<PAGE> 1
VANGUARD
INSTITUTIONAL INDEX
FUND
Semiannual Report
June 30, 1997
[PHOTO]
[THE VANGUARD GROUP LOGO]
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[PHOTO]
THE VANGUARD GROUP: LINKING TRADITION AND INNOVATION
At Vanguard, we treasure our rich nautical heritage--even as we steer our
course toward the twenty-first century. Our Report cover reflects that blending
of tradition and innovation, of past, present, and future. The montage includes
a bronze medallion with a likeness of our namesake, HMS Vanguard (Lord Nelson's
flagship at The Battle of the Nile); a clock built circa 1816 in Scotland,
featuring a portrait of Nelson; and several views of our recently completed
campus, which is steeped in nautical imagery--from our buildings named after
Nelson's warships (Victory, Majestic, and Goliath are three shown), to our
artwork and ornamental compass rose.
CONTENTS
A Message To
Our Shareholders
1
The Markets
In Perspective
3
Performance
Summary
5
Financial
Statements
6
Trustees And
Officers
INSIDE BACK COVER
All comparative mutual fund data
are from Lipper Analytical Services, Inc.
or Morningstar unless otherwise noted.
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[PHOTO]
DEAR SHAREHOLDER,
The U.S. stock market continued its amazing climb during the first half of
1997. During the six months ended June 30--a period that favored
large-capitalization stocks--Vanguard Institutional Index Fund provided a
return of +20.6%, a precise match of its benchmark, the Standard & Poor's 500
Composite Stock Price Index, and ahead of the return of about 95% of general
equity mutual funds.
This was a remarkable achievement, but one that is unlikely to persist or
to recur.
The adjacent table compares our Fund's six-month total return (capital
change plus reinvested dividends) with those of the average general equity fund
and the S&P 500 Index. Vanguard Institutional Index Fund's return is based on
an increase in net asset value from $68.86 per share on December 31, 1996, to
$82.36 per share on June 30, 1997, with the latter figure adjusted for
dividends totaling $0.54 per share paid from net investment income and a
distribution of $0.095 per share paid from net realized capital gains.
<TABLE>
<CAPTION>
- -------------------------------------------------------
TOTAL RETURN
SIX MONTHS ENDED
JUNE 30, 1997
- -------------------------------------------------------
<S> <C>
Vanguard Institutional Index Fund +20.6%
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Average General Equity Fund +13.0%
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S&P 500 Index +20.6%
- -------------------------------------------------------
</TABLE>
THE PERIOD IN REVIEW
A nearly perfect climate for common stocks--strong economic growth, rising
corporate profits, and decelerating inflation--prevailed during the six months
ended June 30. While the market's rising tide lifted all boats,
large-capitalization stocks rose the most. The record-setting advance was
interrupted by a decline of nearly -10% in the S&P 500 Index during the seven
weeks following February 18. By early May, however, the market had resumed its
ascent into record territory.
Jitters about interest rates and inflation were the apparent causes of the
brief slide. Although the Federal Reserve Board raised its target for
short-term interest rates by a quarter-point to 5.50% on March 25, short-term
interest rates ended the period where they began it (5.17% for 90-day U.S.
Treasury bills). Longer-term rates were up only slightly (less than one-quarter
percentage point) on balance during the first half of 1997. The stock market's
strong rebound in the second quarter stemmed from a combination of factors,
including strong corporate earnings reports, a lessening of inflation fears,
and an easing in interest rates. Whatever their causes, the price fluctuations
served as a clear reminder of the volatility that is very much a part of
investing in stocks.
One indication of the bias toward large-cap stocks during the period is
that the return on the S&P 500 Index was well in excess of the +17.6% return on
the entire U.S. stock market, as measured by the Wilshire 5000 Equity Index.
The "non-S&P 500" stocks were up but +10.6%, only one-half the gain in the
widely followed 500 Index. Even within the S&P 500 Index, there was a powerful
bias toward big stocks and against smaller stocks: The 25 largest stocks in the
Index returned +26.5%, while the 475 others provided a return of +17.6%.
Among the S&P 500 stocks, health-care issues led the way with an advance
of +31.4% during the half-year, but all major sectors (except utilities) booked
double-digit
1
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gains. Other notable performances among sectors came from consumer staples,
producer durables, financial services, and technology, all of which provided
returns of more than +20% for the half-year. In general, the S&P 500's growth
stocks proved stronger during the period than its value stocks.
The market's pronounced tilt toward larger stocks resulted not only in the
remarkable absolute performance of our Fund, but in exceptional relative
performance. Our return during the period was fully +7.6 percentage points
ahead of the return of the average general equity mutual fund. This competitive
group is typically weighted toward smaller-cap stocks--a distinction that has
heavily favored our Portfolio over the past two-and-a-half years but that
cannot, and will not, work to our advantage in all periods.
IN SUMMARY
The extraordinary bull market for U.S. stocks that began almost 15 years ago
has amply demonstrated the rewards of long-term investing. Risk, the
inseparable companion of reward, may not be so apparent after such a period.
Yet investors disregard risk at their peril. So we hope that the sizable,
sudden fluctuations in the stock market during the first half of 1997
reinforced two key messages that we have repeatedly stressed in these Reports
to you.
The first message, of course, concerns the importance of holding a
balanced portfolio of stock funds, bond funds, and money market funds in
proportions appropriate to your financial situation, tolerance for risk, and
investment objectives. By making it easier to ride out episodes of market
volatility, a balanced portfolio helps investors to adhere to our second
message: Always "stay the course" toward your long-term investment goals.
/s/ JOHN C. BOGLE /s/ JOHN J. BRENNAN
John C. Bogle John J. Brennan
Chairman of the Board President
July 19, 1997
2
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[PHOTO]
THE MARKETS IN PERSPECTIVE
SIX MONTHS ENDED JUNE 30, 1997
U.S. EQUITY MARKETS
As the economy continued to grow while the rate of inflation did not, a robust
market provided solid gains to investors in U.S. common stocks during the
first half of 1997. The best performers were primarily larger-capitalization
issues, although the small-company indexes exhibited some strength in the final
two months of the period. Over the half-year, the Standard & Poor's 500
Composite Stock Price Index gained 20.6%, fueled by a 10.8% boost since the end
of April. Reflecting the gains among smaller companies, the Russell 2000 Index
posted a 10.2% increase for the six-month period, driven by an 11.1% jump in
May and a 4.3% rise in June. It was particularly noteworthy that the recent
small-cap gains were led by small growth stocks, the worst segment of the U.S.
market during the past 12 months. This group has surged 17.6% since the end of
March, although at the half-year's end it still lagged the S&P 500 Index by a
sizable margin (5.2% versus 20.6%).
Stocks benefited from the continued strength of corporate earnings, which
rose some 15% during the past year, and from a widespread confidence reflected
in increased price/earnings ratios. The strength in earnings, the expectation
that income will continue to increase at an attractive pace, and the further
conviction that inflation is not a problem helped stocks to continue to produce
solid gains in the fiscal period. What's more, earnings have shown not only
good strength but remarkable consistency in beating the consensus forecasts of
Wall Street analysts.
<TABLE>
<CAPTION>
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TOTAL RETURNS
PERIODS ENDED JUNE 30, 1997
---------------------------
6 MONTHS 1 YEAR 5 YEARS*
- ---------------------------------------------------------
<S> <C> <C> <C>
EQUITY
S&P 500 Index 20.6% 34.7% 19.8%
Russell 2000 Index 10.2 16.3 17.9
MSCI EAFE Index 11.4 13.2 13.2
- ---------------------------------------------------------
FIXED-INCOME
Lehman Aggregate Bond Index 3.1% 8.2% 7.1%
Lehman 10-Year Municipal
Bond Index 3.3 8.3 7.4
Salomon Brothers Three-Month
U.S. Treasury Bill Index 2.6 5.3 4.5
- ---------------------------------------------------------
OTHER
Consumer Price Index 1.1% 2.3% 2.7%
- ---------------------------------------------------------
</TABLE>
*Average annual.
The strongest gains in the S&P 500 Index during the past six months came
from the health-care sector (up 31.4%) and the consumer-staples sector (up
23.9%). By contrast, numerous uncertainties for utilities caused the issues in
that sector to lag the broad market, although, on an absolute basis, their 8.2%
return over six months is quite good.
U.S. FIXED-INCOME MARKETS
The modest rise in interest rates during the past six months reflects the
economy's underlying momentum. The 10-year U.S. Treasury's yield increased from
6.42% at the end of December to 6.97% by the middle of April. In the following
weeks, economic reports indicated a slowing in economic growth and further
reduced fears of an increase in inflation. This news helped interest rates fall
to 6.50% by the end of June.
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Fueled by robust consumer spending, the U.S. economy expanded at a
remarkable 5.8% rate in the first three months of 1997. Reflecting the vibrant
economy, the nation's unemployment rate stood at 5.0% in June. Strong economic
growth and tight labor markets have often led to rising inflation because of
increased demand for goods and services. With this in mind, the Federal Reserve
raised its federal funds interest rate target by 0.25% on March 25 in a
"preemptive" strike against mounting inflationary pressures. Observed price
increases have been subdued in recent months, however. Wholesale prices have
fallen in each of the first six months of 1997, and so far this year consumer
prices have risen at a slower pace than last year.
With interest rates very close to year-end levels, bond investors have
fared reasonably well during the past six months, as illustrated by the 3.1%
return of the Lehman Brothers Aggregate Bond Index. Investors who favored
shorter-maturity and lower-quality issues achieved somewhat better returns.
Mortgage-backed securities continued to perform well because refinancing
activity has been reduced to historically low levels as interest rates have
risen. Municipal issues also tended to perform better than their taxable
counterparts.
INTERNATIONAL EQUITY MARKETS
International investors received fairly good returns over the past six months.
As measured by the broad Morgan Stanley Capital International Europe,
Australasia, Far East Index, foreign markets gained 11.4%.
The period saw two major developments. First, the Japanese stock market
moved sharply higher in the spring, returning 11.1% in May and 7.5% in June to
U.S. investors. Better tone in the economy, plus strong earnings reported by
export-oriented companies benefiting from the weak yen, gave Japan a
long-awaited boost. For the six months, the Japanese market is up 9.2%. The
competitive benefits of a weak currency relative to the dollar extended to
Germany, where the export-driven capital goods and chemical manufacturers
gained; overall, the German market rose 17.0% during the six-month period.
Arguably the biggest news came from the French elections at the end of
May. The new government is considered to be less friendly toward the austerity
measures needed to meet the eligibility requirements for the European Monetary
Union (EMU) in 1999. The French elections also had a broad impact across the
continent. Although most investors appear to agree that the elections won't
jeopardize the continent's move toward the EMU, the timing and intensity of the
fiscal measures are now less certain. For the six months, Europe gained 24.8%
in local currencies, which a strong dollar trimmed to 14.4% for U.S. investors.
4
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PERFORMANCE SUMMARY
All of the data on this page represent past performance, which cannot be used
to predict future returns that may be achieved by the Fund. Note, too, that
both share price and return can fluctuate widely so that an investment in the
Fund could lose money.
<TABLE>
<CAPTION>
INSTITUTIONAL INDEX FUND
TOTAL INVESTMENT RETURNS: JULY 31, 1990-JUNE 30, 1997
- -----------------------------------------
INSTITUTIONAL INDEX S&P 500
FISCAL CAPITAL INCOME TOTAL TOTAL
YEAR RETURN RETURN RETURN RETURN
- -----------------------------------------
<S> <C> <C> <C> <C>
1990 -7.3% 1.6% -5.7% -5.7%
1991 26.4 3.9 30.3 30.5
1992 4.5 3.0 7.5 7.6
1993 7.1 2.9 10.0 10.1
1994 -1.5 2.8 1.3 1.3
1995 34.4 3.2 37.6 37.6
1996 20.6 2.5 23.1 23.0
1997* 19.8 0.8 20.6 20.6
- -----------------------------------------
</TABLE>
*Six months ended June 30, 1997.
See Financial Highlights table on page 14 for dividend and capital gains
information for the past five years.
<TABLE>
<CAPTION>
AVERAGE ANNUAL TOTAL RETURNS: PERIODS ENDED JUNE 30, 1997
- --------------------------------------------------------------------------------------
SINCE INCEPTION
INCEPTION --------------------------
DATE 1 YEAR 5 YEARS CAPITAL INCOME TOTAL
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Institutional Index Fund 7/31/90 34.79% 19.77% 14.22% 3.04% 17.26%
- --------------------------------------------------------------------------------------
</TABLE>
5
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[PHOTO]
FINANCIAL STATEMENTS
JUNE 30, 1997 (unaudited)
STATEMENT OF NET ASSETS
This Statement provides a detailed list of the Fund's holdings, including each
security's market value on the last day of the reporting period. Securities are
grouped and subtotaled by asset type (common stocks, bonds, etc.), with the
Fund's S&P 500 Index common stocks listed in descending market value order.
Other assets are added to, and liabilities are subtracted from, the value of
Total Investments to calculate the Fund's Net Assets. Finally, Net Assets are
divided by the outstanding shares of the Fund to arrive at its share price, or
Net Asset Value (NAV) Per Share.
At the end of the Statement of Net Assets, you will find a table displaying
the composition of the Fund's net assets on both a dollar and per-share basis.
Because all income and any realized gains must be distributed to shareholders
each year, the bulk of net assets consists of Paid in Capital (money invested
by shareholders). The amounts shown for Undistributed Net Investment Income and
Accumulated Net Realized Gains usually approximate the sums the Fund had
available to distribute to shareholders as income dividends or capital gains as
of the statement date, but may differ because certain investments or
transactions may be treated differently for financial statement and tax
purposes. Any Accumulated Net Realized Losses, and any cumulative excess of
distributions over net income or net realized gains, will appear as negative
balances. Unrealized Appreciation (Depreciation) is the difference between the
market value of the Fund's investments and their cost, and reflects the gains
(losses) that would be realized if the Fund were to sell all of its investments
at their statement-date values.
<TABLE>
<CAPTION>
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MARKET
VALUE*
INSTITUTIONAL INDEX FUND SHARES (000)
- -------------------------------------------------------------------------------
COMMON STOCKS
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
General Electric Co. 7,549,759 $ 493,565
The Coca-Cola Co. 5,705,476 385,120
Exxon Corp. 5,714,690 351,453
- Microsoft Corp. 2,757,949 348,708
Merck & Co., Inc. 2,778,132 287,537
Royal Dutch Petroleum Co. ADR 4,947,092 268,998
Intel Corp. 1,884,936 266,836
Philip Morris Cos., Inc. 5,594,900 248,274
Procter & Gamble Co. 1,558,946 220,201
International Business
Machines Corp. 2,304,209 207,811
Johnson & Johnson 3,065,355 197,332
Bristol-Myers Squibb Co. 2,301,203 186,397
Wal-Mart Stores, Inc. 5,252,740 177,608
Pfizer, Inc. 1,485,788 177,552
E.I. du Pont de Nemours & Co. 2,598,336 163,370
American International
Group, Inc. 1,080,685 161,427
Eli Lilly & Co. 1,278,202 139,723
PepsiCo, Inc. 3,538,769 132,925
AT&T Corp. 3,739,473 131,115
Hewlett-Packard Co. 2,338,741 130,969
SBC Communications Inc. 2,101,128 130,007
Citicorp 1,066,131 128,535
Mobil Corp. 1,808,246 126,351
The Walt Disney Co. 1,553,716 124,686
Gillette Co. 1,282,340 121,502
Abbott Laboratories 1,780,208 118,829
American Home Products Corp. 1,481,548 113,338
Chevron Corp. 1,504,010 111,203
NationsBank Corp. 1,680,062 108,364
Fannie Mae 2,450,781 106,915
Lucent Technologies, Inc. 1,472,827 106,136
BellSouth Corp. 2,284,418 105,940
BankAmerica Corp. 1,640,461 105,912
Motorola, Inc. 1,367,612 103,939
Ford Motor Co. 2,738,072 103,362
- Cisco Systems, Inc. 1,517,019 101,830
Amoco Corp. 1,138,801 99,005
Minnesota Mining &
Manufacturing Co. 958,402 97,757
Chase Manhattan Corp. 995,660 96,641
GTE Corp. 2,202,444 96,632
General Motors Corp. 1,684,370 93,798
Travelers Group Inc. 1,476,087 93,086
The Boeing Co. 1,658,949 88,028
Ameritech Corp. 1,263,737 85,855
American Express Co. 1,088,339 81,081
Schering-Plough Corp. 1,692,602 81,033
Unilever NV ADR 368,868 80,413
- Oracle Corp. 1,548,940 77,931
Warner-Lambert Co. 624,627 77,610
McDonald's Corp. 1,598,502 77,228
Home Depot, Inc. 1,117,732 77,054
Bell Atlantic Corp. 1,007,539 76,447
Allstate Corp. 1,018,894 74,379
Schlumberger Ltd. 568,558 71,070
Texaco Inc. 607,174 66,030
Banc One Corp. 1,339,610 64,887
Kimberly-Clark Corp. 1,294,607 64,407
- WorldCom, Inc. 2,011,246 64,234
</TABLE>
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<TABLE>
<CAPTION>
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MARKET
VALUE*
SHARES (000)
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Time Warner, Inc. 1,302,731 $ 62,857
- Compaq Computer Corp. 632,169 62,743
First Union Corp. 658,646 60,925
MCI Communications Corp. 1,581,282 60,484
Columbia/HCA Healthcare Corp. 1,538,085 60,466
Xerox Corp. 744,929 58,756
Monsanto Co. 1,361,535 58,631
Eastman Kodak Co. 763,555 58,603
NYNEX Corp. 1,013,390 58,397
Morgan Stanley, Dean Witter,
Discover and Co. 1,318,793 56,791
Emerson Electric Co. 1,024,799 56,428
Wells Fargo & Co. 206,536 55,661
Federal Home Loan
Mortgage Corp. 1,615,753 55,541
AlliedSignal Inc. 651,292 54,709
Northern Telecom Ltd. 598,752 54,486
Campbell Soup Co. 1,070,650 53,532
Chrysler Corp. 1,609,720 52,819
Atlantic Richfield Co. 741,127 52,249
Sprint Corp. 990,971 52,150
Sears, Roebuck & Co. 902,196 48,493
Norwest Corp. 859,942 48,372
Anheuser-Busch Cos., Inc. 1,143,906 47,973
Caterpillar, Inc. 438,622 47,097
- Dell Computer Corp. 400,753 47,038
Dow Chemical Co. 539,384 46,994
Computer Associates
International, Inc. 835,695 46,538
Lockheed Martin Corp. 445,027 46,088
Sara Lee Corp. 1,105,484 46,016
Merrill Lynch & Co., Inc. 762,381 45,457
First Data Corp. 1,032,630 45,371
United Technologies Corp. 545,229 45,254
Medtronic, Inc. 549,932 44,544
Colgate-Palmolive Co. 679,396 44,331
J.P. Morgan & Co., Inc. 424,297 44,286
First Chicago NBD Corp. 721,774 43,667
U S WEST Communications
Group 1,103,186 41,576
Kellogg Co. 482,841 41,343
Pharmacia & Upjohn, Inc. 1,168,191 40,595
Union Pacific Corp. 568,324 40,067
Duke Energy Corp. 827,111 39,650
The Bank of New York Co., Inc. 898,029 39,064
H.J. Heinz Co. 846,190 39,031
NIKE, Inc. Class B 664,530 38,792
Fleet Financial Group, Inc. 603,026 38,141
Texas Instruments, Inc. 439,938 36,982
Aetna Inc. 347,041 35,528
Amgen, Inc. 608,947 35,357
- 3Com Corp. 786,676 35,351
ConAgra, Inc. 549,456 35,234
General Re Corp. 188,648 34,334
Southern Co. 1,568,925 34,320
The Seagram Co. Ltd. 852,429 34,310
Westinghouse Electric Corp. 1,461,188 33,790
International Paper Co. 691,738 33,593
Waste Management Inc. 1,041,499 33,458
Baxter International, Inc. 639,805 33,430
McDonnell Douglas Corp. 485,519 33,258
Deere & Co. 586,814 32,201
Gannett Co., Inc. 325,488 32,142
Burlington Northern Santa Fe
Corp. 355,398 31,941
- AirTouch Communications, Inc. 1,156,623 31,663
Automatic Data Processing, Inc. 673,176 31,639
- Sun Microsystems, Inc. 848,145 31,540
PNC Bank Corp. 743,313 30,940
CIGNA Corp. 172,164 30,559
CPC International, Inc. 330,619 30,520
Walgreen Co. 565,971 30,350
Aluminum Co. of America 399,138 30,085
Tyco International Ltd. 428,937 29,838
J.C. Penney Co., Inc. 567,888 29,637
Rockwell International Corp. 501,439 29,585
- Applied Materials, Inc. 416,436 29,463
Corning, Inc. 527,492 29,342
Archer-Daniels-Midland Co. 1,244,161 29,238
Norfolk Southern Corp. 288,506 29,067
- U S WEST Media Group 1,429,409 28,946
KeyCorp 515,889 28,825
Household International, Inc. 244,913 28,762
Illinois Tool Works, Inc. 573,051 28,617
MBNA Corp. 768,096 28,132
SunTrust Banks, Inc. 510,391 28,103
CSX Corp. 500,394 27,772
Raytheon Co. 543,287 27,708
- Boston Scientific Corp. 447,910 27,519
Marsh & McLennan Cos., Inc. 381,134 27,203
The Chubb Corp. 402,048 26,887
Mellon Bank Corp. 594,934 26,846
National City Corp. 510,824 26,818
Dayton-Hudson Corp. 498,728 26,526
Phillips Petroleum Co. 606,086 26,516
American General Corp. 554,944 26,499
Loews Corp. 264,380 26,471
First Bank System, Inc. 307,749 26,274
May Department Stores Co. 547,195 25,855
CoreStates Financial Corp. 477,584 25,670
Textron, Inc. 379,560 25,193
The Gap, Inc. 640,204 24,888
BankBoston Corp. 339,270 24,449
PPG Industries, Inc. 420,003 24,413
Enron Corp. 595,233 24,293
- CUC International, Inc. 938,839 24,234
General Mills, Inc. 371,244 24,177
Barnett Banks, Inc. 459,087 24,102
Edison International 962,074 23,932
- Viacom Inc. Class B 793,574 23,807
Weyerhaeuser Co. 455,764 23,700
Pitney Bowes, Inc. 339,668 23,607
- Toys R Us, Inc. 665,773 23,302
- Tellabs, Inc. 416,158 23,201
Halliburton Co. 291,314 23,087
PG&E Corp. 946,190 22,945
Mattel, Inc. 671,557 22,749
The Goodyear Tire & Rubber Co. 359,264 22,746
</TABLE>
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<TABLE>
<CAPTION>
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MARKET
VALUE*
INSTITUTIONAL INDEX FUND SHARES (000)
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
- Tele-Communications, Inc.
Class A 1,526,804 22,616
Hartford Financial Services
Group Inc. 271,396 22,458
United Healthcare Corp. 428,923 22,304
Unocal Corp. 574,091 22,282
U.S. Bancorp 346,556 22,223
Honeywell, Inc. 292,813 22,217
- EMC Corp. 566,935 22,110
Wachovia Corp. 373,842 21,800
Avon Products, Inc. 304,561 21,491
AMP, Inc. 505,898 21,121
- HFS Inc. 364,068 21,116
Albertson's, Inc. 577,548 21,080
Air Products & Chemicals, Inc. 256,019 20,802
- Tenet Healthcare Corp. 694,362 20,527
Praxair, Inc. 363,123 20,335
CVS Corp. 395,589 20,274
Ralston-Ralston Purina Group 245,022 20,138
Fifth Third Bancorp 243,834 19,994
- Seagate Technology 567,079 19,954
Great Western Financial Corp. 369,264 19,848
Aon Corp. 383,204 19,831
- HEALTHSOUTH Corp. 790,085 19,703
Hershey Foods Corp. 352,104 19,476
- AMR Corp. 210,007 19,426
- Micron Technology, Inc. 484,114 19,334
FPL Group, Inc. 419,598 19,328
USX-Marathon Group 662,770 19,137
Occidental Petroleum Corp. 759,647 19,039
Barrick Gold Corp. 858,317 18,883
American Electric Power Co., Inc. 434,631 18,254
Alcan Aluminium Ltd. 522,791 18,134
Service Corp. International 551,279 18,123
Marriott International 293,554 18,017
Georgia-Pacific Corp. 210,703 17,989
Wrigley, (Wm.) Jr. Co. 267,642 17,932
Tenneco, Inc. 394,357 17,820
Texas Utilities Co. 517,258 17,813
- The Kroger Co. 584,991 16,965
Comerica, Inc. 246,495 16,762
- Federated Department Stores 478,967 16,644
American Stores Co. 336,037 16,592
TRW, Inc. 291,384 16,554
Charles Schwab Corp. 403,595 16,421
- ITT Corp. 268,143 16,373
Browning-Ferris Industries, Inc. 488,703 16,249
Conseco Inc. 437,969 16,205
- Costco Cos., Inc. 486,200 15,984
Williams Cos., Inc. 365,043 15,971
Consolidated Edison Co. of
New York, Inc. 541,274 15,934
Dover Corp. 257,947 15,864
Crown Cork & Seal Co., Inc. 296,139 15,825
Cognizant Corp. 390,375 15,810
The Clorox Co. 118,670 15,664
Bankers Trust New York Corp. 179,783 15,641
Dominion Resources, Inc. 424,759 15,557
Eaton Corp. 177,777 15,522
Masco Corp. 371,466 15,509
Ingersoll-Rand Co. 250,970 15,497
Lincoln National Corp. 239,140 15,395
Hilton Hotels Corp. 574,534 15,261
- Federal Express Corp. 263,587 15,222
Dresser Industries, Inc. 405,916 15,120
Pioneer Hi-Bred International, Inc. 189,001 15,120
PacifiCorp 680,977 14,981
Entergy Corp. 547,221 14,980
Lowe's Cos., Inc. 398,936 14,811
Sysco Corp. 405,429 14,798
Fortune Brands, Inc. 395,907 14,772
St. Paul Cos., Inc. 192,572 14,684
Union Pacific Resources
Group, Inc. 584,445 14,538
Newell Co. 366,728 14,532
Guidant Corp. 170,209 14,468
ALLTEL Corp. 428,671 14,334
Transamerica Corp. 152,778 14,294
Cardinal Health, Inc. 249,254 14,270
Becton, Dickinson & Co. 281,853 14,269
Rite Aid Corp. 282,853 14,107
The Quaker Oats Co. 314,166 14,098
UNUM Corp. 335,061 14,073
Genuine Parts Co. 414,072 14,027
Newmont Mining Corp. 359,581 14,024
Salomon, Inc. 249,728 13,891
Delta Air Lines, Inc. 169,272 13,880
Union Carbide Corp. 291,972 13,741
- Kmart Corp. 1,117,070 13,684
Public Service Enterprise
Group Inc. 547,267 13,682
Republic New York Corp. 126,788 13,630
SAFECO Corp. 290,941 13,583
Tribune Co. 282,544 13,580
Cooper Industries, Inc. 272,498 13,557
The McGraw-Hill Cos. 230,390 13,550
Rohm & Haas Co. 146,638 13,207
MGIC Investment Corp. 272,192 13,048
Baker Hughes, Inc. 335,231 12,969
Coastal Corp. 243,761 12,965
Winn-Dixie Stores, Inc. 344,563 12,835
- Digital Equipment Corp. 360,254 12,767
International Flavors &
Fragrances, Inc. 252,695 12,761
- Computer Sciences Corp. 176,352 12,719
R.R. Donnelley & Sons Co. 346,120 12,677
Phelps Dodge Corp. 148,740 12,671
Burlington Resources, Inc. 286,759 12,653
The Limited, Inc. 622,186 12,599
CINergy Corp. 361,908 12,599
VF Corp. 147,160 12,472
Carolina Power & Light Co. 346,759 12,440
- Parametric Technology Corp. 292,352 12,425
Freeport-McMoRan Copper &
Gold Inc. Class B 397,470 12,371
Sherwin-Williams Co. 396,899 12,254
Times Mirror Co. Class A 221,727 12,250
- Bay Networks, Inc. 457,926 12,164
</TABLE>
8
<PAGE> 11
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
MARKET
VALUE*
SHARES (000)
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Champion International Corp. 219,690 12,138
Reynolds Metals Co. 168,336 11,994
- Thermo Electron Corp. 345,871 11,889
Amerada Hess Corp. 213,279 11,850
UST Inc. 426,403 11,833
Case Corp. 171,151 11,788
Northrop Grumman Corp. 133,653 11,736
Consolidated Natural Gas Co. 217,692 11,715
Equifax, Inc. 314,310 11,688
- Advanced Micro Devices, Inc. 323,164 11,634
Inco Ltd. 386,290 11,613
Interpublic Group of Cos., Inc. 189,140 11,597
Houston Industries, Inc. 536,871 11,509
Torchmark Corp. 161,500 11,507
Eastman Chemical Co. 180,408 11,456
Nucor Corp. 202,420 11,437
Jefferson-Pilot Corp. 163,211 11,404
Comcast Corp. Class A Special 534,836 11,399
MBIA, Inc. 99,753 11,253
Hercules, Inc. 234,946 11,248
Green Tree Financial Corp. 314,763 11,213
Unicom Corp. 498,641 11,095
New York Times Co. Class A 221,604 10,969
Allegheny Teledyne Inc. 405,133 10,939
General Dynamics Corp. 144,337 10,825
Fluor Corp. 193,959 10,704
PECO Energy Corp. 509,690 10,703
Knight-Ridder, Inc. 215,345 10,565
- LSI Logic Corp. 325,997 10,432
Central & South West Corp. 490,409 10,421
Parker Hannifin Corp. 170,994 10,377
The Dun & Bradstreet Corp. 393,933 10,341
Rubbermaid, Inc. 345,645 10,283
Sonat, Inc. 198,153 10,155
- Cabletron Systems, Inc. 357,521 10,122
H.F. Ahmanson & Co. 232,770 10,009
- National Semiconductor Corp. 326,514 9,999
Laidlaw Inc. Class B 721,450 9,965
GPU Inc. 277,017 9,938
Morton International, Inc. 327,466 9,885
Avery Dennison Corp. 239,287 9,601
W.W. Grainger, Inc. 121,916 9,532
W.R. Grace & Co. 172,568 9,513
TJX Cos., Inc. 356,950 9,415
Whirlpool Corp. 172,246 9,398
Golden West Financial Corp. 131,989 9,239
DTE Energy Co. 333,192 9,204
- Western Atlas, Inc. 124,411 9,113
Baltimore Gas & Electric Co. 339,387 9,057
Dana Corp. 238,302 9,055
Dillard's Inc. 261,442 9,052
Nordstrom, Inc. 184,090 9,020
Placer Dome, Inc. 550,143 9,009
State Street Corp. 194,172 8,980
Willamette Industries, Inc. 127,379 8,917
Dow Jones & Co., Inc. 221,805 8,914
Union Electric Co. 234,452 8,836
Beneficial Corp. 124,036 8,814
Southwest Airlines Co. 336,409 8,705
- Humana, Inc. 373,721 8,642
Hasbro, Inc. 297,140 8,431
Columbia Gas Systems, Inc. 128,053 8,355
Pennzoil Co. 108,449 8,323
PACCAR, Inc. 178,588 8,282
Northern States Power Co. 158,667 8,211
- AutoZone Inc. 348,231 8,205
- St. Jude Medical, Inc. 209,828 8,183
The Stanley Works 204,102 8,164
Perkin-Elmer Corp. 101,266 8,057
Black & Decker Corp. 216,554 8,053
Sigma-Aldrich Corp. 230,125 8,040
Circuit City Stores, Inc. 225,450 8,018
Union Camp Corp. 159,826 7,991
Johnson Controls, Inc. 193,473 7,944
Ashland Inc. 170,578 7,911
Wendy's International, Inc. 303,483 7,872
- General Instrument Corp. 314,322 7,858
- Ceridian Corp. 184,806 7,808
Harcourt General, Inc. 163,515 7,787
Brown-Forman Corp. Class B 158,413 7,733
Harris Corp. 91,985 7,727
IKON Office Solutions 309,130 7,709
H & R Block, Inc. 238,792 7,701
Ohio Edison Co. 350,871 7,653
Liz Claiborne, Inc. 164,075 7,650
Raychem Corp. 102,563 7,628
PP&L Resources Inc. 379,333 7,563
Frontier Corp. 375,741 7,491
The Mead Corp. 119,940 7,466
Great Lakes Chemical Corp. 141,480 7,410
- Woolworth Corp. 307,608 7,383
Westvaco Corp. 233,879 7,353
Tandy Corp. 130,831 7,327
James River Corp. 197,560 7,310
Brunswick Corp. 228,916 7,154
Ecolab, Inc. 148,322 7,082
Kerr-McGee Corp. 111,475 7,065
ITT Industries, Inc. 271,473 6,990
Armstrong World Industries Inc. 94,832 6,958
USX-U.S. Steel Group 197,862 6,938
Engelhard Corp. 330,801 6,926
- Providian Financial Corp. 215,146 6,912
Temple-Inland Inc. 127,555 6,888
- FMC Corp. 85,584 6,799
Pall Corp. 289,271 6,726
Pacific Enterprises 195,373 6,569
Thomas & Betts Corp. 124,843 6,562
Mallinckrodt, Inc. 169,971 6,459
Deluxe Corp. 189,242 6,458
Cummins Engine Co., Inc. 90,855 6,411
USF&G Corp. 265,946 6,383
American Greetings Corp.
Class A 172,122 6,369
- US Airways Group Inc. 181,909 6,367
U.S. Surgical Corp. 169,026 6,296
- Silicon Graphics, Inc. 405,337 6,080
Reebok International Ltd. 129,684 6,063
Ryder System, Inc. 182,910 6,036
</TABLE>
9
<PAGE> 12
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
MARKET
VALUE*
INSTITUTIONAL INDEX FUND SHARES (000)
- -------------------------------------------------------------------------------
<S> <C> <C>
Bausch & Lomb, Inc. 127,663 6,016
Maytag Corp. 230,025 6,009
- DSC Communications Corp. 269,371 5,994
Nalco Chemical Co. 154,790 5,979
- Andrew Corp. 208,810 5,847
Polaroid Corp. 104,124 5,779
Adobe Systems, Inc. 164,657 5,773
Whitman Corp. 238,409 5,722
- ALZA Corp. 194,282 5,634
Aegon NV ARS 80,395 5,633
- Rowan Cos., Inc. 196,738 5,546
- Tandem Computers, Inc. 273,630 5,541
Snap-On Inc. 140,089 5,516
- Novell, Inc. 796,862 5,503
- Fruit of the Loom, Inc. 176,590 5,474
Mercantile Stores Co., Inc. 84,698 5,331
The BFGoodrich Co. 122,993 5,327
SuperValu Inc. 154,053 5,315
Owens Corning 123,107 5,309
Bemis Co., Inc. 122,436 5,295
Louisiana-Pacific Corp. 249,370 5,268
Cyprus Amax Minerals Co. 213,948 5,242
Tupperware Corp. 142,544 5,203
Sun Co., Inc. 167,152 5,182
Echlin, Inc. 142,885 5,144
National Service Industries, Inc. 105,188 5,121
The Timken Co. 143,376 5,099
- Oryx Energy Co. 241,149 5,094
General Signal Corp. 114,251 4,984
Biomet, Inc. 262,067 4,881
NorAm Energy Corp. 315,158 4,806
Allergan, Inc. 150,276 4,781
Pep Boys (Manny, Moe & Jack) 139,707 4,759
C.R. Bard, Inc. 130,941 4,755
Manor Care Inc. 144,515 4,715
Harnischfeger Industries Inc. 112,608 4,673
Comcast Corp. Class A 218,396 4,559
Tektronix, Inc. 75,510 4,531
Giant Food, Inc. Class A 137,323 4,480
Louisiana Land & Exploration Co. 78,345 4,475
Crane Co. 105,559 4,414
Homestake Mining Co. 335,891 4,388
Millipore Corp. 99,355 4,372
- Harrah's Entertainment, Inc. 236,984 4,266
Autodesk, Inc. 109,661 4,201
- Apple Computer, Inc. 291,912 4,142
NICOR, Inc. 114,720 4,116
Moore Corp. Ltd. 206,654 4,069
Worthington Industries, Inc. 221,587 4,058
Cooper Tire & Rubber Co. 184,394 4,057
Boise Cascade Corp. 111,478 3,937
Scientific-Atlanta, Inc. 176,738 3,866
Foster Wheeler Corp. 93,533 3,788
- Beverly Enterprises, Inc. 227,122 3,691
McDermott International, Inc. 126,094 3,680
Alberto-Culver Co. Class B 128,714 3,604
Meredith Corp. 122,775 3,560
ENSERCH Corp. 159,163 3,541
Countrywide Credit
Industries, Inc. 109,298 3,409
- Santa Fe Energy Resources, Inc. 229,365 3,369
Caliber System Inc. 89,955 3,351
Darden Restaurants Inc. 367,339 3,329
Helmerich & Payne, Inc. 57,084 3,289
Stone Container Corp. 227,781 3,260
- Unisys Corp. 402,102 3,066
Aeroquip-Vickers Inc. 64,244 3,036
Shared Medical Systems Corp. 56,070 3,014
ASARCO, Inc. 98,283 3,010
Peoples Energy Corp. 80,263 3,005
Potlatch Corp. 66,257 2,998
King World Productions, Inc. 85,494 2,992
Inland Steel Industries, Inc. 112,531 2,940
Battle Mountain Gold Co. Class A 516,671 2,939
- Navistar International Corp. 168,845 2,913
Briggs & Stratton Corp. 57,871 2,894
- Niagara Mohawk Power Corp. 331,711 2,840
Centex Corp. 66,407 2,698
- Bethlehem Steel Corp. 256,574 2,678
Russell Corp. 87,860 2,603
- Amdahl Corp. 279,348 2,444
EG&G, Inc. 107,869 2,427
Springs Industries Inc. Class A 45,904 2,421
Fleetwood Enterprises, Inc. 81,000 2,415
- Data General Corp. 91,268 2,373
Great Atlantic & Pacific Tea
Co., Inc. 87,059 2,367
Jostens Inc. 88,091 2,356
Cincinnati Milacron, Inc. 90,827 2,356
Longs Drug Stores, Inc. 88,862 2,327
Adolph Coors Co. Class B 86,393 2,279
Safety-Kleen Corp. 132,704 2,239
Freeport-McMoRan Copper &
Gold Inc. Class A 72,417 2,118
Ball Corp. 69,556 2,091
ONEOK, Inc. 62,406 2,009
Echo Bay Mines Ltd. 317,364 1,825
Pulte Corp. 51,920 1,794
John H. Harland Co. 70,897 1,617
Eastern Enterprises 46,621 1,617
Giddings & Lewis, Inc. 76,090 1,579
Kaufman & Broad Home Corp. 89,314 1,569
Fleming Cos., Inc. 86,717 1,561
Stride Rite Corp. 113,465 1,461
- Charming Shoppes, Inc. 242,203 1,264
NACCO Industries, Inc. Class A 18,366 1,037
- Armco, Inc. 238,876 926
- Intergraph Corp. 106,648 893
- Viacom Inc. Class A 18,015 530
- TCI Satellite Entertainment, Inc.
Class A 21,000 165
- Fresenius National
Medical Care Pfd. 114,209 7
- -------------------------------------------------------------------------------
TOTAL COMMON STOCKS (98.6%)(1)
(COST $10,236,681) 15,678,602
- -------------------------------------------------------------------------------
</TABLE>
10
<PAGE> 13
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
FACE MARKET
AMOUNT VALUE*
(000) (000)
- -------------------------------------------------------------------------------
TEMPORARY CASH INVESTMENTS (1.2%)
- -------------------------------------------------------------------------------
<S> <C> <C>
U.S. TREASURY BILL
(2) 5.21%, 7/24/97 $ 15,500 $ 15,451
REPURCHASE AGREEMENT
Collateralized by U.S. Government
Obligations in a Pooled
Cash Account
5.93%, 7/1/97 176,890 176,890
- -------------------------------------------------------------------------------
TOTAL TEMPORARY CASH INVESTMENTS
(COST $192,338) 192,341
- -------------------------------------------------------------------------------
TOTAL INVESTMENTS (99.8%)
(COST $10,429,019) $15,870,943
- -------------------------------------------------------------------------------
OTHER ASSETS AND LIABILITIES (0.2%)
- -------------------------------------------------------------------------------
Other Assets--Note E 190,446
Liabilities--Note E (158,731)
------------
31,715
- -------------------------------------------------------------------------------
NET ASSETS (100%)
- -------------------------------------------------------------------------------
Applicable to 193,093,831 outstanding
shares of beneficial interest
(unlimited authorization) $15,902,658
===============================================================================
NET ASSET VALUE PER SHARE $82.36
===============================================================================
</TABLE>
*See Note A in Notes to Financial Statements.
- -Non-Income Producing Security.
(1)The combined market value of common stocks and S&P 500 Index futures
contracts represents 100.0% of net assets.
(2)Security segregated as initial margin for open futures contracts.
ADR--American Depository Receipt.
ARS--American Registered Share.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
AMOUNT PER
(000) SHARE
- -------------------------------------------------------------------------------
AT JUNE 30, 1997, NET ASSETS CONSISTED OF:
- -------------------------------------------------------------------------------
<S> <C> <C>
Paid in Capital $10,315,687 $53.43
Undistributed Net
Investment Income 40,722 .21
Accumulated Net
Realized Gains 100,750 .52
Unrealized Appreciation--
Note D
Investment Securities 5,441,924 28.18
Futures Contracts 3,575 .02
- -------------------------------------------------------------------------------
NET ASSETS $15,902,658 $82.36
===============================================================================
</TABLE>
11
<PAGE> 14
STATEMENT OF OPERATIONS
This Statement shows dividend and interest income earned by the Fund during the
reporting period, and details the operating expenses charged to the Fund. These
expenses directly reduce the amount of investment income available to pay to
shareholders as dividends. This Statement also shows any Net Gain (Loss)
realized on the sale of investments, and the increase or decrease in the
Unrealized Appreciation (Depreciation) on investments during the period. If the
Fund invested in futures contracts during the period, the results of these
investments are shown separately.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
INSTITUTIONAL INDEX FUND
SIX MONTHS ENDED JUNE 30, 1997
(000)
- -------------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME
INCOME
Dividends $ 124,503
Interest 4,499
------------
Total Income 129,002
------------
EXPENSES
The Vanguard Group--Note B 4,113
------------
Total Expenses 4,113
- -------------------------------------------------------------------------------------
NET INVESTMENT INCOME 124,889
- -------------------------------------------------------------------------------------
REALIZED NET GAIN
Investment Securities Sold 47,767
Futures Contracts 43,548
- -------------------------------------------------------------------------------------
REALIZED NET GAIN 91,315
- -------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION)
Investment Securities 2,368,492
Futures Contracts 4,258
- -------------------------------------------------------------------------------------
CHANGE IN UNREALIZED APPRECIATION (DEPRECIATION) 2,372,750
- -------------------------------------------------------------------------------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $2,588,954
=====================================================================================
</TABLE>
12
<PAGE> 15
STATEMENT OF CHANGES IN NET ASSETS
This Statement shows how the Fund's total net assets changed during the two
most recent reporting periods. The Operations section summarizes information
that is detailed in the Statement of Operations. The amounts shown as
Distributions to shareholders from the Fund's net income and capital gains may
not match the amounts shown in the Operations section, because distributions
are determined on a tax basis and may be made in a period different from the
one in which the income was earned or the gains were realized on the financial
statements. The Capital Share Transactions section shows the amount
shareholders invested in the Fund, either by purchasing shares or by
reinvesting distributions, as well as the amounts redeemed. The corresponding
numbers of Shares Issued and Redeemed are shown at the end of the Statement.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
INSTITUTIONAL INDEX FUND
--------------------------------
SIX MONTHS YEAR
ENDED ENDED
JUN. 30, 1997 DEC. 31, 1996
(000) (000)
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
INCREASE IN NET ASSETS
OPERATIONS
Net Investment Income $ 124,889 $ 195,323
Realized Net Gain 91,315 169,598
Change in Unrealized Appreciation (Depreciation) 2,372,750 1,528,203
--------------------------------
Net Increase in Net Assets Resulting from Operations 2,588,954 1,893,124
--------------------------------
DISTRIBUTIONS
Net Investment Income (99,865) (204,455)
Realized Capital Gain (17,007) (154,705)
--------------------------------
Total Distributions (116,872) (359,160)
--------------------------------
NET EQUALIZATION CREDITS--Note A 5,568 14,428
--------------------------------
CAPITAL SHARE TRANSACTIONS(1)
Issued 3,042,260 4,539,900
Issued in Lieu of Cash Distributions 104,790 325,871
Redeemed (1,148,457) (1,662,138)
--------------------------------
Net Increase from Capital Share Transactions 1,998,593 3,203,633
- ------------------------------------------------------------------------------------------------------
Total Increase 4,476,243 4,752,025
- ------------------------------------------------------------------------------------------------------
NET ASSETS
Beginning of Period 11,426,415 6,674,390
--------------------------------
End of Period $15,902,658 $11,426,415
======================================================================================================
(1)Shares Issued (Redeemed)
Issued 41,192 71,930
Issued in Lieu of Cash Distributions 1,361 4,831
Redeemed (15,401) (26,039)
--------------------------------
Net Increase in Shares Outstanding 27,152 50,722
======================================================================================================
</TABLE>
13
<PAGE> 16
FINANCIAL HIGHLIGHTS
This table summarizes the Fund's investment results and distributions to
shareholders on a per-share basis. It also presents the Fund's Total Return and
shows net investment income and expenses as percentages of average net assets.
These data will help you assess: the variability of the Fund's net income and
total returns from year to year; the relative contributions of net income and
capital gains to the Fund's total return; how much it costs to operate the
Fund; and the extent to which the Fund tends to distribute capital gains.
The table also shows the Portfolio Turnover Rate, a measure of trading
activity. A turnover rate of 100% means that the average security is held in
the Fund for one year. Finally, the table lists the Fund's Average Commission
Rate Paid, a disclosure required by the SEC beginning in 1996. This rate is
calculated by dividing total commissions paid on portfolio securities by the
total number of shares purchased and sold on which commissions were charged.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
INSTITUTIONAL INDEX FUND
YEAR ENDED DECEMBER 31,
FOR A SHARE OUTSTANDING SIX MONTHS ENDED -----------------------------------------------------
THROUGHOUT EACH PERIOD JUNE 30, 1997 1996 1995 1994 1993 1992
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $68.86 $57.93 $43.22 $44.20 $41.45 $39.91
INVESTMENT OPERATIONS
Net Investment Income .690 1.38 1.28 1.23 1.20 1.17
Net Realized And Unrealized Gain (Loss)
on Investments 13.445 11.90 14.86 (.66) 2.92 1.79
Total from Investment Operations 14.135 13.28 16.14 .57 4.12 2.96
DISTRIBUTIONS
Dividends From Net Investment Income (.540) (1.36) (1.27) (1.21) (1.19) (1.17)
Distributions From Realized Capital Gains (.095) (.99) (.16) (.34) (.18) (.25)
Total Distributions (.635) (2.35) (1.43) (1.55) (1.37) (1.42)
- ---------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $82.36 $68.86 $57.93 $43.22 $44.20 $41.45
===========================================================================================================================
TOTAL RETURN 20.59% 23.06% 37.60% 1.31% 10.02% 7.54%
===========================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $15,903 $11,426 $6,674 $3,265 $3,103 $1,525
Ratio of Total Expenses to
Average Net Assets 0.06%* 0.06% 0.06% 0.07% 0.07% 0.07%
Ratio of Net Investment Income to
Average Net Assets 1.85%* 2.18% 2.49% 2.80% 2.72% 2.94%
Portfolio Turnover Rate 6%* 9% 4%** 23%** 4%** 9%**
Average Commission Rate Paid $.0160 $.0167 N/A N/A N/A N/A
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
*Annualized.
**Portfolio turnover rates excluding in-kind redemptions were 4%, 19%, 3%, and
6%, respectively.
14
<PAGE> 17
NOTES TO FINANCIAL STATEMENTS
Vanguard Institutional Index Fund is registered under the Investment Company
Act of 1940 as a diversified open-end investment company, or mutual fund.
A. The following significant accounting policies conform to generally accepted
accounting principles for mutual funds. The Fund consistently follows such
policies in preparing its financial statements.
1. SECURITY VALUATION: Securities listed on an exchange are valued at the
latest quoted sales prices as of the close of trading on the New York Stock
Exchange (generally 4:00 p.m. Eastern time) on the valuation date; such
securities not traded on the valuation date are valued at the mean of the
latest quoted bid and asked prices. Securities not listed on an exchange are
valued at the latest quoted bid prices. Temporary cash investments acquired
more than 60 days to maturity are valued using the latest bid prices or using
valuations based on a matrix system (which considers such factors as security
prices, yields, maturities, and ratings), both as furnished by independent
pricing services. Other 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 capital share
transactions.
4. REPURCHASE AGREEMENTS: The Fund, along with members of The Vanguard
Group, transfers uninvested cash balances into a Pooled Cash Account, which is
invested in repurchase agreements secured by U.S. government securities.
Securities pledged as collateral for repurchase agreements are held by a
custodian bank until the agreements mature. Each agreement requires that the
market value of the collateral be sufficient to cover payments of interest and
principal; however, in the event of default or bankruptcy by the other party to
the agreement, retention of the collateral may be subject to legal proceedings.
5. FUTURES: The Fund uses S&P 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 invest incoming cash in the
market, or sell futures in response to cash outflows, thereby simulating a
fully invested position in the underlying index while maintaining a cash
balance for liquidity. The Fund may seek to enhance returns 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 held by the Fund and the prices of futures
contracts, and the possibility of an illiquid market.
Futures contracts are valued at their quoted daily settlement prices. The
aggregate principal amounts of the contracts are not recorded in the financial
statements. Fluctuations in the value of the contracts are recorded in the
Statement of Net Assets as an asset (liability) and in the Statement of
Operations as unrealized appreciation (depreciation) until the contracts are
closed, when they are recorded as realized futures gains (losses).
6. DISTRIBUTIONS: Distributions to shareholders are recorded on the
ex-dividend date.
7. OTHER: Dividend income is recorded on the ex-dividend date. Security
transactions are accounted for on the date securities are bought or sold. Costs
used to determine realized gains (losses) on the sale of investment securities
are those of the specific securities sold.
15
<PAGE> 18
B. The Vanguard Group 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 six
months ended June 30, 1997, the fee for such services represented an effective
annual rate of 0.06% of average net assets. The Fund's trustees and officers
are also directors and officers of Vanguard.
C. During the six months ended June 30, 1997, the Fund purchased
$2,328,264,000 of investment securities and sold $414,050,000 of investment
securities, other than temporary cash investments.
D. At June 30, 1997, net unrealized appreciation of investment securities for
financial reporting and federal income tax purposes was $5,441,924,000,
consisting of unrealized gains of $5,545,039,000 on securities that had risen
in value since their purchase and $103,115,000 in unrealized losses on
securities that had fallen in value since their purchase.
At June 30, 1997, the aggregate settlement value of open futures contracts
expiring in September 1997, and the unrealized appreciation were:
<TABLE>
<CAPTION>
--------------------------------------------------------------------
(000)
-----------------------------
NUMBER OF AGGREGATE
LONG SETTLEMENT UNREALIZED
FUTURES CONTRACTS CONTRACTS VALUE APPRECIATION
--------------------------------------------------------------------
<S> <C> <C> <C>
S&P 500 Index 504 $224,343 $3,575
--------------------------------------------------------------------
</TABLE>
E. The market value of securities on loan to broker/dealers at June 30, 1997,
was $29,951,000, for which the Fund held cash collateral of $30,790,000.
16
<PAGE> 19
TRUSTEES AND OFFICERS
JOHN C. BOGLE, Chairman of the Board and Director of The Vanguard Group, Inc.
and of each of the investment companies in The Vanguard Group.
JOHN J. BRENNAN, President, Chief Executive Officer, and Director of The
Vanguard Group, Inc. and of each of the investment companies in The
Vanguard Group.
ROBERT E. CAWTHORN, Chairman Emeritus and Director of Rhone-Poulenc Rorer,
Inc.; Managing Director of Global Health Care Partners/DLJ Merchant
Banking Partners; Director of Sun Company, Inc. and Westinghouse
Electric Corp.
BARBARA BARNES HAUPTFUHRER, Director of The Great Atlantic and Pacific Tea Co.,
Ikon Business Solutions, Inc., Raytheon Co., Knight-Ridder, Inc., and
Massa-chusetts Mutual Life Insurance Co.; Trustee Emerita of Wellesley
College.
BRUCE K. MACLAURY, President Emeritus of The Brookings Institution; Director of
American Express Bank Ltd., The St. Paul Companies, Inc., and National
Steel Corp.
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., Procter & Gamble 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; Principal of The Vanguard Group, Inc.; Treasurer
of each of the investment companies in The Vanguard Group.
KAREN E. WEST, Controller; Principal of The Vanguard Group, Inc.; Controller of
each of the investment companies in The Vanguard Group.
OTHER VANGUARD OFFICERS
ROBERT A. DISTEFANO, Senior Vice President, Information Technology.
JAMES H. GATELY, Senior Vice President,
Individual Investor Group.
IAN A. MACKINNON, Senior Vice President,
Fixed Income Group.
F. WILLIAM MCNABB III, Senior Vice President,
Institutional Investor Group.
RALPH K. PACKARD, Senior Vice President and
Chief Financial Officer.
[THE VANGUARD GROUP LOGO]
Please send your comments to us at:
Post Office Box 2600, Valley Forge, Pennsylvania 19482
Fund Information: 1-800-662-7447
Individual Account Services: 1-800-662-2739
Institutional Investor Services: 1-800-523-1036
http://www.vanguard.com [email protected]
All Vanguard funds are offered by prospectus only. Prospectuses contain more
complete information on advisory fees, distribution charges, and other expenses
and should be read carefully before investing or sending money. Prospectuses
may be obtained directly from The Vanguard Group.
(C) 1997 Vanguard Marketing Corporation, Distributor
<PAGE> 20
[PHOTO]
THE VANGUARD FAMILY OF FUNDS
EQUITY AND BALANCED FUNDS
GROWTH AND INCOME FUNDS
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Vanguard/Windsor II
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Vanguard Growth and Income Portfolio
Vanguard Selected Value Portfolio
Vanguard/Trustees' Equity-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 Portfolios
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
INTERNATIONAL FUNDS
Vanguard International Growth Portfolio
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INDEX FUNDS
Vanguard Index Trust
Vanguard Tax-Managed Fund
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Vanguard Bond Index Fund
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FIXED-INCOME FUNDS
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Vanguard Money Market Reserves
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INCOME FUNDS
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(CA, NJ, OH, PA)
TAX-EXEMPT INCOME FUNDS
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(CA, FL, NJ, NY, OH, PA)
Q942-6/97
