<PAGE> 1
[VANGUARD INSTITUTIONAL INDEX FUND LOGO]
ANNUAL REPORT 1995
<PAGE> 2
In this Annual Report, I am delighted to formally introduce you to John J.
Brennan, who, on January 31, 1996, will assume my responsibilities as Chief
Executive Officer of Vanguard Institutional Index Fund and the other Funds in
The Vanguard Group. Mr. Brennan will continue to serve as President of the
Funds, and I will continue to serve as Chairman of the Board.
[FIGURE 1]
As a shareholder in Vanguard's Index Funds since their inception and as
Chairman of all the Vanguard Funds, I want to tell you that I am enthusiastic
and confident that Jack Brennan is exactly the right person to succeed me as
Chief Executive Officer. To use yet another Vanguard nautical metaphor, he will
be the new captain. He has the qualities of leadership, integrity,
intelligence, and vision that must continue to be Vanguard's hallmark as we
move toward, and then into, the 21st century.
I know that he has these qualities, because Jack Brennan and I have
been working closely together since he joined Vanguard in 1982. He is a
graduate of Dartmouth College and Harvard Business School. He started as
Assistant to the Chairman and, rising like a rocket, became President in 1989.
While, at age 41, he may seem young, he is in fact older than I was when I
became Chief Executive Officer of Vanguard's predecessor organization in 1967,
at the age of 38. Most important of all, Jack is completely dedicated to the
Vanguard character, and believes in our basic mission: serving solely the
shareholder, free of any conflict of interest. He believes in holding our costs
of operation to a minimum, and in retaining our position as the lowest-cost
provider of financial services in the world. He is a true competitor, who
shares Vanguard's dedication to providing highly competitive returns to our
investors relative to the returns provided by other mutual funds with
comparable objectives. He also believes in reporting our results to
shareholders with complete candor. He has the full support of the Board of
Directors and our crew, and is committed to staying the course we have set for
Vanguard. You need have no doubt that the essential elements that drew you to
Vanguard in the first place will remain intact.
As for me, I expect to fill a useful, if less demanding, role as
Chairman of the Board. I shall keep a watchful eye over the interests of our
shareholders, our crew, and our investment policies. I shall also speak out on
industry affairs, reminding all who will listen of the primacy of the interests
of mutual fund shareholders. I will be readily available to provide Jack
Brennan with whatever wisdom I may have acquired during my lifetime of
experience in this wonderful industry and in my service as captain of Vanguard
since I founded this unique organization more than two decades ago.
In short, I'll still be around. Thank you for all your confidence in me
in the past and, in advance, for your continued confidence in Vanguard under
Jack Brennan's leadership.
/s/ JOHN C. BOGLE
- -----------------
VANGUARD INSTITUTIONAL INDEX FUND IS DESIGNED PRIMARILY FOR INSTITUTIONAL
INVESTORS. THE FUND'S PRIMARY OBJECTIVE IS TO MATCH THE PERFORMANCE OF THE
UNMANAGED STANDARD & POOR'S 500 COMPOSITE STOCK PRICE INDEX.
<PAGE> 3
CHAIRMAN'S LETTER
TO OUR SHAREHOLDERS:
Rising in almost straight-line fashion throughout 1995, the U.S. stock market
last year provided its best total return in over thirty years. Vanguard
Institutional Index Fund was among the leading mutual funds in a roaring bull
market, providing a return of +37.60%--the highest in our history--during the
twelve months ended December 31, 1995. Our Fund did an exemplary job of
tracking the Index and earned a return that outpaced fully 85% of all general
equity mutual funds.
The total return (capital change plus reinvested dividends) of the Fund
actually outpaced, by the narrowest of margins, its target benchmark, the
unmanaged Standard & Poor's 500 Composite Stock Price Index during the year, as
shown in this table:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
TOTAL RETURN
------------------
YEAR ENDED
DECEMBER 31, 1995
- ----------------------------------------------------------------------
<S> <C>
VANGUARD INSTITUTIONAL INDEX FUND +37.60%
- ----------------------------------------------------------------------
STANDARD & POOR'S 500 INDEX +37.58%
- ----------------------------------------------------------------------
</TABLE>
"Standard & Poor's(R)," "S&P 500(R)," and "500" are trademarks of The
McGraw-Hill Companies, Inc.
The Fund's return is based on net asset values of $43.22 per share on December
31, 1994, and $57.93 on December 31, 1995, with the latter figure adjusted to
take into account four quarterly dividends from net investment income totaling
$1.27 per share and a distribution of $0.16 per share from net realized capital
gains.
THE STOCK MARKET IN 1995
The great bull market in stocks we enjoyed during the year was virtually
uninterrupted, as stock prices rose in eleven of the past twelve months. The
dimension of the increase was close to record breaking, delighting the bulls
even as it astonished the bears. By year's end, the Standard & Poor's 500 Index
had generated a total return of +37.6%--its best year since 1958.
There were, as always, many opinions as to the source of the surprising
strength in the stock market. In my view, it resulted from a combination of:
(1) record-breaking corporate profits; (2) a growing speculative fever in the
marketplace, particularly in the final weeks of the year; and (3) a sharp
decline in long-term interest rates. The rise in corporate profits was
particularly striking. It's estimated that operating earnings for the companies
in the Standard & Poor's 500 Index increased about +15% in 1995, after already
rising +16% in 1994. (Since 1926, earnings growth has averaged less than +7%
per year.) If there is a cautionary signal in this boom in profits, it is that
the two-year cumulative earnings growth of +33% has been accompanied by
dividend growth of only +11%.
This subdued dividend growth in the face of sharply higher stock prices
resulted in a decline in the yield on the Index to 2.2%, the lowest level on
record. Nonetheless, the Wall Street chorus sings "this time it's different."
Dividend yield and earnings growth--the two fundamentals of stock returns--are
clearly taking a back seat to the market's high valuation of the long-term
fundamentals. This is called "speculation," and it is hardly an inconsequential
component of 1995's high returns on stocks. So, as 1996 begins, we face an
environment that is surely sobering.
The huge decline in interest rates during the year not only provided a
major stimulus to the stock market but also set bond prices afire. The yield of
the Lehman Long-Term Corporate Bond Index declined from 8.9% to 6.9% during our
1995 fiscal year, even below its level of 7.1% at the start of 1994. The 1995
decline drove long-term bond prices up by fully +19%, resulting in a total
return (including the interest coupon) of +28%--remarkably competitive with the
return on stocks. Short-term rates also declined as the Federal Reserve
reduced the Federal funds rate (the rate at which banks borrow from one
another) in July and again in December. On balance during the year, the yield
on the U.S. Treasury bill eased from 5.6% to 5.0%.
This improvement in the actual (and expected) interest rate environment
was caused
1
<PAGE> 4
[FIGURE 2]
largely by a measurable softening in the growth of the U.S. economy, perhaps
with further weakness to come. A sluggish economy, in turn, engendered
continued optimism about the benign outlook for inflation. (Indeed, the
Consumer Price Index (CPI) was quite well-behaved in 1995, rising by but +2.6%,
its smallest increase since 1986.) Investors should carefully ponder the extent
to which today's high growth rate of corporate earnings is likely to be
sustained in a slowing economy.
THE 1990S SO FAR
During the past year, growth stocks (return of +38.1%) and value stocks
(+37.0%) were relatively equal participants in the great bull market. So far
during the 1990s, there has been little overall difference between the two
investment styles, as shown in the upper chart to the left, despite some
considerable year-to-year variations. For the six years, on balance, the
average annual returns were: Standard & Poor's Growth Index +13.3%; Standard &
Poor's Value Index +12.6%.
In terms of market capitalization, there was a clear progression of
returns during 1995. Large-cap stocks led the way (+37.6%), followed by mid-cap
stocks (+33.5%), followed in turn by small-cap stocks (+28.4%). As shown in the
upper right-hand chart, however, during the 1990s, there has been little from
which to distinguish the three capitalization classes, just as has been the
case between the growth and value objectives. In short, the various market
segments seem to enjoy cycles of superiority in their (unpredictable) turns.
But, over longer periods, their respective returns tend to converge.
I should add that the extraordinary gains achieved by stocks in the
great bull market of 1995 have materially added to the total return of the
Standard & Poor's 500 Index so far during the 1990s. One year ago, the
five-year return on the Index averaged just +8.7% annually. When we tack on an
2
<PAGE> 5
ebullient 1995, the six-year return rises sharply, to +13.1%. These two
returns, in substance, nicely bracket the +10.7% long-term (since 1926) return
on stocks. In any event, I would be very surprised if the decade of the 1990s,
when it comes to its conclusion, will have matched the average return on stocks
of +17.5% per year during the Golden Eighties.
VANGUARD INSTITUTIONAL INDEX FUND IN 1995
During 1995, the Fund continued its excellent record of tracking the Standard
& Poor's 500 Index. Our return of +37.60% was just a hair better than the
return of +37.58% for the Index during the year, in spite of our expense ratio,
minuscule as it may be. Our expenses amounted to only 0.06% of assets in 1995,
as far as we know, the lowest of any equity mutual fund in the United States.
The most important fact about 1995 is doubtless that investors in
sound, broadly diversified U.S. equity funds earned very large returns, mostly
ranging from +25% to +40%. Their returns reflected a sort of breakout from the
much more modest annual gains of about +9% during the first five years of the
decade.
In markets of such force, it is surprising that the more conservative
large-cap funds led the way. Surprising or not, our Fund outpaced fully 85% of
all general equity mutual funds, touching the all-time high ranking it achieved
in 1972.(1) Indeed, our Fund's return of +37.6% surpassed the +31.1% return of
the average general equity fund by a remarkable margin of 6.5 percentage
points. The basis for this advantage can be attributed to the Index's emphasis
on the large blue-chip stocks, which led the market upward in 1995. When the
blue-chip stocks trail their smaller more aggressive cousins, this percentage
will dwindle, perhaps even strongly.
A LONGER-TERM PERSPECTIVE
It should go without saying that neither the giant absolute return nor the
significant relative return we achieved in 1995 should be considered a
representation of future returns. Nevertheless, over the years the Standard &
Poor's 500 Index has proved to be a remarkably difficult measure for active
managers to surpass. The chart below makes this point by showing the percentage
of general equity funds outpaced by the Index in each of the past 25 years.
(continued)
- ----------------
(1) When we published our booklet The Triumph Of Indexing in early 1995, little
did we know that the year would work out so favorably for index funds.
[FIGURE 3]
3
<PAGE> 6
The chart clearly shows that the odds have favored the Index. Why?
Because the Index rarely outperforms fewer than 30% of the equity funds and
often outperforms more than 70%. To put a finer point on it, the differences
are presented in the table below:
<TABLE>
<CAPTION>
- -------------------------------------------------------
PERCENTAGE OF STOCK FUNDS
OUTPACED BY THE
STANDARD & POOR'S 500 INDEX NUMBER OF YEARS
- -------------------------------------------------------
<S> <C>
LESS THAN 30% 2
30% TO 49% 8
50% TO 70% 5
MORE THAN 70% 10
- -------------------------------------------------------
</TABLE>
In short, the secret of long-term success in investment performance is: (1) not
being very bad very often; (2) accepting the fact that most years will be in
the average range; and (3) frequently being very good. Clearly, 1995 was an
outstanding example of this final factor.
Both the chart and the summary table illustrate the inherent strength
of the indexing concept. That said, you should be aware that, while the
Standard & Poor's 500 Index has tracked the total stock market very well over
time, it presently represents only about 70% of the market value of the total
U.S. stock market. In contrast, as noted earlier, the typical general equity
fund maintains substantial holdings in the smaller stocks that compose the
remaining 30% of the market. Therefore, I would emphasize, especially after
the superlative 1995 return of the Index relative to most equity funds, that
there will be years when sub-average returns will (not "may") occur. When such
years occur, please don't be concerned. Indexing is not designed to be a
year-to-year phenomenon, but a rational and productive long-range strategy.
Lest there be any mystery about the "secret" of indexing, the basis of
its success is straightforward. It assumes that: (1) all investors (including
professional managers as a group) will earn the same aggregate gross return as
the stock market as a whole (say,
[FIGURE 4]
<TABLE>
<CAPTION>
Average Annual Total Returns--Periods Ended December 31, 1995
- ------------------------------------------------------------------
Since
1 Year 5 Years Inception*
- ------------------------------------------------------------------
<S> <C> <C> <C>
INSTITUTIONAL INDEX FUND +37.60% +16.54% +13.92%
AVERAGE GENERAL EQUITY FUND +31.07 +16.45 +13.34
STANDARD & POOR'S 500 INDEX +37.58 +16.59 +13.97
</TABLE>
*Inception, July 31, 1990.
Note: Past performance is not predictive of future performance.
4
<PAGE> 7
[FIGURE 5]
+10% per year); and (2) that the net returns actually received by investors
will equal their gross returns less any sales charges, advisory fees, other
operating expenses, and portfolio turnover costs. That's really all there is to
it.
SOME ACTIVELY MANAGED FUNDS DO BETTER
There are, without question, some actively managed funds that have outpaced the
Standard & Poor's 500 Index over extended periods in the past. And most
investors will, and do, seek them out no matter how difficult it is to identify
them in advance. Such investors should realize that they face unfavorable odds
against finding funds that will outpace the Index, and very long odds indeed
against finding funds that will outpace the Index returns by a significant
margin.
To make this point, the chart above compares the ten-year return of
Vanguard's oldest and largest index fund--Vanguard Index Trust-500
Portfolio--with those of the 273 diversified mutual funds following value and
growth strategies that were in operation during the full period. It is
startling to see that only 46 of the 273 actively managed funds outpaced the
500 Portfolio and 227 did not. The chances of successfully selecting such a
fund, then, would be about one in six.
It is even more startling to see that, if we define a 2% positive or
negative margin as "statistically significant," only 15 of the 273 funds (5%)
achieved a significant advantage, while 129 (47%) incurred a significant
disadvantage. The chances of significantly outperforming, then, were about one
in eighteen. In short, the odds favor indexing. That is no doubt why, in its
August 1995 issue, Money magazine headlined: VANGUARD WINS: "INDEX FUNDS SHOULD
BE THE CORE OF MOST PORTFOLIOS TODAY."
IN SUMMARY
The competitiveness of indexing as a long-term investment strategy was
reaffirmed in 1995. The strength of the stock market during the year surprised
most observers, myself included. Vanguard Institutional Index Fund benefited
particularly because: (1) it was--at all times--100% invested in the bull
market; (2) large capitalization stocks--which dominate the Standard & Poor's
500 Index and thus our Fund--led the market; and (3) we have an ongoing
low-cost advantage. The Fund, now five and
5
<PAGE> 8
one-half years old, has succeeded in meeting its objectives and has been well
recognized by the marketplace. Total assets grew to $6.7 billion at year-end
1995.
I should note that the Fund's sibling, the 500 Portfolio of Vanguard
Index Trust, will celebrate its twentieth anniversary this coming August. This
Portfolio, virtually identical to Vanguard Institutional Index Fund but
carrying a slightly higher annual expense ratio (0.20% in 1995 for the Trust
versus 0.06% for the Fund), has demonstrated the same investment
characteristics and nearly identical relative performance. The Trust's assets
are presently $17.4 billion.
That said, 1995 was an extraordinarily bountiful year for shareholders
of Vanguard Institutional Index Fund. We should all take (only) a moment to
bask in the light of its generous rewards. We should also recognize, however,
that the financial markets are never a "one-way street," and the risks that
exist today in the stock market may well come home to roost in 1996 and erode
its 1995 bounty. Put even more bluntly, shareholders in our Institutional Index
Fund, for example, enjoyed an enhancement of nearly +38% in value during the
year. With this gain now behind us, even significant market declines seem
unlikely to take shareholders back to where they were--presumably with
satisfaction--just one year ago.
Under these circumstances, what course of action should Vanguard
Institutional Index Fund's shareholders follow? In our Annual Report one year
ago, under very different circumstances, I urged you to "stay the course,"
despite the lackluster returns provided by equities during the year. Today, you
should recognize that, despite the short-term risks of investing, the biggest
long-term risks are: (1) failing to invest in stocks at all; and (2) following
an erratic and ever-changing course. For our part, we intend to manage the Fund
under the same time-tested indexing strategy we have followed for nearly a
score of years. "Stay the course" proved wise counsel a year ago; I reiterate
it today.
Sincerely,
/s/ JOHN C. BOGLE
- -----------------
John C. Bogle
Chairman of the Board
January 12, 1996
Note: Mutual fund data from Lipper Analytical Services, Inc.
AVERAGE ANNUAL TOTAL RETURNS--THE AVERAGE ANNUAL TOTAL RETURNS FOR THE FUND
(PERIODS ENDED DECEMBER 31, 1995) ARE AS FOLLOWS:
<TABLE>
<CAPTION>
SINCE INCEPTION
-----------------------------
INCEPTION TOTAL CAPITAL INCOME
DATE 1 YEAR 5 YEARS RETURN RETURN RETURN
---- ------ ------- ------ ------- ------
<S> <C> <C> <C> <C> <C> <C>
VANGUARD INSTITUTIONAL INDEX FUND 7/31/90 +37.60% +16.54% +13.92% +10.73% +3.19%
</TABLE>
ALL OF THESE DATA REPRESENT PAST PERFORMANCE. THE INVESTMENT RETURN AND
PRINCIPAL VALUE OF AN INVESTMENT WILL FLUCTUATE SO THAT INVESTORS' SHARES, WHEN
REDEEMED, MAY BE WORTH MORE OR LESS THAN THEIR ORIGINAL COST.
6
<PAGE> 9
TOTAL INVESTMENT RETURN TABLE
The following table illustrates the results of a single-share investment in
VANGUARD INSTITUTIONAL INDEX FUND since inception through December 31, 1995.
During the period illustrated, stock prices fluctuated widely; these results
should not be considered a representation of the dividend income or capital
gain or loss that may be realized from an investment made in the Fund today.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
PERIOD PER SHARE DATA TOTAL INVESTMENT RETURN*
- --------------------------------------------------------------------------------------------------------------------------------
Institutional Index Fund S&P 500
Value with Income ------------------------------- --------
Year Ended Net Asset Capital Gains Income Dividends & Capital Capital Income Total Total
December 31 Value Distributions Dividends Gains Reinvested Return Return Return Return
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
INITIAL (7/90) $34.10 -- -- $34.10 -- -- -- --
- --------------------------------------------------------------------------------------------------------------------------------
1990 31.62 -- $ .52 32.14 - 7.3% +1.6% - 5.7% - 5.7%
- --------------------------------------------------------------------------------------------------------------------------------
1991 39.91 $.06 1.16 41.89 +26.4 +3.9 +30.3 +30.5
- --------------------------------------------------------------------------------------------------------------------------------
1992 41.45 .25 1.17 45.05 + 4.5 +3.0 + 7.5 + 7.6
- --------------------------------------------------------------------------------------------------------------------------------
1993 44.20 .18 1.19 49.56 + 7.1 +2.9 +10.0 +10.1
- --------------------------------------------------------------------------------------------------------------------------------
1994 43.22 .34 1.21 50.21 - 1.5 +2.8 + 1.3 + 1.3
- --------------------------------------------------------------------------------------------------------------------------------
1995 57.93 .16 1.27 69.10 +34.4 +3.2 +37.6 +37.6
- --------------------------------------------------------------------------------------------------------------------------------
LIFETIME +102.6% +103.1%
- --------------------------------------------------------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURN +13.9% + 14.0%
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Includes reinvestment of income dividends and any capital gains distributions
for both the Fund and the Index.
Note: No adjustment has been made for income taxes payable by shareholders on
reinvested income dividends and capital gains distributions.
7
<PAGE> 10
STATEMENT OF NET ASSETS
FINANCIAL STATEMENTS
December 31, 1995
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- --------------------------------------------------------------------------------------
COMMON STOCKS
- --------------------------------------------------------------------------------------
<S> <C> <C>
General Electric Co. 2,418,638 $ 174,142
AT&T Corp. 2,305,152 149,259
Exxon Corp. 1,798,165 144,078
The Coca-Cola Co. 1,816,445 134,871
Merck & Co., Inc. 1,789,073 117,632
Philip Morris Cos., Inc. 1,216,406 110,085
Royal Dutch Petroleum Co. ADR 776,236 109,546
Procter & Gamble Co. 993,807 82,486
Johnson & Johnson 937,997 80,316
International Business
Machines Corp. 823,561 75,562
* Microsoft Corp. 857,669 75,260
Wal-Mart Stores, Inc. 3,324,440 74,384
Intel Corp. 1,192,482 67,673
Mobil Corp. 572,834 64,157
PepsiCo, Inc. 1,140,954 63,751
American International
Group, Inc. 686,539 63,505
Bristol-Myers Squibb Co. 734,428 63,069
BellSouth Corp. 1,438,584 62,578
Hewlett-Packard Co. 741,129 62,070
GTE Corp. 1,405,243 61,831
Pfizer, Inc. 918,399 57,859
General Motors Corp. 1,082,272 57,225
E.I. du Pont de Nemours & Co. 804,179 56,192
Amoco Corp. 719,337 51,702
SBC Communications Inc. 882,438 50,740
Chevron Corp. 944,491 49,586
Federal National Mortgage Assn. 394,993 49,028
Motorola, Inc. 854,098 48,684
Abbott Laboratories, Inc. 1,144,666 47,790
Ameritech Corp. 802,086 47,323
McDonald's Corp. 1,004,923 45,347
Ford Motor Co. 1,555,351 45,105
Eli Lilly & Co. 798,669 44,925
The Walt Disney Co. 756,964 44,661
American Home Products Corp. 452,798 43,921
Bell Atlantic Corp. 633,215 42,346
Citicorp 615,476 41,391
Minnesota Mining &
Manufacturing Co. 607,672 40,258
The Boeing Co. 496,924 38,946
BankAmerica Corp. 535,784 34,692
Gillette Co. 642,585 33,495
NYNEX Corp. 618,805 33,415
Kimberly-Clark Corp. 403,285 33,372
Eastman Kodak Co. 494,951 33,162
Home Depot, Inc. 690,415 33,054
Columbia/HCA Healthcare Corp. 644,621 32,714
Unilever NV ADR 231,736 32,617
Chrysler Corp. 554,006 30,678
Texaco Inc. 382,464 30,023
* Cisco Systems, Inc. 396,203 29,567
Schering-Plough Corp. 532,265 29,141
Travelers Group Inc. 462,109 29,055
American Express Co. 701,491 29,024
* Pharmacia & Upjohn, Inc. 729,382 28,264
Capital Cities/ABC, Inc. 222,872 27,497
NationsBank, Inc. 391,036 27,226
Allstate Corp. 649,290 26,702
Dow Chemical Co. 379,108 26,680
* Oracle Corp. 629,398 26,592
Emerson Electric Co. 325,052 26,573
Atlantic Richfield Co. 232,811 25,784
MCI Communications Corp. 981,496 25,642
Anheuser-Busch Co., Inc. 368,305 24,630
U S WEST Communications Group 681,722 24,372
Kellogg Co. 314,856 24,323
Schlumberger Ltd. 350,292 24,258
* Viacom International Class B 504,706 23,910
Southern Co. 964,619 23,754
Lockheed Martin Corp. 290,011 22,911
* Amgen, Inc. 385,208 22,824
Sara Lee Corp. 701,057 22,346
Sears, Roebuck & Co. 564,540 22,017
Federal Home Loan Mortgage Corp. 261,741 21,855
J.P. Morgan & Co., Inc. 272,075 21,834
Campbell Soup Co. 360,937 21,656
First Data Corp. 322,889 21,593
Xerox Corp. 156,158 21,394
Banc One Corp. 566,601 21,389
Chemical Banking Corp. 362,049 21,270
Time Warner, Inc. 559,199 21,180
WMX Technologies Inc. 702,109 20,976
Pacific Telesis Group 620,355 20,859
Monsanto Co. 166,878 20,443
* AirTouch Communications 716,681 20,246
Sprint Corp. 505,060 20,139
Computer Associates
International, Inc. 349,939 19,903
Union Pacific Corp. 297,733 19,650
AlliedSignal Inc. 409,604 19,456
Warner-Lambert Co. 195,655 19,003
* Tele-Communications Inc. Class A 945,359 18,789
The Seagram Co. Ltd. 540,304 18,708
Medtronic, Inc. 334,720 18,702
* COMPAQ Computer Corp. 384,866 18,474
General Re Corp. 118,608 18,384
First Chicago NBD Corp. 464,600 18,352
H.J. Heinz Co. 534,852 17,717
Pacific Gas & Electric Co. 614,511 17,437
Norwest Corp. 511,211 16,870
Caterpillar, Inc. 285,994 16,802
</TABLE>
8
<PAGE> 11
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- --------------------------------------------------------------------------------------
<S> <C> <C>
Baxter International, Inc. 400,778 $ 16,783
United Technologies Corp. 176,628 16,758
Rockwell International Corp. 314,435 16,626
Raytheon Co. 350,927 16,581
United Healthcare Corp. 252,945 16,568
Burlington Northern Santa Fe Corp. 205,602 16,037
The Dun & Bradstreet Corp. 245,231 15,879
Northern Telecom Ltd. 367,714 15,812
The Chase Manhattan Corp. 259,105 15,708
J.C. Penney Co., Inc. 328,020 15,622
Automatic Data Processing, Inc. 208,867 15,508
May Department Stores Co. 361,110 15,257
Wells Fargo & Co. 69,886 15,095
First Interstate Bancorp. 110,034 15,020
PNC Bank Corp. 464,514 14,981
McDonnell Douglas Corp. 162,192 14,922
Norfolk Southern Corp. 187,885 14,913
Colgate-Palmolive Co. 210,783 14,807
Fleet Financial Group, Inc. 355,947 14,505
CPC International, Inc. 211,089 14,486
Nike, Inc. Class B 207,011 14,413
ConAgra, Inc. 345,363 14,246
Texas Instruments, Inc. 273,425 14,150
The Bank of New York Co., Inc. 289,613 14,119
Duke Power Co. 296,694 14,056
* Digital Equipment Corp. 217,851 13,970
International Paper Co. 368,625 13,962
CSX Corp. 304,755 13,904
Enron Corp. 364,380 13,892
Archer-Daniels-Midland Co. 767,767 13,820
First Union Corp. 246,808 13,729
Aluminum Co. of America 256,249 13,549
Barrick Gold Corp. 511,653 13,495
Texas Utilities Co. 327,068 13,451
Deere & Co. 379,314 13,371
Loews Corp. 170,585 13,370
General Mills, Inc. 227,409 13,133
PPG Industries, Inc. 283,864 12,987
Merrill Lynch & Co., Inc. 254,441 12,976
* U S WEST Media Group 682,620 12,970
Phillips Petroleum Co. 379,261 12,942
Tenneco, Inc. 258,287 12,817
Weyerhaeuser Co. 294,366 12,731
* Sun Microsystems, Inc. 275,044 12,549
Gannett Co., Inc. 203,034 12,461
KeyCorp 342,857 12,429
FPL Group, Inc. 267,763 12,417
The Chubb Corp. 126,077 12,198
AMP, Inc. 315,119 12,093
Albertson's, Inc. 365,856 12,028
Micron Technology Inc. 298,961 11,846
American Brands, Inc. 262,860 11,730
* Boston Scientific Corp. 236,642 11,595
Dean Witter Discover & Co. 244,622 11,497
Aetna Life & Casualty Co. 165,524 11,463
SCEcorp 644,825 11,446
CIGNA Corp. 109,935 11,351
SunTrust Banks, Inc. 165,396 11,330
Wachovia Corp. 246,664 11,285
Mellon Bank Corp. 204,625 10,999
American Electric Power Co., Inc. 269,760 10,925
Consolidated Edison Co. of
New York, Inc. 340,250 10,888
Public Service Enterprise
Group Inc. 354,307 10,851
Walgreen Co. 357,155 10,670
Corning, Inc. 332,022 10,625
Unocal Corp. 357,860 10,423
American General Corp. 297,586 10,378
Dominion Resources, Inc. 251,243 10,364
Pitney Bowes, Inc. 220,113 10,345
U.S. Healthcare, Inc. 222,349 10,311
Unicom Corp. 310,972 10,184
Alcan Aluminium Ltd. 326,145 10,151
* Applied Materials, Inc. 258,292 10,138
Illinois Tool Works, Inc. 170,236 10,044
The Goodyear Tire & Rubber Co. 220,747 10,016
Occidental Petroleum Corp. 460,709 9,848
Mattel, Inc. 319,755 9,832
PECO Energy Corp. 321,414 9,683
Entergy Corp. 329,811 9,647
Ralston-Purina Group 153,324 9,564
Marsh & McLennan Cos., Inc. 105,970 9,405
Westinghouse Electric Corp. 567,736 9,368
UST Inc. 279,944 9,343
First Bank System, Inc. 187,992 9,329
Houston Industries, Inc. 380,348 9,223
Georgia-Pacific Corp. 133,000 9,127
Hercules, Inc. 161,506 9,105
Browning-Ferris Industries, Inc. 307,849 9,082
Morgan Stanley Group, Inc. 112,479 9,069
The Limited, Inc. 518,610 9,011
ITT Corp. 168,944 8,954
Honeywell, Inc. 183,848 8,940
First Fidelity Bancorp. 118,429 8,927
Wrigley (Wm.) Jr. Co. 168,234 8,832
Loral Corp. 249,580 8,829
* CUC International, Inc. 258,578 8,824
The Gap, Inc. 208,726 8,766
R.R. Donnelley & Sons Co. 222,464 8,759
PacifiCorp 411,669 8,748
* Toys R Us, Inc. 395,512 8,602
Sysco Corp. 263,890 8,576
Air Products & Chemicals, Inc. 161,848 8,537
</TABLE>
9
<PAGE> 12
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- --------------------------------------------------------------------------------------
<S> <C> <C>
* Cabletron Systems, Inc. 104,231 $ 8,443
Halliburton Co. 165,630 8,385
Household International, Inc. 141,276 8,353
Placer Dome Group, Inc. 346,184 8,352
W.R. Grace & Co. 140,901 8,331
Barnett Banks, Inc. 140,477 8,288
Textron, Inc. 122,238 8,251
* AMR Corp. 110,549 8,208
* ITT Hartford Group, Inc. 168,944 8,173
USX-Marathon Group 416,171 8,115
Lincoln National Corp. 150,526 8,091
ALLTEL Corp. 273,679 8,074
* Federated Department Stores 292,944 8,056
Winn Dixie Stores, Inc. 218,107 8,043
Conrail, Inc. 113,408 7,939
Fluor Corp. 120,274 7,938
MBNA Corp. 214,330 7,903
Tyco International Ltd. 220,437 7,853
Dayton-Hudson Corp. 104,371 7,828
Lowes Cos., Inc. 232,530 7,790
Central & South West Corp. 278,624 7,767
International Flavors &
Fragrances, Inc. 160,670 7,712
Morton International, Inc. 214,095 7,681
Carolina Power & Light Co. 222,096 7,662
Boatmen's Bancshares, Inc. 187,185 7,651
CoreStates Financial Corp. 201,896 7,647
Bankers Trust New York Corp. 113,931 7,576
* Novell, Inc. 534,524 7,550
Bank of Boston Corp. 162,481 7,515
Union Carbide Corp. 198,734 7,452
Alco Standard Corp. 162,185 7,400
Avon Products, Inc. 97,921 7,381
Service Corp. International 167,701 7,379
TRW, Inc. 94,665 7,337
U.S. Bancorp 218,501 7,320
Hershey Foods Corp. 112,094 7,286
Eastman Chemical 116,284 7,282
Masco Corp. 231,786 7,272
Genuine Parts Co. 177,245 7,267
DTE Energy Co. 209,441 7,226
Nucor Corp. 126,270 7,213
Transamerica Corp. 98,949 7,211
Burlington Resources, Inc. 182,715 7,172
Becton, Dickinson & Co. 95,190 7,139
Amerada Hess Corp. 134,192 7,112
National City Corp. 213,231 7,063
CINergy Corp. 226,098 6,924
Marriott International 180,623 6,909
Praxair, Inc. 201,880 6,788
St. Paul Cos., Inc. 121,978 6,785
Great Lakes Chemical Corp. 93,447 6,728
Pioneer Hi Bred International 120,831 6,721
* 3 Com Corp. 143,616 6,696
* The Kroger Co. 178,410 6,690
The Quaker Oats Co. 193,630 6,680
Comerica, Inc. 165,289 6,632
Williams Cos., Inc. 146,523 6,429
Dresser Industries, Inc. 263,360 6,419
* Silicon Graphics, Inc. 232,500 6,394
* Humana, Inc. 233,545 6,393
The McGraw-Hill Cos. 72,145 6,286
SAFECO Corp. 181,835 6,273
Rohm & Haas Co. 97,416 6,271
Phelps Dodge Corp. 100,001 6,225
Union Electric Co. 147,351 6,152
Newmont Mining Corp. 135,823 6,146
* DSC Communications Corp. 166,443 6,138
Consolidated Natural Gas Co. 134,711 6,113
H & R Block, Inc. 150,702 6,103
Baltimore Gas & Electric Co. 212,919 6,068
* LSI Logic Corp. 184,781 6,052
Dover Corp. 163,936 6,045
* Federal Express Corp. 81,571 6,026
Panhandle Eastern Corp. 216,036 6,022
Eaton Corp. 111,935 6,002
* Tenet Healthcare Corp. 288,517 5,987
General Public Utilities Corp. 174,100 5,919
Newell Co. 228,760 5,919
Champion International Corp. 139,226 5,847
Rubbermaid, Inc. 227,972 5,813
UNUM Corp. 105,045 5,777
PP&L Resources Inc. 229,570 5,739
Cooper Industries, Inc. 155,640 5,720
American Stores Co. 213,601 5,714
Inco Ltd. 171,679 5,708
Whirlpool Corp. 106,532 5,673
Coastal Corp. 151,543 5,645
* Computer Sciences Corp. 80,317 5,642
Freeport-McMoRan Copper &
Gold Inc. Class B 200,294 5,633
Apple Computer, Inc. 177,063 5,622
Tribune Co. 91,805 5,612
Providian Corp. 137,406 5,599
Dow Jones & Co., Inc. 140,067 5,585
Ingersoll-Rand Co. 157,190 5,521
Times Mirror Co. Class A 162,096 5,491
* Crown Cork & Seal Co., Inc. 130,784 5,460
Delta Air Lines, Inc. 73,847 5,455
Salomon, Inc. 153,548 5,451
The Clorox Co. 76,006 5,444
General Dynamics Corp. 90,890 5,374
Reynolds Metals Co. 91,592 5,186
Ohio Edison Co. 220,151 5,174
</TABLE>
10
<PAGE> 13
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- --------------------------------------------------------------------------------------
<S> <C> <C>
Republic New York Corp. 81,406 5,057
Great Western Financial Corp. 197,218 5,029
Sherwin-Williams Co. 123,036 5,014
Baker Hughes, Inc. 203,769 4,967
Interpublic Group of Cos., Inc. 112,838 4,894
W.W. Grainger, Inc. 73,340 4,859
VF Corp. 92,102 4,858
Union Camp Corp. 101,895 4,853
Southwest Airlines Co. 207,495 4,824
Kmart Corp. 662,853 4,806
Northern States Power Co. 97,722 4,801
Jefferson-Pilot Corp. 102,980 4,789
Nordstrom, Inc. 118,954 4,788
* Tellabs, Inc. 127,756 4,727
Kerr-McGee Corp. 74,435 4,727
Golden West Financial Corp. 84,883 4,690
Torchmark Corp. 103,612 4,688
Melville Corp. 151,561 4,661
Dillard Department Stores Class A 163,089 4,648
Northrop Grumman Corp. 71,319 4,564
Engelhard Corp. 207,908 4,522
H.F. Ahmanson & Co. 169,503 4,492
Premark International, Inc. 88,312 4,471
Willamette Industries, Inc. 79,733 4,465
Sonat, Inc. 124,901 4,450
Pall Corp. 165,113 4,437
Knight-Ridder, Inc. 70,861 4,429
Harcourt General, Inc. 105,040 4,399
Black & Decker Corp. 124,109 4,375
* St. Jude Medical, Inc. 101,358 4,333
* Price/Costco Inc. 282,322 4,305
Hilton Hotels Corp. 69,724 4,288
Laidlaw Inc. Class B 417,582 4,280
Dana Corp. 146,307 4,279
Rite Aid Corp. 121,287 4,154
New York Times Co. Class A 139,032 4,119
Johnson Controls, Inc. 59,316 4,078
Westvaco Corp. 146,492 4,065
The Mead Corp. 77,645 4,057
ITT Industries, Inc. 168,944 4,055
Mallinckrodt Group, Inc. 110,767 4,029
The Dial Corp. 135,757 4,022
Comcast Corp. Class A Special 221,468 4,014
* National Semiconductor Corp. 178,089 3,962
* Ceridian Corp. 95,775 3,951
Hasbro, Inc. 126,913 3,934
* Western Atlas Inc. 76,840 3,880
Circuit City Stores, Inc. 140,272 3,875
Avery Dennison Corp. 76,721 3,846
Tandy Corp. 91,670 3,804
Louisiana-Pacific Corp. 156,136 3,786
USX-U.S. Steel Group 119,374 3,671
Parker Hannifin Corp. 106,762 3,657
Brown-Forman Corp. Class B 99,900 3,646
Raychem Corp. 63,609 3,618
* Harrah's Entertainment, Inc. 148,667 3,605
Temple-Inland Inc. 81,223 3,584
Beneficial Corp. 76,759 3,579
* FMC Corp. 52,918 3,579
Sigma Aldrich Corp. 72,145 3,571
Whitman Corp. 151,858 3,531
Federal Paper Board Co., Inc. 68,046 3,530
Cyprus Amax Minerals Co. 134,637 3,517
Deluxe Corp. 119,618 3,469
Pacific Enterprises 122,566 3,462
Wendy's International, Inc. 157,403 3,345
Brunswick Corp. 138,447 3,323
Armstrong World Industries Inc. 53,345 3,307
* Owens-Corning Fiberglas Corp. 73,659 3,305
The Stanley Works 63,905 3,291
Bausch & Lomb, Inc. 82,561 3,271
Ashland Inc. 91,998 3,231
* Columbia Gas Systems, Inc. 73,213 3,212
Manor Care Inc. 90,410 3,164
Echlin, Inc. 86,436 3,155
Maytag Corp. 155,793 3,155
Homestake Mining Co. 199,796 3,122
Polaroid Corp. 65,482 3,102
SuperValu Inc. 98,082 3,090
Harris Corp. 56,551 3,089
Reebok International Ltd. 109,107 3,082
Allergan, Inc. 93,051 3,024
Liz Claiborne, Inc. 107,657 2,987
Sun Co., Inc. 109,032 2,985
American Greetings Corp. Class A 107,669 2,974
Cooper Tire & Rubber Co. 120,699 2,972
* Biomet, Inc. 166,978 2,964
* ALZA Corp. 118,987 2,945
Nalco Chemical Co. 97,102 2,925
James River Corp. 118,361 2,855
Pennzoil Co. 67,067 2,834
Ryder System, Inc. 114,339 2,830
Ecolab, Inc. 93,544 2,806
Caliber System Inc. 56,424 2,758
USF&G Corp. 162,714 2,746
Darden Restaurants Inc. 228,787 2,717
Worthington Industries, Inc. 130,923 2,717
Giant Food, Inc. Class A 85,968 2,708
Moore Corp. Ltd. 144,004 2,682
* Fruit of the Loom, Inc. 109,490 2,669
Millipore Corp. 64,732 2,662
C.R. Bard, Inc. 82,063 2,647
Snap-On Inc. 58,229 2,635
</TABLE>
11
<PAGE> 14
STATEMENT OF NET ASSETS (continued)
<TABLE>
<CAPTION>
Market
Value
Shares (000)+
- --------------------------------------------------------------------------------------
<S> <C> <C>
Freeport-McMoRan Copper &
Gold Inc. Class A 92,217 $ 2,582
The BF Goodrich Co. 37,738 2,571
Woolworth Corp. 191,993 2,496
Advanced Micro Devices, Inc. 150,461 2,483
Foster Wheeler Corp. 57,837 2,458
Mercantile Stores Co., Inc. 53,145 2,458
Boise Cascade Corp. 69,498 2,406
Tektronix, Inc. 48,465 2,381
Paccar, Inc. 56,061 2,355
Harnischfeger Industries Inc. 70,146 2,332
Autodesk, Inc. 67,850 2,307
Perkin-Elmer Corp. 60,998 2,303
Santa Fe Pacific Gold Corp. 189,532 2,298
Pep Boys (Manny, Moe & Jack) 89,515 2,294
* Bethlehem Steel Corp. 162,453 2,274
National Service Industries, Inc. 69,677 2,256
General Signal Corp. 68,467 2,217
* Varity Corp. 59,327 2,202
Comcast Corp. Class A 124,726 2,183
* Andrew Corp. 56,091 2,145
Cummins Engine Co., Inc. 57,917 2,143
Thomas & Betts Corp. 28,899 2,131
Louisiana Land & Exploration Co. 48,308 2,071
* King World Productions, Inc. 53,064 2,063
Teledyne Inc. 80,456 2,062
* Oryx Energy Co. 150,731 2,016
Niagara Mohawk Power Corp. 208,323 2,005
NICOR, Inc. 72,598 1,997
Stone Container Corp. 138,185 1,987
TJX Cos., Inc. 104,437 1,971
ASARCO, Inc. 61,298 1,962
Bemis Co., Inc. 76,259 1,954
Echo Bay Mines Ltd. 183,058 1,899
Pittston Services Group 60,240 1,890
Briggs & Stratton Corp. 42,520 1,844
EG & G, Inc. 74,690 1,811
Shared Medical Systems Corp. 33,483 1,808
* Tandem Computers, Inc. 168,401 1,789
Inland Steel Industries, Inc. 70,404 1,769
United States Surgical Corp. 82,371 1,761
McDermott International, Inc. 78,461 1,726
The Timkin Co. 45,017 1,722
Fleetwood Enterprises, Inc. 66,481 1,712
Potlatch Corp. 42,161 1,687
Scientific-Atlanta, Inc. 111,189 1,668
Meredith Corp. 39,775 1,666
Consolidated Freightways, Inc. 62,801 1,664
Crane Co. 43,527 1,605
ENSERCH Corp. 98,727 1,604
Peoples Energy Corp. 50,405 1,600
NorAm Energy Corp. 179,727 1,595
Russell Corp. 56,453 1,567
* Beverly Enterprises Inc. 142,194 1,511
Ogden Corp. 70,540 1,508
USLIFE Corp. 49,653 1,483
* Amdahl Corp. 171,844 1,461
Centex Corp. 40,866 1,420
Longs Drug Stores, Inc. 29,326 1,404
* Unisys Corp. 245,816 1,383
Alberto-Culver Co. Class B 39,788 1,368
Jostens Inc. 55,837 1,354
Pulte Corp. 38,672 1,300
Safety-Kleen Corp. 82,808 1,294
Cincinnati Milacron, Inc. 49,043 1,287
Great Atlantic & Pacific Tea
Co., Inc. 54,756 1,259
* Santa Fe Energy Resources, Inc. 130,800 1,259
Adolph Coors Co. Class B 55,112 1,219
Alexander & Alexander
Services, Inc. 63,554 1,208
Ball Corp. 43,631 1,200
* Rowan Cos., Inc. 121,362 1,199
Trinova Corp. 41,824 1,197
* USAir Group, Inc. 90,106 1,194
Springs Industries Inc. Class A 28,764 1,190
* Navistar International Corp. 107,797 1,132
Fleming Cos., Inc. 53,867 1,111
Helmerich & Payne, Inc. 35,480 1,055
* Intergraph Corp. 66,042 1,040
Eastern Enterprises 29,157 1,028
* Bally Entertainment Corp. 67,658 947
John H. Harland Co. 44,362 926
* Armco, Inc. 153,713 903
* Cray Research, Inc. 36,460 902
ONEOK, Inc. 39,078 894
* Viacom International Class A 18,016 827
Giddings & Lewis, Inc. 49,424 803
Midlantic Corp. 12,000 787
Luby's Cafeterias, Inc. 33,774 752
Community Psychiatric Centers 61,178 750
* Data General Corp. 53,789 740
NACCO Industries, Inc. Class A 12,950 719
Kaufman & Broad Home Corp. 46,945 698
* Shoney's Inc. 57,906 594
Outboard Marine Corp. 28,324 577
Stride Rite Corp. 68,644 515
* Ryan's Family Steak Houses, Inc. 74,729 514
Yellow Corp. 39,367 487
Charming Shoppes, Inc. 141,617 398
Brown Group, Inc. 24,549 350
Handleman Co. 46,993 270
Zurn Industries, Inc. 11,359 243
- --------------------------------------------------------------------------------------
TOTAL COMMON STOCKS (99.7%)(1)
(Cost $5,108,451) 6,653,182
- --------------------------------------------------------------------------------------
</TABLE>
12
<PAGE> 15
<TABLE>
<CAPTION>
Face Market
Amount Value
(000) (000)+
- --------------------------------------------------------------------------------------
<S> <C> <C>
TEMPORARY CASH INVESTMENTS (.7%)
- --------------------------------------------------------------------------------------
COMMERCIAL PAPER
UBS Finance
5.85%, 1/2/96 $42,521 $ 42,514
U.S. TREASURY BILL--NOTE D
5.33%, 3/21/96 2,500 2,473
- --------------------------------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(Cost $44,986) 44,987
- --------------------------------------------------------------------------------------
TOTAL INVESTMENTS (100.4%)
(Cost $5,153,437) 6,698,169
- --------------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (-.4%)
- --------------------------------------------------------------------------------------
Other Assets--Note E 209,746
Liabilities--Note E (233,525)
---------
(23,779)
- ---------------------------------------------------------------------------------------
NET ASSETS (100%)
- ---------------------------------------------------------------------------------------
Applicable to 115,219,583 outstanding
shares of beneficial interest
(unlimited authorization) $6,674,390
- ---------------------------------------------------------------------------------------
NET ASSET VALUE PER SHARE $57.93
=======================================================================================
</TABLE>
+ See Note A to Financial Statements.
* Non-Income Producing Security.
(1)The combined market value of common stocks and Standard & Poor's 500 Index
futures contracts represents 100.2% of net assets.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
AT DECEMBER 31, 1995,
NET ASSETS CONSISTED OF:
- ---------------------------------------------------------------------------------------
Amount Per
(000) Share
----- -----
<S> <C> <C>
Paid in Capital--Note C $5,113,461 $44.38
Undistributed Net
Investment Income 4,834 .04
Accumulated Net
Realized Gains--Note C 11,549 .10
Unrealized Appreciation
(Depreciation)--Note D:
Investment Securities 1,544,732 13.41
Futures Contracts (186) --
- ---------------------------------------------------------------------------------------
NET ASSETS $6,674,390 $57.93
- ---------------------------------------------------------------------------------------
</TABLE>
13
<PAGE> 16
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended
December 31, 1995
(000)
- -------------------------------------------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME
INCOME
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 121,661
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 501
- ------------------------------------------------------------------------------------------------------------------
Total Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 122,162
- ------------------------------------------------------------------------------------------------------------------
EXPENSES
The Vanguard Group--Note B . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,057
- ------------------------------------------------------------------------------------------------------------------
Total Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,057
- ------------------------------------------------------------------------------------------------------------------
Net Investment Income . . . . . . . . . . . . . . . . . . . . . . . 119,105
- ------------------------------------------------------------------------------------------------------------------
REALIZED NET GAIN
Investment Securities Sold . . . . . . . . . . . . . . . . . . . . . . . . . . . 34,733
Futures Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,133
- ------------------------------------------------------------------------------------------------------------------
Realized Net Gain . . . . . . . . . . . . . . . . . . . . . . . . . 44,866
- ------------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION)
Investment Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,312,241
Futures Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (378)
- -------------------------------------------------------------------------------------------------------------------
Change in Unrealized Appreciation (Depreciation) . . . . . . . . . . 1,311,863
- ------------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets Resulting from Operations . . . . . . . . $1,475,834
==================================================================================================================
</TABLE>
14
<PAGE> 17
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED Year Ended
DECEMBER 31, 1995 December 31, 1994
(000) (000)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net Investment Income . . . . . . . . . . . . . . . . . . . . . $ 119,105 $ 86,437
Realized Net Gain . . . . . . . . . . . . . . . . . . . . . . . 44,866 59,110
Change in Unrealized Appreciation (Depreciation) . . . . . . . . 1,311,863 (104,278)
- -------------------------------------------------------------------------------------------------------------------
Net Increase in Net Assets
Resulting from Operations . . . . . . . . . . . . . . . . . 1,475,834 41,269
- ------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS (1)
Net Investment Income . . . . . . . . . . . . . . . . . . . . . (126,041) (86,378)
Realized Net Gain . . . . . . . . . . . . . . . . . . . . . . . (17,546) (24,704)
- -------------------------------------------------------------------------------------------------------------------
Total Distributions . . . . . . . . . . . . . . . . . . . . . (143,587) (111,082)
- -------------------------------------------------------------------------------------------------------------------
NET EQUALIZATION CREDITS--NOTE A . . . . . . . . . . . . . . . . . 9,730 1,482
- ------------------------------------------------------------------------------------------------------------------
CAPITAL SHARE TRANSACTIONS (2)
Issued -- Regular . . . . . . . . . . . . . . . . . . . . . . 2,362,829 872,789
-- In Lieu of Cash Distributions . . . . . . . . . . . 128,566 101,035
-- Exchange . . . . . . . . . . . . . . . . . . . . . 173,742 62,420
Redeemed -- Regular . . . . . . . . . . . . . . . . . . . . . . (543,904) (731,115)
-- Exchange . . . . . . . . . . . . . . . . . . . . . (53,975) (74,579)
- -------------------------------------------------------------------------------------------------------------------
Net Increase from Capital Share Transactions . . . . . . . . . 2,067,258 230,550
- ------------------------------------------------------------------------------------------------------------------
Total Increase . . . . . . . . . . . . . . . . . . . . . . . . 3,409,235 162,219
- ------------------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Year . . . . . . . . . . . . . . . . . . . . . . . 3,265,155 3,102,936
- ------------------------------------------------------------------------------------------------------------------
End of Year (3) . . . . . . . . . . . . . . . . . . . . . . . . $6,674,390 $3,265,155
==================================================================================================================
(1) Distributions Per Share
Net Investment Income . . . . . . . . . . . . . . . . . . . $1.27 $1.21
Realized Net Gain . . . . . . . . . . . . . . . . . . . . . $ .16 $ .34
- ------------------------------------------------------------------------------------------------------------------
(2) Shares Issued and Redeemed
Issued . . . . . . . . . . . . . . . . . . . . . . . . . . 48,924 21,720
Issued in Lieu of Cash Distributions . . . . . . . . . . . 2,354 2,327
Redeemed . . . . . . . . . . . . . . . . . . . . . . . . . (11,612) (18,694)
- -------------------------------------------------------------------------------------------------------------------
39,666 5,353
- ------------------------------------------------------------------------------------------------------------------
(3) Undistributed Net Investment Income . . . . . . . . . . . $ 4,834 $ 2,040
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
15
<PAGE> 18
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------
For a Share Outstanding Throughout Each Year 1995 1994 1993 1992 1991
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR . . . . . . . . . $43.22 $44.20 $41.45 $39.91 $31.62
------- ------- ------- ------- -------
INVESTMENT OPERATIONS
Net Investment Income . . . . . . . . . . . . . . 1.28 1.23 1.20 1.17 1.16
Net Realized and Unrealized Gain (Loss)
on Investments . . . . . . . . . . . . . . . . 14.86 (.66) 2.92 1.79 8.35
------- ------- ------- ------- -------
TOTAL FROM INVESTMENT OPERATIONS . . . . 16.14 .57 4.12 2.96 9.51
- -------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income . . . . . . (1.27) (1.21) (1.19) (1.17) (1.16)
Distributions from Realized Capital Gains . . . . (.16) (.34) (.18) (.25) (.06)
------- ------- ------- ------- -------
TOTAL DISTRIBUTIONS . . . . . . . . . . . (1.43) (1.55) (1.37) (1.42) (1.22)
- -------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR . . . . . . . . . . . . $57.93 $43.22 $44.20 $41.45 $39.91
=========================================================================================================================
TOTAL RETURN . . . . . . . . . . . . . . . . . . . . +37.60% +1.31% +10.02% +7.54% +30.34%
- -------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
- ------------------------
Net Assets, End of Year (Millions) . . . . . . . . . $6,674 $3,265 $3,103 $1,525 $1,069
Ratio of Expenses to Average Net Assets . . . . . . . .06% .07% .07% .07% .08%
Ratio of Net Investment Income to
Average Net Assets . . . . . . . . . . . . . . . 2.49% 2.80% 2.72% 2.94% 3.15%
Portfolio Turnover Rate . . . . . . . . . . . . . . . 4%+ 23%+ 4%+ 9%+ 4%
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
+ Portfolio turnover rates excluding in-kind redemptions were 4%, 19%, 3%, and
6%, respectively.
16
<PAGE> 19
NOTES TO FINANCIAL STATEMENTS
Vanguard Institutional Index Fund is registered under the Investment Company
Act of 1940 as a diversified open-end investment company.
A. The following significant accounting policies are in conformity with
generally accepted accounting principles for investment companies. Such
policies are consistently followed by the Fund in the preparation of financial
statements.
1. SECURITY VALUATION: Securities listed on an exchange are valued at the
latest quoted sales prices as of the close of the New York Stock Exchange
(generally 4:00 PM) on the valuation date; securities not traded are valued
at the mean of the latest quoted bid and asked prices; securities not
listed are valued at the latest quoted bid prices. Temporary cash
investments are valued at amortized cost which approximates market value.
2. FEDERAL INCOME TAXES: The Fund intends to continue to qualify as a
regulated investment company and distribute all of its taxable income.
Accordingly, no provision for Federal income taxes is required in the
financial statements.
3. EQUALIZATION: The Fund follows the accounting practice known as
"equalization," under which a portion of the price of capital shares issued
and redeemed, equivalent to undistributed net investment income per share
on the date of the transaction, is credited or charged to undistributed
income. As a result, undistributed income per share is unaffected by Fund
share sales or redemptions.
4. FUTURES: The Fund utilizes Standard & Poor's 500 Index futures contracts
to a limited extent, with the objectives of maintaining full exposure to
the stock market, enhancing returns, maintaining liquidity and minimizing
transaction costs. The Fund may purchase futures contracts to immediately
position incoming cash in the market, thereby simulating a fully invested
position in the underlying index while maintaining a cash balance for
liquidity. In the event of redemptions, the Fund may pay redeeming
shareholders from its cash balance and reduce its futures position
accordingly. Returns may be enhanced by using futures contracts instead of
the underlying securities when futures are believed to be priced more
attractively than the underlying securities.
The primary risks associated with the use of futures contracts are
imperfect correlation between changes in market values of stocks contained
in the underlying index and the prices of futures contracts, and the
possibility of an illiquid market. Futures contracts are valued based upon
their quoted daily settlement prices. Fluctuations in the values of futures
contracts are recorded as unrealized appreciation (depreciation) until
terminated, at which time realized gains (losses) are recognized.
Unrealized appreciation (depreciation) related to open futures contracts is
required to be treated as realized gain (loss) for Federal income tax
purposes.
5. OTHER: Security transactions are accounted for on the date the securities
are purchased or sold. Costs used in determining realized gains and losses
on the sale of investment securities are those of specific securities sold.
Dividend income and distributions to shareholders are recorded on the
ex-dividend date.
B. The Vanguard Group, Inc. provides investment advisory, corporate
management, administrative, marketing, and distribution services and pays for
all other operating expenses, except for taxes, in return for a fee calculated
at an annual percentage rate of the average net assets of the Fund. For the
year ended December 31, 1995, the fee for such services represented an
effective annual rate of .06 of 1% of average net assets. The Fund's trustees
and officers are also directors and officers of Vanguard.
17
<PAGE> 20
NOTES TO FINANCIAL STATEMENTS (continued)
C. During the year ended December 31, 1995, purchases and sales of investment
securities other than U.S. Government securities and temporary cash investments
were $2,258,953,000 and $207,448,000, respectively.
During the year ended December 31, 1995, the Fund realized $11,966,000 of net
capital gains resulting from in-kind redemptions. Such gains are not taxable
to the Fund and therefore will not be distributed to shareholders; accordingly,
such gains have been reclassified from accumulated net realized gains to paid
in capital.
D. At December 31, 1995, unrealized appreciation of investment securities for
financial reporting and Federal income tax purposes was $1,544,732,000, of
which $1,610,296,000 related to appreciated securities and $65,564,000 related
to depreciated securities.
At December 31, 1995, the aggregate settlement value of open Standard & Poor's
500 Index futures contracts expiring in March 1996, the related unrealized
depreciation, and the market value of securities deposited as initial margin
for those contracts were $31,850,000, $186,000, and $2,473,000, respectively.
E. The market value of securities on loan to broker/dealers at December 31,
1995, was $7,265,000, for which the Fund had received cash collateral of
$7,394,000.
18
<PAGE> 21
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Trustees
Vanguard Institutional Index Fund
In our opinion, the accompanying statement of net assets and the related
statements of operations and of changes in net assets and the financial
highlights present fairly, in all material respects, the financial position of
Vanguard Institutional Index Fund (the "Fund") at December 31, 1995, and the
results of its operations, the changes in its net assets and the financial
highlights for each of the respective periods presented, in conformity with
generally accepted accounting principles. These financial statements and
financial highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits, which included confirmation of securities by correspondence with
the custodian and brokers and the application of alternative auditing
procedures where confirmations from brokers were not received, provide a
reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Thirty South Seventeenth Street
Philadelphia, Pennsylvania 19103
January 31, 1996
SPECIAL 1995 TAX INFORMATION (UNAUDITED)
FOR VANGUARD INSTITUTIONAL INDEX FUND
Corporate shareholders should note that for the fiscal year ended December 31,
1995, 93.0% of the Fund's investment income (i.e., dividend income plus
short-term capital gains, if any) qualifies for the intercorporate dividends
received deduction.
19
<PAGE> 22
TRUSTEES AND OFFICERS
JOHN C. BOGLE, Chairman and Chief Executive Officer
Chairman and Director of The Vanguard Group, Inc., and of each of the
investment companies in The Vanguard Group.
JOHN J. BRENNAN, President
President and Director of The Vanguard Group, Inc., and of each of the
investment companies in The Vanguard Group.
ROBERT E. CAWTHORN, Chairman of Rhone-Poulenc Rorer Inc.; Director of Sun
Company, Inc.
BARBARA BARNES HAUPTFUHRER, DIRECTOR of The Great Atlantic and Pacific Tea Co.,
Alco Standard Corp., Raytheon Co., Knight-Ridder, Inc., and Massachusetts
Mutual Life Insurance Co.
BRUCE K. MACLAURY, President of The Brookings Institution; Director of American
Express Bank Ltd. and The St. Paul Companies, Inc.
BURTON G. MALKIEL, Chemical Bank Chairman's Professor of Economics, Princeton
University; Director of Prudential Insurance Co. of America, Amdahl Corp.,
Baker Fentress & Co., The Jeffrey Co., and Southern New England Communications
Co.
ALFRED M. RANKIN, JR., Chairman, President, and Chief Executive Officer of
NACCO Industries, Inc.; Director of NACCO Industries, The BFGoodrich Co., and
The Standard Products Co.
JOHN C. SAWHILL, President and Chief Executive Officer of The Nature
Conservancy; formerly, Director and Senior Partner of McKinsey & Co. and
President of New York University; Director of Pacific Gas and Electric Co. and
NACCO Industries.
James O. Welch, Jr., Retired Chairman of Nabisco Brands, Inc.; retired Vice
Chairman and Director of RJR Nabisco; Director of TECO Energy, Inc. and Kmart
Corp.
J. LAWRENCE WILSON, Chairman and Chief Executive Officer of Rohm & Haas Co.;
Director of Cummins Engine Co.; Trustee of Vanderbilt University.
OTHER FUND OFFICERS
RAYMOND J. KLAPINSKY, Secretary; Senior Vice President and Secretary of The
Vanguard Group, Inc.; Secretary of each of the investment companies in The
Vanguard Group.
RICHARD F. HYLAND, Treasurer; Treasurer of The Vanguard Group, Inc., and of
each of the investment companies in The Vanguard Group.
KAREN E. WEST, Controller; Vice President of The Vanguard Group, Inc.;
Controller of each of the investment companies in The Vanguard Group.
OTHER VANGUARD GROUP OFFICERS
ROBERT A. DISTEFANO IAN A. MACKINNON
Senior Vice President Senior Vice President
Information Technology Fixed Income Group
JEREMY G. DUFFIELD F. WILLIAM MCNABB III
Senior Vice President Senior Vice President
Planning & Development Institutional
JAMES H. GATELY RALPH K. PACKARD
Senior Vice President Senior Vice President
Individual Investor Group Chief Financial Officer
20
<PAGE> 23
THE VANGUARD FAMILY OF FUNDS
EQUITY AND BALANCED FUNDS
GROWTH AND INCOME FUNDS
Vanguard/Windsor Fund
Vanguard/Windsor II
Vanguard Equity Income Fund
Vanguard Quantitative Portfolios
Vanguard/Trustees' Equity Fund
U.S. Portfolio
Vanguard Convertible
Securities Fund
BALANCED FUNDS
Vanguard/Wellington Fund
Vanguard/Wellesley Income Fund
Vanguard STAR Portfolio
Vanguard Asset Allocation Fund
Vanguard LIFEStrategy Funds
GROWTH FUNDS
Vanguard/Morgan Growth Fund
Vanguard/PRIMECAP Fund
Vanguard U.S. Growth Portfolio
AGGRESSIVE GROWTH FUNDS
Vanguard Explorer Fund
Vanguard Specialized Portfolios
Vanguard Horizon Fund
Global Equity Portfolio
Global Asset Allocation Portfolio
Capital Opportunity Portfolio
Aggressive Growth Portfolio
INTERNATIONAL FUNDS
Vanguard International
Growth Portfolio
Vanguard/Trustees' Equity Fund
International Portfolio
INDEX FUNDS
Vanguard Index Trust
500 Portfolio
Total Stock Market Portfolio
Extended Market Portfolio
Growth Portfolio
Value Portfolio
Small Capitalization Stock Portfolio
Vanguard Tax-Managed Fund
Vanguard Balanced Index Fund
Vanguard Bond Index Fund
Total Bond Market Portfolio
Short-Term Bond Portfolio
Intermediate-Term Bond Portfolio
Long-Term Bond Portfolio
Vanguard International Equity Index Fund
European Portfolio
Pacific Portfolio
Emerging Markets Portfolio
FIXED INCOME FUNDS
MONEY MARKET FUNDS
Vanguard Money Market Reserves
Vanguard Admiral Fund
U.S. Treasury Money Market Portfolio
TAX-EXEMPT MONEY MARKET FUNDS
Vanguard Municipal Bond Fund
Money Market Portfolio
Vanguard State Tax-Free Funds
Money Market Portfolios
(CA, NJ, OH, PA)
TAX-EXEMPT INCOME FUNDS
Vanguard Municipal Bond Fund
Vanguard State Tax-Free Funds
Insured Longer-Term Portfolios
(CA, FL, NJ, NY, OH, PA)
INCOME FUNDS
Vanguard Fixed Income
Securities Fund
Vanguard Admiral Fund
Vanguard Preferred Stock Fund
This Report has been prepared for shareholders and may be distributed to others
only if preceded or accompanied by a current prospectus. All Funds in the
Vanguard Family are offered by prospectus only.
[THE VANGUARD GROUP LOGO]
Vanguard Financial Center
Valley Forge, Pennsylvania 19482
New Account Information:
1 (800) 662-7447
Shareholder Account Services:
1 (800) 662-2739
Q940-12/95
ON OUR COVER: On the evening of August 1, 1798, Lord Horatio Nelson sailed his
flagship, HMS Vanguard, into Egypt's Aboukir Bay. In a night encounter, the
British fleet annihilated Napoleon Bonaparte's ships of the line in what is
still considered to be the most complete victory ever recorded in naval
history. Our Report's cover illustration is Thomas Luny's 1830 painting, The
Battle Of The Nile, in which the French flagship, L'Orient, is shown as it
exploded at 10:00 p.m. under a gibbous moon.
<PAGE> 24
VANGUARD INSTITUTIONAL INDEX FUND
EDGAR APPENDIX
This appendix describes the components of the printed version of this report
that do not translate into a format acceptable to the EDGAR system.
The cover of the printed version of this report features Thomas Luny's 1830
painting "The Battle Of The Nile".
A photograph of John C. Brennan and John C. Bogle appears on the inside cover
top-center.
A running head featuring a sword, helmet, gloves and battleships in the
background appears at the top of pages one through six.
A graphic chart illustrating annual total returns between Growth Stocks versus
Value Stocks (Standard & Poor's Growth Index and Standard & Poor's Value Index)
for the fiscal years 1990 through 1995. Line charts illustrating cumulative
returns between Large Stocks versus Small Stocks (Standard & Poor's 500 Index,
Wilshire 4500 Index and Russell 2000 Index) for the fiscal years 1990 through
1995 appears at the top of page two.
A graphic chart illustrating the percent of General Equity Funds outperformed
by S&P 500 Index for the fiscal years 1971 through 1995 appears at the bottom
of page three.
Line chart illustrating cumulative performance between Vanguard Institutional
Index Fund, Average General Equity Fund and Standard & Poor's 500 Index,
average Annual Total Returns for the period July 31, 1990, to December 31, 1995
appears at the bottom of page four.
Graphic chart illustrating performance between Growth and Value Funds versus
Index Trust 500 for the ten year period ended December 31, 1995 appears at the
top of page five.
A running head featuring a cannon and battleships in the background appears at
the top of page seven.
A running head featuring open log book, pen and battleships in the background
appears at the top of pages nine through eighteen.
A running head featuring a sextant, a map, and battleships in the background
appears at the top of page twenty.
A running head featuring birds flying and ships in the background appears at
the top of the inside back cover.
