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Semiannual Report
EQUITY
MARKET
INDEX FUNDS
June 30,1999
[LOGO OF T. ROWE PRICE APPEARS HERE]
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REPORT HIGHLIGHTS
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Equity Market Index Funds
. The equity markets posted very good results overall, with strong
performance extending to smaller companies and value-oriented stocks toward
the end of the period.
. The Equity Index 500 Fund stayed on pace with the outstanding gains of the
past four years.
. The Total Equity Market Index Fund performed well, benefiting alternately
from its large-cap and small-cap components.
. The Extended Equity Market Index Fund's double-digit return derived
completely from second quarter gains.
. Just as some active managers would benefit from an extended shift to
smaller companies, index funds with small- and mid-cap exposure might also
benefit.
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FELLOW SHAREHOLDERS
The first half of 1999 saw a significant shift in investor sentiment. Stability
returned to Asia and to other foreign economies, and the U.S. economy thrived,
encouraging investors to look beyond the large growth stocks they had been
favoring. The equity markets posted very good results overall, with excellent
performance extending to smaller companies and value-oriented stocks toward the
end of the period.
MARKET ENVIRONMENT
After many quarters of dominating the domestic equity markets, very large growth
stocks took a breather in the spring of 1999 as investors shifted their
attention to undervalued small-cap and value stocks. Investors had long favored
large growth companies for their ability to sustain earnings during a period of
significant global economic weakness. In April, however, Asia showed some signs
of revival and the European Central Bank took steps to stimulate Europe's
economy. Moreover, the U.S. economy remained surprisingly strong, with GDP
growth running well ahead of projections and consumer spending at high levels.
Against this backdrop, investors appeared more comfortable looking for
opportunities beyond the pricey blue chip market, especially among smaller
companies and cyclical firms that tend to benefit from economic growth.
As a result, positive returns this half have been much more broad-based than in
recent periods. Even so, the Standard & Poor's 500 Stock Index still managed to
turn in a healthy 12.38% return for the first half of 1999. The small- and
mid-cap dominated Wilshire 4500 returned a strong 11.35% during the half, but
unlike the S&P 500, all of the Wilshire 4500's returns came in
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WILSHIRE 5000 RETURNS BY SECTOR
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Periods Ended 6/30/99 6 Months 12 Months
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Basic Materials 19.2% 3.6%
Business Services 7.3 - 4.0
Consumer Discretionary 15.2 19.1
Consumer Nondurables - 4.9 - 6.9
Durable Goods 4.5 - 3.3
Energy 20.3 7.7
Financial 10.7 3.2
Health Care - 1.0 9.9
Industrial 15.4 14.6
Miscellaneous - 3.1 - 15.2
Retail 10.9 28.2
Technology 23.6 56.6
Telecommunications 18.4 45.6
Transportation 10.1 1.3
Utilities - 4.4 3.1
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the second quarter. The performance of the Wilshire 5000, an index that closely
approximates a combination of the S&P 500 and the Wilshire 4500, naturally split
the difference between these indices, earning 11.87%.
Many areas of the market performed well. Technology stocks were once again at
the top of the Wilshire 5000 Returns breakdown, though the sector's leaders
changed. Software and information services companies drove the rally during the
first quarter but lagged the sector in the second as equipment makers took the
lead. Former high-fliers, such as Microsoft and America Online, were weak once
the market rotated in April, while companies like IBM and Lucent as well as a
host of small- and mid-cap firms performed well. The Internet stocks also
continued an amazing run that started at the technology market's bottom in early
October 1998. While these issues cooled off quite a bit in the second quarter,
many can still boast exceptional returns year-to-date.
Basic materials stocks also advanced during the half on optimism regarding the
U.S. economy. (In fact, during the past quarter, the trend toward economically
sensitive stocks was even more pronounced, as capital equipment and industrial
shares were solid performers.) Drug stocks, which had been market darlings in
recent years, did poorly. They suffered especially tough losses in April, when
Pfizer lowered its earnings estimates and analysts noted that the large drug
companies would have a difficult time maintaining double-digit growth rates
going forward.
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INFORMATION ON YEAR-END DISTRIBUTIONS
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To help you with tax planning, we try to give you a good idea of the per-share
income and capital gain amounts our funds may distribute near year-end. In late
October, we will provide estimates of these amounts, which will be paid on
December 16, 1999, to shareholders of record on December 14. These preliminary
numbers will be included in The Price Report mailing to shareholders in late
October and will also be available on our Web site-www.troweprice.com. We hope
that these preliminary numbers will be useful to you in approximating the income
and capital gains taxes you may pay on distributions to taxable accounts.
If your fund distributed any capital gains earlier in 1999, you can find the
amounts on your statements and should include them in your tax planning
calculations. Please keep in mind that the numbers are not final and are likely
to be revised before the December 14 declaration and record date.As the fall
progresses, you may want to check our Web site for revisions.
If you would like information on tax matters relating to mutual funds, please
visit our Web site to download our Insights report, Tax Information for Mutual
Fund Investors, or call 1-800-225-5132 to request a copy.
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PORTFOLIO CHARACTERISTICS
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Extended
Equity Total Equity Equity
As of 6/30/99 Index 500 Market Index Market Index
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Market Cap
(Investment
Weighted Median) $70.3 billion $33.7 billion $2.2 billion
Earnings Growth
Rate Estimated
Next 5 Years* 13.4% 13.7% 17.3%
P/E Ratio (Based
on Next 12 Months'
Estimated Earnings) 27.9X 27.1X 20.7X
*Forecasts are based on T. Rowe Price research and are in no way an indication
of future investment returns.
Despite strong returns, the markets were frequently rattled by economic data
releases, as investors worried that U.S. growth, which had been so good for
stocks, might bring about inflation and higher interest rates. Market behavior
during the half was in keeping with a recent pattern, wherein stocks race upward
on positive corporate or economic news, then sag as investors await the next
round of announcements.
[EQUITY INDEX 500 FUND]
Even though investors broadened their focus in the year's second quarter, the
Equity Index 500 Fund nonetheless had a strong six-month total return of 12.17%.
That result contributed to a superb 12-month return of 22.50%. These results
closely tracked the S&P 500 but, as is usually the case, the fund's operating
and management expenses caused it to trail the benchmark slightly.
The S&P 500's performance continued to be impressive. Its 12.38% return for the
half year was well above the historical average return for stocks (generally
placed at about 10% to 12% per year) but in line with the tremendous gains of
recent years. In the second quarter, sectors of the S&P 500 that had been
virtually forgotten -- more value-oriented stocks and companies that could be
classified as mid-caps -- handily outperformed the narrow group of large growth
stocks that had dominated for more than a year. The stock of metals manufacturer
Alcoa, for example, soared 51% in April after the company reported strong
earnings.
There were extensive changes to the S&P 500 this half, mostly the result of
merger and acquisition activity. In all, 17 index slots changed hands during the
first half of 1999 -- a large number historically but in line with the pace of
the last few years. The second half of the 1990s has been characterized by an
abundance of mergers, usually funded with company stock as successful companies
have viewed their own high-priced shares
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PERFORMANCE COMPARISON
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Periods Ended 6/30/99 6 Months 12 Months
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Equity Index 500 Fund 12.17% 22.50%
S&P 500 12.38 22.76
as the most practical currency for acquisitions. Among the new merger
announcements between S&P 500 companies this year, AT&T announced plans to buy
MediaOne Group and AlliedSignal plans to buy Honeywell.
As has been the case for the last several years, the largest number of S&P
additions came from the financial sector. Two regional banks, AmSouth and
SouthTrust, the large insurance company AFLAC, and securities firm Paine Webber
Group were all added. The remaining additions came from a variety of sectors,
including two large retailers, Best Buy and Office Depot, utilities Florida
Progress and CMS Energy, the pharmaceutical company Watson Pharmaceuticals, and
the managed care company Wellpoint Health Networks.
A few additions were the result of corporate restructurings. For example, RJR
Nabisco Holdings spun off its tobacco unit, resulting in the deletion of the old
RJR from the index and the addition of the non-tobacco part of the company,
Nabisco Holding Group, a maker of food products.
Correspondingly, most of the 17 deletions occurred as the result of merger and
acquisition activity or corporate restructurings. One exception was
Harnischfeger Industries, a manufacturer of mining and papermaking equipment.
Harnischfeger filed for reorganization under Chapter 11 after becoming
overextended during a period of acquisitions. The committee at Standard and
Poor's responsible for constructing the S&P 500, has a policy of deleting
companies when they file for bankruptcy.
[TOTAL EQUITY MARKET INDEX FUND]
The Total Equity Market Index Fund posted a return of 11.85% for the first half
of 1999 and 19.60% for the past year. These returns were nearly identical to
those of the Wilshire 5000. Steady cash flows increased the asset size of the
fund, which in turn helped it track the Wilshire 5000 more closely.
The recent small- and mid-cap stock turnaround helped the Wilshire 5000 close in
on the S&P over the last year. However, even though the market advance broadened
in 1999, large-cap growth stocks garnered an ever-increasing weight in the
index. To illustrate this, consider the following: as of June 30, 1999, the 20
largest stocks in the Wilshire 5000 -- which contains more than 7,000 companies
- -- composed a little over 27% of the
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PERFORMANCE COMPARISON
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Periods Ended 6/30/99 6 Months 12 Months
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Total Equity Market
Index Fund 11.85% 19.60%
Wilshire 5000 11.87 19.59
index's total market value. A year earlier, the 20 largest made up just over 22%
of its market value. This trend primarily reflects appreciation in the large
growth stocks, although consolidation among some very large companies also
contributed. The sheer size of these companies has had and will have a profound
effect on the performance of your fund.
A few of the current top-20 stocks had notably large returns over the last year.
IBM posted a 126% gain on the strength of its efforts to provide businesses with
Internet solutions. Cisco, the leading provider of routers and switching
products for communications networks, had a 114% return, and Microsoft sustained
its performance trend of the last several years with a 72% advance. These are
amazing returns given the size of these companies.
Internet stocks also had an important effect on the fund. Although the Internet
segment paused in the second quarter, giving back some of its spectacular rally,
it remained a market leader. Among the household Internet names, America Online,
Yahoo!, and Amazon.com returned 329%, 337%, and 276%, respectively, over the
last year. In keeping with our strategy, we made an effort to keep our Internet
weight in line with the index as the sector soared and to hold a representative
sample of the myriad businesses in the field. However, we feel there is a touch
of speculation in this area, and a decline in the sector could contribute
negatively to performance in the future.
EXTENDED EQUITY MARKET INDEX FUND
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PERFORMANCE COMPARISON
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Periods Ended 6/30/99 6 Months 12 Months
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Extended Equity Market
Index Fund 11.25% 11.15%
Wilshire 4500 11.35 10.55
After being in the doldrums for most of the last year, the Extended Equity
Market Index Fund came to life in the second quarter, reflecting renewed
interest in small- and mid-cap stocks. Its six-month results of 11.25% were
fairly close to the Wilshire 4500, and 12-month returns of 11.15% were actually
ahead of the benchmark. In general, we expect the fund to lag the Wilshire 4500
due to operating and management expenses and to trading costs that the index
does not incur. The fund has enjoyed periods of superior performance, though,
because of the modest tracking
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error involved in sampling a very large index (rather than trying to own in
excess of 6,000 stocks). We have taken steps to reduce the tracking error as the
fund has grown in size since, in general, tracking error is just as likely to
produce underperformance relative to the index as outperformance.
Within the small- and mid-cap universe, many sectors advanced during the first
half. Among the top-performing sectors were technology, energy, and
telecommunications. In technology, communications equipment and semiconductor
stocks did particularly well, with semiconductors rebounding from a slump and
equipment companies benefiting from the rapid growth of the Internet. Similarly,
telecommunications stocks have enjoyed strong returns as the nature of
communications has changed dramatically over the last few years. In fact, as a
group, these companies have grown and changed so greatly that we now track them
as a separate group within the Wilshire indices, whereas they were once part of
the broad utilities sector.
Many companies entered the Wilshire indices during the first half of 1999,
encompassing both initial public offerings and spin-offs from existing
companies. Several of the new companies were Internet-related as there was a
huge rush to bring these companies public while their market was hot. One of the
larger Internet companies to go public this year, in terms of market cap, was
priceline.com, a company that allows buyers to name their own price for goods
and services. Another notable new company in the index was Goldman Sachs Group,
one of the oldest
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SECTOR DIVERSIFICATION
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Percent of Extended
Equities Equity Total Equity Equity
As of 6/30/99 Index 500 Market Index Market Index
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Basic Materials 4.0% 3.9% 3.5%
Business Services 0.9 2.1 6.3
Telecommunications 8.7 7.7 2.9
Retail 6.5 6.4 5.2
Consumer
Nondurables 7.9 6.8 3.7
Consumer
Discretionary 5.0 5.8 8.0
Energy 6.3 4.9 3.3
Financial 16.1 17.2 18.9
Health Care 11.8 10.0 6.5
Transportation 0.9 1.1 1.5
Technology 21.8 22.6 25.0
Utilities 2.2 2.6 3.8
Miscellaneous 0.1 0.1 0.4
Industrial 6.0 5.6 3.3
Durable Goods 1.8 3.2 7.7
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Total 100% 100% 100%
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and largest investment banks, which decided to go public after a long history as
a limited partnership. As new companies show up in the index, we generally buy
all of the largest and a sample of the smaller ones.
OUTLOOK
It is hard to argue with the underpinnings of this lengthy and determined bull
market. Steady economic growth, tame inflation, and a vigilant Federal Reserve
have combined with generous consumer spending to create a business environment
in which companies of all sizes have regularly produced outstanding earnings. In
this sense, the rally in inexpensive small- and mid-cap companies and value
stocks was long overdue. On the other hand, many indices are trading at or near
their all-time highs. High returns have produced high expectations, and a
tendency toward increased volatility -- both in terms of up-and-down price
fluctuation and rapid rotation among market sectors -- that is likely to
continue.
The changes of the past several months have benefited active managers
considerably relative to S&P 500 index funds. Actively managed portfolios tend
to do better when small- and mid-cap stocks outperform since they often have
more exposure to such stocks than the S&P 500 does. If the rally in small- and
mid-cap stocks persists, active managers may regain some of the luster they have
lost during the lengthy period of large-cap dominance. At the same time, index
funds that invest in markets beyond the S&P, such as the Extended Equity Market
Index and Total Equity Market Index funds, are likely to benefit from the trend
as well.
Respectfully submitted,
/s/ Richard T. Whitney
Richard T. Whitney
Chairman of the Investment Advisory Committee
/s/ Kristen F. Culp
Kristen F. Culp
Executive Vice President
July 23, 1999
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T. ROWE PRICE EQUITY MARKET INDEX FUNDS
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THE EVOLVING S&P 5000 INDEX
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Changes in the index in 1999
Additions Deletions
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McKessonHBOC HBO
SouthTrust Oryx Energy
AmSouth Tele-Communications
Century Telephone Enterprises Rubbermaid
Kansas City Southern AMP
Watson Pharmaceuticals Aeroquip-Vickers
CMS Energy UnionCamp
AFLAC Meyer (Fred)
Delphi Automotive Systems Moore
PaineWebber Group Bankers Trust
WellPoint Health Networks Harnischfeger Industries
Nabisco Holding Group RJR Nabisco Holdings
Florida Progress Morton International
Office Depot American Stores
Network Appliance Ascend Communications
Best Buy AirTouch Communications
Vulcan Materials Provident
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T. ROWE PRICE EQUITY MARKET INDEX FUNDS
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PORTFOLIO HIGHLIGHTS
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TWENTY-FIVE LARGEST HOLDINGS
Percent of
Net Assets
Equity Index 500 Fund 6/30/99
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Microsoft 4.0%
GE 3.2
IBM 2.1
Wal-Mart 1.9
Cisco Systems 1.8
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Lucent Technologies 1.8
Intel 1.7
Exxon 1.6
AT&T 1.6
Merck 1.5
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MCI WorldCom 1.4
Citigroup 1.4
Coca-Cola 1.3
American International Group 1.3
Pfizer 1.2
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Bristol-Myers Squibb 1.2
Johnson & Johnson 1.2
Royal Dutch Petroleum 1.1
Bank of America 1.1
America Online 1.0
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Procter & Gamble 1.0
SBC Communications 1.0
Hewlett-Packard 0.9
Bell Atlantic 0.9
Philip Morris 0.9
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Total 38.1%
Note: Table excludes reserves.
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T. ROWE PRICE EQUITY MARKET INDEX FUNDS
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PORTFOLIO HIGHLIGHTS
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TWENTY-FIVE LARGEST HOLDINGS
Percent of
Net Assets
Total Equity Market Index Fund 6/30/99
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Microsoft 3.2%
GE 2.5
IBM 1.6
Wal-Mart 1.5
Lucent Technologies 1.4
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Cisco Systems 1.4
Intel 1.4
Exxon 1.3
AT&T 1.2
Merck 1.2
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MCI WorldCom 1.1
Citigroup 1.1
Coca-Cola 1.1
American International Group 1.0
Bristol-Myers Squibb 0.9
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Pfizer 0.9
Johnson & Johnson 0.9
Bank of America 0.9
America Online 0.8
Procter & Gamble 0.8
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SBC Communications 0.8
Hewlett-Packard 0.7
Bell Atlantic 0.7
Berkshire Hathaway 0.7
Philip Morris 0.7
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Total 29.8%
Note: Table excludes reserves.
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T. ROWE PRICE EQUITY MARKET INDEX FUNDS
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PORTFOLIO HIGHLIGHTS
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TWENTY-FIVE LARGEST HOLDINGS
Percent of
Net Assets
Extended Equity Market Index Fund 6/30/99
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Berkshire Hathaway 2.9%
Yahoo! 1.0
Goldman Sachs Group 0.9
Qwest Communications International 0.6
QUALCOMM 0.6
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Amazon.com 0.6
Level 3 Communications 0.6
Cox Communications 0.5
At Home 0.5
e-Bay 0.5
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priceline.com 0.5
Equitable Companies 0.4
Intimate Brands 0.3
Biogen 0.3
CMG Information Services 0.3
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Immunex 0.3
Linear Technology 0.3
Maxim Integrated Products 0.3
Lexmark International 0.3
E*TRADE 0.3
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Xilinx 0.3
Knight/Trimark Group 0.2
Analog Devices 0.2
Cablevision Systems 0.2
Republic Industries 0.2
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Total 13.1%
Note: Table excludes reserves.
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T. ROWE PRICE EQUITY MARKET INDEX FUNDS
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PERFORMANCE COMPARISON
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These charts show the value of a hypothetical $10,000 investment in each fund
over the past 10 fiscal year periods or since inception (for funds lacking
10-year records). The result is compared with a broad-based average or index.
The index return does not reflect expenses, which have been deducted from the
fund's return.
EQUITY INDEX 500 FUND
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[LINE GRAPH APPEARS HERE]
S&P 500 STOCK INDEX EQUITY INDEX 500 FUND
3/30/90 10,000 10,000
6/90 10,629 10,680
6/91 11,415 11,403
6/92 12,946 12,857
6/93 14,711 14,510
6/94 14,917 14,659
6/95 18,807 18,428
6/96 23,696 23,155
6/97 31,919 31,094
6/98 41,547 40,331
6/99 51,001 49,405
TOTAL EQUITY MARKET INDEX FUND
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[LINE GRAPH APPEARS HERE]
WILSHIRE 5000 INDEX TOTAL EQUITY MARKET INDEX FUND
1/30/98 10,000 10,000
6/98 11,484 11,521
6/99 13,734 13,779
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T. ROWE PRICE EQUITY MARKET INDEX FUNDS
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PERFORMANCE COMPARISON
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EXTENDED EQUITY MARKET INDEX FUND
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[LINE GRAPH APPEARS HERE]
WILSHIRE 4500 INDEX EXTENDED EQUITY MARKET INDEX FUND
1/30/98 10,000 10,000
6/98 11,099 11,240
6/99 12,271 12,493
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AVERAGE ANNUAL COMPOUND TOTAL RETURN
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This table shows how the fund would have performed each year if its actual (or
cumulative) returns for the periods shown had been earned at a constant rate.
<TABLE>
<CAPTION>
Since Inception
Periods Ended 6/30/99 1 Year 5 Years 10 Years Inception Date
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<S> <C> <C> <C> <C> <C>
Equity Index 500 Fund 22.50% 27.51% - 18.85% 3/30/90
Total Equity Market Index Fund 19.60 - - 25.47 1/30/98
Extended Equity Market Index Fund 11.15 - - 17.07 1/30/98
</TABLE>
Investment return and principal value represent past performance and will vary.
Shares may be worth more or less at redemption than at original purchase.
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For yield, price, last transaction, current balance, or to conduct transactions,
24 hours, 7 days a week, call Tele*Access(R): 1-800-638-2587 toll free
For assistance with your existing fund account, call:
Shareholder Service Center
1-800-225-5132 toll free
410-625-6500 Baltimore area
To open a brokerage account
or obtain information, call:
1-800-638-5660 toll free
Internet address:
www.troweprice.com
T. Rowe Price Associates
100 East Pratt Street
Baltimore, Maryland 21202
This report is authorized for distribution only to shareholders and to others
who have received a copy of the prospectus appropriate to the fund or funds
covered in this report.
Investor Centers:
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Invest With Conodence(R)
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T. Rowe Price Investment Services, Inc., Distributor.
