about certain foreign companies than about domestic companies.
Securities of some foreign companies are generally less liquid and more volatile
than securities of comparable domestic companies. There is generally less
government supervision and regulation of stock exchanges, brokers, and listed
companies than in the U.S. In addition, with respect to certain foreign
countries, there is the possibility of expropriation or confiscatory taxation,
political or social instability, or diplomatic developments which could affect
U.S. investments in those countries.
Although the Funds will endeavor to achieve most favorable execution costs
in their portfolio transactions, fixed commissions on many foreign stock
exchanges are generally higher than negotiated commissions on U.S. exchanges. In
addition, it is expected that the expenses for custodian arrangements of the
Funds' foreign securities will be somewhat greater than the expenses for a fund
that invests primarily in domestic securities.
Certain foreign governments levy withholding taxes against dividend and
interest income. Although in some countries a portion of these taxes are
recoverable, the non-recovered portion of foreign withholding taxes will reduce
the income received from the companies comprising the Funds. However, these
foreign withholding taxes are not expected to have a significant impact on the
Funds, since each Fund seeks long-term capital appreciation and any income
should be considered incidental.
Over the last decade, aggregate growth in international stock markets has
considerably outpaced that of the U.S. stock market. Almost two-thirds of the
world's equity market capitalization now lies outside the United States.
As of December 31, 1999 the total market capitalization of the Morgan
Stanley Capital International World Stock Market Index was $15.8 trillion. The
major countries and regions comprising the Index are as follows:
PERCENT OF WORLD
----------------
INDEX CAPITALIZATION
--------------------
United States 50%
Canada 2
Japan 10
Other Pacific Basin 3
--
Total Pacific Basin 13
Europe 35
==
100%
B-3
<PAGE>
Federal Tax Treatment of Non-U.S. Transactions. Special rules govern the
Federal income tax treatment of certain transactions denominated in terms of a
currency other than the U.S. dollar or determined by reference to the value of
one or more currencies other than the U.S. dollar. The types of transactions
covered by the special rules include the following: (i) the acquisition of, or
becoming the obligor under, a bond or other debt instrument (including, to the
extent provided in Treasury regulations, preferred stock); (ii) the accruing of
certain trade receivables and payables; and (iii) the entering into or
acquisition of any forward contract, futures contract, option or similar
financial instrument if such instrument is not marked to market. The disposition
of a currency other than the U.S. dollar by a taxpayer whose functional currency
is the U.S. dollar is also treated as a transaction subject to the special
currency rules. However, foreign currency-related regulated futures contracts
and nonequity options are generally not subject to the special currency rules if
they are or would be treated as sold for their fair market value at year-end
under the marking-to-market rules applicable to other futures contracts unless
an election is made to have such currency rules apply. With respect to
transactions covered by the special rules, foreign currency gain or loss is
calculated separately from any gain or loss on the underlying transaction and is
normally taxable as ordinary income or loss. A taxpayer may elect to treat as
capital gain or loss foreign currency gain or loss arising from certain
identified forward contracts, futures contracts, and options that are capital
assets in the hands of the taxpayer and which are not part of a straddle. The
Treasury Department issued regulations under which certain transactions subject
to the special currency rules that are part of a "section 988 hedging
transaction" (as defined in the Internal Revenue Code of 1986, as amended, and
the Treasury regulations) will be integrated and treated as a single transaction
or otherwise treated consistently for purposes of the Code. Any gain or loss
attributable to the foreign currency component of a transaction engaged in by a
Fund which is not subject to the special currency rules (such as foreign equity
investments other than certain preferred stock) will be treated as capital gain
or loss and will not be segregated from the gain or loss on the underlying
transaction. It is anticipated that some of the non-U.S. dollar-denominated
investments and foreign currency contracts the Funds may make or enter into will
be subject to the special currency rules described above.
Foreign Tax Credit. Foreign governments may withhold taxes on dividends and
interest paid with respect to foreign securities. Foreign governments may also
impose taxes on other payments or gains with respect to foreign securities. If,
at the close of its fiscal year, more than 50% of a Fund's total assets are
invested in securities of foreign issuers, the Fund may elect to pass through
foreign taxes paid, and thereby allow shareholders to take a tax credit or
deduction on their tax returns. If shareholders meet certain holding period
requirements with respect to Fund shares, an offsetting tax credit may be
available. If shareholders do not meet the holding period requirements, they may
still be entitled to a deduction for certain foreign taxes. In either case, a
shareholder's tax statement will show more taxable income or capital gains than
were actually distributed by the Fund, but will also show the amount of the
available offsetting credit or deduction.
A shareholder that is a nonresident alien for U.S. tax purposes may be
subject to adverse U.S. tax consequences. For example, dividends and short-term
capital gains paid by the Fund will generally be subject to U.S. federal
withholding tax at a rate of 30% (or lower treaty rate if applicable). Foreign
investors are urged to consult their tax advisers regarding the U.S. tax
treatment of ownership of shares in the Funds.
REPURCHASE AGREEMENTS. Each Fund, along with the other members of The
Vanguard Group, may invest in repurchase agreements with commercial banks,
brokers, or dealers to generate income from its excess cash balances. A
repurchase agreement is an agreement under which a Fund acquires a fixed-income
security (generally a security issued by the U.S. Government or an agency
thereof, a banker's acceptance or a certificate of deposit) from a seller,
subject to resale to the seller at an agreed upon price and date (normally, the
next business day). A repurchase agreement may be considered a loan
collateralized by securities. The resale price reflects an agreed upon interest
rate effective for the period the instrument is held by a Fund and is unrelated
to the interest rate on the underlying instrument. In these transactions, the
securities acquired by a Fund (including accrued interest earned thereon) must
have a total value in excess of the value of the repurchase agreement and are
held by a custodian bank until repurchased. In addition, the Board of Trustees
will monitor the Funds' repurchase agreement transactions generally and will
establish guidelines and standards for review of the creditworthiness of any
bank, broker, or dealer party to a repurchase agreement with a Fund.
The use of repurchase agreements involves certain risks. For example, if
the other party to the agreement defaults on its obligation to repurchase the
underlying security at a time when the value of the security has
B-4
<PAGE>
declined, the Fund may incur a loss upon disposition of the security. If the
other party to the agreement becomes insolvent and subject to liquidation or
reorganization under the Bankruptcy Code or other laws, a court may determine
that the underlying security is collateral for a loan by a Fund not within the
control of the Fund and therefore the Fund may not be able to substantiate its
interest in the underlying security and may be deemed an unsecured creditor of
the other party to the agreement. While the Fund's management acknowledges these
risks, it is expected that they will be controlled through careful monitoring
procedures.
ILLIQUID SECURITIES. Each Fund may invest up to 15% of its net assets in
illiquid securities. Illiquid securities are securities that may not be sold or
disposed of in the ordinary course of business within seven business days at
approximately the value at which they are being carried on the Fund's books.
Each Fund may invest in restricted, privately placed securities that, under
the Commission's rules, may be sold only to qualified institutional buyers.
Because these securities can be resold only to qualified institutional buyers or
after they have been held for a number of years, they may be considered illiquid
securities--meaning that they could be difficult for the Fund to convert to cash
if needed.
If a substantial market develops for a restricted security held by a Fund,
it will be treated as a liquid security, in accordance with procedures and
guidelines approved by the Board of Trustees. This generally includes securities
that are unregistered that can be sold to qualified institutional buyers in
accordance with Rule 144A under the Securities Act of 1933. While the Fund's
investment adviser determines the liquidity of restricted securities on a daily
basis, the Board oversees and retains ultimate responsibility for the adviser's
decisions. Several factors that the Board considers in monitoring these
decisions include the valuation of a security, the availability of qualified
institutional buyers, and the availability of information about the security's
issuer.
LENDING OF SECURITIES. Each Fund may lend its investment securities to
qualified institutional investors (typically brokers, dealers, banks, or other
financial institutions) who need to borrow securities in order to complete
certain transactions, such as covering short sales, avoiding failures to deliver
securities, or completing arbitrage operations. By lending its investment
securities, a Fund attempts to increase its net investment income through the
receipt of interest on the loan. Any gain or loss in the market price of the
securities loaned that might occur during the term of the loan would be for the
account of the Fund. The terms and the structure and the aggregate amount of
such loans must be consistent with the 1940 Act, and the Rules or
interpretations of the Commission thereunder. These provisions limit the amount
of securities a Fund may lend to 33 1/3% of the Fund's total assets, and require
that (a) the borrower pledge and maintain with the Fund collateral consisting of
cash, an irrevocable letter of credit or securities issued or guaranteed by the
United States Government having at all times not less than 100% of the value of
the securities loaned, (b) the borrower add to such collateral whenever the
price of the securities loaned rises (i.e., the borrower "marks to the market"
on a daily basis), (c) the loan be made subject to termination by the Fund at
any time, and (d) the Fund receive reasonable interest on the loan (which may
include the Fund's investing any cash collateral in interest bearing short-term
investments), any distribution on the loaned securities and any increase in
their market value. Loan arrangements made by each Fund will comply with all
other applicable regulatory requirements, including the rules of the New York
Stock Exchange, which presently require the borrower, after notice, to redeliver
the securities within the normal settlement time of three business days. All
relevant facts and circumstances, including the creditworthiness of the broker,
dealer or institution, will be considered in making decisions with respect to
the lending of securities, subject to review by the Board of Trustees.
At the present time, the Staff of the Commission does not object if an
investment company pays reasonable negotiated fees in connection with loaned
securities, so long as such fees are set forth in a written contract and
approved by the investment company's Trustees. In addition, voting rights pass
with the loaned securities, but if a material event will occur affecting an
investment on loan, the loan must be called and the securities voted.
VANGUARD INTERFUND LENDING PROGRAM. The Commission has issued an exemptive
order permitting the Funds and other Vanguard funds to participate in Vanguard's
interfund lending program. This program allows the Vanguard funds to borrow
money from and loan money to each other for temporary or emergency purposes. The
program is subject to a number of conditions, including the requirement that no
fund may borrow or lend money through the program unless it receives a more
favorable interest rate than is available from a typical bank for a comparable
transaction. In addition, a Vanguard fund may participate in the program only if
and to the extent that such participation is consistent with the fund's
investment objective and other investment policies.
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The Boards of Trustees of the Vanguard funds are responsible for ensuring that
the interfund lending program operates in compliance with all conditions of the
Commission's exemptive order.
FUTURES CONTRACTS, OPTIONS ON FUTURES CONTRACTS, WARRANTS, CONVERTIBLE
SECURITIES AND SWAP AGREEMENTS. Each Fund may enter into futures contracts,
warrants, options on futures contracts, convertible securities, and swap
agreements for the purpose of remaining fully invested and reducing transaction
costs. Futures contracts provide for the future sale by one party and purchase
by another party of a specified amount of a specific security at a specified
future time and at a specified price. Futures contracts which are standardized
as to maturity date and underlying financial instrument are traded on national
futures exchanges. The Fund's trading of futures contracts and options is
regulated under the Commodity Exchange Act by the Commodity Futures Trading
Commission (CFTC), a U.S. Government Agency. Assets committed to futures
contracts will be segregated to the extent required by law.
Each Fund will "under normal circumstances" invest at least 80% of its
assets in stocks represented in its respective index. However, each Fund has
given itself the flexibility to invest up to 50% of its assets in futures and
options under other than normal circumstances. Any investment in futures and
options over 20% of a Fund's assets would be made in emergency situations, for
short-term purposes.
Although most futures contracts by their terms call for actual delivery or
acceptance of the underlying financial instrument, the Funds will generally only
utilize stock index contracts which are settled by a cash amount equal to the
value of an explicit stock index (such as the Standard & Poor's 500 Stock Index)
on the contract maturity date. In most cases, however, the contracts are closed
out before the settlement date. Closing out an open futures position is done by
taking an opposite position ("buying" a contract which has previously been
"sold," "selling" a contract previously "purchased") in an identical contract to
terminate the position. Brokerage commissions are incurred when a futures
contract is bought or sold.
Futures traders are required to make a good faith margin deposit in cash or
government securities with a broker or custodian to initiate and maintain open
positions in futures contracts. A margin deposit is intended to assure
completion of the contract (delivery or acceptance of the underlying security)
if it is not terminated prior to the specified delivery date. Minimal initial
margin requirements are established by the futures exchange and may be changed.
Brokers may establish deposit requirements which are higher than the exchange
minimums. Futures contracts are customarily purchased and sold on margin which
may range upward from less than 5% of the value of the contract being traded.
After a futures contract position is opened, the value of the contract is
marked to market daily. If the futures contract price changes to the extent that
the margin on deposit does not satisfy margin requirements, payment of
additional "variation" margin will be required. Conversely, change in the
contract value may reduce the required margin, resulting in a repayment of
excess margin to the contract holder. Variation margin payments are made to and
from the futures broker for as long as the contract remains open. The Fund
expects to earn interest income on its margin deposits.
Traders in futures contracts, in general, use the futures markets for one
of two purposes: 1) to offset or hedge unfavorable changes in the value of
securities otherwise held (or expected to be held) for investment purposes; or,
2) to profit from fluctuations in the financial instrument underlying the value
of the futures contracts. In either case, futures contracts general offer a cost
effective and efficient means to replicate exposure to various financial
instruments. The Funds intend to use futures contracts to either simulate full
(or near full) investment in stocks, while keeping cash on hand to meet
shareholder redemptions, or to reduce transaction costs. A Fund will not utilize
futures contracts to leverage its exposure to gains and losses to that above
100% of its assets.
Regulations of the CFTC applicable to the Funds require that all of their
futures transactions constitute bona fide hedging transactions except to the
extent that the aggregate initial margins and premiums required to establish any
non-hedging positions do not exceed five percent of the value of a Fund's
portfolio. The Funds will only sell futures contracts to protect securities it
owns against price declines or purchase contracts to protect against an increase
in the price of securities it intends to purchase. As evidence of this hedging
interest, the Funds expect that approximately 75% of all futures contract
purchases will be "completed;" that is, equivalent amounts of related securities
will have been purchased or are being purchased by the Funds upon sale of open
futures contracts.
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Although techniques other than the sale and purchase of futures contracts
could be used to control a Fund's exposure to market fluctuations, the use of
futures contracts may be a more effective means of hedging this exposure. While
the Funds will incur commission expenses in both opening and closing out futures
positions, these costs are lower than transaction costs incurred in the purchase
and sale of the underlying securities.
RESTRICTIONS ON THE USE OF FUTURES CONTRACTS. A Fund will not enter into
futures contract transactions to the extent that, immediately thereafter, the
sum of its initial margin deposits on open contracts exceeds 5% of the market
value of the Fund's total assets. In addition, a Fund will not enter into
futures contracts to the extent that its outstanding obligations to purchase
securities under these contracts would exceed 20% of the Fund's total assets.
Risk Factors in Futures Transactions. Positions in futures contracts may be
closed out only on an exchange which provides a secondary market for such
futures. However, there can be no assurance that a liquid secondary market will
exist for any particular futures contract at any specific time. Thus, it may not
be possible to close a futures position. In the event of adverse price
movements, a Fund would continue to be required to make daily cash payments to
maintain its required margin. In such situations, if a Fund has insufficient
cash, it may have to sell portfolio securities to meet daily margin requirements
at a time when it may be disadvantageous to do so. In addition, a Fund may be
required to make delivery of the instruments underlying futures contracts it
holds. The inability to close options and futures positions also could have an
adverse impact on the ability to effectively hedge the Fund.
A Fund will minimize the risk that it will be unable to close out a futures
contract by only entering into futures which are traded on national futures
exchanges and for which there appears to be a liquid secondary market.
The risk of loss in trading futures contracts in some strategies can be
substantial, due both to the low margin deposits required, and the extremely
high degree of leverage involved in futures pricing. As a result, a relatively
small price movement in a futures contract may result in immediate and
substantial loss (as well as gain) to the investor. For example, if at the time
of purchase, 10% of the value of the futures contract is deposited as margin, a
subsequent 10% decrease in the value of the futures contract would result in a
total loss of the margin deposit, before any deduction for the transaction
costs, if the account were then closed out. A 15% decrease would result in a
loss equal to 150% of the original margin deposit if the contract were closed
out. Thus, a purchase or sale of a futures contract may result in losses in
excess of the amount invested in the contract. However, because the futures
strategies of each Fund are engaged in only for hedging purposes, the adviser
does not believe that a Fund is subject to the risks of loss frequently
associated with futures transactions. A Fund would presumably have sustained
comparable losses if, instead of the futures contracts, it had invested in the
underlying financial instrument and sold it after the decline.
Utilization of futures transactions by each Fund does involve the risk of
imperfect or no correlation where the securities underlying futures contracts
have different maturities than the portfolio securities being hedged. It is also
possible that a Fund could both lose money on futures contracts and also
experience a decline in value of its portfolio securities. There is also the
risk of loss by the Fund of margin deposits in the event of bankruptcy of a
broker with whom a Fund has an open position in a futures contract or related
option. Additionally, investments in futures and options involve the risk that
the investment adviser will incorrectly predict stock market and interest rate
trends.
Most futures exchanges limit the amount of fluctuation permitted in futures
contract prices during a single trading day. The daily limit establishes the
maximum amount that the price of a futures contract may vary either up or down
from the previous day's settlement price at the end of a trading session. Once
the daily limit has been reached in a particular type of contract, no trades may
be made on that day at a price beyond that limit. The daily limit governs only
price movement during a particular trading day and therefore does not limit
potential losses, because the limit may prevent the liquidation of unfavorable
positions. Futures contract prices have occasionally moved to the daily limit
for several consecutive trading days with little or no trading, thereby
preventing prompt liquidation of futures positions and subjecting some futures
traders to substantial losses.
Swap Agreements. Swap agreements are contracts 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 Funds will
B-7
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minimize this risk by entering into agreements that mark to market no less
frequently than quarterly. Swap agreements also bear the risk that a Fund will
not be able to meet its obligation to the counterparty. This risk will be
mitigated by investing the Fund in the specific asset for which it is obligated
to pay a return.
Federal Tax Treatment of Futures Contracts. Each Fund is required for
federal income tax purposes to recognize as income for each taxable year its net
unrealized gains and losses on certain futures contracts as of the end of the
year as well as those actually realized during the year. In these cases, any
gain or loss recognized with respect to a futures contract is considered to be
60% long-term capital gain or loss and 40% short-term capital gain or loss,
without regard to the holding period of the contract. Gains and losses on
certain other futures contracts (primarily non-U.S. futures contracts) are not
recognized until the contracts are closed and are
treated as long-term or short-term depending on the holding period of the
contract. Sales of futures contracts which are intended to hedge against a
change in the value of securities held by a Fund may affect the holding period
of such securities and, consequently, the nature of the gain or loss on such
securities upon disposition. A Fund may be required to defer the recognition of
losses on futures contracts to the extent of any unrecognized gains on related
positions held by the Fund.
In order for a Fund to continue to qualify for Federal income tax treatment
as a regulated investment company, at least 90% of its gross income for a
taxable year must be derived from qualifying income; i.e., dividends, interest,
income derived from loans of securities, gains from the sale of securities or of
foreign currencies, or other income derived with respect to the Fund's business
of investing in securities or currencies. It is anticipated that any net gain
recognized on futures contracts will be considered qualifying income for
purposes of the 90% requirement.
Each Fund will distribute to shareholders annually any net capital gains
which have been recognized for federal income tax purposes on futures
transactions. Such distributions will be combined with distributions of capital
gains realized on the Fund's other investments and shareholders will be advised
on the nature of the transactions.
FUNDAMENTAL INVESTMENT LIMITATIONS
Each Fund is subject to the following fundamental investment limitations,
which cannot be changed in any material way without the approval of the holders
of a majority of the affected Fund's shares. For these purposes, a "majority" of
shares means shares representing the lesser of: (i) 67% or more of the votes
cast to approve a change, so long as shares representing more than 50% of the
Fund's net asset value are present or represented by proxy; or (ii) more than
50% of the Fund's net asset value.
ASSESSABLE SECURITIES. Each Fund may not invest in assessable securities or
securities involving unlimited liability on the part of the holders thereof.
BORROWING. Each Fund may not borrow money, except for temporary or
emergency purposes in an amount not exceeding 15% of the Fund's net assets. Each
Fund may borrow money through banks, or Vanguard's interfund lending program
only, and must comply with all applicable regulatory conditions. Each Fund may
not make any additional investments whenever its outstanding borrowings exceed
5% of net assets.
COMMODITIES. Each Fund may not invest in commodities, except that each Fund
may invest in stock futures contracts, stock options, and options on stock
futures contracts. Under normal circumstances, no more than 5% of a Fund's total
assets may be used as initial margin deposit for futures contracts, and no more
than 20% of a Fund's total assets may be invested in futures contracts or
options at any time.
DIVERSIFICATION. With respect to 75% of its total assets, each Fund may
not: (i) purchase more than 10% of the outstanding voting securities of any one
issuer, or (ii) purchase securities of any issuer if, as a result, more than 5%
of the Fund's total assets would be invested in that issuer's securities. This
limitation does not apply to obligations of the United States Government, its
agencies, or instrumentalities.
ILLIQUID SECURITIES. Each Fund may not acquire any security if, as a
result, more than 15% of its net assets would be invested in securities that are
illiquid.
INDUSTRY CONCENTRATION. Each Fund may not invest more than 25% of its total
assets in any one industry.
INVESTING FOR CONTROL. Each Fund may not invest in a company for the
purpose of controlling its management.
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INVESTMENT COMPANIES. Each Fund may not invest in any other investment
company, except through a merger, consolidation or acquisition of assets, or to
the extent permitted by Section 12 of the 1940 Act. Investment companies whose
shares the Fund acquires pursuant to Section 12 must have investment objectives
and investment policies consistent with those of the Fund.
LOANS. Each Fund may not lend money to any person except by purchasing
fixed income securities, entering into repurchase agreements, lending its
portfolio securities, or through Vanguard's interfund lending program.
MARGIN. Each Fund may not purchase securities on margin or sell securities
short, except as permitted by the Funds' investment policies relating to
commodities.
OIL, GAS, MINERALS. Each Fund may not invest in oil, gas, or other mineral
exploration or development programs.
PLEDGING ASSETS. Each Fund may not pledge, mortgage, or hypothecate more
than 15% of its net assets.
REAL ESTATE. Each Fund may not invest directly in real estate, although it
may invest in securities of companies that deal in real estate and bonds secured
by real estate.
SENIOR SECURITIES. Each Fund may not issue senior securities, except in
compliance with the 1940 Act.
UNDERWRITING. Each Fund may not engage in the business of underwriting
securities issued by other persons. The Fund will not be considered an
underwriter when disposing of its investment securities.
None of these limitations prevents a Fund from participating in The
Vanguard Group (Vanguard). Because each Fund is a member of Vanguard, each Fund
may own securities issued by Vanguard, make loans to Vanguard, and contribute to
Vanguard's costs or other financial requirements. See Management of the Funds
for more information.
The investment limitations set forth above are considered at the time
investment securities are purchased. If a percentage restriction is adhered to
at the time the investment is made, a later increase in percentage resulting
from a change in the market value of assets will not constitute a violation of
such restriction.
SHARE PRICE
Each Fund's share price, or "net asset value" per share, is calculated by
dividing the net assets attributable to each share class by the total number of
shares outstanding for that class. The net asset value is determined as of the
regular close of the New York Stock Exchange (generally 4:00 p.m. Eastern time)
on each day the Exchange is open for trading.
Portfolio securities for which market quotations are readily available
(includes those securities listed on national securities exchanges, as well as
those quoted on the NASDAQ Stock Market) will be valued at the last quoted sales
price on the day the valuation is made. Such securities which are not traded on
the valuation date are valued at the mean of the bid and ask prices. Price
information on exchange-listed securities is taken from the exchange where the
security is primarily traded. Any foreign securities are valued at the latest
quoted sales price available before the time when assets are valued. Securities
may be valued on the basis of prices provided by a pricing service when such
prices are believed to reflect the fair market value of such securities.
Short-term instruments (those with remaining maturities of 60 days or less)
may be valued at cost, plus or minus any amortized discount or premium, which
approximates market value.
Bonds and other fixed income securities may be valued on the basis of
prices provided by a pricing service when such prices are believed to reflect
the fair market value of such securities. The prices provided by a pricing
service may be determined without regard to bid or last sale prices of each
security, but take into account institutional-size transactions in similar
groups of securities as well as any developments related to specific securities.
Foreign securities are valued at the last quoted sales price, or the most
recently determined closing price calculated according to local market
convention, available at the time a Fund is valued. Prices are obtained from the
broadest and most representative market on which the securities trade. If events
which materially affect the value of each Fund's investments occur after the
close of the securities markets on which such securities are primarily traded,
those investments may be valued by such methods as the Board of Trustees deems
in good faith to reflect fair value.
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In determining each Fund's net asset value per share, all assets and
liabilities initially expressed in foreign currencies will be converted into
U.S. dollars using the officially quoted daily exchange rates used by Morgan
Stanley Capital International in calculating various benchmarking indexes. This
officially quoted exchange rate may be determined prior to or after the close of
a particular securities market. If such quotations are not available or do not
reflect market conditions at the time the Fund is valued, the rate of exchange
will be determined in accordance with policies established in good faith by the
Board of Trustees.
Other assets and securities for which no quotations are readily available
or which are restricted as to sale (or resale) are valued by such methods as the
Board of Trustees deems in good faith to reflect fair value.
The share price for each Fund can be found daily in the mutual fund
listings of most major newspapers under the heading of Vanguard Index Funds.
PURCHASE OF SHARES
Each Fund reserves the right in its sole discretion (i) to suspend the
offerings of its shares, (ii) to reject purchase orders when in the judgment of
management such rejection is in the best interests of the Fund, and (iii) to
reduce or waive the minimum investment for or any other restrictions on initial
and subsequent investments as well as redemption fees for certain fiduciary
accounts or under circumstances where certain economies can be achieved in sales
of the Fund's shares.
REDEMPTION OF SHARES
Each Fund may suspend redemption privileges or postpone the date of payment
(i) during any period that the New York Stock Exchange is closed, or trading on
the Exchange is restricted as determined by the Commission, (ii) during any
period when an emergency exists as defined by the Commission as a result of
which it is not reasonably practicable for the Fund to dispose of securities
owned by it, or fairly to determine the value of its assets, and (iii) for such
other periods as the Commission may permit.
Each Fund has made an election with the Commission to pay in cash all
redemptions requested by any shareholder of record limited in amount during any
90-day period to the lesser of $250,000 or 1% of the net assets of the Fund at
the beginning of such period.
No charge is made by the Fund for redemptions from the European and Pacific
Funds. There is a 0.5% redemption fee charged for redemptions from the Emerging
Markets Fund. The redemption fee is paid to the Fund to reimburse the Fund for
transaction costs it incurs while liquidating securities in order to meet fund
redemptions. Shares redeemed may be worth more or less than what was paid for
them, depending on the market value of the securities held by the Funds.
TRADING SHARES THROUGH CHARLES SCHWAB
Each Fund has authorized Charles Schwab & Co., Inc. (Schwab) to accept on
its behalf purchase and redemption orders under certain terms and conditions.
Schwab is also authorized to designate other intermediaries to accept purchase
and redemption orders on each Fund's behalf subject to those terms and
conditions. Under this arrangement, each Fund will be deemed to have received a
purchase or redemption order when Schwab or, if applicable, Schwab's authorized
designee, accepts the order in accordance with each Fund's instructions.
Customer orders that are properly transmitted to each Fund by Schwab, or if
applicable, Schwab's authorized designee, will be priced as follows:
Orders received by Schwab before 3 p.m. Eastern time on any business day,
will be sent to Vanguard that day and your share price will be based on each
Fund's net asset value calculated at the close of trading that day. Orders
received by Schwab after 3 p.m. Eastern time, will be sent to Vanguard on the
following business day and your share price will be based on each Fund's net
asset value calculated at the close of trading that day.
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MANAGEMENT OF THE FUNDS
OFFICERS AND TRUSTEES
The officers of each Fund manage its day-to-day operations and are
responsible to the Fund's Board of Trustees. The Trustees set broad policies for
the Funds and choose its officers. The following is a list of the Trustees and
officers of the Funds and a statement of their present positions and principal
occupations during the past five years. As a group, the Funds' Trustees and
officers own less than 1% of the outstanding shares of each Fund. Each Trustee
also serves as a Director of The Vanguard Group, Inc., and as a Trustee of each
of the funds administered by Vanguard. The mailing address of the Trustees and
officers of the Funds is Post Office Box 876, Valley Forge, PA 19482.
JOHN J. BRENNAN, (DOB: 7/29/1954) Chairman, Chief Executive Officer & Trustee*
Chairman, Chief Executive Officer, and Director of The Vanguard Group, Inc., and
Trustee of each of the investment companies in The Vanguard Group.
JOANN HEFFERNAN HEISEN, (DOB: 1/25/1950) Trustee Vice President, Chief
Information Officer, and member of the Executive Committee of Johnson & Johnson
(Pharmaceuticals/Consumer Products); Director of Johnson & Johnson*MERCK
Consumer Pharmaceuticals Co., The Medical Center at Princeton, and Women's
Research and Education Institute.
BRUCE K. MACLAURY, (DOB: 5/7/1931) Trustee President Emeritus of The Brookings
Institution (Independent Non-Partisan Research Organization); Director of
American Express Bank, Ltd., The St. Paul Companies, Inc. (Insurance and
Financial Services), and National Steel Corp.
BURTON G. MALKIEL, (DOB: 8/28/1932) Trustee Chemical Bank Chairman's Professor
of Economics, Princeton University; Director of Prudential Insurance Co. of
America, Banco Bilbao Gestinova, Baker Fentress & Co. (Investment Management),
The Jeffrey Co. (Holding Company), and Select Sector SPDR Trust (Exchange-Traded
Mutual Fund).
ALFRED M. RANKIN, JR., (DOB: 10/8/1941) Trustee Chairman, President, Chief
Executive Officer, and Director of NACCO Industries, Inc. (Machinery/Coal/
Appliances); and Director of The BFGoodrich Co. (Aircraft
Systems/Manufacturing/Chemicals).
JOHN C. SAWHILL, (DOB: 6/12/1936) Trustee President and Chief Executive Officer
of The Nature Conservancy (Non-Profit Conservation Group); Director of Pacific
Gas and Electric Co., Procter & Gamble Co., NACCO Industries
(Machinery/Coal/Appliances), and Newfield Exploration Co. (Energy); formerly,
Director and Senior Partner of McKinsey & Co., and President of New York
University.
JAMES O. WELCH, JR., (DOB: 5/13/1931) Trustee Retired Chairman of Nabisco
Brands, Inc. (Food Products); retired Vice Chairman and Director of RJR Nabisco
(Food and Tobacco Products); Director of TECO Energy, Inc., and Kmart Corp.
J. LAWRENCE WILSON, (DOB: 3/2/1936) Trustee Retired Chairman of Rohm & Haas Co.
(Chemicals); Director of Cummins Engine Co.(Diesel Engine Company), and The Mead
Corp. (Paper Products); and Trustee of Vanderbilt University.
RAYMOND J. KLAPINSKY, (DOB: 12/7/1938) Secretary* Managing Director of The
Vanguard Group, Inc.; Secretary of The Vanguard Group, Inc. and of each of the
investment companies in The Vanguard Group.
THOMAS J. HIGGINS, (DOB: 5/21/1957) Treasurer* Principal of The Vanguard Group,
Inc.; Treasurer of each of the investment companies in The Vanguard Group.
ROBERT D. SNOWDEN, (DOB: 9/4/1961) Controller* Principal of The Vanguard Group,
Inc.; Controller of each of the investment companies in The Vanguard Group.
- ---------
*Officers of the Funds are "interested persons" as defined in the 1940 Act.
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THE VANGUARD GROUP
Each Fund is a member of The Vanguard Group of Investment Companies, which
consists of more than 100 funds. Through their jointly-owned subsidiary, The
Vanguard Group, Inc. (Vanguard), the Funds and the other funds in The Vanguard
Group obtain at cost virtually all of their corporate management,
administrative, and distribution services. Vanguard also provides investment
advisory services on an at-cost basis to certain Vanguard funds.
Vanguard employs a supporting staff of management and administrative
personnel needed to provide the requisite services to the funds and also
furnishes the funds with necessary office space, furnishings, and equipment.
Each fund pays its share of Vanguard's net expenses, which are allocated among
the funds under methods approved by the Board of Trustees of each fund. In
addition, each fund bears its own direct expenses, such as legal, auditing, and
custodian fees.
The Funds' officers are also officers and employees of Vanguard. No officer
or employee owns, or is permitted to own, any securities of any external adviser
for the funds.
Vanguard adheres to a Code of Ethics established pursuant to Rule 17j-1
under the 1940 Act. The Code is designed to prevent unlawful practices in
connection with the purchase or sale of securities by persons associated with
Vanguard. Under Vanguard's Code of Ethics certain officers and employees of
Vanguard who are considered access persons are permitted to engage in personal
securities transactions. However, such transactions are subject to procedures
and guidelines similar to, and in many cases more restrictive than, those
recommended by a blue ribbon panel of mutual fund industry executives.
Vanguard was established and operates under an Amended and Restated Funds'
Service Agreement which was approved by the shareholders of each of the funds.
The amounts which each of the funds has invested are adjusted from time to time
in order to maintain the proportionate relationship between each fund's relative
net assets and its contribution to Vanguard's capital. The Amended and Restated
Funds' Service Agreement provides that each Vanguard fund may be called upon to
invest up to 0.40% of its current net assets in Vanguard as contributions to
Vanguard's capitalization. At December 31, 1999, each Fund had contributed
capital to Vanguard representing 0.02 of each Fund's net assets. The total
amount contributed by the Funds was $1,796,000, which represented 1.8% of
Vanguard's capitalization.
MANAGEMENT. Corporate management and administrative services include: (1)
executive staff; (2) accounting and financial; (3) legal and regulatory; (4)
shareholder account maintenance; (5) monitoring and control of custodian
relationships; (6) shareholder reporting; and (7) review and evaluation of
advisory and other services provided to the Funds by third parties.
DISTRIBUTION. Vanguard Marketing Corporation, a wholly-owned subsidiary of
The Vanguard Group, Inc., provides all distribution and marketing activities for
the funds in the Group. The principal distribution expenses are for advertising,
promotional materials and marketing personnel. Distribution services may also
include organizing and offering to the public, from time to time, one or more
new investment companies which will become members of The Vanguard Group. The
Trustees and officers of Vanguard determine the amount to be spent annually on
distribution activities, the manner and amount to be spent on each fund, and
whether to organize new investment companies.
One half of the distribution expenses of a marketing and promotional nature
is allocated among the funds based upon relative net assets. The remaining one
half of those expenses is allocated among the funds based upon each fund's sales
for the preceding 24 months relative to the total sales of the funds as a Group;
provided, however, that no fund's aggregate quarterly rate of contribution for
distribution expenses of a marketing and promotional nature shall exceed 125% of
average distribution expense rate for The Vanguard Group, and that no fund shall
incur annual distribution expenses in excess of 20/100 of 1% of its average
month-end net assets. Expenses paid to Vanguard for marketing and distribution
activities will be allocated to the class of shares of each Fund on behalf of
which the expenses were incurred by making such allocations to each share class
as if each such class were a separate Vanguard fund. Expenses associated with
Vanguard's provision of shareholder account services will be allocated to each
share class on the basis of the amount incurred by each share class.
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During the fiscal years ended December 31, 1997, 1998, and 1999, the Funds
incurred the following approximate amounts of The Vanguard Group's management
(including transfer agency), distribution, and marketing expenses.
FUND 1997 1998 1999
---- ---- ---- ----
European Stock Index Fund ......... $4,979,000 $7,906,000 $12,019,000
Pacific Stock Index Fund .......... 2,737,000 2,932,000 5,173,000
Emerging Markets Stock Index Fund . 2,410,000 2,036,000 2,643,000
INVESTMENT ADVISORY SERVICES
Investment advisory services to the Funds are provided on an
"internalized," at-cost basis from an experienced investment management staff
employed directly by Vanguard. The compensation and other expenses of this staff
are paid by the Vanguard funds utilizing these services.
During the fiscal years ended December 31, 1997, 1998, and 1999, the Funds
incurred expenses for investment advisory services of approximately the
following amounts:
FUND 1997 1998 1999
---- ---- ---- ----
European Stock Index Fund .............. $23,000 $47,000 $87,000
Pacific Stock Index Fund ............... 23,000 47,000 87,000
Emerging Markets Stock Index Fund ...... 23,000 47,000 87,000
TRUSTEE COMPENSATION
The same individuals serve as Trustees of all Vanguard funds (with two
exceptions, which are noted in the table appearing below), and each fund pays a
proportionate share of the Trustees' compensation. The funds employ their
officers on a shared basis, as well. However, officers are compensated by The
Vanguard Group, Inc., not the funds.
INDEPENDENT TRUSTEES. The funds compensate their independent Trustees--that
is, the ones who are not also officers of the fund--in three ways:
- - The independent Trustees receive an annual fee for their service to the
funds, which is subject to reduction based on absences from scheduled Board
meetings.
- - The independent Trustees are reimbursed for the travel and other expenses
that they incur in attending Board meetings.
- - Upon retirement, the independent Trustees receive an aggregate annual fee
of $1,000 for each year served on the Board, up to fifteen years of
service. This annual fee is paid for ten years following retirement, or
until each Trustee's death.
"INTERESTED" TRUSTEE. Mr. Brennan serves as a Trustee, but is not paid in
this capacity. He is, however, paid in his role as officer of The Vanguard
Group, Inc.
COMPENSATION TABLE. The following table provides compensation details for
each of the Trustees. We list the amounts paid as compensation and accrued as
retirement benefits by the Funds for each Trustee. In addition, the table shows
the total amount of benefits that we expect each Trustee to receive from all
Vanguard funds upon retirement, and the total amount of compensation paid to
each Trustee by all Vanguard funds.
B-13
<PAGE>
VANGUARD INTERNATIONAL EQUITY INDEX FUNDS
COMPENSATION TABLE
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
PENSION OR TOTAL
AGGREGATE RETIREMENT COMPENSATION
COMPENSATION BENEFITS ACCRUED FROM ALL VANGUARD
FROM THESE AS PART OF THESE ESTIMATED ANNUAL FUNDS PAID TO
FUNDS FUNDS' EXPENSES BENEFITS UPON TRUSTEES
NAMES OF TRUSTEES (1) (1) RETIREMENT (2)
- ----------------------------------------------------------------------------------------------------
John C. Bogle(3) None None None None
John J. Brennan None None None None
JoAnn Heffernan Heisen $1,376 $76 $15,000 $80,000
Bruce K. MacLaury $1,426 $129 $12,000 $75,000
Burton G. Malkiel $1,386 $125 $15,000 $80,000
Alfred M. Rankin, Jr. $1,376 $92 $15,000 $80,000
John C. Sawhill $1,376 $116 $15,000 $80,000
James O. Welch, Jr. $1,376 $134 $15,000 $80,000
J. Lawrence Wilson $1,376 $97 $15,000 $80,000
</TABLE>
- ---------
(1) The amounts shown in this column are based on the Funds' fiscal year ended
December 31, 1999.
(2) The amounts reported in this column reflect the total compensation paid to
each Trustee for his or her service as Trustee of 103 Vanguard funds (102
in the case of Mr. Malkiel; 93 in the case of Mr. MacLaury) for the 1999
calendar year.
(3) Mr. Bogle has retired from the Funds' Board, effective December 31, 1999.
PORTFOLIO TRANSACTIONS
In placing portfolio transactions, each Fund uses its best judgment to
choose the broker most capable of providing the brokerage services necessary to
obtain the best available price and most favorable execution. The full range and
quality of brokerage services available are considered in making these
determinations. In those instances where it is reasonably determined that more
than one broker can offer the brokerage services needed to obtain the best
available price and most favorable execution, consideration will be given to
those brokers which supply statistical information and provide other services in
addition to execution services to the Funds.
For the fiscal years ended December 31, 1997, 1998, and 1999, the Funds
paid the following approximate amounts in brokerage commissions.
FUND 1997 1998 1999
---- ---- ---- ----
European Stock Index Fund ......... $1,522,000 $4,485,000 $3,125,000
Pacific Stock Index Fund .......... 605,000 370,000 1,003,000
Emerging Markets Stock Index Fund . 2,302,000 987,000 1,829,000
TOTAL RETURN
The average annual total return of each Fund for the one- and five-year
periods ended December 31, 1999 and since its inception are set forth below:
1 YEAR ENDED 5 YEARS ENDED SINCE
FUND 12/31/1999 12/31/1999 INCEPTION*
- ---- ---------- ---------- ----------
European Stock Index Fund**........ 16.62% 22.58% 14.61%
Pacific Stock Index Fund**......... 57.05% 2.52% 3.20%
Emerging Markets Stock Index Fund+. 59.96% 4.88% 6.03%
- ---------
*June 18, 1990 for European and Pacific Stock Index Funds, and May 4, 1994 for
Emerging Markets Stock Index Fund.
**Return figures do not reflect the annual account maintenance fee imposed on
accounts with balances of less than $10,000, or the transaction fee imposed on
purchases prior to April 1, 2000.
+Return figures do not reflect the annual account maintenance fee imposed on
accounts with balances of less than $10,000, but do reflect the 0.5% trans-
action fee imposed on purchases and redemptions.
B-14
<PAGE>
These performance figures have been adjusted for the Funds' transaction
fees but do not reflect their annual account maintenance fee of $10. The Funds'
transaction fees were as follows:
FUND PURCHASE FEES REDEMPTION FEES
- ---- ------------- ---------------
European Stock Index None (beginning 4/1/2000) None
Fund 0.5% (from 11/3/1997 to 3/31/2000)
1.0% (from 6/18/1990 to 11/2/1997)
Pacific Stock Index None (beginning 4/1/2000) None
Fund 0.5% (from 1/1/1997 to 3/31/2000)
1.0% (from 6/18/1990 to 12/31/1996)
Emerging Markets Stock 0.5% (beginning 4/1/2000) 0.5% (beginning
Index Fund 1.0% (from 11/3/1997 to 3/31/2000) 4/1/2000)
1.5% (from 1/1/1997 to 11/2/1997) 1.0% (from 5/4/
2.0% (from 5/4/1994 to 12/31/1996) 1994 to 3/31/
2000
AVERAGE ANNUAL TOTAL RETURN
Average annual total return is the average annual compounded rate of return
for the periods of one year, five years, ten years or the life of the Fund, all
ended on the last day of a recent month. Average annual total return quotations
will reflect changes in the price of the Fund's shares and assume that all
dividends and capital gains distributions during the respective periods were
reinvested in Fund shares. Average annual total return is calculated by finding
the average annual compounded rates of return of a hypothetical investment over
such periods according to the following formula (average annual total return is
then expressed as a percentage):
T = (ERV/P)1/N - 1
Where:
T =average annual total return
P =a hypothetical initial investment of $1,000
n =number of years
ERV =ending redeemable value: ERV is the value, at the end
of the applicable period, of a hypothetical $1,000
investment made at the beginning of the applicable
period
AVERAGE ANNUAL AFTER-TAX TOTAL RETURN QUOTATION
We calculate the Fund's average annual after-tax total return by finding
the average annual compounded rate of return over the 1-, 5-, and 10-year
periods that would equate the initial amount invested to the after-tax value,
according to the following formulas:
P (1+T)N = ATV
Where:
P =a hypothetical initial payment of $1,000
T =average annual after-tax total return
n =number of years
ATV =after-tax value at the end of the 1-, 5-, or 10-year
periods of a hypothetical $1,000 payment made at the
beginning of the time period, assuming no liquidation
of the investment at the end of the measurement periods
B-15
<PAGE>
Instructions:
1. Assume all distributions by the Fund are reinvested--less the taxes due on
such distributions--at the price on the reinvestment dates during the
period. Adjustments may be made for subsequent re-characterizations of
distributions.
2. Calculate the taxes due on distributions by the Fund by applying the
highest federal marginal tax rates to each component of the distributions
on the reinvestment date (e.g., ordinary income, short-term capital gain,
long-term capital gain, etc.). For periods after December 31, 1997, the
federal marginal tax rates used for the calculations are 39.6% for ordinary
income and short-term capital gains and 20% for long-term capital gains.
Note that the applicable tax rates may vary over the measurement period.
Assume no taxes are due on the portions of any distributions classified as
exempt interest or non-taxable (i.e., return of capital). Ignore any
potential tax liabilities other than federal tax liabilities (e.g., state
and local taxes).
3. Include all recurring fees that are charged to all shareholder accounts.
For any account fees that vary with the size of the account, assume an
account size equal to the Fund's mean (or median) account size. Assume that
no additional taxes or tax credits result from any redemption of shares
required to pay such fees.
4. State the total return quotation to the nearest hundredth of one percent.
CUMULATIVE TOTAL RETURN
Cumulative total return is the cumulative rate of return on a hypothetical
initial investment of $1,000 for a specified period. Cumulative total return
quotations reflect changes in the price of the Fund's shares and assume that all
dividends and capital gains distributions during the period were reinvested in
Fund shares. Cumulative total return is calculated by finding the cumulative
rates of a return of a hypothetical investment over such periods, according to
the following formula (cumulative total return is then expressed as a
percentage):
C = (ERV/P) - 1
Where:
C =cumulative total return
P =a hypothetical initial investment of $1,000
ERV =ending redeemable value: ERV is the value, at the end
of the applicable period, of a hypothetical $1,000
investment made at the beginning of the applicable
period
SEC YIELDS
Yield is the net annualized yield based on a specified 30-day (or one
month) period assuming semiannual compounding of income. Yield is calculated by
dividing the net investment income per share earned during the period by the
maximum offering price per share on the last day of the period, according to the
following formula:
YIELD = 2[((A-B)/CD+1)6 - 1]
Where:
a =dividends and interest earned during the period
b =expenses accrued for the period (net of reimbursements)
c =the average daily number of shares outstanding during
the period that were entitled to receive dividends
d =the maximum offering price per share on the last day of
the period
B-16
<PAGE>
COMPARATIVE INDEXES
Vanguard may use reprinted material discussing The Vanguard Group, Inc. or
any of the member funds of The Vanguard Group of Investment Companies. The funds
may use one or more of the following unmanaged indexes for comparative
performance purposes:
SELECT EMERGING MARKETS FREE INDEX--is an unpublished index which includes
common stocks of companies located in 13 emerging markets and the developed
countries of Hong Kong and Singapore.
MORGAN STANLEY CAPITAL INTERNATIONAL EUROPE, AUSTRALASIA, FAR EAST INDEX--is an
arithmetic, market value-weighted average of the performance of over 1,000
securities listed on the stock exchanges of countries in Europe, Australia,
Asia, and the Far East.
MORGAN STANLEY CAPITAL INTERNATIONAL EMERGING MARKETS FREE INDEX--an arithmetic,
market value-weighted average of the performance of securities listed on the
stock exchanges of 22 developing countries.
MORGAN STANLEY CAPITAL INTERNATIONAL EUROPE, AUSTRALASIA, FAR EAST + SELECT
EMERGING MARKETS FREE INDEX--an arithmetic, market value-weighted average of the
performance of securities listed on the stock markets of Europe, Australia, the
Far East and 15 developing countries.
TOTAL INTERNATIONAL COMPOSITE INDEX--a Vanguard maintained index that combines
the Morgan Stanley Capital International EAFE Index with the Select Emerging
Markets Free Index on a market value-weighted basis.
FT-ACTUARIES WORLD INDEX--includes approximately 2,400 securities from 24
countries including the U.S.
FT-ACTUARIES EURO-PACIFIC INDEX--a subset of the FT Actuaries World Index, which
excludes companies in the U.S., Canada, Mexico, and South Africa.
SALOMON-RUSSELL PRIMARY MARKET INDEX--consists of the approximately 700 largest
stocks within 23 countries.
SALOMON-RUSSELL EXTENDED MARKET INDEX--consists of approximately 1,000 medium
and small capitalization stocks from 23 countries.
SALOMON-RUSSELL BROAD MARKET INDEX--consists of all of the stocks within the
Primary Market Index and the Extended Market Index.
RUSSELL UNIVERSE OF NON-U.S. EQUITY PORTFOLIOS--a universe of separate accounts
and pooled funds available to U.S. investors, which invest in international
equities.
RUSSELL UNIVERSE OF WORLD EQUITY PORTFOLIOS--a universe of equity-oriented
global portfolios.
LIPPER INTERNATIONAL UNIVERSE--a universe of mutual funds that invest in
international equities.
LIPPER DIVERSIFIED INTERNATIONAL UNIVERSE--a universe of mutual funds that
invest in international equities from more than one country.
LIPPER INTERNATIONAL AVERAGE--the average return of the portfolios included in
the Lipper International Universe.
LIPPER DIVERSIFIED INTERNATIONAL AVERAGE--the average return of the portfolios
included in the Lipper Diversified International Universe.
STANDARD AND POOR'S 500 COMPOSITE STOCK PRICE INDEX--includes stocks selected by
Standard & Poor's Index Committee to include leading companies in leading
industries and to reflect the U.S. stock market.
STANDARD AND POOR'S MIDCAP 400 INDEX--is composed of 400 medium sized domestic
stocks.
STANDARD AND POOR'S SMALLCAP 600/BARRA VALUE INDEX--contains stocks of the S&P
SmallCap 600 Index which have a lower than average price-to-book ratio.
STANDARD AND POOR'S SMALLCAP 600/BARRA GROWTH INDEX--contains stocks of the S&P
SmallCap 600 Index which have a higher than average price-to-book ratio.
RUSSELL 1000 VALUE INDEX--consists of the stocks in the Russell 1000 Index
(comprising the 1,000 largest U.S.-based companies measured by total market
capitalization) with the lowest price-to-book ratios, comprising 50% of the
market capitalization of the Russell 1000.
WILSHIRE 5000 TOTAL MARKET INDEX--consists of more than 7,000 common equity
securities, covering all stocks in the U.S. for which daily pricing is
available.
WILSHIRE 4500 COMPLETION INDEX--consists of all stocks in the Wilshire 5000
except for the 500 stocks in the Standard and Poor's 500 Index.
B-17
<PAGE>
SALOMON BROTHERS HIGH-GRADE CORPORATE BOND INDEX--consists of publicly issued,
non-convertible corporate bonds rated Aa or Aaa. It is a value-weighted, total
return index, including approximately 800 issues with maturities of 12 years or
greater.
BARING EMERGING MARKETS INDEX--a diversified index of approximately 250
relatively liquid stocks from 13 emerging market countries.
SALOMON BROTHERS BROAD INVESTMENT-GRADE BOND INDEX--is a market-weighted index
that contains approximately 4,700 individually priced investment-grade corporate
bonds rated BBB or better, U.S. Treasury and agency issues, and mortgage
pass-through securities.
SHEARSON LEHMAN LONG-TERM TREASURY BOND INDEX--is composed of all bonds covered
by the Shearson Lehman Hutton Treasury Bond Index with maturities of ten years
or greater.
NASDAQ INDUSTRIAL INDEX--is composed of more than 3,000 industrial issues. It is
a value-weighted index calculated on price change only and does not include
income.
COMPOSITE INDEX--65% Standard & Poor's 500 Index and 35% Lehman Brothers
Corporate A or Better Bond Index.
COMPOSITE INDEX--65% Lehman Brothers Corporate A or Better Bond Index and a 35%
weighting in a blended equity composite (75% Standard & Poor's/BARRA Value
Index, 12.5% Standard & Poor's Utilities Index and 12.5% Standard & Poor's
Telephone Index).
LEHMAN BROTHERS LONG-TERM CORPORATE AA OR BETTER BOND INDEX--consists of all
publicly issued, fixed rate, nonconvertible investment grade,
dollar-denominated, SEC-registered corporate debt rated Aa or Aaa.
FINANCIAL STATEMENTS
The Funds' Financial Statements as of and for the year ended December 31,
1999, appearing in the Funds' 1999 Annual Report to Shareholders, and the report
thereon of PricewaterhouseCoopers LLP, independent accountants, also appearing
therein, are incorporated by reference in this Statement of Additional
Information. For a more complete discussion of the performance, please see the
Funds' Annual Report to Shareholders, which may be obtained without charge.
SAI072-04/28/2000
B-18
<PAGE>
PART C
VANGUARD INTERNATIONAL EQUITY INDEX FUNDS
OTHER INFORMATION
ITEM 23. EXHIBITS
(a) Declaration of Trust**
(b) By-Laws**
(c) Reference is made to Articles III and V of the Registrant's Declaration
of Trust
(d) Not Applicable
(e) Investment Advisory Contract**
(f) Reference is made to the section entitled "Management of the Funds" in
the Registrant's Statement of Additional Information
(g) Custodian Agreement*
(h) Amended and Restated Funds' Service Agreement**
(i) Legal Opinion**
(j) Consent of Independent Accountants*
(k) Not Applicable
(l) Not Applicable
(m) Not Applicable
(n) Not Applicable
(o) Multiple Class Plan**
(p) Code of Ethics*
--------------------------
* Filed herewith
** Filed previously
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
Registrant is not controlled by or under common control with any person.
ITEM 25. INDEMNIFICATION
The Registrant's organizational documents contain provisions indemnifying
Trustees and officers against liability incurred in their official capacity.
Article VII, Section 2 of the Declaration of Trust provides that the Registrant
may indemnify and hold harmless each and every Trustee and officer from and
against any and all claims, demands, costs, losses, expenses, and damages
whatsoever arising out of or related to the performance of his or her duties as
a Trustee or officer. However, this provision does not cover any liability to
which a Trustee or officer would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence, or reckless disregard of the duties
involved in the conduct of his or her office. Article VI of the By-Laws
generally provides that the Registrant shall indemnify its Trustees and officers
from any liability arising out of their past or present service in that
capacity. Among other things, this provision excludes any liability arising by
reason of willful misfeasance, bad faith, gross negligence, or the reckless
disregard of the duties involved in the conduct of the Trustee's or officer's
office with the Registrant.
ITEM 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
The Vanguard Group, Inc. (Vanguard) is an investment adviser registered under
the Advisers Act. The list required by this Item 26 of officers and directors of
Vanguard, together with any information as to any business profession, vocation,
or employment of a substantial nature engaged in by such officers and directors
during the past two years, is incorporated herein by reference from Schedules B
and D of Form ADV filed by Vanguard pursuant to the Advisers Act (SEC File No.
801-11953).
C-1
<PAGE>
ITEM 27. PRINCIPAL UNDERWRITERS
(a) Not Applicable
(b) Not Applicable
(c) Not Applicable
ITEM 28. LOCATION OF ACCOUNTS AND RECORDS
The books, accounts, and other documents required to be maintained by Section 31
(a) of the Investment Company Act and the rules promulgated thereunder will be
maintained at the offices of Registrant; Registrant's Transfer Agent, The
Vanguard Group, Inc., 100 Vanguard Boulevard, Malvern, Pennsylvania 19355; and
the Registrant's Custodian, Brown Brothers Harriman & Co., 40 Water Street,
Boston, Massachusetts 02109.
ITEM 29. MANAGEMENT SERVICES
Other than as set forth under the description of The Vanguard Group in Part B of
this Registration Statement, the Registrant is not a party to any
management-related service contract.
ITEM 30. UNDERTAKINGS
Not Applicable
C-2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant hereby certifies that it meets all the
requirements for effectiveness of this Registration Statement pursuant to Rule
485(b) under the Securities Act of 1933 and has duly caused this Post-Effective
Amendment to this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the Town of Valley Forge and the
Commonwealth of Pennsylvania, on the 28th day of April, 2000.
VANGUARD INTERNATIONAL EQUITY
INDEX FUNDS
BY:_________________________________
(signature)
(HEIDI STAM)
JOHN J. BRENNAN*
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Act of 1933, this Post-Effective
Amendment to the Registration Statement has been signed below by the following
persons in the capacities and on the date indicated:
SIGNATURE TITLE DATE
- --------------------------------------------------------------------------------
By:/S/ JOHN J. BRENNAN President, Chairman, Chief April 28, 2000
--------------------------- Executive Officer, and Trustee
(Heidi Stam)
John J. Brennan*
By:/S/ JOANN HEFFERNAN HEISEN Trustee April 28, 2000
---------------------------
(Heidi Stam)
JoAnn Heffernan Heisen*
By:/S/ BRUCE K. MACLAURY Trustee April 28, 2000
---------------------------
(Heidi Stam)
Bruce K. MacLaury*
By:/S/ BURTON G. MALKIEL Trustee April 28, 2000
---------------------------
(Heidi Stam)
Burton G. Malkiel*
By:/S/ ALFRED M. RANKIN, JR. Trustee April 28, 2000
---------------------------
(Heidi Stam)
Alfred M. Rankin, Jr.*
By:/S/ JOHN C. SAWHILL Trustee April 28, 2000
---------------------------
(Heidi Stam)
John C. Sawhill*
By:/S/ JAMES O. WELCH, JR. Trustee April 28, 2000
---------------------------
(Heidi Stam)
James O. Welch, Jr.*
By:/S/ J. LAWRENCE WILSON Trustee April 28, 2000
---------------------------
(Heidi Stam)
J. Lawrence Wilson*
By:/S/ THOMAS J. HIGGINS Treasurer and Principal April 28, 2000
--------------------------- Financial Officer and
(Heidi Stam) Principal Accounting Officer
Thomas J. Higgins*
*By Power of Attorney. See File Number 33-4424, filed on January 25, 1999.
Incorporated by Reference.
<PAGE>
INDEX TO EXHIBITS
Custodian Agreement .................................................. Ex-99.BG
Consent of Independent Accountants ................................... Ex-99.BJ
Code of Ethics ....................................................... Ex-99.BP
<PAGE>
EX-99.BG
CUSTODIAN AGREEMENT
THIS AGREEMENT, dated as of July 20, 1999, between certain open-end
management investment companies (each investment company a "Fund") organized
under the laws of the State of Delaware and registered with the Securities and
Exchange Commission under the 1940 Act, on behalf of certain of their series
(each series a "Series"), and BROWN BROTHERS HARRIMAN & CO., a limited
partnership formed under the laws of the State of New York (BBH&CO. or the
CUSTODIAN),
W I T N E S S E T H:
WHEREAS, the Fund wishes to employ BBH&Co. to act as custodian for the Fund
and to provide related services, all as provided herein, and BBH&Co. is willing
to accept such employment, subject to the terms and conditions herein set forth;
NOW, THEREFORE, in consideration of the mutual covenants and agreements
herein contained, the Fund and BBH&Co. hereby agree, as follows:
1. APPOINTMENT OF CUSTODIAN. The Fund hereby appoints BBH&Co. as the Fund's
custodian, and BBH&Co. hereby accepts such appointment. All Investments of the
Fund delivered to the Custodian or its agents or Subcustodians shall be dealt
with as provided in this Agreement. The duties of the Custodian with respect to
the Fund's Investments shall be set forth expressly in this Agreement and any
addenda thereto which duties are generally comprised of safekeeping and various
administrative duties that will be performed in accordance with Instructions and
as reasonably required to effect Instructions.
2. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE FUND. The Fund hereby
represents, warrants and covenants each of the following:
2.1 This Agreement has been, and at the time of delivery of each
Instruction such Instruction will have been, duly authorized, executed and
delivered by the Fund. This Agreement does not violate any Applicable Law
or conflict with or constitute a default under the Fund's prospectus or
other organic document, agreement, judgment, order or decree to which the
Fund is a party or by which it or its Investments is bound. The Fund is and
will be in compliance with all laws and regulations applicable to its
operations, investments or activities.
2.2 By providing an Instruction with respect to the first acquisition
of an Investment in a jurisdiction other than the United States of America,
the Fund shall be deemed to have confirmed to the Custodian that the Fund
has (a) assessed and accepted all material Country or Sovereign Risks and
accepted responsibility for their occurrence, (b) made all determinations
required to be made by the Fund under the 1940 Act, and (iii) appropriately
and adequately disclosed to its shareholders, other investors and all
persons who have rights in or to such
<PAGE>
Investments, all material investment risks, including those relating to the
custody and settlement infrastructure or the servicing of securities in
such jurisdiction.
2.3 The Fund shall safeguard and shall solely be responsible for the
safekeeping of any testkeys, identification codes, passwords, other
security devices or statements of account with which the Custodian provides
it. In furtherance and not limitation of the foregoing, in the event the
Fund utilizes any on-line service offered by the Custodian, the Fund and
the Custodian shall be fully responsible for the security of each party's
connecting terminal, access thereto and the proper and authorized use
thereof and the initiation and application of continuing effective
safeguards in respect thereof. Additionally, if the Fund uses any on-line
or similar communications service made available by the Custodian, the Fund
shall be solely responsible for ensuring the security of its access to the
service and for the use of the service, and shall only attempt to access
the service and the Custodian's computer systems as directed by the
Custodian. If the Custodian provides any computer software to the Fund
relating to the services described in this Agreement, the Fund will only
use the software for the purposes for which the Custodian provided the
software to the Fund, and will abide by the license agreement accompanying
the software and any other security policies which the Custodian provides
to the Fund.
3. REPRESENTATION AND WARRANTY OF BBH&CO. BBH&Co. hereby represents and warrants
that this Agreement has been duly authorized, executed and delivered by BBH&Co.
and does not and will not violate any Applicable Law or conflict with or
constitute a default under BBH&Co.'s limited partnership agreement or any
agreement, instrument, judgment, order or decree to which BBH&Co. is a party or
by which it is bound. BBH&Co. also warrants that it will comply with all
applicable laws and regulations in performance of its duties under this
Agreement.
4. INSTRUCTIONS. Unless otherwise explicitly indicated herein, the Custodian
shall perform its duties pursuant to Instructions. As used herein, the term
INSTRUCTION shall mean a directive initiated by the Fund, acting directly or
through its board of directors, officers or other Authorized Persons, which
directive shall conform to the requirements of this Section 4.
4.1 AUTHORIZED PERSONS. For purposes hereof, an AUTHORIZED PERSON
shall be a person or entity authorized to give Instructions for or on
behalf of the Fund by written notices to the Custodian or otherwise in
accordance with procedures delivered to the Custodian. The Custodian may
treat any Authorized Person as having full authority of the Fund to issue
Instructions hereunder unless the notice of authorization contains explicit
limitations as to said authority. The Custodian shall be entitled to rely
upon the authority of Authorized Persons until it receives appropriate
written notice from the Fund to the contrary.
<PAGE>
4.2 FORM OF INSTRUCTION. Each Instruction shall be transmitted by such
secured or authenticated electro-mechanical means as the Custodian shall
make available to the Fund from time to time unless the Fund shall elect to
transmit such Instruction in accordance with Subsections 4.2.1 through
4.2.3 of this Section.
4.2.1 FUND DESIGNATED SECURED-TRANSMISSION METHOD. Instructions
may be transmitted through a secured or tested electro-mechanical
means identified by the Fund or by an Authorized Person entitled to
give Instruction and acknowledged and accepted by the Custodian; it
being understood that such acknowledgment shall authorize the
Custodian to receive and process such means of delivery but shall not
represent a judgment by the Custodian as to the reasonableness or
security of the method determined by the Authorized Person.
4.2.2 WRITTEN INSTRUCTIONS. Instructions may be transmitted in a
writing that bears the manual signature of Authorized Persons.
4.2.3 OTHER FORMS OF INSTRUCTION. Instructions may also be
transmitted by another means determined by the Fund or Authorized
Persons and acknowledged and accepted by the Custodian (subject to the
same limits as to acknowledgements as is contained in Subsection
4.2.1, above) including Instructions given orally or by SWIFT, telex
or telefax (whether tested or untested).
When an Instruction is given by means established under Subsections 4.2.1
through 4.2.3, it shall be the responsibility of the Custodian to use reasonable
care to adhere to any security or other procedures established in writing
between the Custodian and the Authorized Person with respect to such means of
Instruction, but such Authorized Person shall be solely responsible for
determining that the particular means chosen is reasonable under the
circumstances. If the Custodian believes that the means chosen are unreasonable,
it shall promptly notify an Authorized Person. Oral Instructions shall be
binding upon the Custodian only if and when an Authorized Person provides
Instructions that conform to the requirements of this Section 4. Any Oral
Instructions shall promptly thereafter be confirmed in writing by an Authorized
Person (which confirmation may bear the facsimile signature of such Person).
With respect to telefax Instructions, the parties agree and acknowledge that
receipt of legible Instructions cannot be assured and that the Custodian cannot
verify that authorized signatures on telefax Instructions are original or
properly affixed. If the Custodian determines that a telefax Instruction is
illegible, the Custodian shall promptly contact an Authorized Person and request
a legible telefax Instruction. Provided the Custodian has exercised the standard
of care required herein with respect to receipt of Proper Instructions including
but not limited to any applicable security or authorization procedures, the
Custodian shall not be liable for losses or expenses incurred through actions
taken in reliance on inaccurately stated or unauthorized telefax Instructions.
The provisions of Section 4A of the Uniform Commercial Code shall apply to Funds
Transfers performed in accordance with Instructions. In the event that a Funds
Transfer Services Agreement is executed between the Fund or an Authorized Person
and the Custodian, such an agreement shall comprise a designation of form of a
means of delivering Instructions for purposes of this Section 4.2.
4.3 COMPLETENESS AND CONTENTS OF INSTRUCTIONS. The Authorized Person
shall be responsible for assuring the adequacy and accuracy of
Instructions. Particularly, upon any acquisition or disposition or other
dealing in the Fund's Investments and upon any delivery and transfer of any
Investment or moneys, the person initiating such Instruction shall give the
Custodian an Instruction with appropriate detail, including, without
limitation:
<PAGE>
4.3.1 The transaction date and the date and location of
settlement;
4.3.2 The specification of the type of transaction;
4.3.4 A description of the Investments or moneys in question,
including, as appropriate, quantity, price per unit, amount of money
to be received or delivered and currency information. Where an
Instruction is communicated by electronic means, or otherwise where an
Instruction contains an identifying number such as a CUSIP, SEDOL or
ISIN number, the Custodian shall be entitled to rely on such number as
controlling notwithstanding any inconsistency contained in such
Instruction, particularly with respect to Investment description. If
the Custodian is aware of such an inconsistency in an Instruction, it
shall give prompt notice of such inconsistency to an Authorized
Person.
4.3.5 The name of the broker or similar entity concerned with
execution of the transaction.
If the Custodian shall reasonably determine that an Instruction, including a
telefax Instruction, is either unclear or incomplete, the Custodian shall give
prompt notice of such determination to the Fund, and the Fund shall thereupon
amend or otherwise reform such Instruction. In such event, the Custodian shall
have no obligation to take any action in response to the Instruction initially
delivered until the redelivery of an amended or reformed Instruction.
4.4 TIMELINESS OF INSTRUCTIONS. In giving an Instruction, the Fund
shall take into consideration delays which may occur due to the involvement
of a Subcustodian or agent, differences in time zones, and other factors
particular to a given market, exchange or issuer. When the Custodian has
established specific timing requirements or deadlines with respect to
particular classes of Instruction and the Custodian has notified the Fund
of such timing requirements and deadlines, or when an Instruction is
received by the Custodian at such a time that it could not reasonably be
expected to have acted on such Instruction due to time zone differences or
other factors beyond its reasonable control, the execution of any
Instruction received by the Custodian after such deadline or at such time
(including any modification or revocation of a previous Instruction) shall
be at the risk of the Fund.
5. SAFEKEEPING OF FUND ASSETS. The Custodian shall hold Investments
delivered to it or Subcustodians for the Fund in accordance with the provisions
of this Section. The Custodian will identify the Investments on its books as
belonging to each individual Series. The Custodian shall not be responsible for
(a) the safekeeping of Investments not delivered or that are not caused to be
issued to it or its Subcustodians; or, (b) pre-existing faults or defects in
Investments that are delivered to the Custodian, or its Subcustodians. The
Custodian or Subcustodian shall give prompt
<PAGE>
notice to the Fund of any pre-existing faults or defects that it is aware of.
The Custodian is hereby authorized to hold with itself or a Subcustodian, and to
record in one or more accounts, all Investments delivered to and accepted by the
Custodian, any Subcustodian or their respective agents pursuant to an
Instruction or in consequence of any corporate action. Each such account is a
"Securities Account" (as such term is defined in the Uniform Commercial Code as
in effect from time to time in the State of New York (the "UCC")). The Custodian
shall hold Investments for the account of the Fund and shall segregate
Investments from assets belonging to the Custodian and shall cause its
Subcustodians to segregate Investments from assets belonging to the Subcustodian
in an account held for the Fund or in an account maintained by the Subcustodian
generally for non-proprietary assets of the Custodian.
The parties acknowledge that the Custodian and Subcustodians each are
acting under this Agreement as a "Securities Intermediary" (as such term is used
and defined in the UCC). For the purposes of this Agreement, the parties hereto
acknowledge and agree that (i) any Investment held by the Custodian or any
Subcustodian shall constitute a "Financial Asset" (as such term is used and
defined in the UCC), (ii) the Fund may at any time issue one or more
"Entitlement Orders" (as such term is used and defined in the UCC) with respect
to the Fund's Investments, (iii) upon the Custodian's or Subcustodian's receipt
of an Investment for the benefit of the Fund, the Custodian or Subcustodian, as
the case may be, shall credit to the Fund a "Securitiy Entitlement" (as such
term is used and defined in the UCC), and (iv) the Fund shall have a Security
Entitlement with respect to all Investments held by the Custodian or
Subcustodian.
5.1 USE OF SECURITIES DEPOSITORIES. The Custodian may deposit and
maintain Investments in any Securities Depository, either directly or
through one or more Subcustodians
<PAGE>
appointed by the Custodian. Investments held in a Securities Depository
shall be held (a) subject to the agreement, rules, statement of terms and
conditions or other document or conditions effective between the Securities
Depository and the Custodian or the Subcustodian, as the case may be, and
(b) in an account for the Fund or in bulk segregation in an account
maintained for the non-proprietary assets of the entity holding such
Investments in the Depository. If market practice or the rules and
regulations of the Securities Depository prevent the Custodian, the
Subcustodian or (any agent of either) from holding its client assets in
such a separate account, the Custodian, the Subcustodian or other agent
shall as appropriate segregate such Investments for benefit of the Fund or
for benefit of clients of the Custodian generally on its own books.
5.2 CERTIFICATED ASSETS. Investments which are certificated may be
held in registered or bearer form: (a) in the Custodian's vault; (b) in the
vault of a Subcustodian or agent of the Custodian or a Subcustodian; or (c)
in an account maintained by the Custodian, Subcustodian or agent at a
Securities Depository; all in accordance with customary market practice in
the jurisdiction in which any Investments are held.
5.3 REGISTERED ASSETS. Investments which are registered may be
registered in the name of the Custodian, a Subcustodian, or in the name of
the Fund or a nominee for any of the foregoing, and may be held in any
manner set forth in paragraph 5.2 above with or without any identification
of fiduciary capacity in such registration.
5.4 BOOK ENTRY ASSETS. Investments which are represented by book-entry
may be so held in an account maintained by the Book-Entry Agent on behalf
of the Custodian, a Subcustodian or another agent of the Custodian, or a
Securities Depository.
5.5 REPLACEMENT OF LOST INVESTMENTS. In the event of a loss of
Investments for which the Custodian is responsible under the terms of this
Agreement, the Custodian shall promptly replace such Investment, or in the
event that such replacement cannot be effected, the Custodian shall pay to
the Fund the fair market value of such Investment based on the last
available price as of the close of business in the relevant market on the
date that a claim was first made to the Custodian with respect to such
loss.
6. ADMINISTRATIVE DUTIES OF THE CUSTODIAN. The Custodian shall perform the
following administrative duties with respect to Investments of the Fund.
6.1 PURCHASE OF INVESTMENTS. Pursuant to Instruction, Investments
purchased for the account of the Fund shall be paid for (a) against
delivery thereof to the Custodian or a Subcustodian, as the case may be,
either directly or through a Clearing Corporation or a Securities
Depository (in accordance with the rules of such Securities Depository or
such Clearing Corporation), or (b) otherwise in accordance with an
Instruction, Applicable Law, generally accepted trade practices, or the
terms of the instrument representing such Investment.
6.2 SALE OF INVESTMENTS. Pursuant to Instruction, Investments sold for
the account of the Fund shall be delivered (a) against payment therefor in
cash, by check or by bank wire
<PAGE>
transfer, (b) by credit to the account of the Custodian or the applicable
Subcustodian, as the case may be, with a Clearing Corporation or a
Securities Depository (in accordance with the rules of such Securities
Depository or such Clearing Corporation), or (c) otherwise in accordance
with an Instruction, Applicable Law, generally accepted trade practices, or
the terms of the instrument representing such Investment.
6.3 DELIVERY IN CONNECTION WITH BORROWINGS OF THE FUND OR OTHER
COLLATERAL AND MARGIN REQUIREMENTS. Pursuant to Instruction, the Custodian
may deliver Investments or cash of the Fund in connection with borrowings
and other collateral and margin requirements.
6.4 FUTURES AND OPTIONS. If, pursuant to an Instruction, the Custodian
shall become a party to an agreement with the Fund and a futures commission
merchant regarding margin (TRI-PARTY AGREEMENT), the Custodian shall (a)
receive and retain, to the extent the same are provided to the Custodian,
confirmations or other documents evidencing the purchase or sale by the
Fund of exchange-traded futures contracts and commodity options, (b) when
required by such Tri-Party Agreement, deposit and maintain in an account
opened pursuant to such Agreement (MARGIN ACCOUNT), segregated either
physically or by book-entry in a Securities Depository for the benefit of
any futures commission merchant, such Investments as the Fund shall have
designated as initial, maintenance or variation "margin" deposits or other
collateral intended to secure the Fund's performance of its obligations
under the terms of any exchange-traded futures contracts and commodity
options; and (c) thereafter pay, release or transfer Investments into or
out of the Margin Account in accordance with the provisions of the such
Agreement. Alternatively, the Custodian may deliver Investments, in
accordance with an Instruction, to a futures commission merchant for
purposes of margin requirements in accordance with Rule 17f-6. The
Custodian shall in no event be responsible for but shall give prompt notice
to the Fund in the event it becomes aware of the acts and omissions of any
futures commission merchant to whom Investments are delivered pursuant to
this Section; for the sufficiency of Investments held in any Margin
Account; or, for the performance of any terms of any exchange-traded
futures contracts and commodity options.
6.5 CONTRACTUAL OBLIGATIONS AND SIMILAR INVESTMENTS. From time to
time, the Fund's Investments may include Investments that are not ownership
interests as may be represented by certificate (whether registered or
bearer), by entry in a Securities Depository or by book entry agent,
registrar or similar agent for recording ownership interests in the
relevant Investment. If the Fund shall at any time acquire such
Investments, including without limitation deposit obligations, loan
participations, repurchase agreements and derivative arrangements, the
Custodian shall (a) receive and retain, to the extent the same are provided
to the Custodian, confirmations or other documents evidencing the
arrangement; and (b) perform on the Fund's account in accordance with the
terms of the applicable arrangement, but only to the extent directed to do
so by Instruction. The Custodian shall have no responsibility for
agreements running to the Fund as to which it is not a party other than to
retain, to the extent the same are provided to the Custodian, documents or
copies of documents evidencing the arrangement and, in accordance with
Instruction, to include such arrangements in reports made to the Fund.
6.6 EXCHANGE OF SECURITIES. Unless otherwise directed by Instruction,
the Custodian shall: (a) exchange securities held for the account of the
Fund for other securities in connection with any reorganization,
recapitalization, conversion, split-up, change of par value of shares or
similar event, and (b) deposit any such securities in accordance with the
terms of any reorganization or protective plan.
<PAGE>
6.7 SURRENDER OF SECURITIES. Unless otherwise directed by Instruction,
the Custodian may surrender securities: (a) in temporary form for
definitive securities; (b) for transfer into the name of an entity
allowable under Section 5.3; and (c) for a different number of certificates
or instruments representing the same number of shares or the same principal
amount of indebtedness.
6.8 RIGHTS, WARRANTS, ETC. Pursuant to Instruction, the Custodian
shall (a) deliver warrants, puts, calls, rights or similar securities to
the issuer or trustee thereof, or to any agent of such issuer or trustee,
for purposes of exercising such rights or selling such securities, and (b)
deposit securities in response to any invitation for the tender thereof.
6.9 MANDATORY CORPORATE ACTIONS. Unless otherwise directed by
Instruction, the Custodian shall: (a) comply with the terms of all
mandatory or compulsory exchanges, calls, tenders, redemptions or similar
rights of securities ownership affecting securities held on the Fund's
account and promptly notify the Fund of such action, and (b) collect all
stock dividends, rights and other items of like nature with respect to such
securities.
6.10 INCOME COLLECTION. Unless otherwise directed by Instruction, the
Custodian shall collect any amount due and payable to the Fund with respect
to Investments and promptly credit the amount collected to a Principal or
Agency Account; provided, however, that the Custodian shall not be
responsible for: (a) the collection of amounts due and payable with respect
to Investments that are in default, or (b) the collection of cash or share
entitlements with respect to Investments that are not registered in the
name of the Custodian or its Sub-custodians. The Custodian is hereby
authorized to endorse and deliver any instrument required to be so endorsed
and delivered to effect collection of any amount due and payable to the
Fund with respect to Investments.
6.11 OWNERSHIP CERTIFICATES AND DISCLOSURE OF THE FUND'S INTEREST. The
Custodian is hereby authorized to execute on behalf of the Fund ownership
certificates, affidavits or other disclosure required under Applicable Law
or established market practice in connection with the receipt of income,
capital gains or other payments by the Fund with respect to Investments, or
in connection with the sale, purchase or ownership of Investments.
6.12 PROXY MATERIALS. The Custodian shall deliver, or cause to be
delivered promptly, to the Fund proxy forms, notices of meeting, and any
other notices or announcements materially affecting or relating to
Investments received by the Custodian or any nominee.
6.13 TAX RECLAIM SERVICE. The Custodian will apply for a reduction of
withholding tax and any refund of any tax paid or tax credits which apply
in each applicable market in respect of income payments on Investments for
the benefit of the Fund which the Custodian believes may be available to
such Fund. Where such reports are available, the Custodian shall
periodically report to the Fund concerning the making of applications for a
reduction of withholding tax and refund of any tax paid or tax credits
which apply in each applicable market in respect of income payments on
Investments for the benefit of the Fund.
The provision of tax reclaim services by the Custodian is conditional
upon the Custodian receiving from the Fund or, where required, the
beneficial owner of Investments (a) a declaration of its identity and place
of residence and (b) certain other documentation (pro forma copies of which
are available from the Custodian). The Custodian shall use reasonable means
to
<PAGE>
advise the Fund of the declarations, documentation and information which
the Fund is to provide to the Custodian in order for the Custodian to
provide the tax reclaim services described herein. The Fund shall provide
to the Custodian such documentation and information as it may require in
connection with taxation, and warrants that, when given, this information
shall be true and correct in every respect, not misleading in any way, and
contain all material information. The Fund undertakes to notify the
Custodian immediately if any such information requires updating or
amendment. The Custodian shall perform tax reclaim services only with
respect to taxation by the revenue authorities of the countries notified to
the Fund.
The Fund confirms that the Custodian is authorized to deduct from any
cash received or credited to an account any taxes or levies required by any
revenue or governmental authority for whatever reasons in respect of the
accounts. The Custodian and the Fund shall promptly notify the other
regarding any change in the Fund's tax status with respect to withholding
taxes of which it becomes aware. It is acknowledged that the Custodian does
not offer tax advice and that the Fund should consult with its tax adviser
as to tax matters.
6.14 OTHER DEALINGS. The Custodian shall otherwise act as directed by
Instruction, including without limitation effecting the free payments of
moneys or the free delivery of securities, provided that such Instruction
shall indicate the purpose of such payment or delivery and that the
Custodian shall record the party to whom such payment or delivery is made.
The Custodian shall attend to all nondiscretionary details in
connection with the sale or purchase or other administration of
Investments, except as otherwise directed by an Instruction.
In fulfilling the duties set forth in Sections 6.6 through 6.10 above, the
Custodian shall provide promptly to the Fund all material information pertaining
to a corporate action which the Custodian actually receives. The Custodian shall
not be responsible for the completeness or accuracy of such information as long
as the Custodian has shown due diligence in attempting to receive complete and
accurate information. Any advance credit of cash or shares expected to be
received as a result of any corporate action shall be subject to actual
collection and may, when the Custodian deems collection unlikely, be reversed by
the Custodian. The Custodian shall notify the Fund at least 48 hours prior to
any such reversal.
The Custodian may at any time or times in its discretion appoint (and may
at any time remove) agents (other than Subcustodians) to carry out some or all
of the administrative provisions of this Agreement (AGENTS), provided, however,
that the appointment of such agent shall not relieve the
<PAGE>
Custodian of its administrative obligations under this Agreement.
7. CASH ACCOUNTS, DEPOSITS AND MONEY MOVEMENTS. Subject to the terms and
conditions set forth in this Section 7, the Fund hereby authorizes the Custodian
to open and maintain, with itself or with Subcustodians, cash accounts in United
States Dollars, in such other currencies as are the currencies of the countries
in which the Fund maintains Investments or in such other currencies as the Fund
shall from time to time request by Instruction.
7.1 TYPES OF CASH ACCOUNTS. Cash accounts opened on the books of the
Custodian (PRINCIPAL ACCOUNTS) shall be opened in the name of the Fund.
Such accounts collectively shall be a deposit obligation of the Custodian
and shall be subject to the terms of this Section 7 and the general
liability provisions contained in Section 9. Cash accounts opened on the
books of a Subcustodian may be opened in the name of the Fund or the
Custodian or in the name of the Custodian for its customers generally
(AGENCY ACCOUNTS). Such deposits shall be obligations of the Subcustodian
and shall be treated as an Investment of the Fund. Accordingly, the
Custodian shall be responsible for exercising reasonable care in the
administration of such accounts but shall not be liable for their repayment
in the event such Subcustodian, by reason of its bankruptcy, insolvency or
sovereign risk/force majeure, fails to make repayment unless (a) such
Subcustodian is a parent, subsidiary or otherwise affiliated with the
Custodian or (b) the Custodian's negligence, bad faith or willful
misconduct was the direct cause of the Subcustodian failing to make the
repayment or (c) a transaction or other matter between the Custodian and
Subcustodian unrelated to the Funds was the cause of the Subcustodian
failing to make repayment. Under (a), (b) or (c) the Custodian shall be
liable for the repayment.
7.2 PAYMENTS AND CREDITS WITH RESPECT TO THE CASH ACCOUNTS. The
Custodian shall make payments from or deposits to any of said accounts in
the course of carrying out its administrative duties, including but not
limited to income collection with respect to the Fund's Investments, and
otherwise in accordance with Instructions. The Custodian and its
Subcustodians shall be required to credit amounts to the cash accounts only
when moneys are actually received in cleared funds in accordance with
banking practice in the country and currency of deposit. Any credit made to
any Principal or Agency Account before actual receipt of cleared funds
shall be provisional and may be reversed by the Custodian in the event such
payment is not actually collected. The Custodian shall provide the Fund
with at least 48 hours notice prior to any such reversal. Unless otherwise
specifically agreed in writing by the Custodian or any Subcustodian, all
deposits shall be payable only at the branch of the Custodian or
Subcustodian where the deposit is made or carried.
7.3 CURRENCY AND RELATED RISKS. The Fund bears risks of holding or
transacting in any currency. The Custodian shall not be liable for any loss
or damage arising from the applicability of any law or regulation now or
hereafter in effect, or from the occurrence of any event, which may delay
or affect the transferability, convertibility or availability of any
currency in the country (a) in which such Principal or Agency Accounts are
maintained or (b) in which such currency is issued, and in no event shall
the Custodian be obligated to make payment of a deposit denominated in a
currency during the period during which its transferability, convertibility
or
<PAGE>
availability has been affected by any such law, regulation or event. The
Custodian shall notify the Fund in the event it is aware that the Fund is
entering into a transaction that is, to its knowledge, illegal under local
law. Without limiting the generality of the foregoing, neither the
Custodian nor any Subcustodian shall be required to repay any deposit made
at a foreign branch of either the Custodian or Subcustodian if such branch
cannot repay the deposit due to a cause for which the Custodian would not
be responsible in accordance with the terms of Section 9 of this Agreement
unless the Custodian or such Subcustodian expressly agrees in writing to
repay the deposit under such circumstances. All currency transactions in
any account opened pursuant to this Agreement are subject to exchange
control regulations of the United States and of the country where such
currency is the lawful currency or where the account is maintained. Any
taxes, costs, charges or fees imposed on the convertibility of a currency
held by the Fund shall be for the account of the Fund unless such taxes,
costs, charges or fees were due to an error by the Custodian or
Subcustodian.
7.4 FOREIGN EXCHANGE TRANSACTIONS. The Custodian shall, subject to the
terms of this Section, settle foreign exchange transactions (including
contracts, futures, options and options on futures) on behalf and for the
account of the Fund with such currency brokers or banking institutions,
including Subcustodians, as the Fund may direct pursuant to Instructions.
The Custodian may act as principal in any foreign exchange transaction with
the Fund in accordance with Section 7.4.2 of this Agreement. The
obligations of the Custodian in respect of all foreign exchange
transactions (whether or not the Custodian shall act as principal in such
transaction) shall be contingent on the free, unencumbered transferability
of the currency transacted on the actual settlement date of the
transaction.
7.4.1 THIRD PARTY FOREIGN EXCHANGE TRANSACTIONS. The Custodian
shall process foreign exchange transactions (including without
limitation contracts, futures, options, and options on futures), where
any third party acts as principal counterparty to the Fund on the same
basis it performs duties as agent for the Fund with respect to any
other of the Fund's Investments. Accordingly the Custodian shall only
be responsible for delivering or receiving currency on behalf of the
Fund in respect of such contracts pursuant to Instructions. The
Custodian shall not be responsible for the failure of any counterparty
(including any Subcustodian) in such agency transaction to perform its
obligations thereunder unless (a) such counterparty is a parent,
subsidiary or otherwise affiliated with the Custodian or (b) the
Custodian's negligence, bad faith or willful misconduct was the direct
cause of the counterparty failing to perform its obligations or (c) a
transaction or other matter between the Custodian and the counterparty
unrelated to the Funds was the cause of the counterparty's failure to
perform. Under (a), (b), or (c), the Custodian shall be liable. The
Custodian (a) shall transmit cash and Instructions to and from the
currency broker or banking institution with which a foreign exchange
contract or option has been executed pursuant hereto, (b) may make
free outgoing payments of cash in the form of Dollars or foreign
currency without receiving confirmation of a foreign exchange contract
or option or confirmation that the countervalue currency completing
the foreign exchange contract has been delivered or received or that
the option has been delivered or received, and (c) shall hold all
confirmations, certificates and other documents and agreements
received by the Custodian and evidencing or relating to such foreign
exchange transactions in safekeeping. The Fund accepts full
responsibility for its use of third-party foreign exchange dealers and
for execution of said foreign exchange contracts and options and
understands that the Fund shall be responsible for any and all costs
and interest charges which may be incurred by the Fund or the
Custodian as a result of the failure or delay of third parties to
deliver foreign exchange. The Custodian or Subcustodian shall
respectively be responsible for any failure or delay of third parties
to deliver foreign exchange when either of those parties respectively
is a parent, subsidiary or otherwise affiliated with such third party.
<PAGE>
7.4.2 FOREIGN EXCHANGE WITH THE CUSTODIAN AS PRINCIPAL. The
Custodian may undertake foreign exchange transactions with the Fund as
principal as the Custodian and the Fund may agree from time to time.
In such event, the foreign exchange transaction will be performed in
accordance with the particular agreement of the parties, or in the
event a principal foreign exchange transaction is initiated by
Instruction in the absence of specific agreement, such transaction
will be performed in accordance with the usual commercial terms of the
Custodian.
7.5 DELAYS. If no event of Force Majeure shall have occurred and be
continuing and in the event that a delay shall have been caused by the
negligence, bad faith or willful misconduct of the Custodian in carrying
out an Instruction to credit or transfer cash, the Custodian shall be
liable to the Fund: (a) with respect to Principal Accounts, for interest to
be calculated at the rate customarily paid on such deposit and currency by
the Custodian on overnight deposits at the time the delay occurs for the
period from the day when the transfer should have been effected until the
day it is in fact effected; and, (b) with respect to Agency Accounts, for
interest to be calculated at the rate customarily paid on such deposit and
currency by the Subcustodian on overnight deposits at the time the delay
occurs for the period from the day when the transfer should have been
effected until the day it is in fact effected. The Custodian shall not be
liable for delays in carrying out such Instructions to transfer cash which
are not due to the Custodian's own negligence, bad faith or willful
misconduct. The Custodian shall make reasonable attempts where possible to
mitigate any such delays.
7.6 ADVANCES. If, for any reason in the conduct of its safekeeping
duties pursuant to Section 5 hereof or its administration of the Fund's
assets pursuant to Section 6 hereof, the Custodian or any Subcustodian
advances monies to facilitate settlement or otherwise for benefit of the
Fund (whether or not any Principal or Agency Account shall be overdrawn
either during, or at the end of, any Business Day), Fund hereby does:
7.6.1 grant to the Custodian a continuing security interest in
certain Investments (as mutually agreed from time to time) as security
for such Advance such security interest to be effective only as long
as such Advance remain outstanding; and,
7.6.2 agree that the Custodian may secure the resulting Advance
by perfecting a security interest in such Investments under Applicable
Law.
The Custodian shall promptly notify the Fund of any such Advances and the
time at which such Advances must be repaid. Such Advances shall be deemed a
loan payable on demand, bearing interest at the rate customarily charged by
the Custodian on similar loans.
Neither the Custodian nor any Subcustodian shall be obligated to
advance monies to the Fund, and in the event that such Advance occurs, any
transaction giving rise to an Advance shall be for the account and risk of
the Fund and shall not be deemed to be a transaction undertaken by the
Custodian for its own account and risk. If such Advance shall have been
made by a Subcustodian or any other person, the Custodian may assign any
rights granted to the Custodian hereunder to such Subcustodian or other
person. If the Fund shall fail to repay when due the principal balance of
an Advance and accrued and unpaid interest thereon, the Custodian or its
assignee, as the case may be, shall be entitled to utilize the available
cash balance in the applicable Series Agency or Principal Account and to
dispose of any agreed upon Investments to the extent necessary to recover
payment of all principal of, and interest on, such
<PAGE>
Advance in full. The Custodian may assign any rights it has hereunder to a
Subcustodian or third party. Any security interest in Investments taken
hereunder shall be treated as Financial Assets credited to Securities
Accounts under Articles 8 and 9 of the UCC. Accordingly, the Custodian
shall have the rights and benefits of a secured creditor that is a
Securities Intermediary under such Articles 8 and 9.
7.7 INTEGRATED ACCOUNT. For purposes hereof, deposits maintained in
all Principal Accounts for each Series of each Fund (whether or not
denominated in Dollars) shall collectively constitute a single and
indivisible current account with respect to that series' obligations to the
Custodian, or its assignee, and balances in such Principal Accounts shall
be available for satisfaction of that series' obligations under this
Section 7. The Custodian shall further have a right of offset against the
balances in any Agency Account maintained hereunder to the extent that the
aggregate of all Principal Accounts is overdrawn.
8. SUBCUSTODIANS AND SECURITIES DEPOSITORIES. Subject to the provisions
hereinafter set forth in this Section 8, the Fund hereby authorizes the
Custodian to utilize Securities Depositories to act on behalf of the Fund and to
appoint from time to time and to utilize Subcustodians. With respect to
securities and funds held by a Subcustodian, either directly or indirectly
(including by a Securities Depository or Clearing Corporation), notwithstanding
any provisions of this Agreement to the contrary, payment for securities
purchased and delivery of securities sold may be made prior to receipt of
securities or payment, respectively, and securities or payment may be received
in a form, in accordance with (a) governmental regulations, (b) rules of
Securities Depositories and clearing agencies, (c) generally accepted trade
practice in the applicable local market, (d) the terms and characteristics of
the particular Investment, or (e) the terms of Instructions.
8.1 DOMESTIC SUBCUSTODIANS AND SECURITIES DEPOSITORIES. The Custodian
may deposit and/or maintain, either directly or through one or more agents
appointed by the Custodian, Investments of the Fund in any Securities
Depository in the United States, including The Depository Trust Company,
provided such Depository meets applicable requirements of the Federal
Reserve Bank or of the Securities and Exchange Commission. The Custodian
may, at any time and from time to time, appoint any bank as defined in
Section 2(a)(5) of the 1940 Act meeting the requirements of a custodian
under Section 17(f) of the 1940 Act and the rules and regulations
thereunder, to act on behalf of the Fund as a Subcustodian for purposes of
holding Investments of the Fund in the United States.
8.2 FOREIGN SUBCUSTODIANS AND SECURITIES DEPOSITORIES. The Custodian
may
<PAGE>
deposit and/or maintain non-U.S. Investments of the Fund in any non-U.S.
Securities Depository provided such Securities Depository meets the
requirements of an "eligible foreign custodian" under Rule 17f-5
promulgated under the 1940 Act, or any successor rule or regulation ("Rule
17f-5") or which by order of the Securities and Exchange Commission is
exempted therefrom. Additionally, the Custodian may, at any time and from
time to time, appoint (a) any bank, trust company or other entity meeting
the requirements of an ELIGIBLE FOREIGN CUSTODIAN under Rule 17f-5 or which
by order of the Securities and Exchange Commission is exempted therefrom,
or (b) any bank as defined in Section 2(a)(5) of the 1940 Act meeting the
requirements of a custodian under Section 17(f) of the 1940 Act and the
rules and regulations thereunder, to act on behalf of the Fund as a
Subcustodian for purposes of holding Investments of the Fund outside the
United States. Such appointment of foreign Subcustodians shall be subject
to approval of the Fund in accordance with Subsections 8.2.1 and 8.2.2.
8.2.1 BOARD APPROVAL OF FOREIGN SUBCUSTODIANS. Unless and except
to the extent that review of certain matters concerning the
appointment of Subcustodians shall have been delegated to the
Custodian pursuant to Subsection 8.2.2, the Custodian shall, prior to
the appointment of any Subcustodian for purposes of holding
Investments of the Fund outside the United States, obtain written
confirmation of the approval of the Board of Trustees or Directors of
the Fund with respect to (a) the identity of a Subcustodian, (b) the
country or countries in which, and the Securities Depositories, if
any, through which, any proposed Subcustodian is authorized to hold
Investments of the Fund, and (c) the Subcustodian agreement which
shall govern such appointment. Each such duly approved country,
Subcustodian and Securities Depository shall be listed on Appendix A
attached hereto as the same may from time to time be amended.
8.2.2 DELEGATION OF BOARD REVIEW OF SUBCUSTODIANS. From time to
time, the Custodian may offer to perform, and the Fund may accept that
the Custodian perform, certain reviews of Subcustodians and of
Subcustodian Contracts as delegate of the Fund's Board. In such event,
the Custodian's duties and obligations with respect to this delegated
review will be performed in accordance with the terms of Exhibit 2 of
this Agreement [the separate Delegation Agreement between the Fund and
the Custodian].
8.3 RESPONSIBILITY FOR SUBCUSTODIANS. The Custodian shall be liable to
the Fund for any loss or damage to the Fund caused by or resulting from the
acts or omissions of any Subcustodian to the extent that such acts or
omissions would be deemed to be negligence, gross negligence, willful
misconduct or bad faith in accordance with the terms of the relevant
subcustodian agreement under the laws, circumstances and practices
prevailing in the place where the act or omission occurred. In the
countries indicated in Appendix B to this Agreement, the liability of the
Custodian shall be subject to the additional condition that the Custodian
actually recovers such loss or damage from the Subcustodian.
8.4 NEW COUNTRIES. The Fund shall be responsible for informing the
Custodian sufficiently in advance of a proposed investment which is to be
held in a country in which no Subcustodian is authorized to act in order
that the Custodian shall, if it deems appropriate to do so, have sufficient
time to establish a subcustodial arrangement in accordance herewith. In the
event, however, the Custodian is unable to establish such arrangements
prior to the time such Investment is to be acquired, the Custodian is
authorized to designate at its discretion a local safekeeping agent, and
the use of such local safekeeping agent shall be at the sole risk of the
Fund, and accordingly the Custodian shall be responsible to the Fund for
the actions of such agent if and only to the extent the Custodian shall
have recovered from such agent for any
<PAGE>
damages caused the Fund by such agent. Notwithstanding the above, the
Custodian shall be liable to the extent that (a) such local safekeeping
agent is a parent, subsidiary or otherwise affiliated with the Custodian or
(b) the Custodian's negligence, bad faith or willful misconduct is the
direct cause of the local safekeeping agent failing to make the repayment
or (c) a transaction or other matter between the Custodian and the local
safekeeping agent unrelated to the Funds was the cause of the loss or
damage. Under (a), (b) or (c) the Custodian shall be liable.
9. RESPONSIBILITY OF THE CUSTODIAN. In performing its duties and obligations
hereunder, the Custodian shall use reasonable care under the facts and
circumstances prevailing in the market where performance is effected. Subject to
the specific provisions of this Section, the Custodian shall be liable for any
direct damage incurred by the Fund in consequence of the Custodian's negligence,
bad faith or willful misconduct. The Custodian hereby indemnifies the Fund and
agrees to hold the Fund harmless from and against all claims and liabilities,
including counsel fees and taxes, incurred or assessed against the Fund to the
extent that such claim or liability arises from the negligence, gross
negligence, bad faith or willful misconduct on the part of the Custodian itself.
If a Fund gives written notice of claim to the Custodian, the Custodian shall
promptly give a written response to the Fund. Not more than 30 days following
the date of such response, unless the Custodian shall not be liable, the
Custodian will pay the amount of such claim or reimburse the Fund for any
payment made by the Fund in respect thereof. In no event shall the Custodian be
liable hereunder for any special, indirect, punitive or consequential damages
arising out of, pursuant to or in connection with this Agreement even if the
Custodian has been advised of the possibility of such damages. It is agreed that
the Custodian shall have no duty to assess the risks inherent in the Fund's
Investments or to provide investment advice with respect to such Investments and
that the Fund as principal shall bear any risks attendant to particular
Investments such as failure of counterparty or issuer. The Custodian shall
provide the Fund with its Market Practice Reports in
<PAGE>
respect of any foreign market where a Series shall place and maintain
Investments. In addition, the Custodian shall provide the Fund with access to
its Global Updates which address topical "market" events.
9.1 FORCE MAJEURE. The Custodian shall not be responsible for any
failure to perform its duties and correspondingly, shall not be liable for
any loss, cost, damage or expense attributable to its failure to perform in
consequence of a force majeure event. FORCE MAJEURE shall mean any
circumstance or event which is beyond the reasonable control of the
Custodian, a Subcustodian or any agent of the Custodian or a Subcustodian
and which adversely affects the performance by the above parties, including
any event caused by, arising out of or involving (a) an act of God, (b)
accident, fire, water damage or explosion, (c) any third party computer,
system or other equipment failure or malfunction caused by any computer
virus or the malfunction or failure of any communications medium, (d) any
third party interruption of the power supply or other utility service, (e)
any strike or other work stoppage, whether partial or total, (f) any delay
or disruption resulting from or reflecting the occurrence of any Sovereign
Risk, (g) any disruption of, or suspension of trading in, the securities,
commodities or foreign exchange markets, whether or not resulting from or
reflecting the occurrence of any Sovereign Risk, (h) any encumbrance on the
transferability of a currency or a currency position on the actual
settlement date of a foreign exchange transaction, whether or not resulting
from or reflecting the occurrence of any Sovereign Risk, or (i) any other
cause similarly beyond the reasonable control of the Custodian, provided
always that this shall not affect the Custodian's duty to indemnify the
Fund for other losses, claims and liabilities for which the Custodian is
bound to indemnify the Fund pursuant to Section 9. The Custodian and the
Subcustodian shall take reasonable steps to mitigate additional damages.
The Custodian shall notify the Fund when it becomes aware of a situation
outlined above. The Fund shall not be responsible for temporary delays in
the performance of its duties and obligations and correspondingly shall not
be liable for any loss, cost, damage or expense attributable to such delay
in consequence of a Force Majeure event as described above affecting the
Fund's principal place of business operations or administration; provided
always that this shall not affect the Fund's duty to indemnify the
Custodian for losses, claims and liabilities for which the Fund is bound to
indemnify the Custodian pursuant to Section 10.
9.2 LIMITATIONS OF PERFORMANCE. The Custodian shall not be responsible
under this Agreement for any failure to perform its duties, and shall not
be liable hereunder for any loss or damage in association with such failure
to perform, for or in consequence of the following causes:
9.2.1 COUNTRY RISK. COUNTRY RISK shall mean, with respect to the
acquisition, ownership, settlement or custody of Investments in a
jurisdiction, all risks relating to, or arising in consequence of,
systemic and markets factors affecting the acquisition, payment for or
ownership of Investments including (a) the prevalence of crime and
corruption, (b) the inaccuracy or unreliability of business and
financial information, (c) the instability or volatility of banking
and financial systems, or the absence or inadequacy of an
infrastructure to support such systems, (d) custody and settlement
infrastructure of the market in which such Investments are transacted
and held, (e) the acts, omissions and operation of any Securities
Depository, (f) the risk of the bankruptcy or insolvency of banking
agents, counterparties to cash and securities transactions, registrars
or transfer agents, and (g) the existence of market conditions which
prevent the orderly execution or
<PAGE>
settlement of transactions or which affect the value of assets. The
Custodian shall provide the Fund with its Market Practice Reports in
respect of any foreign market where a Series shall place and maintain
Investments. Such Market Practice Report may describe some of the
Country Risks outlined above. In addition, the Custodian shall provide
the Fund with access to its Global Updates which may describe some
timely Country Risks outlined above.
9.2.2 SOVEREIGN RISK. SOVEREIGN RISK shall mean, in respect of
any jurisdiction, including the United States of America, where
Investments are acquired or held hereunder or under a Subcustody
Agreement, (a) any act of war, terrorism, riot, insurrection or civil
commotion, (b) the imposition of any investment, repatriation or
exchange control restrictions by any Governmental Authority, (c) the
confiscation, expropriation or nationalization of any Investments by
any Governmental Authority, whether de facto or de jure, (d) any
devaluation or revaluation of the currency, (e) the imposition of
taxes, levies or other charges affecting Investments, (f) any change
in the Applicable Law, or (g) any other economic or political risk
incurred or experienced. The Custodian shall provide the Fund with its
Market Practice Reports in respect of any foreign market where a
Series shall place and maintain Investments. Such Market Practice
Report may describe some of the Sovereign Risks outlined above. In
addition, the Custodian shall provide the Fund with access to its
Global Updates which may describe some timely Sovereign Risks outlined
above.
9.3 LIMITATIONS ON LIABILITY. The Custodian shall not be liable for
any loss, claim, damage or other liability arising from the following
causes:
9.3.1 FAILURE OF THIRD PARTIES. The failure of any third party
including: (a) any issuer of Investments or book-entry or other agent
of and issuer; (b) any counterparty with respect to any Investment,
including any issuer of exchange-traded or other futures, option,
derivative or commodities contract; (c) failure of an Investment
Advisor, Foreign Custody Manager or other agent of the Fund; or (d)
failure of other third parties similarly beyond the control or choice
of the Custodian unless: (a) any such third party is a parent,
subsidiary or otherwise affiliated with the Custodian or (b) the
Custodian's negligence, bad faith or willful misconduct was the direct
cause of the failure of the third party or (c) a transaction or other
matter between the Custodian and the third party unrelated to the
Funds was the cause of the failure of the third party. Under (a), (b),
or (c) the Custodian shall be liable for the failure of such third
party.
9.3.2 INFORMATION SOURCES. The Custodian may rely upon
information received from issuers of Investments or agents of such
issuers, information received from Subcustodians and from other
commercially reasonable sources such as commercial data bases and the
like, but shall not be responsible for specific inaccuracies in such
information, provided that the Custodian has relied upon such
information in good faith, or for the failure of any commercially
reasonable information provider.
9.3.3 RELIANCE ON INSTRUCTION. Action by the Custodian or the
Subcustodian in accordance with an Instruction, even when such action
conflicts with, or is contrary to any provision of, the Fund's
declaration of trust, certificate of incorporation or by-laws,
Applicable Law, or actions by the trustees, directors or shareholders
of the Fund. If the Custodian or Subcustodian is aware of any of the
above, it shall promptly contact an officer of the Fund.
<PAGE>
9.3.4 RESTRICTED SECURITIES. The limitations inherent in the
rights, transferability or similar investment characteristics of a
given Investment of the Fund.
10.INDEMNIFICATION. The Fund hereby indemnifies the Custodian and each
Subcustodian, and their respective agents, nominees and the partners, employees,
officers and directors, and agrees to hold each of them harmless from and
against all claims and liabilities, including counsel fees and taxes, incurred
or assessed against any of them in connection with the performance of this
Agreement and any Instruction except to the extent that such claim or liability
is the result of the negligence, bad faith or willful misconduct of the
Custodian or Subcustodian. If a Subcustodian or any other person indemnified
under the preceding sentence, gives written notice of claim to the Custodian,
the Custodian shall promptly give written notice to the Fund. Not more than
thirty days following the date of such notice, unless the Custodian shall be
liable under Section 8 hereof in respect of such claim, the Fund will pay the
amount of such claim or reimburse the Custodian for any payment made by the
Custodian in respect thereof.
11. REPORTS AND RECORDS. The Custodian shall:
11.1 create and maintain records relating to the performance of its
obligations under this Agreement;
11.2 make available to the Fund, its auditors, agents and employees,
upon reasonable request and during normal business hours of the Custodian,
all records maintained by the Custodian pursuant to Section 11.1 above,
subject, however, to all reasonable security requirements of the Custodian
then applicable to the records of its custody customers generally; and
11.3 make available to the Fund all Electronic Reports; it being
understood that the Custodian shall not be liable hereunder for the
inaccuracy or incompleteness thereof or for errors in any information
included therein except to the extent that such inaccuracy, incompleteness
or errors are the result of the Custodian's negligence, bad faith or
willful misconduct.
<PAGE>
All such reports and records shall, to the extent applicable, be maintained
and preserved in conformity with the 1940 Act and the rules and regulations
thereunder. The Fund shall examine all records, howsoever produced or
transmitted, promptly upon receipt thereof and notify the Custodian promptly of
any discrepancy or error therein. Unless the Fund delivers written notice of any
such discrepancy or error within a reasonable time after its receipt thereof,
such records shall be deemed to be true and accurate. It is understood that the
Custodian now obtains and will in the future obtain information on the value of
assets from outside sources which may be utilized in certain reports made
available to the Fund. The Custodian deems such sources to be reliable but it is
acknowledged and agreed that the Custodian does not verify nor represent nor
warrant as to the accuracy or completeness of such information and accordingly
shall be without liability in selecting and using such sources and furnishing
such information as long as the Custodian has shown due diligence in attempting
to receive complete and accurate information.
12. MISCELLANEOUS.
12.1 PROXIES, ETC. The Fund will promptly execute and deliver, upon
request, such proxies, powers of attorney or other instruments as may be
necessary or desirable for the Custodian to provide, or to cause any
Subcustodian to provide, custody services.
12.2 ENTIRE AGREEMENT. Except as specifically provided herein, this
Agreement constitutes the entire agreement between the Fund and the
Custodian with respect to the subject matter hereof. Accordingly, this
Agreement supersedes any custody agreement or other oral or written
agreements heretofore in effect between the Fund and the Custodian with
respect to the custody of the Fund's Investments.
12.3 WAIVER AND AMENDMENT. No provision of this Agreement may be
waived, amended or modified, and no addendum to this Agreement shall be or
become effective, or be waived, amended or modified, except by an
instrument in writing executed by the party against which enforcement of
such waiver, amendment or modification is sought; provided, however, that
an Instruction shall, whether or not such Instruction shall constitute a
waiver, amendment or modification for purposes hereof, shall be deemed to
have been accepted by the Custodian when it commences actions pursuant
thereto or in accordance therewith.
<PAGE>
12.4 GOVERNING LAW AND JURISDICTION. THIS AGREEMENT SHALL BE CONSTRUED
IN ACCORDANCE WITH, AND BE GOVERNED BY THE LAWS OF, THE STATE OF NEW YORK,
WITHOUT GIVING EFFECT TO THE CONFLICTS OF LAW OF SUCH STATE.
12.5 NOTICES. Notices and other writings contemplated by this
Agreement, other than Instructions, shall be delivered (a) by hand, (b) by
first class registered or certified mail, postage prepaid, return receipt
requested, (c) by a nationally recognized overnight courier or (d) by
facsimile transmission, provided that any notice or other writing sent by
facsimile transmission shall also be mailed, postage prepaid, to the party
to whom such notice is addressed. All such notices shall be addressed, as
follows:
If to the Fund:
Vanguard Group
P.O. Box 2600
Valley Forge, PA 19482
Attn: Controller
Telephone: (610) 669-6106
Facsimile: (610) 669-6112
If to the Custodian:
Brown Brothers Harriman & Co.
40 Water Street
Boston, Massachusetts 02109
Attn: Manager, Investor Services Department
Telephone: (617) 772-1818
Facsimile: (617) 772-2263,
or such other address as the Fund or the Custodian may have designated in
writing to the other.
12.6 HEADINGS. Paragraph headings included herein are for convenience
of reference only and shall not modify, define, expand or limit any of the
terms or provisions hereof.
12.7 COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original. This Agreement
shall become effective when one or more counterparts have been signed and
delivered by the Fund and the Custodian.
12.8 CONFIDENTIALITY. The parties hereto agree that each shall treat
confidentially the terms and conditions of this Agreement and all
information provided by each party to the other regarding its business and
operations. All confidential information provided by a party hereto shall
be used by any other party hereto solely for the purpose of rendering or
obtaining services pursuant to this Agreement and, except as may be
required in carrying out this Agreement, shall not be disclosed to any
third party without the prior consent of such providing party. The
<PAGE>
foregoing shall not be applicable to any information that is publicly
available when provided or thereafter becomes publicly available other than
through a breach of this Agreement, or that is required to be disclosed by
or to any bank examiner of the Custodian or any Subcustodian, any
Regulatory Authority, any auditor of the parties hereto, or by judicial or
administrative process or otherwise by Applicable Law.
12.9 COUNSEL. In fulfilling its duties hereunder, the Custodian shall
be entitled to receive and act upon the advice of (i) counsel regularly
retained by the Custodian in respect of such matters, (ii) counsel for the
Fund or (iii) such counsel as the Fund and the Custodian may agree upon,
with respect to all matters, and the Custodian shall be without liability
for any action reasonably taken or omitted pursuant to such advice (except
to the extent that such action was due to the Custodian's negligence, bad
faith or willful misconduct).
13. DEFINITIONS. The following defined terms will have the respective meanings
set forth below.
13.1 ADVANCE shall mean any extension of credit by or through the
Custodian or by or through any Subcustodian and shall include amounts paid
to third parties for the account of the Fund or in discharge of any
expense, tax or other item payable by the Fund.
13.2 AGENCY ACCOUNT shall mean any deposit account opened on the books
of a Subcustodian or other banking institution in accordance with Section
7.1.
13.3 AGENT shall have the meaning set forth in the last paragraph of
Section 6.
13.4 APPLICABLE LAW shall mean with respect to each jurisdiction, all
(a) laws, statutes, treaties, regulations, guidelines (or their
equivalents); (b) orders, interpretations licenses and permits; and (c)
judgments, decrees, injunctions writs, orders and similar actions by a
court of competent jurisdiction; compliance with which is required or
customarily observed in such jurisdiction.
13.5 AUTHORIZED PERSON shall mean any person or entity authorized to
give Instructions on behalf of the Fund in accordance with Section 4.1.
13.6 BOOK-ENTRY AGENT shall mean an entity acting as agent for the
issuer of Investments for purposes of recording ownership or similar
entitlement to Investments, including without limitation a transfer agent
or registrar.
13.7 CLEARING CORPORATION shall mean any entity or system established
for purposes of providing securities settlement and movement and associated
functions for a given market.
13.8 DELEGATION AGREEMENT shall mean any separate agreement entered
into between the Custodian and the Fund or its authorized representative
with respect to certain matters concerning the appointment and
administration of Subcustodians delegated to the Custodian pursuant to Rule
17f-5 under the 1940 Act.
<PAGE>
13.9 FOREIGN CUSTODY MANAGER shall mean the Fund's foreign custody
manager appointed pursuant to Rule 17f-5 under the 1940 Act.
13.10 FUNDS TRANSFER SERVICES AGREEMENT shall mean any separate
agreement entered into between the Custodian and the Fund or its authorized
representative with respect to certain matters concerning the processing of
payment orders from Principal Accounts of the Fund.
13.11 INSTRUCTION(S) shall have the meaning assigned in Section 4.
13.12 INVESTMENT ADVISOR shall mean any investment advisor as defined
in Section 202 (a)(11) of the Investment Advisors Act of 1940.
13.13 INVESTMENTS shall mean any investment asset of the Fund,
including without limitation securities, bonds, notes, and debentures as
well as receivables, derivatives, contractual rights or entitlements and
other intangible assets.
13.14 MARGIN ACCOUNT shall have the meaning set forth in Section 6.4
hereof.
13.15 PRINCIPAL ACCOUNT shall mean deposit accounts of the Fund
carried on the books of BBH&Co. as principal in accordance with Section 7.
13.16 SAFEKEEPING ACCOUNT shall mean an account established on the
books of the Custodian or any Subcustodian for purposes of segregating the
interests of the Fund (or clients of the Custodian or Subcustodian) from
the assets of the Custodian or any Subcustodian.
13.17 SECURITIES DEPOSITORY shall mean a central or book entry system
or agency established under Applicable Law for purposes of recording the
ownership and/or entitlement to investment securities for a given market.
13.18 SUBCUSTODIAN shall mean each foreign bank appointed by the
Custodian pursuant to Section 8, but shall not include Securities
Depositories.
13.19 TRI-PARTY AGREEMENT shall have the meaning set forth in Section
6.4 hereof.
13.20 1940 ACT shall mean the Investment Company Act of 1940.
14. COMPENSATION. The Fund agrees to pay to the Custodian for its services under
this Agreement such amount as may be agreed upon in writing from time to time
("Fee Schedule").
15. SEVERAL OBLIGATIONS OF THE FUNDS: With respect to any obligations of the
Funds and their
<PAGE>
related accounts arising hereunder, the Custodian shall look for payment or
satisfaction of any such obligation solely to the assets and property of the
Fund and such accounts to which such obligation relates as though each
investment company had separately contracted with the Custodian by separate
written instrument with respect to each Fund and its accounts. The Custodian and
each Subcustodian realize that the Fund is comprised of one or more Series. The
Custodian and each Subcustodian agree that it will honor and abide by any and
all Instructions or notices which the Custodian or Subcustodian may receive from
time to time from the Fund with respect to designating, marking, allocating or
otherwise attributing securities to or for the benefit of any one Series.
16. TERMINATION. This Agreement may be terminated by either party in accordance
with the provisions of this Section. The provisions of this Agreement and any
other rights or obligations incurred or accrued by any party hereto prior to
termination of this Agreement shall survive any termination of this Agreement.
This Agreement may be terminated as to one or more Funds (but less than all
the Funds) by delivery of an amended Schedule 1 deleting all such Funds, in
which case termination as to the deleted Funds shall take effect seventy-five
days after the date of such delivery. The execution and delivery of an amended
Schedule 1 which deletes one or more Funds, shall constitute a termination
hereof only with respect to such deleted Funds, shall be governed by the
provisions of Section 16.2 as to the identification of a successor custodian and
the delivery of Investments of the Fund so deleted to such successor custodian,
and shall not affect the obligations of the Custodian hereunder with respect to
the other Funds set forth in Schedule 1, as amended from time to time.
<PAGE>
16.1 NOTICE AND EFFECT. This Agreement may be terminated by either
party by written notice effective no sooner than seventy-five days
following the date that notice to such effect shall be delivered to other
party at its address set forth in paragraph 12.5 hereof.
16.2 SUCCESSOR CUSTODIAN. In the event of the appointment of a
successor custodian, it is agreed that the Investments of the Fund held by
the Custodian or any Subcustodian shall be delivered to the successor
custodian in accordance with reasonable Instructions. The Custodian agrees
to cooperate with the Fund in the execution of documents and performance of
other actions necessary or desirable in order to facilitate the succession
of the new custodian. If no successor custodian shall be appointed, the
Custodian shall in like manner transfer the Fund's Investments in
accordance with Instructions.
16.3 DELAYED SUCCESSION. If no Instruction has been given as of the
effective date of termination, Custodian may at any time on or after such
termination date and upon ten days written notice to the Fund either (a)
deliver the Investments of the Fund held hereunder to the Fund at the
address designated for receipt of notices hereunder; or (b) deliver any
investments held hereunder to a bank or trust company having a
capitalization of $2M USD equivalent and operating under the Applicable law
of the jurisdiction where such Investments are located, such delivery to be
at the risk of the Fund. In the event that Investments or moneys of the
Fund remain in the custody of the Custodian or its Subcustodians after the
date of termination owing to the failure of the Fund to issue Instructions
with respect to their disposition or owing to the fact that such
disposition could not be accomplished in accordance with such Instructions
despite diligent efforts of the Custodian, the Custodian shall be entitled
to compensation for its services with respect to such Investments and
moneys during such period as the Custodian or its Subcustodians retain
possession of such items and the provisions of this Agreement shall remain
in full force and effect until disposition in accordance with this Section
is accomplished.
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be
duly executed as of the date first above written.
By:/S/ ROBERT D. SNOWDEN
On behalf of the Funds listed on Schedule 1 hereto
BROWN BROTHERS HARRIMAN & CO.
By:/S/ W. CASEY GILDEA
<PAGE>
SCHEDULE 1 TO
CUSTODIAN AGREEMENT
BETWEEN
CERTAIN OPEN-END MANAGEMENT INVESTMENT COMPANIES ("FUNDS")
and BROWN BROTHERS HARRIMAN & CO.
The following is a list of Funds and their Series for which the Custodian shall
serve under a Custodian Agreement dated as of July 20, 1999 (the "Agreement"):
The following series of Vanguard International Equity Index Funds:
Vanguard Emerging Markets Stock Index Fund
Vanguard European Stock Index Fund
Vanguard Pacific Stock Index Fund
The following series of Vanguard Horizon Funds:
Vanguard Global Asset Allocation Fund
Vanguard Global Equity Fund
The following series of Vanguard Trustees' Equity Fund:
Vanguard International Value Fund
Vanguard Variable Insurance Funds-International Portfolio
IN WITNESS WHEREOF, each of the parties hereto has caused this Appendix to be
executed in its name and on behalf of such Funds.
FUNDS BROWN BROTHERS HARRIMAN & CO.
By: /S/ ROBERT D. SNOWDEN By: /S/ W. CASEY GILDEA
Name: Robert D. Snowden Name: W. Casey Gildea
Title: Controller Title: Manager
<PAGE>
BROWN BROTHERS HARRIMAN & CO. - GLOBAL CUSTODY NETWORK
VANGUARD
APPENDIX A
COUNTRY SUBCUSTODIAN DEPOSITORIES
- ------- ------------ ------------
ARGENTINA CITIBANK NA, BUENOS AIRES Caja de Valores
CRYL
Citibank, N.A., New York Agt. 7/16/81
New York Agreement Amendment 8/31/90
New York Agreement Amendment 7/26/96
AUSTRALIA NATIONAL AUSTRALIA BANK LTD. (NAB) Austraclear Ltd.
CHESS
National Australia Bank Agt. 5/1/85 Reserve Bank of Australia
Agreement Amendment 2/13/92
Omnibus Amendment 11/22/93
AUSTRIA BANK AUSTRIA AG OeKB
Creditanstalt Bankverein Agreement 12/18/89
Omnibus Amendment 1/17/94
BAHRAIN HSBC BANK MIDDLE EAST, BAHRAIN FOR None
HONGKONG & SHANGHAI BANKING CORP. LTD. (HSBC)
Hongkong & Shanghai Banking Corp. Agt. 4/19/91
Omnibus Supplement 12/29/93
Schedule 5/14/96
BBME Supplement 5/14/96
Side Letter Agreement dated 7/28/97
BANGLADESH STANDARD CHARTERED BANK (SCB), DHAKA None
Standard Chartered Bank Agreement 2/18/92
Omnibus Amendment 6/13/94
Appendix 4/8/96
BELGIUM BANK BRUSSELS LAMBERT (BBL) CIK
National Bank of Belgium
Banque Bruxelles Lambert Agt. 11/15/90
Omnibus Amendment 3/1/94
BERMUDA BANK OF N.T. BUTTERFIELD & SON LTD. None
The Bank of N.T. Butterfield & Son Ltd.
Agreement 5/27/97
BOTSWANA STANBIC BANK BOTSWANA LTD FOR STANDARD None
BANK OF SOUTH AFRICA (SBSA)
Standard Bank of South Africa Agreement 3/11/94
Subsidiary Amendment 9/29/97
BRAZIL BANKBOSTON NA, SAO PAULO CBLC
CLC
The First National Bank of Boston Agreement 1/5/88
Omnibus Amendment 2/22/94
Amendment 7/29/96
BULGARIA ING BANK NV, SOFIA CDAD
BNB
ING Bank N.V. Agreement 9/15/97
Page 1 of 8
<PAGE>
COUNTRY SUBCUSTODIAN DEPOSITORIES
- ------- ------------ ------------
CANADA ROYAL BANK OF CANADA (RBC) Bank of Canada
The Royal Bank of Canada Agreement CDS
2/23/96
CHILE CITIBANK NA, SANTIAGO DCV
Citibank, N.A., New York Agt. 7/16/81
New York Agreement Amendment 8/31/90
New York Agreement Amendment 7/26/96
CHINA STANDARD CHARTERED BANK (SCB), SHANGHAI SSCCRC
Standard Chartered Bank Agreement 2/18/92
Omnibus Amendment 6/13/94
Appendix 4/8/96
CHINA STANDARD CHARTERED BANK (SCB), SHENZHEN SSCC
Standard Chartered Bank Agreement 2/18/92
Omnibus Amendment 6/13/94
Appendix 4/8/96
COLOMBIA CITITRUST COLOMBIA SA, SOCIEDAD DCV
FIDUCIARIA FOR CITIBANK NA Deceval
Citibank, N.A., New York Agt. 7/16/81
New York Agreement Amendment 8/31/90
New York Agreement Amendment 7/26/96
Citibank, N.A./Cititrust Colombia Agreement 12/2/91
Citibank, N.A. Subsidiary Amendment 10/19/95
CROATIA BANK AUSTRIA CREDITANSTALT CROATIA DD SDA
FOR BANK AUSTRIA AG
Creditanstalt AG / Bank Austria Creditanstalt
Croatia d.d. Agt. 9/1/98
CYPRUS CYPRUS POPULAR BANK LTD. None
***Requires additional documentation prior to investment.***
Cyprus Popular Bank Ltd. Agt. 2/18/98
CZECH REPUBLIC CITIBANK AS FOR CITIBANK NA SCP
Czech National Bank
Citibank, N.A., New York Agt. 7/16/81
New York Agreement Amendment 8/31/90
New York Agreement Amendment 7/26/96
Citibank NA / Citibank AS Agreement 6/24/96
DENMARK DEN DANSKE BANK VP
Den Danske Bank Agreement 1/1/89
Omnibus Amendment 12/1/93
ECUADOR CITIBANK NA, QUITO Decevale
Citibank, N.A., New York Agt. 7/16/81
New York Agreement Amendment 8/31/90
New York Agreement Amendment 7/26/96
Citibank, Quito Side Letter 7/3/95
EGYPT CITIBANK NA, CAIRO MCSD
Citibank, N.A., New York Agt. 7/16/81
New York Agreement Amendment 8/31/90
New York Agreement Amendment 7/26/96
Page 2 of 8
<PAGE>
COUNTRY SUBCUSTODIAN DEPOSITORIES
- ------- ------------ ------------
FINLAND MERITA BANK PLC FCSD
Union Bank of Finland Agreement 2/27/89
Omnibus Amendment 4/6/94
FRANCE CREDIT AGRICOLE INDOSUEZ (CAI) SICOVAM
Banque de France
Banque Indosuez Agreement 7/19/90
Omnibus Amendment 3/10/94
GERMANY DRESDNER BANK DBC
Dresdner Bank Agreement 10/6/95
GHANA MERCHANT BANK (GHANA) LIMITED FOR None
STANDARD BANK OF SOUTH AFRICA (SBSA)
***Requires additional documentation prior to investment.***
Standard Bank of South Africa Agreement 3/11/94
Subsidiary Amendment Pending
GREECE CITIBANK NA, ATHENS Apothetirion Titlon A.E.
Citibank, N.A., New York Agt. 7/16/81
New York Agreement Amendment 8/31/90
New York Agreement Amendment 7/26/96
HONG KONG HONGKONG & SHANGHAI BANKING HKSCC
CORPORATION LTD. CMU
Hongkong & Shanghai Banking Corp. Agt. 4/19/91
Omnibus Supplement 12/29/93
Schedule 5/14/96
HUNGARY CITIBANK BUDAPEST RT. FOR CITIBANK NA KELER Ltd.
Citibank, N.A., New York Agt. 7/16/81
New York Agreement Amendment 8/31/90
New York Agreement Amendment 7/26/96
Citibank, N.A. Subsidiary Amendment 10/19/95
Citibank, N.A. / Citibank Budapest Agreement 6/23/92
Citibank, N.A. / Citibank Budapest Amendment 9/29/92
INDIA DEUTSCHE BANK AG, MUMBAI NSDL
Deutsche Bank Agreement 2/19/96
INDONESIA CITIBANK NA, JAKARTA None
Citibank, N.A., New York Agt. 7/16/81
New York Agreement Amendment 8/31/90
New York Agreement Amendment 7/26/96
IRELAND ALLIED IRISH BANKS PLC (AIB) CrestCo.
Allied Irish Banks Agreement 1/10/89 Gilt Settlement Office
Omnibus Amendment 4/8/94
ISRAEL BANK HAPOALIM BM TASE Clearinghouse Ltd.
Bank Hapoalim Agreement 8/27/92
ITALY BANCA COMMERCIALE ITALIANA (BCI) Monte Titoli
Banca D'Italia
Banca Commerciale Italiana Agreement 5/8/89
Agreement Amendment 10/8/93
Omnibus Amendment 12/14/93
Page 3 of 8
<PAGE>
COUNTRY SUBCUSTODIAN DEPOSITORIES
- ------- ------------ ------------
JAPAN BANK OF TOKYO - MITSUBISHI, LTD. (BTM) JASDEC
Bank of Japan
Bank of Tokyo - Mitsubishi Agreement 6/17/96
JORDAN HSBC BANK MIDDLE EAST, JORDAN FOR None
HONGKONG & SHANGHAI BANKING CORP. (HSBC)
Hongkong & Shanghai Banking Corp. Agt. 4/19/91
Omnibus Supplement 12/29/93
Schedule 5/14/96
BBME Supplement 5/14/96
Side letter Agreement dated 7/28/97
KENYA STANBIC BANK KENYA LIMITED FOR STANDARD None
BANK OF SOUTH AFRICA (SBSA)
Standard Bank of South Africa Agreement 3/11/94
Subsidiary Amendment 9/29/97
KOREA CITIBANK NA, SEOUL KSD
Citibank, N.A., New York Agt. 7/16/81
New York Agreement Amendment 8/31/90
New York Agreement Amendment 7/26/96
Citibank, Seoul Agreement Supplement 10/28/94
LEBANON HSBC BANK MIDDLE EAST, LEBANON FOR Midclear
HONGKONG & SHANGHAI BANKING CORP. (HSBC)
Hongkong & Shanghai Banking Corp. Agt. 4/19/91
Omnibus Supplement 12/29/93
Schedule 5/14/96
BBME Supplement 5/14/96
Side letter Agreement dated 7/28/97
LUXEMBOURG KREDIETBANK LUXEMBOURG (KBL) Cedel
Kredietbank Luxembourg Agt. 4/7/98
MALAYSIA HONGKONG BANK MALAYSIA BERHAD (HBMB) Bank Negara Malaysia
FOR HONGKONG SHANGHAI BANKING CORP. MCD
(HSBC) Hongkong & Shanghai Banking Corp. Agt. 4/19/91
Omnibus Supplement 12/29/93
Schedule 5/14/96
Malaysia Subsidiary Supplement 5/23/94
Side letter Agreement dated 7/28/97
MAURITIUS HONGKONG & SHANGHAI BANKING CORP. LTD. CDS
(HSBC), PORT LOUIS
Hongkong & Shanghai Banking Corp. Agt. 4/19/91
Omnibus Supplement 12/29/93
Schedule 5/14/96
MEXICO CITIBANK MEXICO SA FOR CITIBANK NA Indeval
Banco de Mexico
Citibank, N.A., New York Agt. 7/16/81
New York Agreement Amendment 8/31/90
New York Agreement Amendment 7/26/96
Citibank Mexico, S.A. Amendment 2/28/95
Page 4 of 8
<PAGE>
COUNTRY SUBCUSTODIAN DEPOSITORIES
- ------- ------------ ------------
MOROCCO CITIBANK MAGHREB, CASABLANCA FOR MAROCLEAR
CITIBANK NA Citibank, N.A., New York Agt. 7/16/81
New York Agreement Amendment 8/31/90
New York Agreement Amendment 7/26/96
Side Letter Agreement Pending
NAMIBIA STANDARD BANK NAMIBIA FOR STANDARD OF None
BANK SOUTH AFRICA (SBSA)
Standard Bank of South Africa Agreement 3/11/94
Subsidiary Amendment 10/3/96
NETHERLANDS ABN-AMRO BANK NV NECIGEF
ABN-AMRO Agreement 12/19/88
MEESPIERSON NV
MeesPierson NV Agreement 6/4/99
NEW ZEALAND NATIONAL AUSTRALIA BANK LTD. (NAB), NZCSD
AUCKLAND
National Australia Bank Agt. 5/1/85
Agreement Amendment 2/13/92
Omnibus Amendment 11/22/93
New Zealand Addendum 3/7/89
NORWAY DEN NORSKE BANK VPS
Den norske Bank Agreement 11/16/94
OMAN HSBC BANK MIDDLE EAST, OMAN FOR Muscat Depository &
HONGKONG & SHANGHAI BANKING CORP. LTD. Securities & Registration
(HSBC)
Hongkong & Shanghai Banking Corp. Agt. 4/19/91 Co.
Omnibus Supplement 12/29/93
Schedule 5/14/96
BBME Supplement 5/14/96
Side letter Agreement dated 7/28/97
PAKISTAN STANDARD CHARTERED BANK (SCB), KARACHI CDC
Standard Chartered Bank Agreement 2/18/92
Omnibus Amendment 6/13/94
Appendix 4/8/96
PERU CITIBANK NA, LIMA CAVALI
Citibank, N.A., New York Agt. 7/16/81
New York Agreement Amendment 8/31/90
New York Agreement Amendment 7/26/96
PHILIPPINES CITIBANK NA, MANILA PCD
Citibank, N.A., New York Agt. 7/16/81 ROSS
New York Agreement Amendment 8/31/90
New York Agreement Amendment 7/26/96
POLAND CITIBANK (POLAND) SA FOR CITIBANK NA NDS
National Bank of Poland
Citibank, N.A., New York Agt. 7/16/81
New York Agreement Amendment 8/31/90
New York Agreement Amendment 7/26/96
Citibank Subsidiary Amendment 10/30/95
Citibank, N.A. / Citibank Poland S.A. Agt. 11/6/92
Page 5 of 8
<PAGE>
COUNTRY SUBCUSTODIAN DEPOSITORIES
- ------- ------------ ------------
PORTUGAL BANCO COMERCIAL PORTUGUES SA (BCP) CVM
Banco Comercial Portugues 5/18/98
ROMANIA ING BANK NV, BUCHAREST SNCDD
BSE
ING Bank N.V. Agreement 9/29/97 NBR
RUSSIA BANK CREDIT SUISSE FIRST BOSTON AO VTB
(CSFB AO)FOR CREDIT SUISSE, ZURICH NDC
***Requires signed Amendment to the Custodian Agreement prior
to investment.***
Credit Suisse, Zurich Agreement 4/30/96
CITIBANK T/O FOR CITIBANK NA
***Requires signed Amendment to the Custodian Agreement prior
to investment.***
Citibank, N.A., New York Agt. 7/16/81
New York Agreement Amendment 8/31/90
New York Agreement Amendment 7/26/96
Citibank, N.A. Subsidiary Amendment 10/19/95
Citibank N.A. / Citibank T/O Agt. 6/16/97
Side Letter Agt. 8/18/97
SINGAPORE HONGKONG & SHANGHAI BANKING CORP. LTD. CDP
(HSBC), SINGAPORE
Hongkong & Shanghai Banking Corp. Agt. 4/19/91
Omnibus Supplement 12/29/93
Schedule 5/14/96
SLOVAKIA ING BANK NV, BRATISLAVA SCP
National Bank of Slovakia
ING Bank N.V. Agreement 9/1/98
SLOVENIA BANK AUSTRIA DD LJUBLJANA KDD
Master Subcustodian Agreement 4/17/98
Amendment dated 4/17/98
Amendment dated 10/14/98
SOUTH AFRICA STANDARD BANK OF SOUTH AFRICA (SBSA) CD
Standard Bank of South Africa Agreement 3/11/94
SPAIN BANCO SANTANDER CENTRAL HISPANO SA SCLV
(BSCH)
Banco de Espana
Banco de Santander Agreement 12/14/88
SRI LANKA HONGKONG & SHANGHAI BANKING CORP. LTD. CDS
(HSBC), Hongkong & Shanghai Banking Corp. Agt. 4/19/91
Omnibus Supplement 12/29/93
Schedule 5/14/96
SWAZILAND STANDARD BANK SWAZILAND LTD FOR None
STANDARD BANK OF SOUTH AFRICA (SBSA)
Standard Bank of South Africa Agreement 3/11/94
Subsidiary Amendment 9/29/97
SWEDEN SKANDINAVISKA ENSKILDA BANKEN (SEB) VPC
Skandinaviska Enskilden Banken Agreement 2/20/89
Omnibus Amendment 12/3/93
Page 6 of 8
<PAGE>
COUNTRY SUBCUSTODIAN DEPOSITORIES
- ------- ------------ ------------
SWITZERLAND UBS AG SIS
Union Bank of Switzerland Agreement 12/20/88
Omnibus Amendment 11/29/94
TAIWAN STANDARD CHARTERED BANK (SCB), TAIPEI TSCD
Standard Chartered Bank Agreement 2/18/92
Omnibus Amendment 6/13/94
Appendix 4/8/96
THAILAND HONGKONG & SHANGHAI BANKING CORP. LTD. TSDC
(HSBC),
Hongkong & Shanghai Banking Corp. Agt. 4/19/91
Omnibus Supplement 12/29/93
Schedule 5/14/96
TRANSNATIONAL BROWN BROTHERS HARRIMAN & CO. (BBH&CO.) Cedel
Euroclear
TURKEY CITIBANK NA, ISTANBUL Takasbank
Central Bank of Turkey
Citibank, N.A., New York Agt. 7/16/81
New York Agreement Amendment 8/31/90
New York Agreement Amendment 7/26/96
UNITED KINGDOM HSBC BANK PLC CGO
Midland Bank Agreement 8/8/90 CrestCo.
Omnibus Amendment 12/15/93 CMO
URUGUAY BANKBOSTON NA, MONTEVIDEO None
The First National Bank of Boston Agreement 1/5/88
Omnibus Amendment 2/22/94
Amendment 7/29/96
VENEZUELA CITIBANK NA, CARACAS CVV
Citibank, N.A., New York Agt. 7/16/81
New York Agreement Amendment 8/31/90
New York Agreement Amendment 7/26/96
ZAMBIA STANBIC BANK ZAMBIA LTD FOR STANDARD LuSE Central Shares
BANK OF SOUTH AFRICA (SBSA) Depository Ltd.
BoZ
Standard Bank of South Africa Agreement 3/11/94
Subsidiary Amendment 10/3/96
ZIMBABWE STANBIC BANK ZIMBABWE LTD FOR STANDARD None
BANK OF SOUTH AFRICA (SBSA)
Standard Bank of South Africa Agreement 3/11/94
Subsidiary Amendment 10/3/96
Page 7 of 8
<PAGE>
NOTES:
1.) THE DEPOSITORIES IN CHILE, PANAMA AND VENEZUELA ARE PRESENTLY
ELECTIVE. IT IS NOT THE CURRENT INTENTION OF BROWN BROTHERS HARRIMAN &
CO. TO USE SUCH DEPOSITORIES UNLESS THEIR USE BECOMES COMPULSORY.
EUROCLEAR IS COMPULSORY FOR FIXED INCOME OBLIGATIONS AND ELECTIVE FOR
EQUITIES. CURRENTLY, BROWN BROTHERS HARRIMAN & CO. USES EUROCLEAR FOR
SETTLEMENT OF EQUITIES WHERE WE ARE INSTRUCTED TO DO SO. WE DO NOT USE
EUROCLEAR FOR THE ONGOING SAFEKEEPING OF EQUITIES.
2.) IF YOU ARE AUTHORIZING INVESTMENT IN COSTA RICA, CYPRUS, ESTONIA,
GHANA, LITHUANIA, OR NIGERIA, THESE ARRANGEMENTS ARE THE SUBJECT OF
ADDITIONAL INFORMATION IN SCHEDULE A TO THE FCM REPORT.
I HEREBY CERTIFY THAT THE BOARD OR ITS DELEGATE HAS APPROVED THE COUNTRIES AND
CENTRAL DEPOSITORIES LISTED ON THIS APPENDIX
/S/ ROBERT D. SNOWDEN
SIGNATURE
NAME: Robert D. Snowden
COMPANY:
(if other than Board)
TITLE: Controller
DATE: July 20, 1999
Page 8 of 8
<PAGE>
BROWN BROTHERS HARRIMAN & CO. - GLOBAL CUSTODY NETWORK
VANGUARD-RECOVER STANDARD MARKETS
APPENDIX B
COUNTRY SUBCUSTODIAN DEPOSITORIES
- ------- ------------ ------------
COSTA RICA BANCO BCT SA CEVAL
***Requires additional documentation prior to investment.***
Master Subcustodian Agreement 8/10/98
CYPRUS CYPRUS POPULAR BANK LTD. None
***Requires additional documentation prior to investment.***
Cyprus Popular Bank Ltd. Agt. 2/18/98
ESTONIA HANSABANK, TALLINN FOR MERITA BANK ECDSL
***Requires additional documentation prior to investment.***
Merita Bank Agreement 12/1/97
GHANA MERCHANT BANK (GHANA) LIMITED FOR None
STANDARD BANK OF SOUTH AFRICA (SBSA)
***Requires additional documentation prior to investment.***
Standard Bank of South Africa Agreement 3/11/94
Subsidiary Amendment Pending
LITHUANIA VILNIAUS BANKAS, VILNIUS FOR MERITA CSDL
BANK
***Requires additional documentation prior to investment.***
Merita Bank Agreement 12/1/97
Page 1 of 1
<PAGE>
July 1, 1999
FACSIMILE
Ms. Sarah A. Buescher
The Vanguard Group
P. O. Box 2600
Valley Forge, PA 19482-2600
Dear Sarah:
You have requested a statement from us regarding what is known as "Year
2000 Compliance" by which is meant the steps taken to assure that computerized
information and communications systems will retain essential functionality in
transition from the year 1999 to the year 2000. Please accept the following in
response to that request.
You will understand that we are not with respect to yourselves merchants of
software and therefore warranties of merchantability and the like are not
supported by context. Rather, we provide services to you that are in one measure
or another dependent for normal operation on the functionality of various
computer systems and software. Accordingly, allow this letter to confirm that:
(1) we will use reasonable care and diligence in accordance with the terms of
the agreement governing the services to assure that these services are not
compromised by loss of systems or software functionality related to the
succession of the year 2000; (2) we will use reasonable care and diligence to
procure that our agents and subcustodians perform likewise; and, (3) we will use
reasonable care and diligence to provide for alternate means of providing
services in the event that a computer system or software might be negatively
affected by the succession of the year 2000.
Please contact me at (617) 772-1371 if you have any questions.
Sincerely,
W. Casey Gildea
Manager
WCG:arg
Exhibit-99.BJ
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectuses and
Statement of Additional Information constituting parts of this Post-Effective
Amendment No. 19 to the Registration Statement on Form N-1A (the "Registration
Statement") of our reports dated February 9, 2000, relating to the financial
statements and financial highlights appearing in the December 31, 1999 Annual
Report to Shareholders of Vanguard International Stock Index Funds, which are
also incorporated by reference into the Registration Statement. We also consent
to the references to us under the heading "Financial Highlights" in the
Prospectuses and under the headings "Financial Statements" and "Service
Providers--Independent Accountants" in the Statement of Additional Information.
PricewaterhouseCoopers LLP
Philadelphia, PA
April 25, 2000
Exhibit EX-99.BP
THE VANGUARD GROUP, INC.
------------------------
CODE OF ETHICS
--------------
SECTION 1: BACKGROUND
This Code of Ethics has been approved and adopted by the Board of Directors of
The Vanguard Group, Inc. ("Vanguard") and the Boards of Trustees of each of the
Vanguard funds in compliance with Rule 17j-1 under the Investment Company Act of
1940. The Code has been amended and restated effective as of May 1, 1999. Except
as otherwise provided, the Code applies to all "Vanguard personnel," which term
includes all employees, officers, Directors and Trustees of Vanguard and the
Vanguard funds. The Code also contains provisions which apply to the investment
advisers to the Vanguard funds (see section 11).
SECTION 2: STATEMENT OF GENERAL FIDUCIARY STANDARDS
This Code of Ethics is based on the overriding principle that Vanguard personnel
act as fiduciaries for shareholders' investments in the Vanguard funds.
Accordingly, Vanguard personnel must conduct their activities at all times in
accordance with the following standards:
a) SHAREHOLDERS' INTERESTS COME FIRST. In the course of fulfilling their
duties and responsibilities to Vanguard fund shareholders, Vanguard personnel
must at all times place the interests of Vanguard fund shareholders first. In
particular, Vanguard personnel must avoid serving their own personal interests
ahead of the interests of Vanguard fund shareholders.
b) CONFLICTS OF INTEREST MUST BE AVOIDED. Vanguard personnel must avoid
any situation involving an actual or potential conflict of interest or possible
impropriety with respect to their duties and responsibilities to Vanguard fund
shareholders.
c) COMPROMISING SITUATIONS MUST BE AVOIDED. Vanguard personnel must not
take advantage of their position of trust and responsibility at Vanguard.
Vanguard personnel must avoid any situation that might compromise or call into
question their exercise of full independent judgment in the best interests of
Vanguard fund shareholders.
<PAGE>
All activities of Vanguard personnel should be guided by and adhere to these
fiduciary standards. The remainder of this Code sets forth specific rules and
procedures which are consistent with these fiduciary standards. However, all
activities by Vanguard personnel are required to conform with these fiduciary
standards regardless of whether the activity is specifically covered in this
Code.
SECTION 3: DUTY OF CONFIDENTIALITY
Vanguard personnel must keep confidential at all times any nonpublic information
they may obtain in the course of their employment at Vanguard. This information
includes but is not limited to:
1) information on the vanguard funds, including recent or impending
securities transactions by the funds, activities of the
funds' advisers, offerings of new funds, and closings of funds;
2) information on Vanguard fund shareholders and prospective
shareholders, including their identities, investments, and account
transactions;
3) information on other vanguard personnel, including their pay,
benefits, position level, and performance ratings; and
4) information on Vanguard business activities, including new services,
products, technologies, and business initiatives.
Vanguard personnel have the highest fiduciary obligation not to reveal
confidential Vanguard information to any party that does not have a clear and
compelling need to know such information.
SECTION 4: GIFT POLICY
Vanguard personnel are prohibited from seeking or accepting gifts of material
value from any person or entity, including any Vanguard fund shareholder or
Vanguard client, when such gift is in relation to doing business with Vanguard.
In certain cases, Vanguard PERSONNEL MAY ACCEPT GIFTS OF DE MINIMIS value (as
determined in accordance with guidelines set forth in Vanguard's Human Resources
Policy Manual) but only if they obtain the approval of a Vanguard officer.
<PAGE>
SECTION 5: OUTSIDE ACTIVITIES
a) PROHIBITIONS ON SECONDARY EMPLOYMENT. Vanguard employees are
prohibited from working for any business or enterprise in the financial services
industry that competes with Vanguard. In addition, Vanguard employees are
prohibited from working for any organization that could possibly benefit from
the employee's knowledge of confidential Vanguard information, such as new
Vanguard services and technologies. Beyond these prohibitions, Vanguard
employees may accept secondary employment, but only with prior approval from the
Vanguard Compliance Department. Vanguard officers are prohibited from accepting
or serving in any form of secondary employment unless they have received
approval from a Vanguard Managing Director or the Vanguard Chairman and Chief
Executive Officer.
b) PROHIBITION ON SERVICE AS DIRECTOR OR PUBLIC OFFICIAL. Vanguard
officers and employees are prohibited from serving on the board of directors of
any publicly traded company or in an official capacity for any federal, state,
or local government (or governmental agency or instrumentality) without prior
approval from the Vanguard Compliance Department.
c) PROHIBITION ON MISUSE OF VANGUARD TIME OR PROPERTY. Vanguard personnel
are prohibited from using Vanguard time, equipment, services, personnel or
property for any purposes other than the performance of their duties and
responsibilities at Vanguard.
SECTION 6: GENERAL PROHIBITIONS ON TRADING
a) TRADING ON KNOWLEDGE OF VANGUARD FUNDS ACTIVITIES. All Vanguard
personnel are prohibited from taking personal advantage of their knowledge of
recent or impending securities activities of the Vanguard funds or the funds'
investment advisers. In particular, Vanguard personnel are prohibited from
purchasing or selling, directly or indirectly, any security when they have
actual knowledge that the security is being purchased or sold, or considered for
purchase or sale, by a Vanguard fund. This prohibition applies to all securities
in which the person has acquired or will acquire "beneficial ownership." For
these purposes, a person is considered to have beneficial ownership in all
securities over which the person enjoys economic benefits substantially
equivalent to ownership (for example, securities held in trust for the person's
benefit), regardless of who is the registered owner. Under this Code of Ethics,
Vanguard personnel are considered to have beneficial ownership of all securities
owned by their spouse or minor children.
<PAGE>
b) VANGUARD INSIDER TRADING POLICY. All Vanguard personnel are subject
to Vanguard's Insider Trading Policy, which is considered an integral part of
this Code of Ethics. Vanguard's Insider Trading Policy prohibits Vanguard
personnel from buying or selling any security while in the possession of
material nonpublic information about the issuer of the security. The policy also
prohibits Vanguard personnel from communicating to third parties any material
nonpublic information about any security or issuer of securities. Any violation
of Vanguard's Insider Trading Policy may result in penalties which could include
termination of employment with Vanguard.
SECTION 7: ADDITIONAL TRADING RESTRICTIONS FOR ACCESS PERSONS
a) APPLICATION. The restrictions of this section 7 apply to all Vanguard
access persons. For purposes of the Code of Ethics, "access persons" include:
1) any Director or Trustee of Vanguard or a Vanguard fund, excluding
disinterested Directors and Trustees (i.e., any Director or Trustee
who is not an "interested person" of a Vanguard fund within the
meaning of Section 2(a)(19) of the Investment Company Act of 1940);
2) any officer of Vanguard or a Vanguard fund; and
3) any employee of Vanguard or a Vanguard fund who in the course of his
or her regular duties participates in the selection of a Vanguard
fund's securities or who works in a Vanguard department or unit that
has access to information regarding a Vanguard fund's impending
purchases or sales of securities.
The Vanguard Compliance Department will notify all Vanguard personnel who
qualify as access persons of their duties and responsibilities under this Code
of Ethics. The restrictions of this section 7 apply to all transactions in which
a Vanguard access person has or will acquire beneficial ownership (see section
6a) of a security, including transactions by a spouse or minor child. However,
the restrictions do not apply to transactions involving: (i) direct obligations
of the Government of the United States; (ii) high quality short-term debt
instruments, including bankers' acceptances, bank certificates of deposit,
commercial paper, and repurchase agreements; and (iii) shares of registered
open-end investment companies (including shares of
<PAGE>
any Vanguard fund). In addition, the restrictions do not apply to transactions
in accounts over which the access person has no direct or indirect control or
influence.
b) GENERAL RESTRICTIONS FOR ACCESS PERSONS. Vanguard access persons are
subject to the following restrictions with respect to their securities
transactions:
1) PRE-CLEARANCE OF SECURITIES TRANSACTIONS. Vanguard access persons must
receive approval from the Vanguard Compliance Department before
purchasing or selling any securities. The Vanguard Compliance
Department will notify Vanguard access persons if their proposed
securities transactions are permitted under this Code of Ethics.
2) TRADING THROUGH VANGUARD BROKERAGE SERVICES. Vanguard access persons
must conduct all their securities transactions through Vanguard
Brokerage Services. Vanguard Brokerage Services will send a
confirmation notice of any purchase or sale of securities by a
Vanguard access person to the Vanguard Compliance Department.
3) PROHIBITION ON INITIAL PUBLIC OFFERINGS. Vanguard access persons are
prohibited from acquiring securities in an initial public offering.
4) PROHIBITION ON PRIVATE PLACEMENTS. Vanguard access persons are
prohibited from acquiring securities in a private placement without
prior approval from the Vanguard Compliance Department. In the event
an access person receives approval to purchase securities in a private
placement, the access person must disclose that investment if he or
she plays any part in a Vanguard fund's later consideration of an
investment in the issuer.
5) PROHIBITION ON OPTIONS. Vanguard access persons are prohibited from
acquiring or selling any option on any security.
6) PROHIBITION ON SHORT-SELLING. Vanguard access persons are prohibited
from selling any security that the access person does not own or
otherwise engaging in "short-selling" activities.
7) PROHIBITION ON SHORT-TERM TRADING PROFITS. Vanguard access persons are
prohibited from profiting in the purchase and sale, or sale and
purchase, of the same (or related) securities within 60 calendar days.
In the event that an access person realizes profits on
<PAGE>
such short-term trades, the access person must relinquish such profits
to The Vanguard Group Foundation.
c) BLACKOUT RESTRICTIONS FOR ACCESS PERSONS. All Vanguard access persons
are subject to the following restrictions when their purchases and sales of
securities coincide with trades by the Vanguard funds:
1) PURCHASES AND SALES WITHIN THREE DAYS FOLLOWING A FUND TRADE. Vanguard
access persons are prohibited from purchasing or selling any security
within three calendar days after a Vanguard fund has traded in the
same (or a related) security. In the event that an access person makes
a prohibited purchase or sale within the three-day period, the access
person must unwind the transaction and relinquish any gain from the
transaction to The Vanguard Group Foundation.
2) PURCHASES WITHIN SEVEN DAYS BEFORE A FUND PURCHASE. A Vanguard access
person who purchases a security within seven calendar days before a
Vanguard fund purchases the same (or a related) security is prohibited
from selling the security for a period of six months following the
fund's trade. In the event that an access person makes a prohibited
sale within the six-month period, the access person must relinquish to
The Vanguard Group Foundation any gain from the transaction.
3) SALES WITHIN SEVEN DAYS BEFORE A FUND SALE. A Vanguard access person
who sells a security within seven days before a Vanguard fund sells
the same (or a related) security must relinquish to The Vanguard Group
Foundation the difference between the access person's sale price and
the Vanguard fund's sale price (assuming the access person's sale
price is higher).
4) RESTRICTIONS NOT APPLICABLE TO TRADES BY VANGUARD INDEX FUNDS. The
restrictions of this section 7c do not apply to purchases and sales of
securities by Vanguard access persons which would otherwise violate
section 7c solely because the transactions coincide with trades by any
Vanguard index funds.
SECTION 8: ADDITIONAL TRADING RESTRICTIONS FOR INSTITUTIONAL CLIENT CONTACTS
<PAGE>
a) APPLICATION. The restrictions of this section 8 apply to all Vanguard
Institutional client contacts. For purposes of the Code of Ethics, an
"Institutional client contact" includes any Vanguard employee who works in a
department or unit at Vanguard that has significant levels of interaction or
dealings with the management of clients of Vanguard's Institutional Investor
Group. The Vanguard Compliance Department will notify Vanguard employees who
qualify as Institutional client contacts of the restrictions of this Section 8.
b) PROHIBITION ON TRADING SECURITIES OF INSTITUTIONAL CLIENTS. Vanguard
Institutional client contacts are prohibited from acquiring securities issued by
clients of the Vanguard Institutional Investor Group (including any options or
futures contracts based on such securities). In the event that any individual
who becomes subject to this prohibition already owns securities issued by
Institutional clients, the individual will be prohibited from disposing of those
securities without prior approval from the Vanguard Compliance Department. The
restrictions of this section 8 apply to all transactions in which Institutional
client contacts have acquired or would acquire beneficial ownership (see section
6a) of a security, including transactions by a spouse or minor child. However,
the restrictions do not apply to transactions in any account over which an
individual does not possess any direct or indirect control or influence. The
Vanguard Compliance Department will maintain a list of the Institutional clients
to which the prohibitions of this section 8 apply. The Vanguard Compliance
Department may waive the prohibition on acquiring securities of Institutional
clients in appropriate cases (including, for example, cases in which an
individual acquires securities as part of an inheritance or through an
employer-sponsored employee benefits or compensation program).
SECTION 9: COMPLIANCE PROCEDURES
a) APPLICATION. The requirements of this section 9 apply to all Vanguard
personnel other than disinterested Directors and Trustees (see section 7a). The
requirements apply to all transactions in which Vanguard personnel have acquired
or would acquire beneficial ownership (see section 6a) of a security, including
transactions by a spouse or minor child. However, the requirements do not apply
to transactions involving: (i) direct obligations of the Government of the
United States; (ii) high quality short-term debt instruments, including bankers'
acceptances, bank certificates of deposit, commercial paper, and repurchase
agreements; and (iii) shares of registered open-end investment companies
(including shares of any Vanguard fund). In addition, the requirements do not
apply to securities acquired for accounts over which the person has no direct or
indirect control or influence.
<PAGE>
b) DISCLOSURE OF PERSONAL HOLDINGS. All Vanguard personnel must disclose
their personal securities holdings to the Vanguard Compliance Department upon
commencement of employment with Vanguard. These disclosures must identify the
title, number of shares, and principal amount with respect to each security
holding.
c) RECORDS OF SECURITIES TRANSACTIONS. All Vanguard personnel must notify
the Vanguard Compliance Department if they have opened or intend to open a
brokerage account. Vanguard personnel must direct their brokers to supply the
Vanguard Compliance Department with duplicate confirmation statements of their
securities transactions and copies of all periodic statements for their
brokerage accounts.
d) CERTIFICATION OF COMPLIANCE. All Vanguard personnel must certify
annually to the Vanguard Compliance Department that: (i) they have read and
understand this Code of Ethics; (ii) they have complied with all requirements of
the Code of Ethics; and (3) they have reported all transactions required to be
reported under the Code of Ethics.
SECTION 10: REQUIRED REPORTS BY DISINTERESTED DIRECTORS AND TRUSTEES
Disinterested Directors and Trustees (see section 7a) are required to report
their securities transactions to the Vanguard Compliance Department only in
cases where the Director or Trustee knew or should have known during the 15-day
period immediately preceding or following the date of the transaction that the
security had been purchased or sold, or was being considered for purchase or
sale, by a Vanguard fund.
SECTION 11: APPLICATION TO INVESTMENT ADVISERS
a) ADOPTION OF CODE OF ETHICS. Each investment adviser to a Vanguard fund
must adopt a code of ethics in compliance with Rule 17j-1 and provide the
Vanguard Compliance Department with a copy of the code of ethics and any
subsequent amendments. Each investment adviser is responsible for enforcing its
code of ethics and reporting to the Vanguard Compliance Department on a timely
basis any violations of the code of ethics and resulting sanctions.
<PAGE>
b) PREPARATION OF ANNUAL REPORTS. Each investment adviser to a Vanguard
fund must prepare an annual report on its code of ethics for review by the Board
of Trustees of the Vanguard fund. This report must contain the following:
1) a description of any issues arising under the adviser's code of ethics
including, but not limited to, information about any violations of the
code, sanctions imposed in response to such violations, changes made
to the code's provisions or procedures, and any recommended changes to
the code; and
2) a certification that the investment adviser has adopted such
procedures as are reasonably necessary to prevent access persons from
violating the code of ethics.
SECTION 12: REVIEW BY BOARDS OF DIRECTORS AND TRUSTEES
a) REVIEW OF INVESTMENT ADVISERS' CODE OF ETHICS. Prior to retaining the
services of any investment adviser for a Vanguard fund, the Board of Trustees of
the Vanguard fund must review the code of ethics adopted by the investment
adviser pursuant to Rule 17j-1 under the Investment Company Act of 1940. The
Board of Trustees must receive a certification from the investment adviser that
the adviser has adopted such procedures as are reasonably necessary to prevent
access persons from violating the adviser's code of ethics. A majority of the
Trustees of the Vanguard fund, including a majority of the disinterested
Trustees of the Fund, must determine whether the adviser's code of ethics
contains such provisions as are reasonably necessary to prevent access persons
from engaging in any act, practice, or course of conduct prohibited by the
anti-fraud provisions of Rule 17j-1.
b) REVIEW OF VANGUARD ANNUAL REPORTS. The Vanguard Compliance Department
must prepare an annual report on this Code of Ethics for review by the Board of
Directors of Vanguard and the Boards of Trustees of the Vanguard funds. The
report must contain the following:
1) a description of issues arising under the Code of Ethics since the
last report including, but not limited to, information about any
violations of the Code, sanctions imposed in response to such
violations, changes made to the Code's provisions or procedures, and
any recommended changes to the Code; and
<PAGE>
2) a certification that Vanguard and the Vanguard Funds have adopted such
procedures as are reasonably necessary to prevent access persons from
violating the Code of Ethics.
SECTION 13: SANCTIONS
In the event of any violation of this Code of Ethics, Vanguard senior management
will impose such sanctions as deemed necessary and appropriate under the
circumstances and in the best interests of Vanguard fund shareholders. In the
case of any violations by Vanguard employees, the range of sanctions could
include a letter of censure, suspension of employment without pay, or permanent
termination of employment.
SECTION 14: RETENTION OF RECORDS
Vanguard must maintain all records required by Rule 17j-1 including: (i) copies
of this Code of Ethics and the codes of ethics of all investment advisers to the
Vanguard funds; (ii) records of any violations of the codes of ethics and
actions taken as a result of the violations; (iii) copies of all certifications
made by Vanguard personnel pursuant to section 9d; (iv) lists of all Vanguard
personnel who are, or within the past five years have been, access persons
subject to the trading restrictions of section 8 and lists of the Vanguard
compliance personnel responsible for monitoring compliance with those trading
restrictions; and (v) copies of the annual reports to the Boards of Directors
and Trustees pursuant to section 12.
