<PAGE> 1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT (NO. 33-34494) UNDER
THE SECURITIES ACT OF 1933
POST-EFFECTIVE AMENDMENT NO. 11
AND
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY
ACT OF 1940
AMENDMENT NO. 12
VANGUARD INSTITUTIONAL
INDEX FUND
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
100 VANGUARD BOULEVARD, P.O. BOX 2600,
MALVERN, PA 19355-0741
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)
REGISTRANT'S TELEPHONE NUMBER (610) 669-1000
RAYMOND J. KLAPINSKY, ESQUIRE
P.O. BOX 876
VALLEY FORGE, PA 19482
IT IS PROPOSED THAT THIS FILING BECOME EFFECTIVE
on July 7, 1997 pursuant to paragraph (b) of Rule 485.
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
As soon as practicable after this Registration Statement becomes effective.
WE HAVE ELECTED TO REGISTER AN INDEFINITE NUMBER OF SHARES PURSUANT TO RULE
24F-2 UNDER THE INVESTMENT COMPANY ACT OF 1940. WE FILED OUR RULE 24F-2 NOTICE
FOR THE YEAR ENDED DECEMBER 31, 1996 ON FEBRUARY 27, 1997.
================================================================================
<PAGE> 2
VANGUARD INSTITUTIONAL INDEX FUND
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
FORM N-1A
ITEM NUMBER LOCATION IN PROSPECTUS
<C> <S> <C>
Item 1. Cover Page.................................... Cover Page
Item 2. Synopsis...................................... Fund and Trust Expenses
Item 3. Condensed Financial Information............... Fund Expenses, Financial Highlights
Item 4. General Description of Registrant............. Investment Objective; Investment
Limitations; Investment Policies;
Investment Risks; General Information
Item 5. Management of the Fund........................ Management and Investment Advisory
Services
Item 5A. Management's Discussion of Fund Performance... Herein incorporated by reference to
Registrant's Annual Report to
Shareholders dated December 31, 1996
filed with the Securities and
Exchange Commission's EDGAR system on
February 20, 1997
Item 6. Capital Stock and Other Securities............ Opening an Account and Purchasing
Shares; Selling Shares; The Share
Price of the Fund and Each Portfolio;
Dividends, Capital Gains and Taxes;
General Information
Item 7. Purchase of Securities Being Offered.......... Opening an Account and Purchasing
Shares; Exchanging Shares; Exchange
Privilege Limitations
Item 8. Redemption or Repurchase...................... Selling Shares
Item 9. Pending Legal Proceedings..................... Not Applicable
<CAPTION>
FORM N-1A LOCATION IN STATEMENT
ITEM NUMBER OF ADDITIONAL INFORMATION
<C> <S> <C>
Item 10. Cover Page.................................... Cover Page
Item 11. Table of Contents............................. Cover Page
Item 12. General Information and History............... Not Applicable
Item 13. Investment Objectives and Policies............ Investment Objective and Policies;
Investment Limitations
Item 14. Management of the Registrant.................. Management and Advisory Services
Item 15. Control Persons and Principal Holders
of Securities................................. Not Applicable
Item 16. Investment Advisory and Other Services........ Management and Advisory Services
Item 17. Brokerage Allocation and Other Practices...... Portfolio Transactions
Item 18. Capital Stock and Other Securities............ Description of Shares and Voting
Rights
Item 19. Purchase, Redemption and Pricing of Securities
Being Offered................................. Purchase of Shares; Redemption of
Shares
Item 20. Tax Status.................................... Not Applicable
Item 21. Underwriters.................................. Not Applicable
Item 22. Calculations of Performance Data.............. Yield and Total Return; Performance
Measures
Item 23. Financial Statements.......................... Financial Statements
</TABLE>
<PAGE> 3
[FLAG LOGO]
P R O S P E C T U S
JULY 7, 1997
VANGUARD INSTITUTIONAL INDEX FUND
Institutional Shares
Institutional Plus Shares
VANGUARD INDEX TRUST
Institutional Shares
of
Extended Market Portfolio
Total Stock Market Portfolio
Small Capitalization Stock Portfolio
Vanguard Group Logo
<PAGE> 4
================================================================================
PROSPECTUS -- JULY 7, 1997
================================================================================
FUND INFORMATION: 1-800-523-1036
- --------------------------------------------------------------------------------
INVESTMENT
OBJECTIVES AND
POLICIES The Vanguard index funds (the "Funds") offered in this
prospectus are Vanguard Institutional Index Fund and
three Portfolios of Vanguard Index Trust (the Extended
Market, Total Stock Market and Small Capitalization Stock
Portfolios). The Funds are open-end, diversified
investment companies. Each Fund invests in common stocks
in order to match the investment performance of a
distinct market index. There is no assurance that the
Funds will achieve their stated objectives. Shares of the
Funds are neither insured nor guaranteed by any agency of
the U.S. Government, including the FDIC.
- --------------------------------------------------------------------------------
INVESTMENT
ALTERNATIVES VANGUARD INSTITUTIONAL INDEX FUND offers two, separate
classes of shares. The "Institutional Shares" are
designed for investors who meet the minimum initial
investment of $10 million and may require special
employee benefit plan services. The "Institutional Plus
Shares" are designed for investors who meet the minimum
initial investment of $200 million and do not require
special employee benefit plan services. This prospectus
relates to both the Institutional Shares and the
Institutional Plus Shares of Vanguard Institutional Index
Fund.
VANGUARD INDEX TRUST -- EXTENDED MARKET PORTFOLIO, TOTAL
STOCK MARKET PORTFOLIO, AND SMALL CAPITALIZATION STOCK
PORTFOLIO each offers two, separate classes of shares.
This prospectus relates to the "Institutional Shares" of
these Funds, which are designed for investors who meet
the minimum initial investment of $10 million and
generally do not require special employee benefit plan
services. The "Investor Shares" of the Funds feature a
$3,000 minimum initial investment and are offered by a
separate prospectus. To obtain information on the
Investor Shares, please call 1-800-662-7447 (SHIP),
Monday through Friday, from 8:00 a.m. to 9:00 p.m. and
Saturday from 9:00 a.m. to 4:00 p.m.
Each Fund's separate share classes have different
expenses; as a result, their investment performance will
vary.
- --------------------------------------------------------------------------------
OPENING AN
ACCOUNT Shares of the Funds may be purchased by Federal Funds
wire of the minimum initial investment. In certain
circumstances, a portfolio transaction fee may be
deducted from purchases of Vanguard Institutional Index
Fund and the Total Stock Market Portfolio. A portfolio
transaction fee of 0.5% is deducted from purchases of the
Extended Market and Small Capitalization Stock
Portfolios. These fees offset the Funds' transaction
costs of buying and selling securities.
- --------------------------------------------------------------------------------
ABOUT THIS
PROSPECTUS This prospectus is designed to set forth concisely the
information you should know about the Funds before you
invest. It should be retained for future reference.
"Statements of Additional Information" containing
additional information about Vanguard Institutional Index
Fund (dated July 7, 1997) and Vanguard Index Trust (dated
July 7, 1997) have been filed with the Securities and
Exchange Commission. These Statements have been
incorporated by reference into this prospectus. Copies
may be obtained, along with other information about the
Funds, without charge by contacting Vanguard or visiting
the Securities and Exchange Commission's web site
(http.//www.sec.gov).
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
<TABLE>
<S> <C> <C> <C> <C> <C>
Highlights................... 2 Implementation of Policies... 14 SHAREHOLDER GUIDE
Fund Expenses................ 4 Investment Limitations....... 19 Opening an Account and
Financial Highlights......... 6 Management and Investment Purchasing Shares............ 26
Yield and Total Return....... 10 Advisory Services............ 19 Trade Date Policy............ 28
FUND INFORMATION Portfolio Transactions....... 21 Selling Your Shares.......... 29
Investment Objectives........ 10 Dividends, Capital Gains Exchanging Your Shares....... 30
Investment Policies.......... 11 and Taxes.................... 22 Exchange Privilege 30
Investment Risks............. 13 The Share Price of Each 23 Limitations..................
Who Should Invest............ 14 Fund......................... 24 Important Information About 30
General Information.......... Telephone Transactions....... 31
Other Account Information....
</TABLE>
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
- --------------------------------------------------------------------------------
<PAGE> 5
HIGHLIGHTS
This prospectus describes Vanguard Institutional Index
Fund (Institutional and Institutional Plus Shares) and
Vanguard Index Trust -- Extended Market Portfolio, Total
Stock Market Portfolio and Small Capitalization Stock
Portfolio (Institutional Shares, only). Unlike other
mutual funds which generally attempt to "beat" market
averages with often unpredictable results, each of these
Funds seeks to "match" the performance of a different
stock market benchmark or index. The Funds are expected
to provide highly predictable returns relative to their
benchmarks. The Funds offer investors the advantages of
a "passive" approach to investing. These include low
investment costs, broad diversification among
securities, minimal portfolio turnover, and relative
predictability.
As with any mutual fund, there is no assurance that the
Funds will meet their objectives.
- --------------------------------------------------------------------------------
INVESTMENT
OBJECTIVES AND
POLICIES The Funds are open-end, diversified investment companies
designed as "index" funds.
VANGUARD INSTITUTIONAL
INDEX FUND The Vanguard Institutional Index Fund seeks to replicate
the performance of the S&P 500 Index.
------------------------------------------------------------------------------
VANGUARD INDEX TRUST Vanguard Index Trust consists of six separate
Portfolios, each of which invests in U.S. common stocks.
The Institutional Shares of three Vanguard Index Trust
Portfolios are offered through this prospectus:
- The EXTENDED MARKET PORTFOLIO seeks to replicate the
performance of the Wilshire 4500 Index.
- The TOTAL STOCK MARKET PORTFOLIO seeks to replicate
the performance of the Wilshire 5000 Index.
- The SMALL CAPITALIZATION STOCK PORTFOLIO seeks to
replicate the performance of the Russell 2000 Small
Stock Index. PAGE 10
- --------------------------------------------------------------------------------
INVESTMENT
RISKS The Funds are subject to stock market risk, which is the
possibility that common stock prices will decline over
short or extended periods. U.S. stock markets tend to be
cyclical, with periods when stock prices generally rise
and periods when stock prices generally decline.
Because of the risks associated with common stocks, the
Funds are intended to be long-term investment vehicles
and are not designed to provide investors with a means
of speculating on short-term market movements. Investors
should not consider an investment in any one portfolio a
complete investment program, but should maintain
holdings of securities with different risk
characteristics -- including U.S. common stocks, bonds
and money market instruments. For further information
concerning the risks associated with investing in the
Funds, see "Investment Risks." PAGE 13
- --------------------------------------------------------------------------------
2
<PAGE> 6
THE VANGUARD
GROUP Vanguard Index Trust is a member of The Vanguard Group
of Investment Companies, a group of more than 30
investment companies with more than 90 distinct
investment portfolios and total assets in excess of $270
billion. The Vanguard Group, Inc. ("Vanguard"), a
jointly owned subsidiary of the Vanguard funds, provides
all corporate management, administrative, distribution
and shareholder accounting services on an at-cost basis
to the funds in the Group. Vanguard Institutional Index
Fund is not part of the Group, however, it employs
Vanguard to provide virtually all of its necessary
services. PAGE 19
- --------------------------------------------------------------------------------
INVESTMENT
ADVISER The Funds receive investment advisory services from
Vanguard's Core Management Group. PAGE 19
- --------------------------------------------------------------------------------
FEES AND EXPENSES The following transaction fees apply to share purchases:
<TABLE>
<CAPTION>
FEE DEDUCTED
FROM PURCHASES
<S> <C>
Vanguard Institutional Index Fund None*
Vanguard Extended Market Portfolio .5%
Vanguard Total Stock Market Portfolio None*
Vanguard Small Capitalization Stock Portfolio .5%
</TABLE>
* Under certain circumstances, Vanguard Institutional
Index Fund and Vanguard Total Stock Market Portfolio
may deduct a portfolio transaction fee, ranging from
0.08% to 0.20%, from purchases of their shares.
Where portfolio transaction fees apply, they are paid
directly to the Fund to offset transaction costs of
buying securities. PAGE 5
- --------------------------------------------------------------------------------
3
<PAGE> 7
FUND EXPENSES The following tables illustrate ALL expenses and fees
that you would incur as a shareholder of each share
class of Vanguard Institutional Index Fund and Vanguard
Index Trust -- Extended Market Portfolio, Total Stock
Market Portfolio and Small Capitalization Portfolio.
Because the Institutional Plus Shares of Vanguard
Institutional Index Fund and the Institutional Shares of
the other Funds were not offered prior to July 7, 1997,
the table is based on the historical expenses of these
Funds' other share classes for the 1996 fiscal year. The
expenses and fees for the Institutional Shares of
Vanguard Institutional Index Fund and the Investor
Shares of the other Funds are also based upon those
incurred during the 1996 fiscal year.
<TABLE>
<CAPTION>
INSTITUTIONAL INSTITUTIONAL INSTITUTIONAL
PLUS INSTITUTIONAL SHARES OF SHARES OF
SHARES OF SHARES OF TOTAL SMALL
SHAREHOLDER VANGUARD EXTENDED STOCK CAPITALIZATION
TRANSACTION INSTITUTIONAL MARKET MARKET STOCK
EXPENSES INDEX FUND PORTFOLIO PORTFOLIO PORTFOLIO+
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales Load Imposed on Purchases............... None* None** None* None**
Sales Load Imposed on Reinvested Dividends.... None None None None
Redemption Fees............................... None None None None
Exchange Fees................................. None None None None
</TABLE>
<TABLE>
<CAPTION>
INSTITUTIONAL INSTITUTIONAL INSTITUTIONAL
PLUS INSTITUTIONAL SHARES OF SHARES OF
SHARES OF SHARES OF TOTAL SMALL
VANGUARD EXTENDED STOCK CAPITALIZATION
ANNUAL FUND INSTITUTIONAL MARKET MARKET STOCK
OPERATING EXPENSES INDEX FUND PORTFOLIO PORTFOLIO PORTFOLIO+
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Management and Administrative Expenses........ .025% .06% .06% .08%
Investment Advisory Fees...................... None None None None
12b-1 Fees.................................... None None None None
Other Expenses
Distributions Costs......................... None .02% .02% .02%
Miscellaneous Expenses...................... None .02% .02% .02%
----- ----- ----- -----
TOTAL OPERATING EXPENSES............. 0.025% 0.10% 0.10% 0.12%
===== ===== ===== =====
</TABLE>
* As described on page 5, these Funds reserve the right to deduct a portfolio
transaction fee, ranging from 0.08% to 0.20% from purchases of their shares.
** As described on page 5, these Funds deduct a 0.5% portfolio transaction fee
from each purchase of shares.
+ Formerly Vanguard Small Capitalization Stock Fund, Inc.
4
<PAGE> 8
<TABLE>
<CAPTION>
INVESTOR INVESTOR
INSTITUTIONAL INVESTOR SHARES OF SHARES OF
SHARES OF SHARES OF TOTAL SMALL
SHAREHOLDER VANGUARD EXTENDED STOCK CAPITALIZATION
TRANSACTION INSTITUTIONAL MARKET MARKET STOCK
EXPENSES INDEX FUND PORTFOLIO PORTFOLIO PORTFOLIO+
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Sales Load Imposed on Purchases............... None* None** None None**
Sales Load Imposed on Reinvested Dividends.... None None None None
Redemption Fees............................... None None None None
Exchange Fees................................. None None None None
</TABLE>
<TABLE>
<CAPTION>
INVESTOR INVESTOR
INSTITUTIONAL INVESTOR SHARES OF SHARES OF
SHARES OF SHARES OF TOTAL SMALL
VANGUARD EXTENDED STOCK CAPITALIZATION
ANNUAL FUND INSTITUTIONAL MARKET MARKET STOCK
OPERATING EXPENSES INDEX FUND PORTFOLIO PORTFOLIO PORTFOLIO+
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Management & Administrative Expenses.......... 0.06% 0.21% 0.18% 0.21%
Investment Advisory Fees...................... None None None None
12b-1 Fees.................................... None None None None
Other Expenses
Distributions Costs......................... None 0.02% 0.02% 0.02%
Miscellaneous Expenses...................... None 0.02% 0.02% 0.02%
----- ----- ----- -----
TOTAL OPERATING EXPENSES.................. 0.06% 0.25% 0.22% 0.25%
===== ===== ===== =====
</TABLE>
*As described below, the Fund reserves the right to deduct a portfolio
transaction fee, ranging from 0.08% to 0.20%, from purchases of its shares.
**As described below, these Funds deduct a 0.5% portfolio transaction fee from
each purchase of shares.
+Formerly Vanguard Small Capitalization Stock Fund, Inc.
- --------------------------------------------------------------------------------
PORTFOLIO
TRANSACTION
FEES Vanguard Institutional Index Fund and the Total Stock
Market Portfolio each reserves the right to deduct a
portfolio transaction fee, ranging from 0.08% to 0.20%,
from purchases of their shares, if any one purchase or
cumulative purchases are of a size that is reasonably
deemed to be disruptive to efficient portfolio
management. A prospective investor may determine whether
this fee will apply by calling Vanguard's Institutional
Investor Services Department at 1-800-523-1036 before
purchasing shares.
The Extended Market Portfolio and Small Capitalization
Stock Portfolio each assesses a portfolio transaction
fee equal to 0.5% of the dollar amount invested. All
portfolio transaction fees are paid to the respective
Fund, not to Vanguard. They are not sales charges.
These fees apply to initial investments in the
respective Funds and all subsequent purchases (including
purchases made by exchange from another Vanguard fund),
but not to reinvested dividend or capital gains
distributions. Portfolio transaction fees are deducted
automatically from the amount invested; they cannot be
paid separately.
The purpose of these fees is to allocate transaction
costs associated with new purchases to investors making
those purchases, thus insulating existing shareholders
from those transaction costs. These costs include: (1)
brokerage costs; (2) market impact costs -- i.e., the
increase in market prices which may result when a Fund
purchases thinly traded stocks; and, most importantly,
(3) the effect of the "bid-ask" spread in the
over-the-counter market. (Securities in the
over-the-counter market
5
<PAGE> 9
are bought at the "ask" or purchase price, but are
valued in a Fund at the mean of the "bid" or sale, and
"ask" prices).
The fees represent Vanguard's estimate of the
transaction costs incurred by the Funds in acquiring
stocks in their respective markets. Without the fees,
the Funds, which incur these costs directly, would
experience reduced investment performance for all of
their shareholders. With the fees, the transaction costs
of acquiring additional stocks are borne not by all
existing shareholders, but by those investors making
additional purchases. Because the purchaser, not the
Funds, bears these costs, the Funds are expected to
track their respective benchmark indexes more closely.
The purpose of these tables is to assist an investor in
understanding the various expenses that an investor in
each Fund would bear directly or indirectly.
The following example illustrates the expenses that an
investor would incur on a $1,000 investment over various
periods, assuming (1) a 5% annual rate of return; and
(2) redemption at the end of each period. As noted in
the table above, there are no redemption fees of any
kind.
<TABLE>
<CAPTION>
1 3 5 10
YEAR YEARS YEARS YEARS
-------------------------------------------------------------------------
<S> <C> <C> <C> <C>
VANGUARD INSTITUTIONAL INDEX FUND
Institutional Plus Shares................ $ 0 $ 1 $ 1 $ 3
Institutional Shares..................... $ 1 $ 2 $ 3 $ 8
VANGUARD INDEX TRUST
EXTENDED MARKET PORTFOLIO
Institutional Shares..................... $ 6 $ 8 $11 $18
Investor Shares.......................... $ 8 $13 $19 $37
TOTAL STOCK MARKET PORTFOLIO
Institutional Shares..................... $ 1 $ 3 $ 6 $13
Investor Shares.......................... $ 2 $ 7 $12 $28
SMALL CAPITALIZATION STOCK PORTFOLIO
Institutional Shares..................... $ 6 $ 9 $12 $20
Investor Shares.......................... $ 8 $13 $19 $37
</TABLE>
These estimates include an account maintenance fee of
$10 per year for the Investor Shares of the Extended
Market Portfolio, Total Stock Market Portfolio and Small
Capitalization Stock Portfolio. This fee applies to
accounts with balances less than $10,000 only.
Any relevant transaction fees are also included in these
estimates.
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION
OF PAST OR FUTURE EXPENSES OR PERFORMANCE. ACTUAL
EXPENSES MAY BE HIGHER OR LOWER THAN THOSE SHOWN.
- --------------------------------------------------------------------------------
FINANCIAL
HIGHLIGHTS The following financial highlights for a share
outstanding throughout each period presented have been
audited by Price Waterhouse LLP, independent
accountants, whose reports on the financial statements,
which include this information, were unqualified. This
information should be read in conjunction with the
financial statements and notes thereto appearing in
Vanguard Institutional Index Fund's 1996 Annual Report
to Shareholders and Vanguard Index Trust's 1996 Annual
Report
6
<PAGE> 10
to Shareholders relating to the Extended Market, Total
Stock Market and Small Capitalization Stock Portfolios,
which are incorporated by reference in the Funds'
Statements of Additional Information and this
Prospectus, and which appear, along with the reports of
Price Waterhouse LLP, in the Funds' 1996 Annual Reports
to Shareholders. For a more complete discussion of the
Funds' performance, please see the Funds' 1996 Annual
Reports to Shareholders, which may be obtained without
charge by writing to or calling Vanguard
(1-800-523-1036).
These financial highlights relate only to the
Institutional Shares of Vanguard Institutional Index
Fund and the Investor Shares of the Vanguard Index Trust
portfolios; each Fund's other share class was not in
existence during the periods covered here.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
VANGUARD INSTITUTIONAL INDEX FUND -- INSTITUTIONAL SHARES
--------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
----------------------------------------------------------- JULY 31, 1990*
1996 1995 1994 1993 1992 1991 TO DEC. 31, 1990
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING
OF PERIOD............... $57.93 $43.22 $44.20 $41.45 $39.91 $31.62 $34.10
------- ------ ------ ------ ------ ------ ------
INVESTMENT OPERATIONS
Net Investment Income... 1.38 1.28 1.23 1.20 1.17 1.16 .52
Net Realized and
Unrealized Gain (Loss)
on Investments........ 11.90 14.86 (.66) 2.92 1.79 8.35 (2.48)
------ ------ ------ ------ ------ ------ ------
TOTAL FROM INVESTMENT
OPERATIONS.......... 13.28 16.14 .57 4.12 2.96 9.51 (1.96)
- ------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net
Investment Income..... (1.36) (1.27) (1.21) (1.19) (1.17) (1.16) (.52)
Distributions from
Realized Capital
Gains................. (.99) (.16) (.34) (.18) (.25) (.06) --
------ ------ ------ ------ ------ ------ ------
TOTAL DISTRIBUTIONS... (2.35) (1.43) (1.55) (1.37) (1.42) (1.22) (.52)
- ------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF
PERIOD.................. $68.86 $57.93 $43.22 $44.20 $41.45 $39.91 $31.62
- ------------------------------------------------------------------------------------------------------------
TOTAL RETURN.............. 23.06% 37.60% 1.31% 10.02% 7.54% 30.34% (5.74)%
- ------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period
(Millions).............. $11,426 $6,674 $3,265 $3,103 $1,525 $1,069 $512
Ratio of Total Expenses to
Average Net Assets...... 0.06% 0.06% 0.07% 0.07% 0.07% 0.08% 0.09%**
Ratio of Net Investment
Income to Average Net
Assets.................. 2.18% 2.49% 2.80% 2.72% 2.94% 3.15% 3.98%**
Portfolio Turnover Rate... 9% 4%+ 23%+ 4%+ 9%+ 4% 2%
Average Commission Rate
Paid.................... $.0167 N/A N/A N/A N/A N/A N/A
</TABLE>
* Commencement of operations.
** Annualized.
+ The portfolio turnover rates excluding in-kind redemptions were 4%, 19%,
3%, and 6%, respectively.
7
<PAGE> 11
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------
EXTENDED MARKET PORTFOLIO -- INVESTOR SHARES
----------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------------------- DEC. 21,+
1996 1995 1994 1993 1992 1991 1990 1989 1988 TO 31, 1987
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF
PERIOD............... $24.07 $18.52 $19.43 $17.35 $15.82 $11.48 $13.92 $11.60 $9.99 $10.00
----- ----- ----- ------ ------ ------ ------ ------ ------ --------
INVESTMENT OPERATIONS
Net Investment
Income............. .34 .30 .28 .23 .24 .25 .30 .26 .34 .03
Net Realized and
Unrealized Gain
(Loss) on
Investments........ 3.85 5.95 (.62) 2.28 1.72 4.54 (2.25) 2.52 1.63 (.04)
----- ----- ----- ------ ------ ------ ------ ------ ------ --------
TOTAL FROM
INVESTMENT
OPERATIONS....... 4.19 6.25 (.34) 2.51 1.96 4.79 (1.95) 2.78 1.97 (.01)
- ---------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net
Investment
Income............. (.34) (.30) (.28) (.23) (.25) (.25) (.33) (.23) (.20) --
Distributions from
Realized Capital
Gains.............. (1.72) (.40) (.29) (.20) (.18) (.20) (.16) (.23) (.16) --
----- ----- ----- ------ ------ ------ ------ ------ ------ --------
TOTAL
DISTRIBUTIONS.... (2.06) (.70) (.57) (.43) (.43) (.45) (.49) (.46) (.36) --
- --------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END
OF PERIOD............ $26.20 $24.07 $18.52 $19.43 $17.35 $15.82 $11.48 $13.92 $11.60 $9.99
================================================================================================================================
TOTAL RETURN*......... 17.65% 33.80% (1.76)% 14.49% 12.47% 41.85% (14.05)% 24.10% 19.75% (0.10)%
================================================================================================================================
RATIOS/SUPPLEMENTAL
DATA
Net Assets, End of
Period (Millions).... $2,099 $1,523 $967 $928 $585 $372 $179 $147 $35 $5
Ratio of Total
Expenses to Average
Net Assets........... 0.25% 0.25% 0.20% 0.20% 0.20% 0.19% 0.23% 0.23% 0.24% 0%
Ratio of Net
Investment Income to
Average Net Assets... 1.42% 1.51% 1.51% 1.48% 1.73% 2.14% 2.68% 2.92% 2.90% 0%
Portfolio Turnover
Rate................. 22% 15% 19% 13% 9% 11% 9% 14% 26% 3%
Average Commission
Rate Paid............ $.0235 N/A N/A N/A N/A N/A N/A N/A N/A N/A
</TABLE>
* Total return figures do not reflect applicable transaction fees on purchases
or the annual account maintenance fee of $10.
+ Commencement of Operations.
<TABLE>
<CAPTION>
----------------------------------------------------
TOTAL STOCK MARKET PORTFOLIO -- INVESTOR SHARES
----------------------------------------------------
MARCH 16+,
YEAR ENDED DEC. 31, 1992, TO
--------------------------------------------- DEC. 31,
1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD........................ $15.04 $11.37 $11.69 $10.84 $10.00
----- ----- ----- ----- -------
INVESTMENT OPERATIONS
Net Investment Income...................................... .29 .29 .27 .26 .23
Net Realized and Unrealized Gain (Loss) on Investments..... 2.84 3.75 (.29) .88 .84
----- ----- ----- ----- -------
TOTAL FROM INVESTMENT OPERATIONS......................... 3.13 4.04 (.02) 1.14 1.07
- -------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income....................... (.29) (.28) (.27) (.26) (.23)
Distributions from Realized Capital Gains.................. (.11) (.09) (.03) (.03) --
----- ----- ----- ----- -------
TOTAL DISTRIBUTIONS...................................... (.40) (.37) (.30) (.29) (.23)
- -------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD.............................. $17.77 $15.04 $11.37 $11.69 $10.84
===============================================================================================================================
TOTAL RETURN**.............................................. 20.96% 35.79% (0.17)% 10.62% 10.41%
===============================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions)........................ $3,531 $1,571 $786 $512 $275
Ratio of Total Expenses to Average Net Assets............... 0.22% 0.25% 0.20% 0.20% 0.21%*
Ratio of Net Investment Income to Average Net Assets........ 1.86% 2.14% 2.35% 2.31% 2.42%*
Portfolio Turnover Rate..................................... 3% 3% 2% 1% 3%
Average Commission Rate Paid................................ $.0216 N/A N/A N/A N/A
</TABLE>
* Annualized.
** Total return figures do not reflect the .25% transaction fee on purchases
through 1995 or the annual account maintenance fee of $10. Subscription
period for the Portfolio was from March 16, 1992, to April 26, 1992, during
which time all assets were held in money market instruments. Performance
measurement began on April 27, 1992.
+ Commencement of operations.
8
<PAGE> 12
<TABLE>
<CAPTION>
-----------------------------------------------------------------------
SMALL CAPITALIZATION STOCK PORTFOLIO -- INVESTOR SHARES(1)
-----------------------------------------------------------------------
YEAR ENDED OCT. 1,
DECEMBER 31, FEB. 1 TO 1993 TO YEAR ENDED SEPTEMBER 30,
-------------- DEC. 31, JAN. 31, -------------------------------------
1996 1995 1994** 1994** 1993 1992 1991 1990(2)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF
PERIOD........................... $18.61 $14.99 $16.24 $16.23 $12.63 $12.03 $8.55 $11.88
------ ------ -------- ------- ------ ------ ------ -------
INVESTMENT OPERATIONS
Net Investment Income (Loss)..... .26 .24 .20 .05 .20 .19 .20 .17
Net Realized and Unrealized Gain
(Loss) on Investments.......... 3.07 4.06 (.86) .96 3.73 .88 3.60 (3.46)
----- ------ -------- ------- ------ ------ ------ -------
TOTAL FROM INVESTMENT
OPERATIONS................... 3.33 4.30 (.66) 1.01 3.93 1.07 3.80 (3.29)
- ------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment
Income......................... (.27) (.23) (.22) (.18) (.18) (.18) (.18) (.04)
Distributions from Realized
Capital Gains.................. (1.44) (.45) (.37) (.82) (.15) (.29) (.14) --
----- ------ -------- ------- ------ ------ ------ -------
TOTAL DISTRIBUTIONS............ (1.71) (.68) (.59) (1.00) (.33) (.47) (.32) (.04)
- ------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD.... $20.23 $18.61 $14.99 $16.24 $16.23 $12.63 $12.03 $8.55
==============================================================================================================================
TOTAL RETURN++.................... 18.12% 28.74% (4.00)% 6.65% 31.60% 9.34% 45.91% (27.73)%
==============================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period
(Millions)....................... $1,713 $971 $605 $533 $432 $202 $111 $40
Ratio of Total Expenses to Average
Net Assets....................... 0.25% 0.25% 0.17%* 0.18%* 0.18% 0.18% 0.21% 0.31%
Ratio of Net Investment Income
(Loss) to
Average Net Assets............... 1.51% 1.58% 1.50%* 1.16%* 1.47% 1.65% 2.11% 1.91%
Portfolio Turnover Rate........... 28% 28% 25% 5% 26% 26% 33% 40%
Average Commission Rate Paid...... $.0245 N/A N/A N/A N/A N/A N/A N/A
</TABLE>
<TABLE>
<CAPTION>
---------------------------------------------------------
SMALL CAPITALIZATION STOCK PORTFOLIO -- INVESTOR SHARES(1)
--------------------------------------------------------- YEAR ENDED SEPTEMBER 30,
----------------------------------
1989+ 1988 1987
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD............................................ $11.96 $15.73 $13.24
------ ------ ------
INVESTMENT OPERATIONS
Net Investment Income (Loss)................................................... .10 .03 (.04)
Net Realized and Unrealized Gain (Loss) on Investments......................... 2.13 (2.59) 4.42
------ ------ ------
TOTAL FROM INVESTMENT OPERATIONS............................................. 2.23 (2.56) 4.38
- -------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income........................................... (.14) -- --
Distributions from Realized Capital Gains...................................... (2.17) (1.21) (1.89)
------ ------ ------
TOTAL DISTRIBUTIONS.......................................................... (2.31) (1.21) (1.89)
- -------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD.................................................. $11.88 $11.96 $15.73
=========================================================================================================================
TOTAL RETURN++.................................................................. 18.83% (14.30)% 38.02%
=========================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions)............................................ $20 $27 $35
Ratio of Total Expenses to Average Net Assets................................... 1.00% 0.95% 0.92%
Ratio of Net Investment Income (Loss) to Average Net Assets..................... .65% .24% (.25)%
Portfolio Turnover Rate......................................................... 160% 68% 92%
Average Commission Rate Paid.................................................... N/A N/A N/A
</TABLE>
* Annualized.
** Unaudited.
(1) Results prior to January 31, 1994, are for the former Vanguard Small
Capitalization Stock Fund.
(2) Adjusted to reflect a 3-for-1 stock split as of February 3, 1990.
+ Prior to September 11, 1989, Schroder Capital Management International
provided investment advisory services to the Fund. Effective September 11,
1989, The Vanguard Group, Inc. began providing investment advisory
services to the Fund on an at-cost basis.
++ Total return figures do not reflect the annual account maintenance fees
of $10 or applicable portfolio transaction fees.
- --------------------------------------------------------------------------------
9
<PAGE> 13
YIELD AND TOTAL
RETURN From time to time each share class of the Funds may
advertise its yield and total return. Both yield and
total return figures are based on historical earnings
and are not intended to indicate future performance. The
"total return" of a class of shares of a fund refers to
the average annual compounded rates of return over one-,
five- and ten-year periods or for the life of the class
of shares of the fund (as stated in the advertisement)
that would equate an initial amount invested at the
beginning of a stated period to the ending redeemable
value of the investment, assuming the reinvestment of
all dividend and capital gains distributions. Any
advertised total returns for Vanguard Index
Trust -- Extended Market or Small Capitalization Stock
Portfolios will take into account the 0.5% transaction
fee on share purchases. The investment results of each
class of shares of the Funds will vary, due to their
different expenses.
In accordance with industry guidelines set forth by the
U.S. Securities and Exchange Commission, the Funds
calculate the "30-day yield" of each class of shares by
dividing the net investment income per share earned by
that class during a 30-day period by the net asset value
per share on the last day of the period. Net investment
income includes interest and dividend income per share
earned by the class of shares; it is net of all expenses
and all recurring and nonrecurring charges that have
been applied to all shareholder accounts of that class.
The yield calculation assumes that net investment income
per share earned by a class over 30 days is compounded
monthly for six months and then annualized. Methods used
to calculate advertised yields are standardized for all
stock and bond mutual funds. However, these methods
differ from the accounting methods used by the Funds to
maintain their books and records, and so the advertised
30-day yield may not fully reflect the income paid to an
investor's account or the yield reported in the Funds'
reports to shareholders.
- --------------------------------------------------------------------------------
INVESTMENT
OBJECTIVES The Funds are open-end, diversified investment companies
designed as "index" funds.
------------------------------------------------------------------------------
VANGUARD
INSTITUTIONAL
INDEX FUND
SEEKS TO MATCH
THE INVESTMENT
PERFORMANCE OF THE
S&P 500 INDEX
Vanguard Institutional Index Fund is an open-end
diversified investment company designed as an "index"
fund. It seeks to replicate the aggregate price and
yield performance, before Fund expenses, of the Standard
& Poor's 500 Composite Stock Price Index (the "S&P 500
Index"), an unmanaged index that emphasizes
large-capitalization companies. The correlation between
the performance of this Fund and the S&P 500 Index is
expected to be 0.95 or higher. A correlation of 1.00
would indicate perfect correlation. There is no
assurance that the Fund will achieve its stated
objective.
Vanguard Institutional Index Fund is neither sponsored
by or affiliated with Standard & Poor's Corporation.
The investment objective is fundamental and so cannot be
changed without the approval of a majority of the Fund's
shareholders.
------------------------------------------------------------------------------
10
<PAGE> 14
VANGUARD
INDEX TRUST
THE EXTENDED
MARKET, TOTAL STOCK
MARKET AND SMALL
CAPITALIZATION STOCK
PORTFOLIOS EACH
SEEKS TO MATCH
THE INVESTMENT
PERFORMANCE OF A
PARTICULAR STOCK
MARKET INDEX Vanguard Index Trust consists of six portfolios, each of
which seeks to provide investment results that
correspond to a particular stock market index. The
correlation between the performance of each portfolio
and its respective index is expected to be at least
0.95. Three of the portfolios are offered through this
prospectus: Extended Market, Total Stock Market and
Small Capitalization Stock Portfolios. Each of these
three Funds attempt to replicate the investment
performance of broad market indexes.
- The EXTENDED MARKET PORTFOLIO seeks to replicate the
aggregate price and yield performance of the Wilshire
4500 Index, an index which consists of more than 6,500
medium- and small-capitalization companies that are
not included in the S&P 500 Index.
- The TOTAL STOCK MARKET PORTFOLIO seeks to replicate
the aggregate price and yield performance of the
Wilshire 5000 Index, an index which consists of all
U.S. stocks that trade on a regular basis on either
the New York or American Stock Exchange or the NASDAQ
over-the-counter market. These stocks include the
large-capitalization companies of the S&P 500 Index,
with the exception of Royal Dutch and Unilever, N.V.,
which trade on the New York Stock Exchange as ADR's,
as well as the medium- and small-capitalization
companies of the Wilshire 4500 Index.
- The SMALL CAPITALIZATION STOCK PORTFOLIO seeks to
replicate the aggregate price and yield performance of
the Russell 2000 Small Stock Index (the "Russell
2000"), a broadly diversified small-capitalization
stock index consisting of approximately 2,000 common
stocks.
There is no assurance that the Funds will achieve their
stated objectives.
- --------------------------------------------------------------------------------
INVESTMENT
POLICIES
THE FUNDS USE
A "PASSIVE"
INVESTMENT APPROACH The Funds are not managed according to traditional
methods of "active" investment management, which involve
the buying and selling of securities based upon
economic, financial and market analysis and investment
judgment. Instead, the Funds utilizing a "passive" or
indexing investment approach, attempt to approximate the
investment performance of their respective indexes
through statistical procedures. The Funds are managed
without regard to tax ramifications.
The Funds are responsible for voting the shares of all
securities they hold.
The investment policies of the Funds are not fundamental
and so may be changed by the Boards of Trustees without
shareholder approval. However, shareholders would be
notified prior to a material change.
------------------------------------------------------------------------------
VANGUARD
INSTITUTIONAL
INDEX FUND Vanguard Institutional Index Fund attempts to remain
fully invested in common stocks. Under normal
circumstances, this Fund will invest at least 95% of its
assets in the common stocks of the S&P 500 Index and
futures contracts and options. This Fund may invest in
certain short-
11
<PAGE> 15
term fixed-income securities as cash reserves, although
cash or cash equivalents are normally expected to
represent less than 1% of its assets. Vanguard
Institutional Index Fund may also invest up to 20% of
its assets in stock futures contracts and options in
order to invest uncommitted cash balances, to maintain
liquidity to meet shareholder redemptions, or to
minimize trading costs. The Fund will not invest in cash
reserves, futures contracts or options as part of a
temporary defensive strategy, such as lowering its
investment in common stocks to protect against potential
stock market declines. Nor may the Fund use futures
contracts or options to leverage its net assets in an
attempt to speculate on potential stock market gains.
See "Implementation of Policies" for a description of
these and other investment practices of the Fund.
------------------------------------------------------------------------------
VANGUARD
INDEX TRUST The Extended Market, Total Stock Market, and Small
Capitalization Stock Portfolios invest in statistically
selected samples of the stocks included in each of their
respective indexes. This sampling technique is expected
to enable each of these Funds to track the price
movements of its respective index, while minimizing
brokerage, custodial, and accounting costs.
EXTENDED MARKET
PORTFOLIO
The EXTENDED MARKET PORTFOLIO invests in a statistically
selected sample of the more than 6,800 stocks included
in the Wilshire 4500 Index. Typically, this Fund invests
in approximately 2,000 stocks. Stocks are selected for
inclusion in the Fund based primarily on their
contribution to the Fund's market capitalization,
industry weightings and other fundamental
characteristics, such as price-earnings ratios, dividend
yields, price-to-book ratios and financial leverage. The
stocks held by this Fund are weighted to make the Fund's
aggregate investment characteristics similar to those of
the Wilshire 4500 Index as a whole.
TOTAL STOCK
MARKET PORTFOLIO
The TOTAL STOCK MARKET PORTFOLIO invests in a
statistically selected sample of the more than 7,300
stocks included in the Wilshire 5000 Index. Typically,
this Fund invests in approximately 2,700 stocks. Stocks
are selected for inclusion in the Fund based primarily
on their contribution to the Fund's market
capitalization, industry weightings and other
fundamental characteristics such as price-earnings
ratios, dividend yields, price-to-book ratios and
financial leverage. The stocks held by this Fund are
weighted to make the Fund's aggregate investment
characteristics similar to those of the Wilshire 5000
Index.
SMALL
CAPITALIZATION
STOCK PORTFOLIO
The SMALL CAPITALIZATION STOCK PORTFOLIO invests in a
statistically selected sample of the approximately 1,900
stocks included in the Russell 2000 Index. Typically,
this Fund invests in approximately 1,500 stocks. Stocks
are selected for inclusion in the Fund based on their
contribution to the Fund's market capitalization,
industry weightings and other fundamental
characteristics, such as price-earnings ratios, dividend
yields, price-to-book ratios and financial leverage. The
stocks held by the Fund are weighted to make the Fund's
aggregate investment characteristics similar to those of
the Russell 2000 Index as a whole.
12
<PAGE> 16
As with Vanguard Institutional Index Fund, these Funds
each attempt to remain fully invested in common stocks.
Under normal circumstances each Fund will invest at
least 95% of its assets in the common stocks of its
respective index and futures contracts and options. Each
Fund may invest in certain short-term fixed income
securities as cash reserves, although cash or cash
equivalents are normally expected to represent less than
1% of each Fund's assets. Each Fund may also invest up
to 20% of its assets in stock futures contracts and
options in order to invest uncommitted cash balances, to
maintain liquidity to meet shareholder redemptions, or
to minimize trading costs. The Funds will not invest in
cash reserves, futures contracts or options as part of a
temporary defensive strategy, such as lowering a Fund's
investment in common stocks to protect against potential
stock market declines. The Funds intend to remain fully
invested, to the extent practicable, in a pool of
securities which will duplicate the investment
characteristics of their respective indexes. See
"Implementation of Policies" for a description of these
and other investment practices of the Funds.
- --------------------------------------------------------------------------------
INVESTMENT
RISKS
THE FUNDS ARE
SUBJECT TO MARKET RISK As mutual funds investing primarily in common stocks,
the Funds are subject to MARKET RISK -- i.e., the
possibility that common stock prices will decline over
short or even extended periods. Both U.S. and foreign
stock markets tend to be cyclical, with periods when
stock prices generally rise and periods when prices
generally decline.
Common stocks, as measured by the S&P 500 Index, have
provided annual total returns (capital appreciation plus
dividend income), averaging +10.8% for all 10-year
periods from 1926 to 1996. Average return may not be
useful for forecasting future returns in any particular
period, as stock returns are quite volatile from year to
year.
------------------------------------------------------------------------------
VANGUARD
INDEX TRUST
THE EXTENDED MARKET,
TOTAL STOCK MARKET
AND SMALL
CAPITALIZATION STOCK
PORTFOLIOS MAY EXHIBIT
GREATER VOLATILITY
RELATIVE TO THE
S&P 500 INDEX
Historically, medium- and small-capitalization stocks
have been more volatile in price than the
larger-capitalization stocks included in the S&P 500
Index. Among the reasons for the greater price
volatility of these securities are the less certain
growth prospects of smaller firms, the lower degree of
liquidity in the markets for such stocks, and the
greater sensitivity of medium- and small-size companies
to changing economic conditions. Besides exhibiting
greater volatility, medium- and small-size company
stocks may, to a degree, fluctuate independently of
larger company stocks. Medium- and small-size company
stocks may decline in price as large company stocks
rise, or rise in price as large company stocks decline.
Medium- and small-size company stocks constitute the
investments of the Extended Market Portfolio, while the
Small Capitalization Stock Portfolio is composed
primarily of small-size company stocks. Investors in
these Funds should therefore expect that the Extended
Market and Small Capitalization Stock Portfolios will be
more volatile than, and may fluctuate independently of,
the S&P 500 Index.
Similarly, medium- and small-size company stocks
constituted approximately 30% of the net assets of the
Total Stock Market Portfolio on
13
<PAGE> 17
December 31, 1996. Investors in this Fund should
therefore also anticipate somewhat greater price
volatility in the Total Stock Market Portfolio relative
to the S&P 500 Index.
- --------------------------------------------------------------------------------
WHO SHOULD
INVEST Each Fund is designed for investors seeking to replicate
the total return of a different broad market index. The
Funds offer investors the advantages of a "passive"
approach to investing. These include low investment
costs, exceptional diversification among a wide range of
stocks, minimal portfolio turnover, and relative
predictability. Unlike other mutual funds, which
generally attempt to "beat" market averages with often
unpredictable results, the Funds seek to "match" the
performance of their underlying indexes and thus are
expected to provide a highly predictable return relative
to these benchmarks.
However, shareholders should expect to be fully exposed
to the market risks inherent in investing in stocks. As
the prices of stocks may be volatile, only investors
able to tolerate short-term, possibly substantial
fluctuations in the value of their investment, brought
about by generally declining stock prices, should
contemplate an investment in the Funds.
Investors may wish to reduce the potential risk of
investing in the Funds by purchasing shares on a
regular, periodic basis (dollar-cost averaging) rather
than making an investment in one lump sum.
The Funds are intended to be long-term investment
vehicles and are not designed to provide investors with
a means of speculating on short-term market movements.
Investors who engage in excessive account activity
generate additional costs which are borne by all
shareholders. In order to minimize such costs, the Funds
have adopted the following policies. Each reserves the
right to reject any purchase request (including exchange
purchases from other Vanguard portfolios) that is
reasonably deemed to be disruptive to efficient
portfolio management, either because of the timing of
the investment or previous excessive trading by the
investor. Additionally, the Funds have adopted exchange
privilege limitations as described in the section
"Exchange Privilege Limitations." Finally, the Funds
reserve the right to suspend the offering of their
shares.
Investors should not consider an investment in any one
Fund a complete investment program, but should maintain
holdings of securities with different risk
characteristics -- including common stocks, bonds and
money market instruments.
- --------------------------------------------------------------------------------
IMPLEMENTATION
OF POLICIES The Funds follow a variety of investment practices in an
effort to duplicate the total return of their respective
indexes.
------------------------------------------------------------------------------
VANGUARD
INSTITUTIONAL
INDEX FUND Vanguard Institutional Index Fund attempts to duplicate
the investment results of the S&P 500 Index by holding
all 500 stocks in approximately the same proportions as
they are represented in the Index. This indexing
technique is known as "complete replication."
14
<PAGE> 18
The S&P 500 Index is composed of 500 common stocks,
which are chosen by Standard & Poor's Corporation
("S&P") on a statistical basis to be included in the
Index. The inclusion of a stock in the S&P 500 Index in
no way implies that S&P believes the stock to be an
attractive investment. The 500 securities, most of which
trade on the New York Stock Exchange, represented, as of
December 31, 1996, approximately 70% of the market value
of all U.S. common stocks. Each stock in the S&P 500
Index is weighted by its market value.
Because of the market-value weighting, the 50 largest
companies in the S&P 500 Index currently account for
approximately 47% of the Index. Typically, companies
included in the S&P 500 Index are the largest and most
dominant firms in their respective industries. As of
December 31, 1996, the five largest companies in the
Index were: General Electric (2.9%), Coca Cola (2.3%),
Exxon Corporation (2.2%), Intel Corporation (1.9%) and
Microsoft Corporation (1.7%). The largest industry
categories were: banks (7.7%), telephone companies
(6.6%), pharmaceutical companies (6.4%), international
oil companies (5.8%) and computer companies (4.6%).
Vanguard Institutional Index Fund is not sponsored,
endorsed, sold or promoted by S&P. S&P makes no
representation or warranty, implied or express, to the
purchasers of the Fund or any member of the public
regarding the advisability of investing in index funds
or the ability of the S&P 500 Index to track general
stock market performance. S&P does not guarantee the
accuracy and/or the completeness of the S&P 500 Index or
any data included therein.
THE S&P MAKES NO WARRANTY, EXPRESS OR IMPLIED, AS TO
RESULTS TO BE OBTAINED BY THE FUND, OWNERS OF THE FUND,
OR ANY PERSON OR ENTITY FROM THE USE OF THE S&P 500 OR
ANY DATA INCLUDED THEREIN. S&P MAKES NO EXPRESS OR
IMPLIED WARRANTIES, AND HEREBY EXPRESSLY DISCLAIMS ALL
SUCH WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A
PARTICULAR PURPOSE FOR USE WITH RESPECT TO THE S&P 500
OR ANY DATA INCLUDED THEREIN.
S&P's only relationship to Vanguard Institutional Index
Fund is the licensing of the S&P marks and the S&P 500,
which is determined, composed and calculated by S&P
without regard to the Fund.
VANGUARD
INDEX TRUST
THE EXTENDED MARKET
PORTFOLIO INVESTS IN
MEDIUM- AND
SMALL-SIZE COMPANY
STOCKS While the S&P 500 Index includes the preponderance of
large market capitalization stocks, it excludes most of
the medium- and small-size companies which comprise the
remaining 30% of the capitalization of the U.S. stock
market. The Wilshire 4500 Index consists of all U.S.
stocks that are not in the S&P 500 Index and that trade
regularly on the New York and American Stock Exchanges
as well as in the NASDAQ over-the-counter market. More
than 6,500 stocks of medium- and small-capitalization
companies are included in the Wilshire 4500 Index.
15
<PAGE> 19
The Extended Market Portfolio will be unable to hold all
of the more than 6,500 issues which comprise the
Wilshire 4500 Index because of the costs involved and
the illiquidity of many of the securities. Instead, this
Fund will hold a representative sample of the securities
in the Wilshire 4500 Index.
THE TOTAL STOCK
MARKET PORTFOLIO
INVESTS IN A SAMPLE OF
ALL U.S. STOCKS Neither the S&P 500 Index nor the Wilshire 4500 Index
independently represents the U.S. stock market as a
whole. The Wilshire 5000 Index, which consists of all
regularly and publicly traded U.S. stocks, provides a
complete proxy for the U.S. stock market. More than
7,800 stocks, including large-, medium-, and
small-capitalization companies are included in the
Wilshire 5000 Index.
In an effort to replicate the investment performance of
the Wilshire 5000 Index, the Total Stock Market
Portfolio will invest in approximately 900 of the
largest stocks in the index and an additional
representative sample of the remaining stocks. As in the
case for the Extended Market Portfolio, the high
transaction costs and illiquidity of many of the smaller
stocks make complete replication of the Wilshire 4500
Index's holdings impractical.
The Extended Market and Total Stock Market Portfolios
are not sponsored, endorsed, sold or promoted by
Wilshire Associates. Wilshire(R) and Wilshire 5000(R)
are registered service marks of Wilshire Associates.
THE SMALL
CAPITALIZATION STOCK
PORTFOLIO INVESTS IN
SMALL-SIZE COMPANY
STOCKS The Small Capitalization Stock Portfolio attempts to
duplicate the investment results of the Russell 2000
Index by investing in approximately 1,500 of the 2,000
stocks in the Russell 2000 Index. The Russell 2000 Index
is composed of approximately 2,000 small-capitalization
common stocks. A company's stock market capitalization
is the total market value of its floating outstanding
shares. As of December 31, 1996, the average stock
market capitalization of the Russell 2000 was $660
million. As in the case of the Extended Market
Portfolio, the high transaction costs and illiquidity of
many of the small stocks contained in the Russell 2000
Index make complete replication of the holdings
impractical.
The Small Capitalization Stock Portfolio is neither
sponsored by nor affiliated with the Frank Russell
Company. Frank Russell's only relationship to the
Portfolio is the licensing of the use of the Russell
2000 Small Stock Index. Frank Russell Company is the
owner of the trademarks and copyrights relating to the
Russell indexes.
THE EXTENDED MARKET,
TOTAL STOCK MARKET
AND SMALL
CAPITALIZATION STOCK
PORTFOLIOS USE
SAMPLING TECHNIQUES The stocks to be included in the Extended Market, Total
Stock Market and Small Capitalization Stock Portfolios
will be selected utilizing a statistical sampling
technique known as "optimization."
This process selects stocks for each Fund so that
various industry weightings, market capitalizations, and
fundamental characteristics (e.g., price-to-book,
price-to-earnings, and debt-to-asset ratios, as well as
dividend yields) match those of their respective
indexes. For instance, if 10% of the capitalization of
the Wilshire 5000 consists of utility companies with
relatively large market capitalizations, then the Total
Stock Market Portfolio's stock holdings are constructed
so that approxi-
16
<PAGE> 20
mately 10% of this Fund's stocks represent utilities
with relatively large capitalizations.
This sampling technique is expected to be an effective
means of substantially duplicating the income and
capital returns of the Extended Market, Total Stock
Market and Small Capitalization Stock Portfolios' target
benchmarks. Over time, the correlation between the
performance of the Extended Market, Total Stock Market
and Small Capitalization Stock Portfolios and their
respective indexes, the Wilshire 4500 Index, Wilshire
5000 Index and Russell 2000 Index, is expected to be at
least 0.95. A correlation of 1.00 would indicate perfect
correlation, which would be achieved when the net asset
value of a Fund, including the value of its dividend and
capital gains distributions, increases or decreases in
exact proportion to changes in the respective target
benchmark.
Due to the use of the sampling technique, neither the
Extended Market Portfolio, Total Stock Market Portfolio
nor the Small Capitalization Stock Portfolio is expected
to track its benchmark index with the same degree of
accuracy as evidenced by the high degree of correlation
between Vanguard Institutional Index Fund and its
benchmark. However, the principal advantage of this
technique is to provide an efficient means to invest in
the universe of stocks. In particular, the three Funds
using sampling are expected to provide broad
diversification, and should operate at low costs due
both to their "passive" approach to portfolio management
and low portfolio turnover rate.
--------------------------------------------------------
EACH OF THE FUNDS
MAY INVEST IN SHORT-
TERM MONEY MARKET
INSTRUMENTS
Although they normally seek to remain substantially
fully invested in securities in their respective
indexes, the Funds each may invest temporarily in
certain short-term money market instruments. Such
securities may be used to invest uncommitted cash
balances or to maintain liquidity to meet shareholder
redemptions. These securities include: obligations of
the United States Government and its agencies or
instrumentalities; commercial paper, bank certificates
of deposit, and bankers' acceptances; and repurchase
agreements collateralized by these securities.
--------------------------------------------------------
DERIVATIVE INVESTING Derivatives are instruments whose values are linked to
or derived from an underlying security or index. The
most common and conventional types of derivative
securities are futures and options.
The Funds may utilize stock futures contracts, options,
warrants, and swap agreements to a limited extent.
Specifically, each Fund may enter into futures contracts
and options provided that not more than 5% of its assets
are required as a margin deposit for futures contracts
or options. Furthermore, not more than 20% of each
Fund's assets are to be invested in futures and options
at any time. Additionally, the Funds' investments in
warrants will not exceed more than 5% of each of their
assets (2% with respect to warrants not listed on the
New York or American Stock Exchanges).
17
<PAGE> 21
The Funds may invest in convertible securities but these
investments are not expected to exceed 5% of each of
their assets.
The risk of loss associated with futures contracts in
some strategies can be substantial due both to the low
margin deposits required and the extremely high degree
of leverage involved in futures pricing. As a result, a
relatively small price movement in a futures contract
may result in an immediate and substantial loss or gain.
However, the Funds will not use futures contracts,
options, warrants, convertible securities or swap
agreements for speculative purposes or to leverage their
net assets. Accordingly, the primary risks associated
with a Fund's use of these investments are: (i)
imperfect correlation between the change in market value
of the stocks held by a Fund and the prices of futures
contracts and options; and (ii) possible lack of a
liquid secondary market for a futures contract and the
resulting inability to close a futures position prior to
its maturity date. The risk of imperfect correlation
will be minimized by investing only in those contracts
whose behavior is expected to resemble that of the
Fund's underlying securities. The risk that a Fund will
be unable to close out a futures position will be
minimized by entering into such transactions on a
national exchange with an active and liquid secondary
market. However, options, warrants, convertible
securities and swap agreements purchased or sold
over-the-counter may be less liquid than exchange traded
securities. Illiquid securities, in general, may not
represent more than 15% of the net assets of any Fund.
Swap agreements are contracts between parties in which
one party agrees to make payments to the other party
based on the change in market value of a specified index
or asset. In return, the other party agrees to make
payments to the first party based on the return of a
different specified index or asset. Although swap
agreements entail the risk that a party will default on
its payment obligations thereunder, the Funds will
minimize this risk by entering into agreements that mark
to market no less frequently than quarterly. Swap
agreements also bear the risk that a Fund will not be
able to meet its obligation to the counterparty. This
risk will be mitigated by a Fund's investment in the
specific asset for which it is obligated to pay a
return.
--------------------------------------------------------
SECURITY LENDING
The Funds may lend their investment securities to
qualified institutional investors for either short-term
or long-term purposes of realizing additional income.
Loans of securities by the Funds will be collateralized
by cash, letters of credit, or securities issued or
guaranteed by the U.S. Government or its agencies. The
collateral will equal at least 100% of the current
market value of the loaned securities. Each Fund will
limit such loans so that they will not exceed 33 1/3 of
the value of its securities.
--------------------------------------------------------
18
<PAGE> 22
PORTFOLIO TURNOVER FOR
THE FUNDS IS EXPECTED
TO BE LOW Although they generally seek to invest for the long
term, the Funds retain the right to sell securities
irrespective of how long they have been held. It is
anticipated that the annual portfolio turnover of each
Fund will not exceed 50%. A turnover rate of 50% would
occur, for example, if one half of the securities of a
Fund were replaced within one year.
- --------------------------------------------------------------------------------
INVESTMENT
LIMITATIONS
THE FUNDS HAVE
ADOPTED CERTAIN
FUNDAMENTAL
LIMITATIONS Each Fund has adopted certain limitations on its
investment practices. Specifically, each Fund will not:
(a) invest more than 25% of its total assets in any one
industry;
(b) borrow money, except that the Fund may borrow from
banks (or through reverse repurchase agreements),
for temporary or emergency (not leveraging)
purposes, including the meeting of redemption
requests which might otherwise require the untimely
disposition of securities, in an amount not
exceeding 15% of the value of the Fund's net assets
(including the amount borrowed and the value of any
outstanding reverse repurchase agreements) at the
time the borrowing is made. Whenever borrowings
exceed 5% of the value of a Fund's net assets, the
Fund will not make any additional investments.
(c) with respect to 75% of its assets, (i) purchase
securities of any issuer (except obligations of the
U.S. Government and its instrumentalities) if, as a
result, more than 5% of the value of the Fund's
assets would be invested in the securities of such
issuer; or (ii) purchase more than 10% of the
outstanding voting securities of any issuer.
These investment limitations are considered at the time
investment securities are purchased. The limitations
described here and in the Statements of Additional
Information relating to the Funds may be changed only
with the approval of a majority of the shareholders of
the applicable Fund.
- --------------------------------------------------------------------------------
MANAGEMENT AND
INVESTMENT
ADVISORY SERVICES The Funds receive all of their essential
services -- including management, administrative,
shareholder, investment advisory, distribution and
marketing -- from The Vanguard Group, Inc. ("Vanguard").
Vanguard Institutional Index Fund employs Vanguard, and
pays it a fee, to provide these services. The Extended
Market, Total Stock Market and Small Capitalization
Stock Portfolios receive services from Vanguard on an
at-cost basis.
--------------------------------------------------------
VANGUARD ADMINISTERS
AND PROVIDES ADVISORY
SERVICES TO THE FUNDS
Vanguard Index Trust is a member of The Vanguard Group
of Investment Companies, a family of more than 30
investment companies with more than 90 distinct
investment portfolios and total assets in excess of $270
billion. Through their jointly-owned subsidiary,
Vanguard, Vanguard Index Trust and the other funds in
the Group obtain virtually all of their corporate
management, administrative, shareholder accounting and
distribution services. Vanguard also provides investment
advisory services to Vanguard Index Trust and to certain
Vanguard funds on an at-cost basis.
19
<PAGE> 23
As a result of Vanguard's unique corporate structure,
the Vanguard funds have costs substantially lower than
those of most competing mutual funds. In 1996, the
average expense ratio (annual costs including advisory
fees divided by total net assets) for the Vanguard funds
amounted to approximately .29% compared to an average of
1.22% for the mutual fund industry (data provided by
Lipper Analytical Services). Each fund that is a member
of The Vanguard Group of Investment Companies pays its
share of Vanguard's net expenses, which are allocated
among the funds under methods approved by the Board of
Directors (Trustees) of each fund. In addition, each
fund bears its own direct expenses, such as legal,
auditing and custodian fees.
------------------------------------------------------------------------------
VANGUARD PROVIDES
MANAGEMENT AND
ADMINISTRATIVE
PERSONNEL TO
THE FUNDS
Vanguard employs a supporting staff of management and
administrative personnel to provide the requisite
services to the Funds and also furnishes the Funds with
the necessary office space, furnishings and equipment.
The Officers of Vanguard Institutional Index Fund and
Vanguard Index Trust manage the day-to-day operations of
the Funds and are responsible to their respective Boards
of Trustees. The Trustees set broad policies for
Vanguard Institutional Index Fund and Vanguard Index
Trust and choose their Officers. A list of Trustees and
Officers and a statement of their present positions and
principal occupations during the past five years can be
found in the Statements of Additional Information of the
Funds.
The Funds are not actively managed, but are instead
administered by Vanguard Core Management Group using
computerized, quantitative techniques.
The Core Management Group manages the investment and
reinvestment of the Funds' assets and continuously
reviews, supervises, and administers the Funds'
investment programs with respect to those assets.
The Core Management Group also provides investment
advisory services to several other Vanguard funds,
including Vanguard Balanced Index Fund, Vanguard
International Equity Index Fund, the Equity Index
Portfolio of the Vanguard Variable Insurance Fund, the
Growth and Income and Capital Appreciation Portfolios
and the equity portion of the Balanced Portfolio of
Vanguard Tax-Managed Fund, the Aggressive Growth
Portfolio of Vanguard Horizon Fund, the REIT Index of
Vanguard Specialized Portfolio, a portion of
Vanguard/Morgan Growth Fund, Vanguard/Windsor II and
(soon) Vanguard/Explorer Fund as well as to several
indexed separate accounts. Total assets under management
by the Core Management Group were approximately $57
billion as of December 31, 1996.
------------------------------------------------------------------------------
20
<PAGE> 24
VANGUARD
INSTITUTIONAL
INDEX FUND PAYS
VANGUARD A
QUARTERLY FEE Under the terms of a Service and Advisory Agreement with
Vanguard, Vanguard pays all of Vanguard Institutional
Index Fund's expenses, except for taxes and brokerage
commissions. In turn, the Fund pays Vanguard a fee at
the end of each fiscal quarter, calculated by applying a
quarterly rate, based on the annual percentage rate of
.02%, to average daily net assets for the quarter for
advisory services, corporate management and
administrative services. In addition, the Fund pays
Vanguard fees at the annual percentage rates of .005%
for the provision of shareholder services to the
Institutional Plus Shares and .04% for the provision of
shareholder services to the Institutional Shares. The
Institutional Plus Shares and the Institutional Shares
each bear their own expenses for shareholder services
provided by Vanguard.
Under a previous Service and Advisory Agreement with
Vanguard for the 1996 fiscal year, the Fund paid
Vanguard an investment advisory and administrative
services fee which represented an effective annual rate
of .06 of 1% of average (daily) net assets; this
reflects the total expenses as a percentage of average
net assets of the Institutional Shares of the Fund for
the 1996 fiscal year.
------------------------------------------------------------------------------
VANGUARD MANAGES
VANGUARD INDEX TRUST
ON AN AT-COST BASIS
The Extended Market, Total Stock Market and Small
Capitalization Portfolios receive all investment
advisory services on an at-cost basis from Vanguard's
Core Management Group.
For the fiscal year ended December 31, 1996 the total
advisory expenses as a percentage of average net assets
of the Investor Shares of Total Stock Market Portfolio,
Extended Market Portfolio and Small Capitalization Stock
Portfolio were .22%, .25%, and .25%, respectively.
The Institutional Shares and the Investor Shares of
these Funds each bear their own expenses relating to
marketing and distribution, account maintenance and
shareholder services.
- --------------------------------------------------------------------------------
PORTFOLIO
TRANSACTIONS In placing portfolio transactions for the Funds,
Vanguard's Core Management Group uses its best judgment
to choose the broker most capable of providing the
brokerage services necessary to obtain the best
available price and most favorable execution at the
lowest commission rate. The full range and quality of
brokerage services available are considered in making
these determinations. In those instances where it is
reasonably determined that more than one broker can
offer the services needed to obtain the best available
price and most favorable execution, consideration may be
given to those brokers which supply statistical
information and provide other services in addition to
execution services to the Funds. However, the Core
Management Group will not pay higher commissions
specifically for the purpose of obtaining research
services.
- --------------------------------------------------------------------------------
21
<PAGE> 25
DIVIDENDS, CAPITAL
GAINS AND TAXES Vanguard Institutional Index Fund and the Total Stock
Market Portfolio each distributes substantially all of
its ordinary income in the form of quarterly dividends.
The Extended Market and Small Capitalization Stock
Portfolios each pay annual dividends. Capital gains
distributions for each Fund, if any, are made annually.
The Funds' dividend and capital gains distributions may
be reinvested in additional shares or received in cash.
See "Distribution Options."
Pursuant to the Internal Revenue Code, certain dividend
and capital gains distributions declared by each Fund
during December, if received by shareholders by January
31, are deemed to have been paid by the Fund and
received by shareholders on December 31 of the prior
year.
Each Fund intends to continue to qualify for taxation as
a "regulated investment company" under the Internal
Revenue Code so that it will not be subject to federal
income tax to the extent its income is distributed to
shareholders. Dividends paid by the Funds from net
investment income, whether received in cash or
reinvested in additional shares, will be taxable to
shareholders as ordinary income. For corporate
investors, dividends from net investment income will
generally qualify in part for the intercorporate
dividends-received deduction. However, the portion of
the dividends so qualified depends on the aggregate
taxable qualifying dividend income received by the Funds
from domestic (U.S.) sources.
Distributions paid by the Funds from long-term capital
gains, whether received in cash or reinvested in
additional shares, are taxable as long-term capital
gains, regardless of the length of time the shares have
been owned. Capital gains distributions are made when a
Fund realizes net capital gains on sales of portfolio
securities during the year. The Funds do not seek to
realize any particular amount of capital gains during a
year; rather, realized gains are a by-product of
portfolio management activities. Consequently, capital
gains distributions may be expected to vary considerably
from year to year; there will be no capital gains
distributions in years when a Fund realizes net capital
losses.
Note that if you elect to receive capital gains
distributions in cash, instead of reinvesting them in
additional shares, you are in effect reducing the
capital at work for you in a Fund. Also, keep in mind
that if you purchase shares in a Fund shortly before the
record date for a dividend or capital gains
distribution, a portion of your investment will be
returned to you as a taxable distribution, regardless of
whether you are reinvesting your distributions or
receiving them in cash.
The Funds will notify you annually as to the tax status
of dividend and capital gains distributions paid by
them.
Dividends and capital gains are calculated and
distributed the same way for each class of shares. The
amount of any income dividends per share will vary,
however, generally due to the differences in shareholder
services expenses for Vanguard Institutional Index
Fund's separate share classes and differences in
marketing and distribution, account maintenance and
shareholder services expenses for Vanguard Index Trust's
separate share classes.
22
<PAGE> 26
A CAPITAL GAIN OR LOSS
MAY BE REALIZED UPON
EXCHANGE OR
REDEMPTION A sale of shares of a Fund is a taxable event, and may
result in a capital gain or loss. A capital gain or loss
may be realized from an ordinary redemption of shares or
an exchange of shares between two mutual funds (or two
portfolios of the same fund).
Dividend distributions, capital gain distributions, and
capital gains or losses from redemptions and exchanges
may be subject to state and local taxes.
Each Fund is required to withhold 31% of taxable
dividends, capital gains distributions, and redemptions
paid to shareholders who have not complied with IRS
taxpayer identification regulations. You may avoid this
withholding requirement by certifying on your Account
Registration Form your proper Social Security or
employer identification number and by certifying that
you are not subject to backup withholding.
Vanguard Institutional Index Fund and Vanguard Index
Trust are organized as Pennsylvania business trusts and,
in the opinion of counsel, are not liable for any income
or franchise tax in the Commonwealth of Pennsylvania.
Vanguard Institutional Index Fund and Vanguard Index
Trust will be subject to Pennsylvania county personal
property tax (if any) in the county which is the site of
its principal office. Shareholders who are Pennsylvania
residents generally will not be subject to county
personal property taxes.
The tax discussion set forth above is included for
general information only. Prospective investors should
consult their own tax advisers concerning the tax
consequences of an investment in the Funds.
- --------------------------------------------------------------------------------
THE SHARE PRICE
OF EACH FUND The share price or "net asset value" per share of each
class of the Funds equals net assets attributable to a
class divided by shares outstanding of the class. Net
asset value per share is determined once daily at the
close of regular trading on the New York Stock Exchange
(generally 4:00 p.m. Eastern time).
Portfolio securities held by the Funds that are listed
on a securities exchange are valued at the last quoted
sales price on the day the valuation is made. Price
information on listed securities is taken from the
exchange where the security is primarily traded.
Securities which are listed on an exchange and which are
not traded on the valuation date are valued at the mean
of the bid and ask prices. For Vanguard Institutional
Index Fund, unlisted securities for which market
quotations are readily available are valued at the
latest quoted bid price. For the Extended Market, Total
Stock Market and Small Capitalization Stock Portfolios,
unlisted securities for which market quotations are
readily available are valued at the mean of the bid and
ask prices. Temporary cash investments are valued at
amortized cost which approximates market value. For each
Fund, securities for which no current quotations are
readily available are valued at fair market value as
determined in good faith by the Trustees. Securities may
be valued on the basis of prices provided by a pricing
service when such prices are believed to reflect the
fair market value of such securities.
23
<PAGE> 27
Each Fund's share price can be found daily in the mutual
fund listings of most major newspapers under the heading
of the Vanguard Group.
- --------------------------------------------------------------------------------
GENERAL
INFORMATION Vanguard Institutional Index Fund and Vanguard Index
Trust are Pennsylvania business trusts. Their
Declarations of Trust permit the Trustees to issue an
unlimited number of shares of beneficial interest with
no par value. Their Boards of Trustees have the power to
designate one or more classes or series of shares of
beneficial interest and to classify or reclassify any
unissued shares with respect to such series or classes.
Currently, Vanguard Institutional Index Fund is offering
shares of one series and Vanguard Index Trust is
offering shares of six series.
Vanguard Institutional Index Fund offers two distinct
classes of shares, the Institutional Shares and the
Institutional Plus Shares. The Institutional Shares are
available to investors who meet the minimum initial
investment of $10 million and may require special
employee benefit plan services. The Institutional Plus
Shares are available to investors who meet the minimum
initial investment of $200 million and do not require
special employee benefit plan services. The
Institutional Shares and the Institutional Plus Shares
each bear their own expenses for shareholder services;
the Institutional Shares are subject to higher expenses
for such services, which may affect performance.
The Extended Market, Total Stock Market and Small
Capitalization Stock Portfolios of Vanguard Index Trust
each offers two distinct classes of shares, the Investor
Shares and the Institutional Shares. The Investor Shares
are available to investors who meet the minimum initial
investment of $3,000 ($1,000 for retirement plan
accounts) and may require special employee benefit plan
services. The Institutional Shares of each Portfolio are
available to investors who meet the minimum initial
investment of $10 million and generally do not require
special employee benefit plan services. The Investor
Shares and the Institutional Shares each bear their own
expenses for marketing and distribution and account
maintenance. It is expected that the expenses to be
borne by the Investor Shares will be higher than the
expenses to be borne by the Institutional Shares, which
may affect performance.
The shares of Vanguard Institutional Index Fund and each
series of Vanguard Index Trust are fully paid and
non-assessable; have no preference as to conversion,
exchange, dividends, retirement or other features; and
have no preemptive rights. Such shares have non-
cumulative voting rights, meaning that the holders of
more than 50% of the shares voting for the election of
Trustees can elect 100% of the Trustees if they so
choose.
Annual meetings of shareholders will not be held except
as required by the Investment Company Act of 1940 and
other applicable law. An annual meeting will be held to
vote on the removal of a Trustee or Trustees of Vanguard
Institutional Index Fund or Vanguard Index Trust if
requested in writing by the holders of not less than 10%
of the outstanding shares of Vanguard Institutional
Index Fund or Vanguard Index Trust, as applicable.
24
<PAGE> 28
All securities and cash for Vanguard Institutional Index
Fund and the Small Capitalization Stock Portfolio are
held by CoreStates Bank, N.A. All securities and cash
for the Extended Market and Total Stock Market
Portfolios of Vanguard Index Trust are held by State
Street Bank and Trust Company. CoreStates Bank, N.A.
holds daily cash balances that are used by these two
Funds to invest in repurchase agreements or securities
acquired in these transactions.
Vanguard, Valley Forge, PA, serves as the Transfer and
Dividend Disbursing Agent for the Funds. Price
Waterhouse LLP serves as independent accountants for the
Funds and will audit their financial statements
annually. Neither Vanguard Institutional Index Fund nor
Vanguard Index Trust is involved in any litigation.
- --------------------------------------------------------------------------------
25
<PAGE> 29
SHAREHOLDER GUIDE
OPENING AN
ACCOUNT AND
PURCHASING
SHARES To open a new account in Vanguard Institutional Index
Fund, complete an Account Registration Form and mail it
to:
Vanguard Financial Center
Vanguard Institutional Index Fund
Name of Class
Attn: Institutional Investor Services
P.O. Box 1472
Valley Forge, PA 19482-1472
VANGUARD
INSTITUTIONAL
INDEX FUND For express or registered mail, send your registration
form to: Vanguard Financial Center, Vanguard
Institutional Index Fund, Attn: Institutional Investor
Services, 100 Vanguard Boulevard, Malvern, PA 19355.
Once the account has been opened, Vanguard will assign a
Service Representative for future account transactions.
Because of the risks associated with common stock
investments, this Fund is intended to be a long-term
investment vehicle and is not designed to provide
investors with a means of speculating on short-term
stock market movements. Consequently, the Fund reserves
the right to reject any specific purchase (or exchange
purchase) request. The Fund also reserves the right to
suspend the offering of shares for a period of time.
Shares of the Fund generally may be purchased by Federal
Funds wire. The minimum initial investment for the Fund
is $10 million for the Institutional Shares and $200
million for the Institutional Plus Shares. Please
contact your Institutional Investor Services
Representative at (1-800-523-1036) to notify the Fund of
the intended investment and to receive an account
number. Wiring instructions are provided below.
Subsequent investments of $5 million or more will be
credited to an account on the date of purchase if
Vanguard is notified one business day in advance of the
intended purchase and a Federal Funds wire is received
by 4:00 p.m. (Eastern time) on the date of purchase. See
"Trade Date Policy."
VANGUARD
INDEX TRUST --
EXTENDED
MARKET PORTFOLIO,
TOTAL STOCK MARKET
PORTFOLIO AND
SMALL CAPITALIZATION
STOCK PORTFOLIO To open an account in Vanguard Index Trust, complete an
Account Registration Form and mail it to:
Vanguard Financial Center
Vanguard Index Trust
NAME OF PORTFOLIO -- INSTITUTIONAL SHARES
Attn: Institutional Investor Services
P.O. Box 1472
Valley Forge, PA 19482-1472
For express or registered mail, send your registration
form to: Vanguard Financial Center, Vanguard Index
Trust, NAME OF PORTFOLIO -- Institutional Shares, Attn:
Institutional Investor Services, 100 Vanguard Boulevard,
Malvern, PA 19355.
26
<PAGE> 30
Once the account has been opened, Vanguard will assign a
Service Representative for future account transactions.
Because of the risks associated with common stock
investments, these Funds are intended to be long-term
investment vehicles and are not designed to provide
investors with a means of speculating on short-term
stock market movements. Consequently, the Funds reserve
the right to reject any specific purchase (or exchange
purchase) request. The Funds also reserve the right to
suspend the offering of shares for a period of time.
Shares of the Funds generally may be purchased by
Federal Funds wire. The minimum initial investment for
the Institutional Shares of each Vanguard Index Trust
Portfolio is $10 million. Please contact your
Institutional Investor Services Representative at
(1-800-523-1036) to notify the Funds of the intended
investment and to receive an account number. Wiring
instructions are provided below.
Subsequent investments of $5 million or more will be
credited to an account on the date of purchase if
Vanguard is notified one business day in advance of the
intended purchase and a Federal Funds wire is received
by 4:00 p.m. (Eastern time) on the date of purchase. See
"Trade Date Policy."
IMPORTANT NOTE
ON PORTFOLIO
TRANSACTION FEES The Extended Market Portfolio and the Small
Capitalization Stock Portfolio each assess a portfolio
transaction fee on purchases of shares equal to 0.5% of
the dollar amount invested.
Vanguard Institutional Index Fund and the Total Stock
Market Portfolio reserve the right to deduct a portfolio
transaction fee, ranging from 0.08% to 0.20%, from
purchases of their shares, if such purchase or
cumulative purchases are of a size that is reasonably
deemed to be disruptive to efficient portfolio
management. Please call Vanguard's Institutional
Investor Services Department before investing to
determine whether a fee will be charged for your share
purchases.
Portfolio transaction fees for the Funds apply to
initial investments and all subsequent purchases
(including purchases made by exchange from another
Vanguard fund) but not to reinvested dividend or capital
gains distributions. Portfolio transaction fees are
deducted automatically from the amount invested, they
cannot be paid separately. The portfolio transaction fee
will be paid to the Fund to offset transaction costs of
buying securities. The fee is not paid to Vanguard and
is not a sales charge.
The Extended Market, Total Stock Market and Small
Capitalization Portfolios also charge a $10 annual
account maintenance fee for Investor Shares accounts
with balances less than $10,000.
27
<PAGE> 31
ADDITIONAL
INVESTMENTS
Please contact
your Service
Representative
Additional investments may be made at any time by wiring
monies to Vanguard. As noted above, investments of $5
million or more require prior-day notification to
qualify for credit on the date of purchase. To ensure
prompt investment, please notify your Institutional
Investor Services Representative in advance of the wire.
------------------------------------------------------------------------------
<TABLE>
<S> <C>
PURCHASING BY WIRE Monies should be wired to:
BEFORE WIRING CORESTATES BANK, N.A.
Please contact your ABA 031000011
Service Representative CORESTATES ACCT NO 0101-9897
ATTN VANGUARD
NAME OF FUND
NAME OF PORTFOLIO
NAME OF CLASS
ACCOUNT NUMBER
ACCOUNT REGISTRATION
To ensure proper receipt, please be sure to include in the
wiring instructions the complete name of the Fund, the account
number Vanguard has assigned you and the eight-digit CoreStates
number. NOTE: Federal Funds wire purchase orders will be
accepted only when the Funds and Custodian Bank are open for
business.
</TABLE>
------------------------------------------------------------------------------
PURCHASING BY
EXCHANGE (from a
Vanguard account) Purchases may also be made by exchange from an existing
Vanguard Fund account. However, the Funds reserve the
right to refuse any exchange purchase request. Please
call your Service Representative.
------------------------------------------------------------------------------
DISTRIBUTION OPTIONS Dividend and capital gains distributions paid by the
Funds will be automatically reinvested in additional
shares of the same class of shares of the Fund that you
own. A cash dividend option is also available. Please
contact your Service Representative for further
information.
CERTIFICATES Share certificates will not be issued for any Fund.
ELECTRONIC PROSPECTUS
DELIVERY If you would prefer to receive a prospectus for a Fund
or any of the Vanguard Funds in an electronic format,
please visit Vanguard's web site at www.vanguard.com. If
you elect to do so, you may also receive a paper copy of
the prospectus, by calling 1-800-523-1036.
- --------------------------------------------------------------------------------
TRADE DATE POLICY Investments will be credited on the date of purchase
under the follow-
ing conditions:
- FOR INVESTMENTS OF $5 MILLION OR MORE: The Fund must
be notified of the intended purchase by the close of
the New York Stock Exchange, (generally 4:00 p.m.
Eastern time) on the prior business day and the
Federal Funds wire must be received by Vanguard by the
close of the Exchange on the date of purchase.
- FOR INVESTMENTS OF LESS THAN $5 MILLION: The Fund must
be notified of the intended purchase by 10:45 a.m.
(Eastern time) on the day of
28
<PAGE> 32
purchase and the Federal Funds wire must be received by
the close of the Exchange.
Generally, if these requirements are not met, an
investment will be credited to the account on the
business day following receipt of a Federal Funds wire.
The trade date, the day on which an account is credited,
is generally the day on which the Fund receives an
investment in the form of Federal Funds. For purchases
by Federal Funds wire or by exchange, the Fund is
credited immediately with Federal Funds. If a purchase
by Federal Funds wire or exchange is received by the
close of the New York Stock Exchange, (generally 4:00
p.m. Eastern time), the trade date is the day of receipt
assuming proper notification has been given, as
described above. If a purchase is received after the
close of the Exchange, the trade date is the business
day following the receipt of the wire or exchange.
- --------------------------------------------------------------------------------
SELLING YOUR
SHARES
WIRE PROCEEDS Any portion of an account may be withdrawn by contacting
your Service Representative. The redemption proceeds
will be wired to the bank account indicated on the
Account Registration Form within five business days
following receipt of a request.
Wire redemptions of less than $5,000 are subject to a $5
charge deducted from the principal in your account.
There is no charge for wire redemptions of $5,000 or
more, or for subsequent dividend wires.
For our mutual protection, wiring instructions must be
on file at Vanguard prior to executing any redemption
request. A request to change the bank account associated
with the wire redemption feature or a request to wire
funds to a bank other than that on file must be received
in writing. A signature guarantee of an authorized
officer is required if the bank registration is not
identical to your account registration.
------------------------------------------------------------------------------
OTHER REDEMPTION
INFORMATION Each Fund may suspend the redemption rights or postpone
payment at times when the New York Stock Exchange is
closed or under any emergency circumstances as
determined by the United States Securities and Exchange
Commission.
If the Board of Trustees determines that it would be
detrimental to the best interests of a Fund's remaining
shareholders to make payment in cash, the Fund may pay
redemption proceeds in whole or in part by a
distribution in kind of readily marketable securities.
Vanguard Institutional Index Fund, reserves the right to
redeem Institutional Shares of any account with a
balance of less than $10 million. This action will be
taken when the balance of the account falls below $10
million due to account redemptions. Reductions in
account balances due to market depreciation will not be
considered until the account balance declines to less
than $5 million. Investors will be provided with 60
days' notice before any such action is taken.
------------------------------------------------------------------------------
29
<PAGE> 33
MANDATORY
CONVERSION TO
INSTITUTIONAL SHARES
OR INVESTOR
SHARES Vanguard Institutional Index Fund reserves the right to
convert an investor's Institutional Plus Shares into the
Institutional Shares of the Fund if the investor's
account balance falls below $200 million. The Extended
Market, Total Stock Market and Small Capitalization
Stock Portfolios, each reserves the right to convert an
investor's Institutional Shares into the Investor Shares
of the same Fund if the investor's account balance falls
below $10 million. Any such conversion will be preceded
by written notice to the investor. There will be no
portfolio transaction fee imposed on share class
conversions.
- --------------------------------------------------------------------------------
EXCHANGING YOUR
SHARES Shares of the Funds may be exchanged for those of other
available Vanguard funds, but only upon prior approval
by Vanguard. Exchanges without prior Vanguard
authorization are not permitted for the Funds. Contact
your Service Representative for further information.
Through December 31, 1997, Investor Shares of the
Extended Market, Total Stock Market and Small
Capitalization Stock Portfolios may be exchanged for the
Institutional Shares of the corresponding Fund, provided
that the investor satisfies all purchase eligibility
requirements for the Institutional Shares.
Exchange requests may be made in writing or by
telephone. The Funds reserve the right to revise or
terminate the exchange privilege and its provisions,
limit the amount of or reject any exchange, as deemed
necessary, at any time, without prior notice.
- --------------------------------------------------------------------------------
EXCHANGE
PRIVILEGE
LIMITATIONS The Funds' exchange privilege is not intended to afford
investors a way to speculate on short-term movements in
the market. Accordingly, in order to prevent excessive
use of the exchange privilege that may potentially
disrupt the management of the Funds and increase
transaction costs, the Funds have established a policy
of limiting excessive exchange activity. With regard to
Vanguard Institutional Index Fund, exchange activity
will not be deemed excessive if limited to one
substantive exchange redemption per calendar year, taken
from assets that have been invested in the Fund for
periods of one year or longer. With regard to the other
Funds, exchange activity will not be deemed excessive if
limited to two substantive exchange redemptions (at
least 30 days apart) from a Fund during any twelve-month
period. The Funds are designed for long-term investors.
- --------------------------------------------------------------------------------
IMPORTANT
INFORMATION
ABOUT TELEPHONE
TRANSACTIONS The ability to initiate exchanges by telephone is
automatically established on your account unless you
request in writing that telephone transactions on your
account not be permitted. The ability to initiate wire
redemptions by telephone will be established on your
account only if you specifically elect this option in
writing.
30
<PAGE> 34
To protect your account from losses resulting from
unauthorized or fraudulent telephone instructions,
Vanguard generally adheres to the following security
procedures:
1. SECURITY CHECK. To request a transaction by
telephone, the caller must identify (i) the fund
name; and (ii) the 10-digit account number.
2. PAYMENT POLICY. The proceeds of any telephone
redemption by wire will be made only in accordance
with the shareowner's prior written instructions.
Neither the Fund nor Vanguard will be responsible for
the authenticity of transaction instructions received by
telephone, provided that reasonable security procedures
have been followed. Vanguard believes that the security
procedures described above are reasonable, and that if
such procedures are followed, you will bear the risk of
any losses resulting from unauthorized or fraudulent
telephone transactions on your account.
- --------------------------------------------------------------------------------
OTHER ACCOUNT
INFORMATION For corporate investors, a current corporate resolution
must be maintained on file at Vanguard at all times. Any
revisions to a corporate resolution must be submitted to
your Service Representative at Vanguard.
To change the registration of an account, a request must
be submitted in writing to Vanguard and include the
following information: the account number and fund name
and class, authorized signatures, any applicable
signature guarantees, and other supporting legal
documents as necessary.
All requests should be mailed to the following address:
Vanguard Financial Center
Attn: Institutional Investor Services
P.O. Box 1472
Valley Forge, PA 19482-1472
- --------------------------------------------------------------------------------
31
<PAGE> 35
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<PAGE> 36
<TABLE>
<S> <C>
---------------------------
THE VANGUARD GROUP
INSTITUTIONAL DIVISION
P.O. Box 2900
Valley Forge, PA 19482
FOR PARTICIPANTS IN
EMPLOYER-SPONSORED PLANS
1-800-523-1188
FOR OTHER INSTITUTIONAL
INVESTORS
1-800-523-1036
TRANSFER AGENT:
The Vanguard Group, Inc.
Vanguard Financial Center
Valley Forge, PA 19482
ELECTRONIC ACCESS TO THE
VANGUARD MUTUAL FUND
EDUCATION AND INFORMATION
CENTER
World Wide Web
http://www.vanguard.com
E-MAIL
[email protected]
I854
</TABLE>
<PAGE> 37
PART B
VANGUARD INSTITUTIONAL INDEX FUND
STATEMENT OF ADDITIONAL INFORMATION
JULY 7, 1997
This Statement is not a prospectus but should be read in conjunction with the
Fund's Prospectus dated July 7, 1997, as may be amended from time to time. To
obtain the Prospectus, please call:
INSTITUTIONAL INVESTOR SERVICES DEPARTMENT
1-800-523-8066
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Objective and Policies......................................................... B-1
Investment Limitations.................................................................... B-4
Purchase of Shares........................................................................ B-5
Redemption of Shares...................................................................... B-6
Management and Advisory Services.......................................................... B-7
Portfolio Transactions.................................................................... B-9
Description of Shares and Voting Rights................................................... B-9
Financial Statements...................................................................... B-10
Yield and Total Return.................................................................... B-10
Performance Measures...................................................................... B-10
</TABLE>
INVESTMENT OBJECTIVE AND POLICIES
REPURCHASE AGREEMENTS. The Fund may invest in repurchase agreements with
commercial banks, brokers or dealers either for defensive purposes due to market
conditions or to generate income from its excess cash balances. A repurchase
agreement is an agreement under which the Fund acquires a money market
instrument (generally a security issued by the U.S. Government or an agency
thereof, a banker's acceptance or a certificate of deposit) from a commercial
bank, broker or dealer, subject to resale to the seller at an agreed upon price
and date (normally, the next business day). A repurchase agreement may be
considered a loan collateralized by securities. The resale price reflects an
agreed upon interest rate effective for the period the instrument is held by the
Fund and is unrelated to the interest rate on the underlying instrument. In
these transactions, the securities acquired by the Fund (including accrued
interest earned thereon) must have a total value in excess of the value of the
repurchase agreement and are held by the Fund's custodial bank until
repurchased. In addition, the Board of Trustees will monitor the Fund's
repurchase agreement transactions generally and will establish guidelines and
standards for review of the creditworthiness of any bank, broker or dealer party
to a repurchase agreement with the Fund. No more than an aggregate of 15% of the
Fund's assets, at the time of investment, will be invested in repurchase
agreements having maturities longer than seven days and securities subject to
legal or contractual restrictions on resale for which there are no readily
available market quotations. From time to time, the Fund's Board of Directors
may determine that certain restricted securities known as Rule 144A securities
are liquid and not subject to the 15% limitation described above.
The use of repurchase agreements involves certain risks. For example, if the
other party to the agreement defaults on its obligation to repurchase the
underlying security at a time when the value of the security has declined, the
Fund may incur a loss upon disposition of the security. If the other party to
the agreement becomes insolvent and subject to liquidation or reorganization
under the Bankruptcy Code or other laws, a court may determine that the
underlying security is collateral for a loan by the Fund not within the control
of the Fund and therefore the Fund may not be able to substantiate its interest
in the underlying security and may be deemed an unsecured creditor of the other
party to the agreement. While the Fund's management acknowledges these risks, it
is expected that they can be controlled through careful monitoring procedures.
LENDING OF SECURITIES. The Fund may lend its securities on a short-term or
long-term basis to qualified institutional investors who need to borrow
securities in order to complete certain transactions, such as covering
B-1
<PAGE> 38
short sales, avoiding failures to deliver securities, or completing arbitrage
operations. By lending its portfolio securities, the Fund attempts to increase
its net investment income through the receipt of interest on the loan. Any gain
or loss in the market price of the securities loaned that might occur during the
term of the loan would be for the account of the Fund. The Fund may lend its
portfolio securities to qualified brokers, dealers, banks or other financial
institutions, so long as the terms, the structure and the aggregate amount of
such loans are not inconsistent with the Investment Company Act of 1940, or the
Rules and Regulations or interpretations of the Securities and Exchange
Commission (the "Commission") thereunder, which currently require that (a) the
borrower pledge and maintain with the Fund collateral consisting of cash, a
letter of credit issued by a domestic U.S. bank, or securities issued or
guaranteed by the United States Government having at all times not less than
100% of the value of the securities loaned, (b) the borrower add to such
collateral whenever the price of the securities loaned rises (i.e., the borrower
"marks to the market" on a daily basis), (c) the loan be made subject to
termination by the Fund at any time and (d) the Fund receive reasonable interest
on the loan (which may include the Fund's investing any cash collateral in
interest-bearing short-term investments), any distribution on the loaned
securities and any increase in their market value. Loan arrangements made by the
Fund will comply with all other applicable regulatory requirements, including
the rules of the New York Stock Exchange, which rules presently require the
borrower, after notice, to redeliver the securities within the normal settlement
time of three business days. All relevant facts and circumstances, including the
creditworthiness of the broker, dealer or institution, will be considered in
making decisions with respect to the lending of securities, subject to review by
the Board of Trustees.
At the present time, the Staff of the Commission does not object if an
investment company pays reasonable negotiated fees in connection with loaned
securities, so long as such fees are set forth in a written contract and
approved by the investment company's trustees. In addition, voting rights pass
with the loaned securities, but if a material event will occur affecting an
investment on loan, the loan must be called and the securities voted.
FUTURES CONTRACTS. The Fund may enter into futures contracts, options, and
options on futures contracts for the purpose of simulating full investment and
reducing transactions costs. The Fund does not use futures or options for
speculative purposes. The Fund will only use futures and options to simulate
full investment in the underlying index while retaining a cash balance for fund
management purposes. Futures contracts provide for the future sale by one party
and purchase by another party of a specified amount of a specific security at a
specified future time and at a specified price. Futures contracts that are
standardized as to maturity date and underlying financial instrument are traded
on national futures exchanges. Futures exchanges and trading are regulated under
the Commodity Exchange Act by the Commodity Futures Trading Commission ("CFTC"),
a U.S. Government Agency. Assets committed to futures contracts will be
segregated at the Fund's custodian bank to the extent required by law.
Although futures contracts by their terms call for actual delivery or acceptance
of the underlying securities, in most cases the contracts are closed out before
the settlement date without the making or taking of delivery. Closing out an
open futures position is done by taking an opposite position ("buying" a
contract that has previously been "sold," or "selling" a contract previously
purchased) in an identical contract to terminate the position. Brokerage
commissions are incurred when a futures contract is bought or sold.
Futures traders are required to make a good faith margin deposit in cash or
government securities with a broker or custodian to initiate and maintain open
positions in futures contracts. A margin deposit is intended to assure
completion of the contract (delivery or acceptance of the underlying security)
if it is not terminated prior to the specified delivery date. Minimal initial
margin requirements are established by the futures exchange and may be changed.
Brokers may establish deposit requirements that are higher than the exchange
minimums. Futures contracts are customarily purchased and sold on deposits which
may range upward from less than 5% of the value of the contract being traded.
After a futures contract position is opened, the value of the contract is marked
to market daily. If the futures contract price changes to the extent that the
margin on deposit does not satisfy margin requirements, payment of additional
"variation" margin will be required. Conversely, change in the contract value
may reduce the required margin, resulting in a repayment of excess margin to the
contract holder. Variation margin payments
B-2
<PAGE> 39
are made to and from the futures broker for as long as the contract remains
open. The Fund expects to earn interest income on its margin deposits.
Traders in futures contracts may be broadly classified as either "hedgers" or
"speculators." Hedgers use the futures markets primarily to offset unfavorable
changes in the value of securities otherwise held for investment purposes or
expected to be acquired by them. Speculators are less inclined to own the
securities underlying the futures contracts which they trade, and use futures
contracts with the expectation of realizing profits from fluctuations in the
prices of underlying securities. The Trust's Portfolios intend to use futures
contracts only for bona fide hedging purposes.
Regulations of the CFTC applicable to the Fund require that all of its futures
transactions constitute bona fide hedging transactions. The Fund will only sell
futures contracts to protect securities it owns against price declines or
purchase contracts to protect against an increase in the price of securities it
intends to purchase. As evidence of this hedging interest, the Fund expects that
approximately 75% of its futures contract purchases will be "completed;" that
is, equivalent amounts of related securities will have been purchased or are
being purchased by the Fund upon sale of open futures contracts.
Although techniques other than the sale and purchase of futures contracts could
be used to control the Fund's exposure to market fluctuations, the use of
futures contracts may be a more effective means of hedging this exposure. While
the Fund will incur commission expenses in both opening and closing out futures
positions, these costs are lower than transaction costs incurred in the purchase
and sale of the underlying securities.
RESTRICTIONS ON THE USE OF FUTURES CONTRACTS. The Fund will not enter into
futures contract transactions to the extent that, immediately thereafter, the
sum of its initial margin deposits on open contracts exceeds 5% of the market
value of its total assets. In addition, the Fund will not enter into futures
contracts to the extent that its outstanding obligations to purchase securities
under these contracts would exceed 20% of the Fund's total assets.
RISK FACTORS IN FUTURES TRANSACTIONS. Positions in futures contracts may be
closed out only on an Exchange that provides a secondary market for such
futures. However, there can be no assurance that a liquid secondary market will
exist for any particular futures contract at any specific time. Thus, it may not
be possible to close a futures position. In the event of adverse price
movements, the Fund would continue to be required to make daily cash payments to
maintain its required margin. In such situations, if the Fund has insufficient
cash, it may have to sell portfolio securities to meet daily margin requirements
at a time when it may be disadvantageous to do so. In addition, the Fund may be
required to make delivery of the instruments underlying futures contracts it
holds. The inability to close options and futures positions could also have an
adverse impact on the ability to hedge it effectively.
The Fund will minimize the risk that it will be unable to close out a futures
contract by only entering into futures that are traded on national futures
exchanges and for which there appears to be a liquid secondary market.
The risk of loss in trading futures contracts in some strategies can be
substantial, due both to the low margin deposits required and the extremely high
degree of leverage involved in futures pricing. As a result, a relatively small
price movement in a futures contract may result in immediate and substantial
loss (as well as gain) to the investor. For example, if at the time of purchase,
10% of the value of the futures contract is deposited as margin, a subsequent
10% decrease in the value of the futures contract would result in a total loss
of the margin deposit, before any deduction for the transaction costs, if the
account were then closed out. A 15% decrease would result in a loss equal to
150% of the original margin deposit if the contract were closed out. Thus, a
purchase or sale of a futures contract may result in losses in excess of the
amount invested in the contract. The Fund also bears the risk that the adviser
will incorrectly predict future stock market trends. However, because the
futures strategy of the Fund is engaged in only for hedging purposes, the Fund's
officers do not believe that the Fund is subject to the risks of loss frequently
associated with futures transactions. The Fund would presumably have sustained
comparable losses if, instead of the futures contract, it had invested in the
underlying financial instrument and sold it after the decline.
Utilization of futures transactions by the Fund does involve the risk of
imperfect or no correlation where the securities underlying futures contracts
have different maturities than the portfolio securities being hedged. It is
B-3
<PAGE> 40
also possible that the Fund could both lose money on futures contracts and also
experience a decline in value of its portfolio securities. There is also the
risk of loss by the Fund of margin deposits in the event of bankruptcy of a
broker with whom the Fund has an open position in a futures contract or related
option.
Most futures exchanges limit the amount of fluctuation permitted in futures
contract prices during a single trading day. The daily limit establishes the
maximum amount that the price of a futures contract may vary either up or down
from the previous day's settlement price at the end of a trading session. Once
the daily limit has been reached in a particular type of contract, no trades may
be made on that day at a price beyond that limit. The daily limit governs only
price movement during a particular trading day and therefore does not limit
potential losses, because the limit may prevent the liquidation of unfavorable
positions. Futures contract prices have occasionally moved to the daily limit
for several consecutive trading days with little or no trading, thereby
preventing prompt liquidation of future positions and subjecting some futures
traders to substantial losses.
FEDERAL TAX TREATMENT OF FUTURES CONTRACTS. The Fund is required for federal
income tax purposes to recognize as income for each taxable year its net
unrealized gains and losses on certain futures contracts as of the end of the
year as well as those actually realized during the year. In most cases, any gain
or loss recognized with respect to a futures contract is considered to be 60%
long-term capital gain or loss and 40% short-term capital gain or loss, without
regard to the holding period of the contract. Furthermore, sales of futures
contracts which are intended to hedge against a change in the value of
securities held by the Fund may affect the holding period of such securities
and, consequently, the nature of the gain or loss on such securities upon
disposition. The Fund may be required to defer the recognition of losses on
futures contracts to the extent of any unrecognized gains on related positions
held by the Fund.
In order for the Fund to continue to qualify for federal income tax treatment as
a regulated investment company, at least 90% of its gross income for a taxable
year must be derived from qualifying income; i.e., dividends, interest, income
derived from loans of securities, gains from the sale of securities or of
foreign currencies or other income derived with respect to the Fund's business
of investing in securities. In addition, gains realized on the sale or other
disposition of securities held for less than three months must be limited to
less than 30% of the Fund's annual gross income. It is anticipated that any net
gain realized from the closing out of futures contracts will be considered gain
from the sale of securities and therefore be qualifying income for purposes of
the 90% requirement. In order to avoid realizing excessive gains on securities
held less than three months, the Fund may be required to defer the closing out
of futures contracts beyond the time when it would otherwise be advantageous to
do so. It is anticipated that unrealized gains on futures contracts, which have
been open for less than three months as of the end of the Fund's fiscal year and
which are recognized for tax purposes, will not be considered gains on sales of
securities held less than three months for the purpose of the 30% test.
The Fund will distribute to shareholders annually any net capital gains which
have been recognized for federal income tax purposes (including unrealized gains
at the end of the Fund's fiscal year) on futures transactions. Such
distributions will be combined with distributions of capital gains realized on
the Fund's other investments and shareholders will be advised on the nature of
the distributions.
INVESTMENT LIMITATIONS
Except as indicated otherwise below, the following restrictions and fundamental
policies cannot be changed without approval of the holders of a majority of the
outstanding shares of the Fund (as defined in the Investment Company Act of 1940
(the "1940 Act")). The Fund may not under any circumstances:
1) change its investment objective, which is to provide investment results that
correspond to the price and yield performance of publicly-traded common
stocks;
2) change its investment policy, which is to attempt to duplicate the
performance of Standard & Poor's 500 Composite Stock Price Index by owning
as many of the 500 stocks contained in the index as is feasible;
3) invest in commodities or purchase real estate, although it may purchase
securities of companies which deal in real estate or interests therein
except that the Fund may invest in stock index futures contracts, stock
options and options on stock index futures contracts to that extent that not
more than 5% of the Fund's
B-4
<PAGE> 41
assets are required as margin deposit for such futures contracts and not
more than 20% of the Fund's assets are invested in futures and options at
anytime;
4) lend money to any person except (i) by purchasing a portion of an issue of
short-term debt securities or similar obligations (including repurchase
agreements) which are publicly distributed or customarily purchased by
institutional investors, and (ii) as provided under "Lending of Securities";
5) purchase securities on margin or sell securities short except as described
in limitation number 3 above;
6) with respect to 75% of the Fund's assets, (i) purchase more than 10% of the
outstanding voting securities of any company, or (ii) purchase securities of
any issuer (except obligations of the United States Government and its
instrumentalities), if as a result, more than 5% of the value of the
Portfolio's total assets would be invested in the securities of such issuer;
7) borrow money, except that the Fund may borrow from banks (or through reverse
repurchase agreements), for temporary or emergency (not leveraging)
purposes, including the meeting of redemption requests which might otherwise
require the untimely disposition of securities, in an amount not exceeding
15% of the value of the Fund's net assets (including the amount borrowed and
the value of any outstanding reverse repurchase agreements) at the time the
borrowing is made. Whenever borrowings exceed 5% of the value of the Fund's
net assets, the Fund will not make any additional investments;
8) pledge, mortgage or hypothecate the Fund's assets to an extent greater than
5% of its total assets;
9) invest in securities of other investment companies, except as they may be
acquired as a part of a merger, consolidation or acquisition of assets
approved by the Fund's shareholders or otherwise to the extent permitted by
Section 12 of the 1940 Act. The Fund will invest only in investment
companies which have investment objectives and policies consistent with
those of the Fund;
10) invest for the purpose of controlling management of any company;
11) engage in the business of underwriting securities issued by other persons,
except to the extent that the Fund may technically be deemed to be an
underwriter under the Securities Act of 1933, as amended, in disposing of
portfolio securities;
12) invest more than 25% of the value of its total assets in any one industry;
13) invest in put, call, straddle or spread options or in interests in oil, gas
or other mineral exploration or development programs, except as set forth in
limitation number "3" above; and
14) purchase or otherwise acquire any security if, as a result, more than 15% of
its net assets would be invested in securities that are illiquid.
These investment limitations are considered at the time investment securities
are purchased. Notwithstanding these limitations, the Fund may own all or any
portion of the securities of, or make loans to, or contribute to the costs or
other financial requirements of any company which will be wholly owned by the
Fund and one or more other investment companies and is primarily engaged in the
business of providing, at-cost, management, administrative, distribution or
related services to the Fund and other investment companies.
PURCHASE OF SHARES
The Fund reserves the right in its sole discretion (i) to suspend the offerings
of its shares, (ii) to reject purchase orders when in the judgment of management
such rejection is in the best interest of the Fund, and (iii) to reduce or waive
the minimum investment for or any other restrictions on initial and subsequent
investments for certain fiduciary accounts or under circumstances where certain
economies can be achieved in sales of the Fund's shares.
EXCHANGE OF SECURITIES FOR SHARES OF THE FUND. In certain circumstances, shares
of the Fund may be purchased in exchange for common stocks. Such common stocks
must be included in the appropriate Index and have a market value in excess of
$10,000. Securities accepted by the Fund will be valued as set forth in the
Fund's prospectus as of the time of the next determination of net asset value
after such acceptance. Shares of the Fund are issued at net asset value
determined as of the same time. All dividends, subscription, or other
B-5
<PAGE> 42
rights which are reflected in the market price of accepted securities at the
time of valuation become the property of the Fund and must be delivered to the
Fund by the investor upon receipt from the issuer. A gain or loss for Federal
income tax purposes would be realized by the investor upon the exchange
depending upon the cost of the securities tendered.
The Fund will not accept securities in exchange for its shares unless: (1) such
securities are, at the time of the exchange, included in the Fund; (2) such an
exchange will not cause the Fund's weightings to become imbalanced with respect
to the weightings of the stocks included in the Index; (3) the investor
represents and agrees that all securities offered to the Fund are not subject to
any restrictions upon their sale by the Fund under the Securities Act of 1933,
or otherwise; (4) such securities are traded in an unrelated transaction with a
quoted sales price on the same day the exchange valuation is made; (5) the
quoted sales price used as a basis of valuation is representative (i.e., one
that does not involve a trade of substantial size which artificially influences
the price of the security); and (6) the value of any such security being
exchanged will not exceed 5% of the Fund's net assets immediately prior to the
transaction.
Investors interested in such purchases should contact the Fund.
REDEMPTION OF SHARES
The Fund may suspend redemption privileges or postpone the date of payment (i)
during any period that the New York Stock Exchange is closed, or trading on the
Exchange is restricted as determined by the Securities and Exchange Commission
(the "Commission"), (ii) during any period when an emergency exists as defined
by the rules of the Commission as a result of which it is not reasonably
practicable for the Fund to dispose of securities owned by it, or fairly to
determine the value of its assets, and (iii) for such other periods as the
Commission may permit.
No charge is made by the Fund for redemptions. Any redemption may be more or
less than the shareholder's cost depending on the market value of the securities
held.
The Fund has made an election with the Commission to pay in cash all redemptions
requested by any shareholder of record limited in amount during any 90-day
period to the lesser of $250,000 or 1% of the net assets of the Fund at the
beginning of such period. Such commitment is irrevocable without the prior
approval of the Commission. Redemptions in excess of the above limits may be
paid in whole or in part investment securities or in cash as the Fund may deem
appropriate, however, payment will be made wholly in cash unless the Trustees
believe that economic or market conditions exist which would make such a
practice detrimental to the best interests of the Fund. If redemptions are paid
in investment securities, such securities will be valued as set forth in the
Prospectus under "The Share Price of the Fund and each Portfolio," and a
redeeming shareholder would normally incur brokerage expenses if he converted
these securities to cash.
B-6
<PAGE> 43
MANAGEMENT AND ADVISORY SERVICES
TRUSTEES AND OFFICERS
The Officers of the Fund manage its day-to-day operations and are responsible to
the Fund's Trustees. The Trustees set broad policies for the Fund and choose its
Officers. The following is a list of Trustees and Officers of the Fund and a
statement of their present positions and principal occupations during the past
five years. The mailing address of the Fund's Trustees and Officers is Post
Office Box 876, Valley Forge, PA 19482.
JOHN C. BOGLE, Chairman and Trustee*
Chairman, Director and former Chief Executive Officer of The Vanguard
Group, Inc., and of each of the investment companies in The Vanguard Group;
Director of The Mead Corporation, General Accident Insurance, and Chris-
Craft Industries, Inc.
JOHN J. BRENNAN, President, Chief Executive
Officer & Trustee*
President, Chief Executive Officer and Director of The Vanguard Group,
Inc., and of each of the other investment companies in The Vanguard Group.
ROBERT E. CAWTHORN, Trustee
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 Corporation.
BARBARA BARNES HAUPTFUHRER, Trustee
Director of The Great Atlantic and Pacific Tea Company, Ikon Business
Solutions, Inc., Raytheon Company, Knight-Ridder, Inc., and Massachusetts
Mutual Life Insurance Co. and Trustee Emerita of Wellesly College.
BRUCE K. MACLAURY, Trustee
President Emeritus of The Brookings Institution; Director of American
Express Bank, Ltd., The St. Paul Companies, Inc. and National Steel
Company.
BURTON G. MALKIEL, Trustee
Chemical Bank Chairman's Professor of Economics, Princeton University;
Director of Prudential Insurance Co. of America, Amdahl Corporation, Baker
Fentress & Co., The Jeffrey Co. and Southern New England Communications
Company.
ALFRED M. RANKIN, JR., Trustee
Chairman, President and Chief Executive Officer of NACCO Industries, Inc.;
Director of The BFGoodrich Company, and The Standard Products Company.
JOHN C. SAWHILL, Trustee
President and Chief Executive Officer, the Nature Conservancy; formerly,
Director and Senior Partner, McKinsey & Co.; President, New York
University; Director of Pacific Gas and Electric Company, Procter & Gamble
Company and NACCO Industries.
JAMES O. WELCH, JR., Trustee
Retired Chairman of Nabisco Brands, Inc., retired Vice Chairman and
Director of RJR Nabisco; Director of TECO Energy, Inc.; and Director of
Kmart Corporation.
J. LAWRENCE WILSON, Trustee
Chairman and Chief Executive Officer of Rohm & Hass Company; Director of
Cummins Engine Company; and Trustee of Vanderbilt University.
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*
Principal of The Vanguard Group, Inc.; Controller of each of the investment
companies in The Vanguard Group.
- ---------------
*Mr. Bogle and the Officers of the Fund are "interested persons" as defined in
the Investment Company Act of 1940.
B-7
<PAGE> 44
REMUNERATION OF TRUSTEES AND OFFICERS
The Fund's Trustees and Officers receive no direct remuneration from the Fund.
However, the Trustees do receive remuneration for their service as Directors or
Trustees of the Funds comprising the Vanguard Group of Investment Companies. The
following table provides detailed information with respect to the aggregate
amounts paid or accrued for the Trustees by the Vanguard Funds for the fiscal
year ended December 31, 1996.
COMPENSATION TABLE
<TABLE>
<CAPTION>
ESTIMATED TOTAL COMPENSATION
ANNUAL BENEFITS FROM ALL VANGUARD FUNDS
NAMES OF TRUSTEES UPON RETIREMENT PAID TO TRUSTEES(2)
- ----------------------------------------------------------- --------------- -----------------------
<S> <C> <C>
John C. Bogle(1) -- --
John J. Brennan(1) -- --
Barbara Barnes Hauptfuhrer $15,000 $65,000
Robert E. Cawthorn $13,000 $65,000
Bruce K. MacLaury $12,000 $60,000
Burton G. Malkiel $15,000 $65,000
Alfred M. Rankin, Jr. $15,000 $65,000
John C. Sawhill $15,000 $65,000
James O. Welch, Jr. $15,000 $65,000
J. Lawrence Wilson $15,000 $65,000
</TABLE>
- ---------------
(1) As "Interested Trustees," Messrs. Bogle and Brennan receive no compensation
for their service as Trustees.
(2) The amounts reported in this column reflect the total compensation paid to
each Trustee for their service as Director or Trustee of 34 Vanguard funds
(33 in the case of Mr. Malkiel; 27 in the case of Mr. MacLaury).
THE VANGUARD GROUP
The Fund currently employs The Vanguard Group, Inc. ("Vanguard") to provide
management, administrative and investment advisory services. Vanguard also
provides virtually all of the corporate management, administrative, and
distribution services for The Vanguard Group of Investment Companies, a family
of more than 30 investment companies with more than 90 distinct investment
portfolios and total assets in excess of $250 billion. Vanguard also provides
investment advisory services to certain Vanguard Funds.
Vanguard employs a supporting staff of management and administrative personnel
needed to provide the requisite services to the Fund and also furnishes the Fund
with the necessary office space, furnishings and equipment.
The Vanguard Group adheres to a Code of Ethics established pursuant to Rule
17j-1 under the Investment Company Act of 1940. The Code is designed to prevent
unlawful practices in connection with the purchase or sale of securities by
persons associated with Vanguard. Under Vanguard's Code of Ethics certain
officers and employees of Vanguard who are considered access persons are
permitted to engage in personal securities transactions. However, such
transactions are subject to procedures and guidelines substantially similar to
those recommended by the mutual fund industry and approved by the U.S.
Securities and Exchange Commission.
The Fund receives all investment advisory services from Vanguard's Core
Management Group. The Core Management Group manages the investment and
reinvestment of the Fund's assets and continuously reviews, supervises, and
administers the Fund's investment program with respect to those assets. The Core
Management Group discharges its responsibilities subject to the control of the
Officers and Trustees of the Fund.
The Core Management Group also provides investment advisory services to several
Vanguard Funds, including Vanguard Index Trust, Vanguard Balanced Index Fund,
Vanguard International Equity Index Fund, Vanguard REIT Index, Vanguard Treasury
Fund, the Growth and Income and Capital Appreciation Portfolios and the equity
portion of the Balanced Portfolio of Vanguard Tax-Managed Fund, the Aggressive
Growth Portfolio of Vanguard Horizon Fund, Vanguard Variable Insurance
Fund-Equity Index Portfolio, and a portion of Vanguard/Windsor II, a portion of
Vanguard/Morgan Growth Fund as well as to several indexed separate accounts.
Total assets under management by the Core Management Group were approximately
$57 billion as of December 31, 1996. The Fund is not actively managed, but is
instead administered by the Core Management Group, using computerized,
quantitative techniques.
B-8
<PAGE> 45
Under the terms of the Service and Advisory Agreement, Vanguard pays all of the
Fund's expenses, except for taxes and brokerage commissions. For the years ended
December 31, 1994, 1995 and 1996, the Fund paid approximately $2,044,000,
$3,057,000, and $5,580,669, respectively, to Vanguard for services rendered
under the Service and Advisory Agreement in effect for the Fund's 1994, 1995 and
1996 fiscal year end.
PORTFOLIO TRANSACTIONS
In placing portfolio transactions, the Core Management Group uses its best
judgment to choose the broker most capable of providing the brokerage services
necessary to obtain best available price and most favorable execution. The full
range and quality of brokerage services available are considered in making these
determinations. In those instances where it is reasonably determined that more
than one broker can offer the brokerage services needed to obtain the best
available price and most favorable execution, consideration will be given to
those brokers which supply statistical information and provide other services in
addition to execution services to the Fund.
Since the Fund does not market its shares through intermediary brokers or
dealers, it is not the Fund's practice to allocate brokerage or principal
business on the basis of sales of its shares which may be made through such
firms. However, the Fund may place portfolio orders with qualified
broker-dealers who recommend the Fund to clients, and may, when a number of
brokers and dealers can provide best price and execution on a particular
transaction, consider the sale of Fund shares by a broker or dealer in selecting
among broker dealers. For the years ended December 31, 1994, 1995, and 1996, the
Fund paid $314,246, $496,995, and $862,036 respectively, in brokerage
commissions.
DESCRIPTION OF SHARES AND VOTING RIGHTS
The Declaration of Trust permits the Trustees to issue an unlimited number of
shares of beneficial interest, without par value. The Board of Trustees has the
power to designate one or more classes or series of shares. Currently, the Fund
is offering shares of one series, which issues two classes of shares: Vanguard
Institutional Index Fund-Institutional Shares and Vanguard Institutional Index
Fund-Institutional Plus Shares.
The shares of the Fund are fully paid and nonassessable, except as set forth
under "Shareholder and Trustee Liability," and have no preference as to
conversion, exchange, dividends, retirement or other features. The shares of the
Fund have no pre-emptive rights. The shares of the Fund have non-cumulative
voting rights, which means that the holders of more than 50% of the shares
voting for the election of Trustees can elect 100% of the Trustees if they
choose to do so. A shareholder is entitled to one vote for each full share held
(and a fractional vote for each fractional share held), then standing in his
name on the books of the Fund. On any matter submitted to a vote of
shareholders, all shares of the Fund then issued and outstanding and entitled to
vote, irrespective of the class or series, shall be voted in the aggregate and
not by class or series, except (i) when required by the Investment Company Act
of 1940, shares shall be voted by individual class or series; and (ii) when the
matter does not affect any interest of a particular class or series, then only
shareholders of the affected classes or series shall be entitled to vote
thereon.
The Fund will continue without limitation of time, provided however that:
(1) Subject to the majority vote of the holders of shares of the Fund
outstanding, the Trustees may sell or convert the assets of the Fund to
another investment company in exchange for shares of such investment
company and distribute such shares ratably among the shareholders of the
Fund;
(2) Subject to the majority vote of shares of the Fund outstanding,
the Trustees may sell and convert into money the assets of the Fund and
distribute such assets ratably among the shareholders of the Fund; and
(3) Without the approval of the shareholders of the Fund, unless
otherwise required by law, the Trustees may combine the assets of any two
or more Portfolios into a single Portfolio so long as such combination will
not have a material adverse effect upon the shareholders of such Portfolio.
Upon completion of the distribution of the remaining proceeds or the remaining
assets of any Portfolio as provided in paragraphs 1), 2), 3) above the Trust
shall terminate as to that Portfolio and the Trustees shall be
B-9
<PAGE> 46
discharged of any and all further liabilities and duties hereunder and the
right, title and interest of all parties shall be cancelled and discharged.
SHAREHOLDER AND TRUSTEE LIABILITY. Under Pennsylvania law, shareholders of such
a Trust may, under certain circumstances, be held personally liable as partners
for the obligations of the Trust. Therefore, the Declaration of Trust contains
an express disclaimer of shareholder liability for acts or obligations of the
Trust and requires that notice of such disclaimer be given in each agreement,
obligation, or instrument entered into or executed by the Trust or the Trustees.
The Declaration of Trust provides for indemnification out of the Trust property
of any shareholder held personally liable (and not because of such shareholder's
acts or omissions) for the obligations of the Trust. The Declaration of Trust
also provides that the Trust shall, upon request, assume the defense of any
claim against any shareholder for any act or obligation of the Trust and satisfy
any judgment thereon. Thus, the risk of a shareholder incurring financial loss
on account of shareholder liability is limited to circumstances in which the
Trust itself would be unable to meet its obligations.
The Declaration of Trust further provides that the Trustees will not be liable
for errors of judgment or mistakes of fact or law, but nothing in the
Declaration of Trust protects a Trustee against any liability to which he would
otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties involved in the conduct of his
office.
FINANCIAL STATEMENTS
The Fund's financial statements for the year ended December 31, 1996, including
the financial highlights for each of the periods, appearing in the Vanguard
Institutional Index Fund 1996 Annual Report to Shareholders, and the report
thereon of Price Waterhouse LLP, independent accountants, also appearing
therein, are incorporated by reference in this Statement of Additional
Information. The Fund's 1996 Annual Report to Shareholders is enclosed with this
Statement of Additional Information and does not include information for the
Institutional Plus Shares of the Fund because such class was not offered during
the Fund's 1996 fiscal year.
YIELD AND TOTAL RETURN
The average annual total return of the Institutional Shares of the Fund* for one
year, three and five years ending December 31, 1996, and since inception on July
31, 1990 was +23.06%, +19.71%, +15.21% and +15.30%, respectively. Total return
is computed by finding the average compounded rates of return over the one-,
five- and ten-year periods (or life of Fund, as applicable) set forth above that
would equate an initial amount invested at the beginning of the periods to the
ending redeemable value of the investment. The annualized yield for the
Institutional Shares of the Fund for the thirty days ended December 31, 1996 was
+1.97%.
- ---------------
* The Fund reserves the right to deduct a portfolio transaction fee, ranging
from 0.08% to 0.20%, from purchases of shares of the Fund if such purchase or
cumulative purchases are of a size that is reasonably deemed to be disruptive
to efficient portfolio management; total return figures are not adjusted to
reflect this transaction fee.
PERFORMANCE MEASURES
Vanguard may use reprinted material discussing The Vanguard Group, Inc. or any
of the member funds of The Vanguard Group of Investment Companies.
The Fund may from time to time use one or more of the following unmanaged
indices for comparative performance purposes.
STANDARD & POOR'S 500 COMPOSITE STOCK PRICE INDEX -- is a well diversified list
of 500 companies representing the U.S. Stock Market.
WILSHIRE 5000 EQUITY INDEX -- consists of more than 7,000 common equity
securities, covering all stocks in the U.S. for which daily pricing is
available.
WILSHIRE 4500 EQUITY INDEX -- consists of all stocks in the Wilshire 5000 except
for the 500 stocks in the Standard & Poor's 500 Index.
B-10
<PAGE> 47
MORGAN STANLEY CAPITAL INTERNATIONAL EAFE INDEX -- is an arithmetic, market
value-weighted average of the performance of over 900 securities listed on the
stock exchanges of countries in Europe, Australia and the Far East.
GOLDMAN SACHS 100 CONVERTIBLE BOND INDEX -- currently includes 71 bonds and 29
preferreds. The original list of names was generated by screening for
convertible issues of $100 million or greater in market capitalization. The
index is priced monthly.
SALOMON BROTHERS GNMA INDEX -- includes pools of mortgages originated by private
lenders and guaranteed by the mortgage pools of the Government National Mortgage
Association.
SALOMON BROTHERS HIGH-GRADE CORPORATE BOND INDEX -- consists of publicly issued,
non-convertible corporate bonds rated Aa or Aaa. It is a value-weighted, total
return index, including approximately 800 issues with maturities of 12 years or
greater.
LEHMAN LONG-TERM TREASURY BOND -- is composed of all bonds covered by the
Shearson Lehman Hutton Treasury Bond Index with maturities of 10 years or
greater.
MERRILL LYNCH CORPORATE & GOVERNMENT BOND -- consists of over 4,500 U.S.
Treasury, Agency and investment grade corporate bonds.
LEHMAN CORPORATE (Baa) BOND INDEX -- all publicly offered fixed-rate,
nonconvertible domestic corporate bonds rated Baa by Moody's, with a maturity
longer than 1 year and with more than $25 million outstanding. This index
includes over 1,000 issues.
BOND BUYER MUNICIPAL BOND INDEX (20 YEAR) -- is a yield index on current coupon
high-grade general obligation municipal bonds.
STANDARD & POOR'S PREFERRED INDEX -- is a yield index based upon the average
yield of four high-grade, non-callable preferred stock issues.
NASDAQ INDUSTRIAL INDEX -- is composed of more than 3,000 industrial issues. It
is a value-weighted index calculated on price change only and does not include
income.
COMPOSITE INDEX -- 70% Standard & Poor's 500 Index, 30% NASDAQ Industrial Index.
COMPOSITE INDEX -- 65% Standard & Poor's 500 Index and 35% Lehman Long-Term
Corporate AA or Better Bond Index.
COMPOSITE INDEX -- 65% Lehman Long-Term Corporate AA or Better Bond Index and a
35% weighting in a blended equity composite (75% Standard & Poor's/BARRA Value
Index and 12.5% Standard & Poor's Utilities Index and 12.5% Standard and Poor's
Telephone Index).
LEHMAN LONG-TERM CORPORATE AA OR BETTER BOND INDEX -- consists of all publicly
issued, fixed rate, nonconvertible investment grade, dollar-denominated,
SEC-registered corporate debt rated AA or AAA.
LEHMAN BROTHERS AGGREGATE BOND INDEX -- is a market weighted index that contains
individually priced U.S. Treasury, agency, corporate, and mortgage pass-through
securities corporate rated BBB- or better. The Index has a market value of over
$4 trillion.
LEHMAN BROTHERS MUTUAL FUND SHORT (1-5) GOVERNMENT/CORPORATE INDEX -- is a
market weighted index that contains individually priced U.S. Treasury, agency,
and corporate investment grade bonds rated BBB- or better with maturities
between 1 and 5 years. The index has a market value of over $1.6 trillion.
LEHMAN BROTHERS MUTUAL FUND INTERMEDIATE (5-10) GOVERNMENT/CORPORATE INDEX -- is
a market weighted index that contains individually priced U.S. Treasury, agency,
and corporate securities rated BBB- or better with maturities between 5 and 10
years. The index has a market value of over $700 billion.
LEHMAN BROTHERS MUTUAL FUND LONG (10+) GOVERNMENT/CORPORATE INDEX -- is a market
weighted index that contains individually priced U.S. Treasury, agency, and
corporate securities rated BBB- or better with maturities greater than 10 years.
The index has a market value of over $900 billion.
B-11
