<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. 13
AND
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY
ACT OF 1940
AMENDMENT NO. 14
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 April 20, 1998 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, 1997 ON MARCH --, 1998.
================================================================================
<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, 1997
filed with the Securities and
Exchange Commission's EDGAR system on
February 24, 1998
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
FORM N-1A LOCATION IN STATEMENT
ITEM NUMBER OF ADDITIONAL INFORMATION
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
VANGUARD INDEX TRUST
PROSPECTUS SUPPLEMENT
April 20, 1998
On April 20, 1998, a subscription period will begin for three new Portfolios of
Vanguard Index Trust: the Mid Capitalization Stock Portfolio, Small
Capitalization Value Stock Portfolio, and Small Capitalization Growth Stock
Portfolio. The subscription period, held for the purpose of accumulating
capital prior to the start of investment activities, will last through May 20,
1998. Fund assets will be invested in money market instruments throughout the
subscription period. For the duration of this period, the Portfolios will
charge no transaction fees.
Beginning May 21, each Portfolio will charge an automatic transaction fee
on purchases of shares (including exchanges from other Vanguard funds, but not
including reinvested dividends and capital gains). The fees are 0.25% for the
Mid Capitalization Stock Portfolio and 1.00% for the Small Capitalization Value
Stock and Small Capitalization Growth Stock Portfolios. These fees, paid
directly to the Portfolios, are designed to offset the higher costs of
purchasing certain types of securities.
<PAGE> 4
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS
DATED JANUARY 9, 1998
VANGUARD INSTITUTIONAL
INDEX FUND
VANGUARD
INDEX TRUST
Prospectus
April 20, 1998
VANGUARD INSTITUTIONAL
INDEX FUND
INSTITUTIONAL SHARES
INSTITUTIONAL PLUS SHARES
VANGUARD INDEX TRUST
INSTITUTIONAL SHARES OF
TOTAL STOCK MARKET
PORTFOLIO
EXTENDED MARKET
PORTFOLIO
MID CAPITALIZATION
STOCK PORTFOLIO
SMALL CAPITALIZATION
STOCK PORTFOLIO
VALUE PORTFOLIO
SMALL CAPITALIZATION
VALUE STOCK PORTFOLIO
GROWTH PORTFOLIO
SMALL CAPITALIZATION
GROWTH STOCK PORTFOLIO
This prospectus contains
financial data for the Fund
and the Trust through
the fiscal year ended
December 31, 1997.
[GRAPHIC OF SHIP]
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION BUT HAS NOT YET BECOME EFFECTIVE. THE
INVESTOR AND INSTITUTIONAL SHARES OF THE MID CAPITALIZATION STOCK PORTFOLIO, THE
SMALL CAPITALIZATION VALUE STOCK PORTFOLIO, AND THE SMALL CAPITALIZATION GROWTH
STOCK PORTFOLIO, AS WELL AS THE INSTITUTIONAL SHARES OF THE VALUE PORTFOLIO AND
THE GROWTH PORTFOLIO, MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO
THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS COMMUNICATION SHALL
NOT CONSTITUTE AN OFFER TO SELL OR SOLICITATION OF AN OFFER TO BUY, NOR SHALL
THERE BE ANY SALE OF THESE SECURITIES IN ANY STATES IN WHICH SUCH OFFER,
SOLICITATION, OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION QUALIFICATION
UNDER THE SECURITIES LAWS OF ANY SUCH STATE. TO OBTAIN A CURRENTLY EFFECTIVE
PROSPECTUS FOR THE EXISTING PORTFOLIOS OF VANGUARD INDEX TRUST, PLEASE CONTACT
VANGUARD'S INVESTOR INFORMATION DEPARTMENT AT 1-800-662-7447.
[VANGUARD GROUP LOGO]
<PAGE> 5
VANGUARD INSTITUTIONAL INDEX FUND Stock Index Mutual Funds
VANGUARD INDEX TRUST
<TABLE>
<CAPTION>
CONTENTS
<S> <C>
Funds Profile 1
Fund Expenses 5
Financial Highlights 9
A Word About Risk 15
The Funds' Objective 15
Who Should Invest 16
Investment Strategy 17
Investment Policies 22
Investment
Limitations 23
Investment
Performance 23
Share Price 25
Dividends, Capital
Gains, and Taxes 25
The Funds and
Vanguard 26
Investment Adviser 26
General Information 27
Investing with
Vanguard 29
- - For Plan
Participants 29
- - For Other
Institutional
Investors 30
Accessing Fund
Information by
Computer 30
Prospectus Postscript 31
Risk Quiz 32
Glossary Inside Back Cover
</TABLE>
INVESTMENT OBJECTIVE AND POLICIES
The Vanguard index funds (the "Funds") offered in this prospectus are Vanguard
Institutional Index Fund and eight Portfolios of Vanguard Index Trust.
Vanguard Institutional Index Fund is an open-end investment company that
seeks to match the investment performance of the Standard & Poor's 500 Composite
Stock Price Index.
Vanguard Index Trust is an open-end investment company that includes eight*
separate, diversified mutual fund portfolios: Total Stock Market, Extended
Market, Mid Capitalization Stock, Small Capitalization Stock, Value, Small
Capitalization Value Stock, Growth, and Small Capitalization Growth Stock. The
Mid Capitalization Stock, Small Capitalization Value Stock, and Small
Capitalization Growth Stock Portfolios did not begin operations until April 20,
1998; the Value and Growth Portfolios did not begin issuing Institutional Shares
until April 20, 1998. Each Trust Portfolio seeks to match, as closely as
possible, the performance of a different stock market index. One index reflects
the entire U.S. stock market; the seven other indexes focus on specific stock
market segments. You can buy shares in any of the eight Portfolios that meet
your investment needs; you do not have to buy shares in all eight.
Long-term capital growth (and, for some Portfolios, dividend income) may be
achieved as the Funds track their respective indexes.
You should note that none of the Funds' shares are guaranteed or insured by
the FDIC or any other agency of the U.S. government. As with any investment in
common stocks, which are subject to wide fluctuations in market value, you could
lose money by investing in the Funds.
FEES AND EXPENSES
The Funds are offered on a no-load basis, which means that you pay no sales
commissions or 12b-1 marketing fees. You will, however, incur expenses for
investment advisory, management, administrative, and distribution services,
which are included in the expense ratios of the Funds.
Five Portfolios charge a fee on purchases: 0.25% for the Extended Market and
Mid Capitalization Stock Portfolios, 0.5% for the Small Capitalization Stock
Portfolio, and 1.00% for the Small Capitalization Value Stock and Small
Capitalization Growth Stock Portfolios (fees apply to both Institutional Shares
and Investor Shares).
ADDITIONAL INFORMATION ABOUT THE FUNDS
Statements of Additional Information (dated April 20, 1998) containing more
information about the Funds are, by reference, part of this prospectus and may
be obtained without charge by contacting Vanguard (see back cover) or visiting
the Securities and Exchange Commission's website (www.sec.gov).
*The 500 Portfolio of Vanguard Index Trust is not included in this prospectus
since it does not offer Institutional Shares.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED UPON
THE ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE> 6
IMPORTANT NOTE
Vanguard Institutional Index Fund offers two separate classes of shares:
Institutional and Institutional Plus. The Institutional Shares are designed for
investors who meet the investment minimum of $10 million and generally do not
require special employee benefit plan services. The Institutional Plus Shares
are designed for investors who meet the investment minimum of $200 million and
generally do not require special employee benefit plan services.
Each Portfolio of Vanguard Index Trust also offers two separate classes of
shares: Institutional and Investor. This prospectus is intended for investors
who qualify for Institutional Shares, which have an investment minimum of $10
million and generally do not require special employee benefit services. Each
Portfolio also offers Investor Shares, which have an investment minimum of
$3,000 and are offered by a separate prospectus (you can obtain a copy of this
prospectus by calling Vanguard). Certain information on Vanguard Index Trust's
Investor Shares is also included in this prospectus.
Note that the Fund's and the Portfolios' separate share classes have
different expenses; as a result, their investment performance will vary.
WHY READING THIS PROSPECTUS IS IMPORTANT
This prospectus explains the objective, risks, and strategy of Vanguard
Institutional Index Fund and of each Portfolio of Vanguard Index Trust. To
highlight terms and concepts important to mutual fund investors, we have
provided "Plain Talk" explanations along the way. Reading the prospectus will
help you decide whether the Funds are the right investment for you. We suggest
that you keep it for future reference.
Vanguard Institutional Index Fund
Vanguard Index Trust
FUND PROFILE
WHO SHOULD INVEST (page 16)
- - Investors looking for a simple way to match the performance of a
specific stock market index.
- - Investors seeking a stock mutual fund as part of a balanced and
diversified investment program.
- - Investors seeking growth of their capital over the long term -- at
least five years.
WHO SHOULD NOT INVEST
- - Investors unwilling to accept significant fluctuations in share price.
- - Investors hoping to beat the stock market.
RISKS OF THE FUNDS (pages 15-23)
The total returns of the Funds will fluctuate within a wide range, so an
investor could lose money over short or even extended periods. The Funds are
subject to market risk (the chance that stock prices in general will fall,
sometimes suddenly and sharply) and objective risk (the chance that a specific
segment of the stock market will not perform as well as the overall market).
More detailed information about risk -- including risks specific to each Fund
- --is provided beginning on page 15.
DIVIDENDS AND CAPITAL GAINS (page 25)
Vanguard Institutional Index Fund and three of Vanguard Index Trust's Portfolios
- -- the Total Stock Market, Value, and Growth Portfolios -- pay dividends in
March, June, September, and December. The Extended Market, Mid Capitalization
Stock, Small Capitalization Stock, Small Capitalization Value Stock, and Small
Capitalization Growth Stock Portfolios pay dividends in December. The Funds pay
capital gains, if any, in December.
INVESTMENT ADVISER (page 26)
Vanguard Core Management Group, Valley Forge, Pa., manages the Funds.
1
<PAGE> 7
Vanguard Institutional Index Fund
Vanguard Index Trust
FUND PROFILE (continued)
AVERAGE ANNUAL TOTAL RETURNS --
INSTITUTIONAL SHARES
PERIODS ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
1 YEAR 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Institutional Index Fund --
Institutional Shares 33.4% 20.3% 17.6%*
S&P 500 Index [BULLET] [BULLET] [BULLET]
Institutional Index Fund --
Institutional Plus Shares 7.3* -- --
S&P 500 Index [BULLET]
Total Stock Market 8.6* -- --
Wilshire 5000 Index 8.9* -- --
Extended Market** 11.8* -- --
Wilshire 4500 Index 12.1* -- --
SmallCap Stock** 11.4* -- --
Russell 2000 Index 11.1* -- --
- --------------------------------------------------------------------------------
</TABLE>
Note: The Mid Capitalization Stock, Small Capitalization Value Stock, and Small
Capitalization Growth Stock Portfolios did not begin operations until April 20,
1998; the Value and Growth Portfolios did not begin offering Institutional
Shares until April 20, 1998.
*Since inception; see pages 2 and 3.
**Does not include transaction fee; see pages 2 and 3.
AVERAGE ANNUAL TOTAL RETURNS --
INVESTOR SHARES
PERIODS ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
1 YEAR 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Total Stock Market 31.0% 18.9% 18.5%*
Wilshire 5000 Index 31.4 19.3 18.9
Extended Market** 26.7% 17.5% 16.4%
Wilshire 4500 Index 25.7 17.0 16.3
SmallCap Stock** 24.6% 17.5% 15.8%
Russell 2000 Index 22.4 16.4 15.8
Value 29.8% 20.5% 20.7%*
S&P/BARRA Value Index 30.0 20.7 20.9*
Growth 36.3% 19.5% 19.5%*
S&P/BARRA Growth Index 36.5 19.6 19.8*
- --------------------------------------------------------------------------------
</TABLE>
Note: The Mid Capitalization Stock, Small Capitalization Value Stock, and Small
Capitalization Growth Stock Portfolios did not begin operations until April 20,
1998.
*Since inception; see pages 2 and 3.
**Does not include transaction fee; see pages 2 and 3.
IN EVALUATING PAST PERFORMANCE, REMEMBER THAT IT IS NOT INDICATIVE OF FUTURE
PERFORMANCE AND THAT RETURNS FROM STOCKS BEFORE ADJUSTING FOR INFLATION WERE
RELATIVELY HIGH DURING THE PERIODS SHOWN. PERFORMANCE FIGURES INCLUDE THE
REINVESTMENT OF ANY DIVIDEND AND CAPITAL GAINS DISTRIBUTIONS. THE RETURNS SHOWN
ARE NET OF EXPENSES, BUT THEY DO NOT REFLECT INCOME TAXES AN INVESTOR WOULD HAVE
INCURRED. NOTE, TOO, THAT BOTH THE RETURN AND PRINCIPAL VALUE OF AN INVESTMENT
WILL FLUCTUATE SO THAT INVESTORS' SHARES, WHEN REDEEMED, MAY BE WORTH MORE OR
LESS THAN THEIR ORIGINAL COST.
INSTITUTIONAL INDEX FUND
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
INSTITUTIONAL INSTITUTIONAL
SHARES PLUS SHARES
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
INCEPTION DATE: 7/31/1990 7/7/1997
NET ASSETS AS OF 12/31/1997: $15.34 $3.50
PORTFOLIO EXPENSE RATIO FOR THE YEAR ENDED 12/31/1997: 0.06% 0.025%
TRANSACTION FEE ON PURCHASES: None* None*
NEWSPAPER ABBREVIATION: InstIdx InstPlus
VANGUARD FUND NUMBER: 094 854
CUSIP NUMBER: 922040100 922040209
QUOTRON SYMBOL: VINIX.Q VIIIX.Q
</TABLE>
*Vanguard Institutional Index Fund reserves the right to deduct a transaction
fee, ranging from 0.08% to 0.20%, from purchases of shares.
2
<PAGE> 8
Vanguard Institutional Index Fund
Vanguard Index Trust
FUND PROFILE (continued)
INDEX TRUST -- INSTITUTIONAL SHARES
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
TOTAL STOCK EXTENDED MIDCAP
MARKET MARKET STOCK
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INCEPTION DATE: 7/7/1997 7/7/1997 4/20/1998
NET ASSETS AS OF 12/31/1997: $1.50 billion $415 million None
PORTFOLIO EXPENSE RATIO FOR THE
YEAR ENDED 12/31/1997 (Annualized): 0.10% 0.10% N/A
TRANSACTION FEE ON PURCHASES: None* 0.25% 0.25%
NEWSPAPER ABBREVIATION: TotStIst ExtndIst MidCapIst
VANGUARD FUND NUMBER: 855 856 864
CUSIP NUMBER: 922908801 922908884 922908835
QUOTRON SYMBOL: VITSX.Q VIEIX.Q N/A
- -------------------------------------------------------------------------------------------------
</TABLE>
*The Total Stock Market Portfolio -- Institutional Shares reserves the right to
deduct a transaction fee, ranging from 0.08% to 0.20%, from purchases of shares.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
SMALLCAP SMALLCAP
STOCK VALUE VALUE
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INCEPTION DATE: 7/7/1997 4/20/1998 4/20/1998
NET ASSETS AS OF 12/31/1997: $137 million None None
PORTFOLIO EXPENSE RATIO FOR THE
YEAR ENDED 12/31/1997 (Annualized): 0.12% N/A N/A
TRANSACTION FEE ON PURCHASES: 0.5% None 1.00%
NEWSPAPER ABBREVIATION: SmCapIst ValIst SmValIst
VANGUARD FUND NUMBER: 857 867 865
CUSIP NUMBER: 922908876 922908850 922908785
QUOTRON SYMBOL: VSCIX.Q N/A N/A
- -------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
SMALLCAP
GROWTH GROWTH
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
INCEPTION DATE: 4/20/1998 4/20/1998
NET ASSETS AS OF 12/31/1997: None None
PORTFOLIO EXPENSE RATIO FOR THE YEAR ENDED 12/31/1997: N/A N/A
TRANSACTION FEE ON PURCHASES: None 1.00%
NEWSPAPER ABBREVIATION: GroIst SmGroIst
VANGUARD FUND NUMBER: 868 866
CUSIP NUMBER: 922908868 922908819
QUOTRON SYMBOL: N/A N/A
- -------------------------------------------------------------------------------------------------
</TABLE>
3
<PAGE> 9
Vanguard Institutional Index Fund
Vanguard Index Trust
FUND PROFILE (continued)
INDEX TRUST -- INVESTOR SHARES
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
TOTAL STOCK EXTENDED MIDCAP
MARKET MARKET STOCK
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INCEPTION DATE: 4/27/1992 12/21/1987 4/20/1998
NET ASSETS AS OF 12/31/1997: $5.09 billion $2.72 billion None
PORTFOLIO EXPENSE RATIO FOR THE
YEAR ENDED 12/31/1997: 0.20% 0.23% N/A
TRANSACTION FEE ON PURCHASES: None 0.25% 0.25%
NEWSPAPER ABBREVIATION: TotSt Extnd MidCap
VANGUARD FUND NUMBER: 085 098 859
CUSIP NUMBER: 922908306 922908207 922908843
QUOTRON SYMBOL: VTSMX.Q VEXMX.Q N/A
- -------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
SMALLCAP SMALLCAP
STOCK VALUE VALUE
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INCEPTION DATE: 10/3/1960 11/2/1992 4/20/1998
NET ASSETS AS OF 12/31/1997: $2.70 Billion $1.80 Billion None
PORTFOLIO EXPENSE RATIO FOR THE
YEAR ENDED 12/31/1997: 0.23% 0.20% N/A
TRANSACTION FEE ON PURCHASES: 0.5% None 1.00%
NEWSPAPER ABBREVIATION: SmCap Value SmValue
VANGUARD FUND NUMBER: 048 006 860
CUSIP NUMBER: 922908702 922908405 922908793
QUOTRON SYMBOL: NAESX.Q VIVAX.Q N/A
- -------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
SMALLCAP
GROWTH GROWTH
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
INCEPTION DATE: 11/2/1997 4/20/1998
NET ASSETS AS OF 12/31/1997: $2.40 billion None
PORTFOLIO EXPENSE RATIO FOR THE YEAR ENDED 12/31/1997: 0.20% N/A
TRANSACTION FEE ON PURCHASES: None 1.00%
NEWSPAPER ABBREVIATION: Growth SmGrowth
VANGUARD FUND NUMBER: 009 861
CUSIP NUMBER: 922908504 922908827
QUOTRON SYMBOL: VIGRX.Q N/A
- ------------------------------------------------------------------------------------------------
</TABLE>
4
<PAGE> 10
FUND EXPENSES
The examples below are designed to help you understand the costs you would bear
as an investor in the Funds.
SHAREHOLDER TRANSACTION EXPENSES AND FEES
INSTITUTIONAL INDEX FUND*
<TABLE>
<S> <C>
Sales Load Imposed on Purchases: None
Transaction Fee on Purchases: None**
Sales Load Imposed on Reinvested Dividends: None
Redemption Fees: None
Exchange Fees: None
</TABLE>
* Applies to both Institutional Shares and Institutional Plus Shares.
** Vanguard Institutional Index Fund reserves the right to deduct a transaction
fee, ranging from 0.08% to 0.20%, from purchases of shares.
INDEX TRUST*
<TABLE>
<S> <C>
Sales Load Imposed on Purchases: None
Transaction Fee on Purchases:**
Extended Market Portfolio: 0.25%
Mid Capitalization Stock Portfolio: 0.25%
Small Capitalization Stock Portfolio: 0.50%
Small Capitalization Value Stock Portfolio: 1.00%
Small Capitalization Growth Stock Portfolio: 1.00%
Total Stock Market,*** Value, and Growth Portfolios: None
Sales Load Imposed on Reinvested Dividends: None
Redemption Fees: None
Exchange Fees: None
</TABLE>
* Applies to both Institutional Shares and Investor Shares.
** The transaction fee is deducted from all purchases (including exchanges from
other Vanguard funds) but not from reinvested dividends and capital gains.
*** The Total Stock Market Portfolio (Institutional Shares) reserves the right
to deduct a transaction fee, ranging from 0.08% to 0.20%, from purchases of
shares.
The next tables illustrate the expenses that you can incur, outside of
transaction and maintenance fees, as a shareholder in either of the Funds. These
expenses are deducted from the Funds' income before it is paid to you. Expenses
include investment advisory fees as well as fees for administering the Funds,
providing services, and other activities. The expenses for Vanguard
Institutional Index Fund; the Total Stock Market, Extended Market, and Small
Capitalization Stock Portfolios; and the Investor Shares of the Value Portfolio
and the Growth Portfolio, as shown in the table, are based upon those incurred
in the fiscal year ended December 31, 1997. The expenses shown for the Mid
Capitalization Stock, Small Capitalization Value Stock, and Small Capitalization
Growth Stock Portfolios (Institutional and Investor Shares), as well as for the
Institutional Shares of the Value Portfolio and the Growth Portfolio, are
estimates for their first full year of operations.
PLAIN TALK ABOUT
VANGUARD'S FEES
Some of Vanguard's index portfolios charge a transaction fee on purchases of
portfolio shares to offset the higher costs of trading certain securities,
particularly small-company and international stocks. The transaction fee ensures
that these higher costs are borne by the investors making the transactions --
and not by shareholders already in the portfolio.
At Vanguard, all fees are paid directly to the portfolio itself (unlike a
sales charge or load, which -- for many fund companies -- ends up in the pocket
of the sponsor, adviser, or sales representative). Without transaction fees, an
index portfolio would have trouble tracking its target index.
PLAIN TALK ABOUT
FUND EXPENSES
All mutual funds have operating expenses. These expenses, which are deducted
from a fund's gross income, are expressed as a percentage of the net assets of
the fund. For instance, the Institutional Index Fund's (Institutional Shares)
expense ratio in fiscal year 1997 was 0.06%, or $0.60 per $1,000 of average net
assets. The average equity index fund had expenses in 1997 of 0.33%, or $3.30
per $1,000 of average net assets, according to Lipper Analytical Services, Inc.,
which reports on the mutual fund industry.
5
<PAGE> 11
FUND OPERATING EXPENSES
INSTITUTIONAL INDEX FUND
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
INSTITUTIONAL INSTITUTIONAL
SHARES PLUS SHARES
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Management and
Administrative Expenses: 0.06% .025%
Investment Advisory Expenses: None None
12b-1 Marketing Fees None None
Other Expenses
Marketing and Distribution Expenses: 0.00% 0.00%
Miscellaneous Expenses
(e.g., Taxes, Auditing): 0.00% 0.00%
---- ----
Total Other Expenses: 0.00% 0.00%
---- ----
TOTAL OPERATING EXPENSES (EXPENSE RATIO): 0.06% .025%
==== ====
</TABLE>
INDEX TRUST -- INSTITUTIONAL SHARES
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
TOTAL STOCK EXTENDED MIDCAP
MARKET MARKET STOCK
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Management and
Administrative Expenses: 0.08% 0.08% 0.09%
Investment Advisory Expenses: None None None
12b-1 Marketing Fees: None None None
Other Expenses
Marketing and Distribution
Expenses: 0.02% 0.02% 0.02%
Miscellaneous Expenses
(e.g., Taxes, Auditing): 0.00% 0.00% 0.01%
---- ---- ----
Total Other Expenses: 0.02% 0.02% 0.03%
---- ---- ----
TOTAL OPERATING EXPENSES:
(EXPENSE RATIO): 0.10% 0.10% 0.12%
==== ==== ====
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
SMALLCAP SMALLCAP
STOCK VALUE VALUE
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Management and
Administrative Expenses: 0.10% 0.08% 0.09%
Investment Advisory Expenses: None None None
12b-1 Marketing Fees: None None None
Other Expenses
Marketing and Distribution
Expenses: 0.02% 0.02% 0.02%
Miscellaneous Expenses
(e.g., Taxes, Auditing): 0.00% 0.02% 0.01%
---- ---- ----
Total Other Expenses: 0.02% 0.04% 0.03%
---- ---- ----
TOTAL OPERATING EXPENSES
(EXPENSE RATIO): 0.12% 0.12% 0.12%
==== ==== ====
</TABLE>
6
<PAGE> 12
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
SMALLCAP
GROWTH GROWTH
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Management and
Administrative Expenses: 0.08% 0.09%
Investment Advisory Expenses: None None
12b-1 Marketing Fees: None None
Other Expenses
Marketing and Distribution Expenses: 0.02% 0.02%
Miscellaneous Expenses
(e.g., Taxes, Auditing): 0.02% 0.01%
---- ----
Total Other Expenses: 0.04% 0.03%
---- ----
TOTAL OPERATING EXPENSES (EXPENSE RATIO): 0.12% 0.12%
==== ====
</TABLE>
INDEX TRUST -- INVESTOR SHARES
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
TOTAL STOCK EXTENDED MIDCAP
MARKET MARKET STOCK
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Management and
Administrative Expenses: 0.17% 0.20% 0.22%
Investment Advisory Expenses: None None None
12b-1 Marketing Fees: None None None
Other Expenses
Marketing and Distribution
Expenses: 0.03% 0.02% 0.02%
Miscellaneous Expenses
(e.g., Taxes, Auditing): 0.00% 0.01% 0.01%
---- ---- ----
Total Other Expenses: 0.03% 0.03% 0.03%
TOTAL OPERATING EXPENSES ---- ---- ----
(EXPENSE RATIO): 0.20% 0.23% 0.25%
==== ==== ====
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
SMALLCAP SMALLCAP
STOCK VALUE VALUE
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Management and
Administrative Expenses: 0.20% 0.17% 0.22%
Investment Advisory Expenses: None None None
12b-1 Marketing Fees: None None None
Other Expenses
Marketing and Distribution
Expenses: 0.02% 0.02% 0.02%
Miscellaneous Expenses
(e.g., Taxes, Auditing): 0.01% 0.01% 0.01%
---- ---- ----
Total Other Expenses: 0.03% 0.03% 0.03%
---- ---- ----
TOTAL OPERATING EXPENSES
(EXPENSE RATIO): 0.23% 0.20% 0.25%
==== ==== ====
</TABLE>
7
<PAGE> 13
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
SMALLCAP
GROWTH GROWTH
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Management and
Administrative Expenses: 0.17% 0.22%
Investment Advisory Expenses: None None
12b-1 Marketing Fees: None None
Other Expenses
Marketing and Distribution Expenses: 0.02% 0.02%
Miscellaneous Expenses
(e.g., Taxes, Auditing): 0.01% 0.01%
---- ----
Total Other Expenses: 0.03% 0.03%
---- ----
TOTAL OPERATING EXPENSES (EXPENSE RATIO): 0.20% 0.25%
==== ====
</TABLE>
The following examples are intended to help you compare the cost of investing
in the Funds with the cost of investing in other mutual funds, by illustrating
the hypothetical expenses that you would incur on a $1,000 investment in a Fund
over various periods. These examples assume that (1) the Fund provides a return
of 5% a year, and (2) you redeem your investment at the end of each period.
INSTITUTIONAL INDEX FUND
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Institutional Shares $1 $2 $3 $8
Institutional Plus Shares $0 $1 $1 $3
- --------------------------------------------------------------------------------
</TABLE>
INDEX TRUST -- INSTITUTIONAL SHARES
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total Stock Market $ 1 $ 3 $ 6 $13
Extended Market 4 6 8 15
MidCap Stock 4 6 9 18
SmallCap Stock 6 9 12 20
Value 1 4 7 15
SmallCap Value Stock 11 14 17 25
Growth 1 4 7 15
SmallCap Growth Stock 11 14 17 25
</TABLE>
INDEX TRUST -- INVESTOR SHARES
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total Stock Market $ 2 $ 6 $11 $26
Extended Market 5 10 15 32
MidCap Stock 5 11 17 34
SmallCap Stock 7 12 18 34
Value 2 6 11 26
SmallCap Value Stock 13 18 24 42
Growth 2 6 11 26
SmallCap Growth Stock 13 18 24 42
</TABLE>
THESE EXAMPLES SHOULD NOT BE CONSIDERED TO REPRESENT ACTUAL EXPENSES OR
PERFORMANCE FROM THE PAST OR FOR THE FUTURE, WHICH MAY BE HIGHER OR LOWER THAN
THOSE SHOWN.
8
<PAGE> 14
FINANCIAL HIGHLIGHTS
The following financial highlights tables show the results for a share
outstanding of Vanguard Institutional Index Fund (Institutional Shares and
Institutional Plus Shares), as well as an Institutional Share outstanding of the
Total Stock Market, Extended Market, and Small Capitalization Stock Market
Portfolios* for each of the last ten years ended December 31, 1997 (or each year
since the Fund's or Portfolio's inception date). The tables also show the
results for an Investor Share outstanding of the Total Stock Market, Extended
Market, Small Capitalization Stock, Value, and Growth Portfolios** for each of
the last ten years ended December 31, 1997 (or each year since the Portfolio's
inception date). The financial statements that include these financial
highlights were audited by Price Waterhouse LLP, independent accountants. You
should read this information in conjunction with the financial statements and
accompanying notes of the Funds, which appear, along with the audit reports from
Price Waterhouse, in the Funds' most recent annual reports to shareholders. The
annual reports are incorporated by reference in the Statements of Additional
Information and in this prospectus, and contain a more complete discussion of
the Funds' performance. You may have the reports sent to you without charge by
contacting Vanguard (see back cover).
PLAIN TALK ABOUT
HOW TO READ THE FINANCIAL HIGHLIGHTS TABLE
This explanation uses the Institutional Index Fund - Institutional Shares as an
example. The Fund began fiscal 1997 with a net asset value (price) of $68.86 per
share. During the year, the Fund earned $1.391 per share from investment income
(interest and dividends) and $21.415 per share from investments that had
appreciated in value or were sold for a price higher than the Fund paid for
them. This resulted in total earnings of $22.806 per share. Of those earnings,
$2.106 per share was returned to shareholders in distributions ($1.391 in
dividends, $.715 in capital gains). The earnings ($22.806 per share) less
distributions ($2.106 per share) resulted in a share price of $89.56 at the end
of the fiscal year, an increase of $20.70 per share (from $68.86 at the start of
the period to $89.56 at the end of the period). Assuming the shareholder had
reinvested the distributions in the purchase of more shares, total return from
the Fund was 33.36% for the year.
As of December 31, 1997, the Fund had $15.3 billion in net assets; an expense
ratio of 0.06% ($0.60 per $1,000 of net assets); and net investment income
amounting to 1.77% of its average net assets. It sold and replaced securities
valued at 7% of its total net assets.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
INSTITUTIONAL INDEX FUND - - INSTITUTIONAL SHARES
-----------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
--------------------------------------------------------------------- 7/31/1990* -
1997 1996 1995 1994 1993 1992 1991 12/31/1990
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 68.86 $ 57.93 $ 43.22 $ 44.20 $ 41.45 $ 39.91 $ 31.62 $ 34.10
-----------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income 1.391 1.38 1.28 1.23 1.20 1.17 1.16 .52
Net Realized and Unrealized
Gain (Loss) on Investments 21.415 11.90 14.86 (.66) 2.92 1.79 8.35 (2.48)
-----------------------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 22.80 613.28 16.14 .57 4.12 2.96 9.51 (1.96)
- ------------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (1.391) (1.36) (1.27) (1.21) (1.19) (1.17) (1.16) (.52)
Distributions from Realized Capital Gains (.715) (.99) (.16) (.34) (.18) (.25) (.06) --
-----------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (2.106) (2.35) (1.43) (1.55) (1.37) (1.42) (1.22) (.52)
- ------------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 89.56 $ 68.86 $ 57.93 $ 43.22 $ 44.20 $ 41.45 $ 39.91 $ 31.62
====================================================================================================================================
TOTAL RETURN 33.36% 23.06% 37.60% 1.31% 10.02% 7.54% 30.34% (5.74)%
====================================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $ 15,348 $ 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% 0.06% 0.07% 0.07% 0.07% 0.08% 0.09%**
Ratio of Net Investment Income to
Average Net Assets 1.77% 2.18% 2.49% 2.80% 2.72% 2.94% 3.15% 3.98%**
Portfolio Turnover Rate 7%+ 9%+ 4%+ 23%+ 4%+ 9%+ 4% 2%
Average Commission Rate Paid $ .0166 $ .0167 N/A N/A N/A N/A N/A N/A
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Inception date.
** Annualized.
+ Portfolio turnover rates excluding in-kind redemptions were 6%, 9%, 4%, 19%,
3%, and 6%, respectively.
- --------------------------------------------------------------------------------
* The Mid Capitalization Stock, Small Capitalization Value Stock, and Small
Capitalization Growth Stock Portfolios did not begin operations until April
20, 1998; the Value and Growth Portfolios did not begin issuing Institutional
Shares until April 20, 1998.
**The Mid Capitalization Stock, Small Capitalization Value Stock, and Small
Capitalization Growth Stock Portfolios did not begin operations until April
20, 1998.
9
<PAGE> 15
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
INSTITUTIONAL INDEX FUND -- INSTITUTIONAL PLUS SHARES
-----------------------------------------------------
7/7/1997* -
12/31/1997
- --------------------------------------------------------------------------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 84.91
-----------
INVESTMENT OPERATIONS
Net Investment Income .681
Net Realized and Unrealized Gain (Loss) on Investments 5.455
-----------
TOTAL FROM INVESTMENT OPERATIONS 6.136
- --------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.866)
Distributions from Realized Capital Gains (.620)
-----------
TOTAL DISTRIBUTIONS (1.486)
- --------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 89.56
================================================================================
TOTAL RETURN 7.29%
================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $ 3,488
Ratio of Total Expenses to Average Net Assets 0.025%**
Ratio of Net Investment Income to Average Net Assets 1.72%**
Portfolio Turnover Rate 7%+
Average Commission Rate Paid $ .0166
- --------------------------------------------------------------------------------
</TABLE>
* Inception Date.
** Annualized.
+ Portfolio turnover rate excluding in-kind redemptions was 6%.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
TOTAL STOCK MARKET PORTFOLIO -- INSTITUTIONAL SHARES
----------------------------------------------------
7/7/1997* -
12/31/1997
- --------------------------------------------------------------------------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 21.27
-----------
INVESTMENT OPERATIONS
Net Investment Income .172
Net Realized and Unrealized Gain (Loss) on Investments 1.642
-----------
TOTAL FROM INVESTMENT OPERATIONS 1.814
- --------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.214)
Distributions from Realized Capital Gains (.230)
-----------
TOTAL DISTRIBUTIONS (.444)
- --------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 22.64
================================================================================
TOTAL RETURN 8.60%
================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $ 1,504
Ratio of Total Expenses to Average Net Assets 0.10%**
Ratio of Net Investment Income to Average Net Assets 1.70%**
Portfolio Turnover Rate 2%
Average Commission Rate Paid $ .0
- --------------------------------------------------------------------------------
</TABLE>
* Inception Date.
** Annualized.
- --------------------------------------------------------------------------------
10
<PAGE> 16
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
EXTENDED MARKET PORTFOLIO -- INSTITUTIONAL SHARES
-------------------------------------------------
7/7/1997* -
12/31/1997
- --------------------------------------------------------------------------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 29.28
-----------
INVESTMENT OPERATIONS
Net Investment Income .200
Net Realized and Unrealized Gain (Loss) on Investments 3.191
-----------
TOTAL FROM INVESTMENT OPERATIONS 3.391
- --------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.371)
Distributions from Realized Capital Gains (1.540)
-----------
TOTAL DISTRIBUTIONS (1.911)
- --------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 30.76
================================================================================
TOTAL RETURN** 11.82%
================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $ 415
Ratio of Total Expenses to Average Net Assets 0.10%+
Ratio of Net Investment Income to Average Net Assets 1.43%+
Portfolio Turnover Rate 15%++
Average Commission Rate Paid $ .0228
- --------------------------------------------------------------------------------
</TABLE>
* Inception date.
** Total return figures do not reflect transaction fees on purchases (0.5% until
November 3, 1997; 0.25% thereafter).
+ Annualized.
++ Portfolio turnover rate excluding in-kind redemptions was 14%.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
SMALL CAPITALIZATION STOCK PORTFOLIO -- INSTITUTIONAL SHARES
------------------------------------------------------------
7/7/1997* -
12/31/1997
- --------------------------------------------------------------------------------
<S> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 22.56
-----------
INVESTMENT OPERATIONS
Net Investment Income .158
Net Realized and Unrealized Gain (Loss) on Investments 2.370
-----------
TOTAL FROM INVESTMENT OPERATIONS 2.528
- --------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.288)
Distributions from Realized Capital Gains (1.050)
-----------
TOTAL DISTRIBUTIONS (1.338)
- --------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 23.75
================================================================================
TOTAL RETURN** 11.42%
================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $ 137
Ratio of Total Expenses to Average Net Assets 0.12%+
Ratio of Net Investment Income to Average Net Assets 1.52%+
Portfolio Turnover Rate 29%
Average Commission Rate Paid $ .0226
- --------------------------------------------------------------------------------
</TABLE>
* Inception date.
** Total return figures do not reflect the 0.5% transaction fee on purchases.
+ Annualized.
- --------------------------------------------------------------------------------
11
<PAGE> 17
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL STOCK MARKET PORTFOLIO -- INVESTOR SHARES
----------------------------------------------------------------
YEAR ENDED DECEMBER 31,
--------------------------------------------------- 3/16/1992*-
1997 1996 1995 1994 1993 12/31/1992
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 17.77 $ 15.04 $ 11.37 $ 11.69 $ 10.84 $ 10.00
----------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .319 .29 .29 .27 .26 .23
Net Realized and Unrealized Gain (Loss) on Investments 5.143 2.84 3.75 (.29) .88 .84
----------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 5.462 3.13 4.04 (.02) 1.14 1.07
- ---------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.322) (.29) (.28) (.27) (.26) (.23)
Distributions from Realized Capital Gains (.270) (.11) (.09) (.03) (.03) --
----------------------------------------------------------------
TOTAL DISTRIBUTIONS (.592) (.40) (.37) (.30) (.29) (.23)
- ---------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 22.64 $ 17.77 $ 15.04 $ 11.37 $ 11.69 $ 10.84
===========================================================================================================================
TOTAL RETURN** 30.99% 20.96% 35.79% -0.17% 10.62% 10.41%
===========================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $ 5,092 $ 3,531 $ 1,571 $ 786 $ 512 $ 275
Ratio of Total Expenses to Average
Net Assets 0.20% 0.22% 0.25% 0.20% 0.20% 0.21%+
Ratio of Net Investment Income to
Average Net Assets 1.65% 1.86% 2.14% 2.35% 2.31% 2.42%+
Portfolio Turnover Rate 2% 3% 3% 2% 1% 3%
Average Commission Rate Paid $ .0177 $ .0216 N/A N/A N/A N/A
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
* Inception date.
** Total return figures do not reflect the 0.25% transaction fee on purchases
through 1995 or the annual account maintenance fee of $10. Subscription
period for the Portfolio was March 16 to April 26, 1992, during which time
all assets were held in money market instruments. Performance measurement
began April 27, 1992.
+ Annualized.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
EXTENDED MARKET PORTFOLIO -- INVESTOR SHARES
----------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
1997 1996 1995 1994 1993 1992 1991 1990
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $ 26.20 $ 24.07 $ 18.52 $ 19.43 $ 17.35 $ 15.82 $ 11.48 $ 13.92
----------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .351 .34 .30 .28 .23 .24 .25 .30
----------------------------------------------------------------------------------
Net Realized and Unrealized Gain (Loss)
on Investments 6.479 3.85 5.95 (.62) 2.28 1.72 4.54 (2.25)
----------------------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 6.830 4.19 6.25 (.34) 2.51 1.96 4.79 (1.95)
- ----------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.360) (.34) (.30) (.28) (.23) (.25) (.25) (.33)
Distributions from Realized
Capital Gains (1.910) (1.72) (.40) (.29) (.20) (.18) (.20) (.16)
----------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (2.270) (2.06) (.70) (.57) (.43) (.43) (.45) (.49)
- ----------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 30.76 $ 26.20 $ 24.07 $ 18.52 $ 19.43 $ 17.35 $ 15.82 $ 11.48
============================================================================================================================
TOTAL RETURN* 26.73% 17.65% 33.80% -1.76% 14.49% 12.47% 41.85% -14.05%
============================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $ 2,723 $ 2,099 $ 1,523 $ 967 $ 928 $ 585 $ 372 $ 179
Ratio of Total Expenses to
Average Net Assets 0.23% 0.25% 0.25% 0.20% 0.20% 0.20% 0.19% 0.23%
Ratio of Net Investment Income to
Average Net Assets 1.30% 1.42% 1.51% 1.51% 1.48% 1.73% 2.14% 2.68%
Portfolio Turnover Rate 15%** 22% 15% 19% 13% 9% 11% 9%
Average Commission Rate Paid $ .0228 $ .0235 N/A N/A N/A N/A N/A N/A
- ----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
EXTENDED MARKET PORTFOLIO -- INVESTOR SHARES
---------------------
YEAR ENDED DECEMBER 31,
---------------------
1989 1988
---------------------
<S> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $ 11.60 $ 9.99
---------------------
INVESTMENT OPERATIONS
Net Investment Income .26 .34
---------------------
Net Realized and Unrealized Gain (Loss)
on Investments 2.52 1.63
---------------------
TOTAL FROM INVESTMENT OPERATIONS 2.78 1.97
- --------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.23) (.20)
Distributions from Realized
Capital Gains (.23) (.16)
---------------------
TOTAL DISTRIBUTIONS (.46) (.36)
- --------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 13.92 $ 11.60
================================================================================
TOTAL RETURN* 24.10% 19.75%
================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $ 147 $ 35
Ratio of Total Expenses to
Average Net Assets 0.23% 0.24%
Ratio of Net Investment Income to
Average Net Assets 2.92% 2.90%
Portfolio Turnover Rate 14% 26%
Average Commission Rate Paid N/A N/A
- --------------------------------------------------------------------------------
</TABLE>
* Total return figures do not reflect transaction fees on purchases (0.5% in
1995, 1996, and the 1997 period; 1% in 1992 through 1994) or the annual
account maintenance fee of $10. (Note: The transaction fee on purchases was
reduced to 0.25% as of November 3, 1997.)
** Portfolio turnover rate excluding in-kind redemptions was 14%.
- --------------------------------------------------------------------------------
12
<PAGE> 18
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
SMALL CAPITALIZATION STOCK PORTFOLIO -- INVESTOR SHARES*
---------------------------------------------------------------------------------------------
YEAR ENDED
DECEMBER 31, YEAR ENDED SEPTEMBER 30,
---------------------------- 2/1/1994- 10/1/1993- ---------------------------------------
1997 1996 1995 12/31/1994 1/31/1994 1993 1992 1991 1990++
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $ 20.23 $ 18.61 $ 14.99 $ 16.24 $ 16.23 $ 12.63 $ 12.03 $ 8.55 $ 11.88
---------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .277 .26 .24 .20 .05 20 .19 .20 .17
Net Realized and Unrealized
Gain (Loss) on Investments 4.632 3.07 4.06 (.86) .96 3.73 .88 3.60 (3.46)
---------------------------------------------------------------------------------------------
TOTAL FROM INVESTMENT
OPERATIONS 4.909 3.33 4.30 (.66) 1.01 3.93 1.07 3.80 (3.29)
- -----------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net
Investment Income (.274) (.27) (.23) (.22) (.18) (.18) (.18) (.18) (.04)
Distributions from
Realized Capital Gains (1.115) (1.44) (.45) (.37) (.82) (.15) (.29) (.14) --
---------------------------------------------------------------------------------------------
TOTAL DISTRIBUTIONS (1.389) (1.71) (.68) (.59) (1.00) (.33) (.47) (.32) (.04)
- -----------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 23.75 $ 20.23 $ 18.61 $ 14.99 $ 16.24 $ 16.23 $ 12.63 $ 12.03 $ 8.55
=============================================================================================================================
TOTAL RETURN* 24.59% 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) $ 2,652 $ 1,713 $ 971 $ 605 $ 533 $ 432 $ 202 $ 111 $ 40
Ratio of Total Expenses to
Average Net Assets 0.23% 0.25% 0.25% 0.17%+ 0.18%+ 0.18% 0.18% 0.21% 0.31%
Ratio of Net Investment Income
to Average Net Assets 1.38% 1.51% 1.58% 1.50%+ 1.16%+ 1.47% 1.65% 2.11% 1.91%
Portfolio Turnover Rate 29% 28% 28% 25%+ 5%+ 26% 26% 33% 40%
Average Commission Rate Paid $ .0226 $ .0245 N/A N/A N/A N/A N/A N/A N/A
- -----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
SMALL CAPITALIZATION STOCK PORTFOLIO -- INVESTOR SHARES*
------------------------
YEAR ENDED SEPTEMBER 30,
------------------------
1989 1988
- --------------------------------------------------------------------------------
<S> <C> <C>
NET ASSET VALUE,
BEGINNING OF PERIOD $ 11.96 $ 15.73
------------------------
INVESTMENT OPERATIONS
Net Investment Income .10 .03
Net Realized and Unrealized
Gain (Loss) on Investments 2.13 (2.59)
------------------------
TOTAL FROM INVESTMENT
OPERATIONS 2.23 (2.56)
- --------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net
Investment Income (.14) --
Distributions from
Realized Capital Gains (2.17) (1.21)
------------------------
TOTAL DISTRIBUTIONS (2.31) (1.21)
- --------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 11.88 $ 11.96
================================================================================
TOTAL RETURN* 18.83% -14.30%
================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period
(Millions) $ 20 $ 27
Ratio of Total Expenses to
Average Net Assets 1.00% 0.95%
Ratio of Net Investment Income
to Average Net Assets 0.65% 0.24%
Portfolio Turnover Rate 160% 68%
Average Commission Rate Paid N/A N/A
- --------------------------------------------------------------------------------
</TABLE>
* Returns prior to January 31, 1994, are for the former Vanguard Small
Capitalization Stock Fund.
** Total return figures do not reflect transaction fees on purchases (0.5% in
1997, 1.0% in 1994 through 1996) or the annual account maintenance fee of
$10.
+ Annualized.
++ Adjusted to reflect a 3-for-1 stock split as of February 3, 1990.
- --------------------------------------------------------------------------------
13
<PAGE> 19
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
VALUE PORTFOLIO -- INVESTOR SHARES
-----------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
-------------------------------------------------------- 11/2/1992*-
1997 1996 1995 1994 1993 12/31/1992
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 17.02 $ 14.79 $ 11.12 $ 11.74 $ 10.30 $ 10.00
-----------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .38 .37 .41 .38 .38 .07
Net Realized and Unrealized Gain (Loss) on Investments 4.57 2.81 3.66 (.46) 1.50 .30
-----------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 4.95 3.18 4.07 (.08) 1.88 .37
- ------------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.37) (.38) (.40) (.38) (.38) (.07)
Distributions from Realized Capital Gains (.75) (.57) -- (.16) (.06) --
-----------------------------------------------------------------------
TOTAL DISTRIBUTIONS (1.12) (.95) (.40) (.54) (.44) (.07)
- ------------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 20.85 $ 17.02 $ 14.79 $ 11.12 $ 11.74 $ 10.30
====================================================================================================================================
TOTAL RETURN+ 29.77% 21.86% 36.94% -0.73% 18.35% 3.70%
====================================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $ 1,796 $ 1,016 $ 496 $ 297 $ 190 $ 24
Ratio of Total Expenses to Average Net Assets 0.20% 0.20% 0.20% 0.20% 0.20% 0%**
Ratio of Net Investment Income to Average Net Assets 2.05% 2.54% 3.06% 3.37% 3.26% 3.46%**
Portfolio Turnover Rate 25% 29% 27% 32% 30% 4%
Average Commission Rate Paid $ .0149 $ .0188 N/A N/A N/A N/A
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
** Inception date.
** Annualized.
+ Total return figures do not reflect the annual maintenance fee of $10.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
GROWTH PORTFOLIO -- INVESTOR SHARES
-----------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
-------------------------------------------------------- 11/2/1992*-
1997 1996 1995 1994 1993 12/31/1992
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF PERIOD $ 16.90 $ 13.97 $ 10.28 $ 10.20 $ 10.26 $ 10.00
-----------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income .23 .22 .21 .21 .21 .06
Net Realized and Unrealized Gain (Loss) on Investments 5.88 3.07 3.68 .08 (.06) .26
-----------------------------------------------------------------------
TOTAL FROM INVESTMENT OPERATIONS 6.11 3.29 3.89 .29 .15 .32
- ------------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income (.23) (.22) (.20) (.21) (.21) (.06)
Distributions from Realized Capital Gains (.25) (.14) -- -- -- --
-----------------------------------------------------------------------
TOTAL DISTRIBUTIONS (.48) (.36) (.20) (.21) (.21) (.06)
- ------------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD $ 22.53 $ 16.90 $ 13.97 $ 10.28 $ 10.20 $ 10.26
====================================================================================================================================
TOTAL RETURN+ 36.34% 23.74% 38.06% 2.89% 1.53% 3.19%
====================================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions) $ 2,365 $ 787 $ 271 $ 86 $ 51 $ 21
Ratio of Total Expenses to Average Net Assets 0.20% 0.20% 0.20% 0.20% 0.20% 0%**
Ratio of Net Investment Income to Average Net Assets 1.19% 1.57% 1.71% 2.08% 2.10% 2.85%**
Portfolio Turnover Rate 26% 29% 24% 28% 36% 2%
Average Commission Rate Paid $ 0.134 $ .0183 N/A N/A N/A N/A
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
** Inception date.
** Annualized.
+ Total return figures do not reflect the annual account maintenance fee of
$10.
- --------------------------------------------------------------------------------
From time to time, the Vanguard funds advertise yield and total return
figures. Yield is a historical measure of dividend income, and total return is a
measure of past dividend income (assuming that it has been reinvested) plus
realized and unrealized capital appreciation (depreciation). Neither yield nor
total return should be used to predict the future performance of a fund.
14
<PAGE> 20
A WORD ABOUT RISK
This prospectus describes the risks you would face as an investor in Vanguard
Institutional Index Fund or the Portfolios of Vanguard Index Trust. It is
important to keep in mind one of the main axioms of investing: The higher the
risk of losing money, the higher the potential reward. The reverse, also, is
generally true: The lower the risk, the lower the potential reward. As you
consider an investment in the Funds, you should take into account your personal
tolerance for the daily fluctuations of the stock market. Remember, too, that
each Fund seeks to match a different stock market index; therefore, investment
risk will vary from one investment to another.
Look for this "warning flag" symbol [FLAG] throughout the prospectus. It is
used to mark detailed information about each type of risk that you, as a
shareholder of the Funds, would confront.
PLAIN TALK ABOUT
INDEXES
An index is a group of securities whose overall performance is used as a
standard to measure investment performance.
THE FUNDS' OBJECTIVES
Each of the Funds seeks to match, as closely as possible, the performance of a
specific stock market index. This objective is fundamental, which means that it
cannot be changed unless a majority of Fund shareholders vote to do so.
[FLAG] BECAUSE OF THE SEVERAL TYPES OF RISK DESCRIBED ON THE FOLLOWING
PAGES, YOUR INVESTMENT IN THE FUNDS, AS WITH ANY INVESTMENT IN COMMON STOCKS,
COULD LOSE MONEY.
The Institutional Index Fund seeks to track the performance of the Standard
& Poor's 500 Composite Stock Price Index, which emphasizes stocks of large U.S.
companies.
The Total Stock Market Portfolio seeks to parallel the performance of the
Wilshire 5000 Equity Index, which consists of all of the U.S. stocks regularly
traded on the New York and American Stock Exchanges and in the Nasdaq
over-the-counter market.
The Extended Market Portfolio seeks to track the performance of the Wilshire
4500 Equity Index, a broadly diversified index of stocks of medium-size and
small U.S. companies (none of which is included in the S&P 500 Index).
The Mid Capitalization Stock Portfolio seeks to parallel the performance of
the Standard & Poor's MidCap 400 Index, which comprises a market-weighted group
of medium-sized U.S. companies.
The Small Capitalization Stock Portfolio seeks to match the performance of
the Russell 2000 Index, which is made up of stocks of small, generally
unseasoned U.S. companies.
15
<PAGE> 21
PLAIN TALK ABOUT
VALUE FUNDS
AND GROWTH FUNDS
Value investing and growth investing are two styles employed by stock fund
managers. Value funds generally emphasize companies that, considering their
assets and earnings history, are attractively priced; these companies often pay
regular dividend income to shareholders. Growth funds generally focus on
companies that, due to their strong earnings and revenue potential, offer
above-average prospects for capital growth, with less emphasis on dividend
income. Value and growth stocks have, in the past, produced similar long-term
returns, though each has periods when it outperforms the other. In general,
value funds are appropriate for investors who want some dividend income and the
potential for capital gains but are less tolerant of share-price fluctuations.
Growth funds, by contrast, appeal to investors who will accept more volatility
in hopes of a greater increase in share price or who prefer a higher portion of
the fund's returns as capital gains, which may be taxed at lower rates than
dividend income.
The Value Portfolio seeks to replicate the performance of the Standard &
Poor's/BARRA Value Index, which includes those stocks of the S&P 500 Index that
offer higher-than-average dividend yields and are often considered out of favor
with investors.
The Small Capitalization Value Stock Portfolio seeks to replicate the
performance of the Standard & Poor's SmallCap 600/BARRA Value Index, which
includes those stocks of the S&P SmallCap 600 Index, with lower-than-average
price/earnings and price/book ratios.
The Growth Portfolio seeks to parallel the performance of the Standard &
Poor's/BARRA Growth Index, which is made up of those stocks of the S&P 500 Index
with lower-than-average dividend yields and higher-than-average price/earnings
and price/book ratios.
The Small Capitalization Growth Stock Portfolio seeks to track the
performance of the Standard & Poor's SmallCap 600/BARRA Growth Index, which
includes those stocks of the S&P SmallCap 600 Index with higher-than-average
price/earnings and price/book ratios.
[FLAG] AN INDEX FUND HAS OPERATING EXPENSES; A MARKET INDEX DOES NOT.
THEREFORE, AN INDEX FUND -- WHILE EXPECTED TO TRACK ITS TARGET INDEX AS CLOSELY
AS POSSIBLE -- WILL NOT BE ABLE TO MATCH THE PERFORMANCE OF THE INDEX EXACTLY.
Neither Vanguard Institutional Index Fund nor any of the Portfolios of
Vanguard Index Trust are sponsored, sold, promoted, or endorsed by Standard &
Poor's Corporation, BARRA Associates, Wilshire Associates, or the Frank Russell
Company.
PLAIN TALK ABOUT
INVESTING FOR THE LONG TERM
The Funds are intended to be long-term investment vehicles; none are designed to
provide investors with a means of speculating on short-term fluctuations in the
stock market.
WHO SHOULD INVEST
Vanguard Institutional Index Fund, or any of the Portfolios of Vanguard Index
Trust, may be a suitable investment for you if you are looking for a U.S. stock
portfolio that follows a simple, cost-effective index-matching strategy and, in
doing so, provides the potential for growth in the value of your investment over
the long term. However, one investment may more closely meet your investment
objectives than the others.
For instance, the Total Stock Market Portfolio may be suitable for you if:
- - You are looking for an investment that reflects the performance of the
entire U.S. stock market.
- - You are seeking some dividend income.
The Institutional Index Fund and the Value Portfolio may be suitable for
you if:
- - You want to invest in large companies.
- - You are seeking some dividend income.
The Extended Market, Mid Capitalization Stock, and Small Capitalization
Stock Portfolios may be suitable for you if:
- - You want to focus on the stocks of medium-sized and/or small companies.
16
<PAGE> 22
- - You can accept greater share-price volatility than Vanguard Institutional
Index Fund and the other Trust Portfolios tend to experience.
The Small Capitalization Value Stock Portfolio may be suitable for you if:
- - You are seeking exposure to the stocks of small companies that are often
considered out of favor in the market.
- - You are comfortable with a higher level of share-price volatility than that
experienced by Vanguard Institutional Index Fund and the other Trust
Portfolios.
- - You are willing to forgo dividend income.
The Growth Portfolio may be suitable for you if:
- - You want to invest in large companies, but you are not seeking dividend
income.
- - You are looking for more growth potential than the Institutional Index Fund
and the Value Portfolio offer -- and are willing to accept greater
fluctuations in share price.
The Small Capitalization Growth Stock Portfolio may be suitable for you if:
- - You want to focus on small-company stocks.
- - You are seeking a portfolio of stocks considered to have
higher-than-average price/earnings and price/book ratios.
- - You are willing to accept a high level of share-price fluctuation.
None of the Funds would be an appropriate investment if you are a
market-timer. Investors who engage in excessive in-and-out trading activity
generate additional costs that are borne by all of the shareholders in a
portfolio. To minimize such costs, which reduce the ultimate returns achieved by
you and other shareholders, the Funds have adopted the following policies:
- - The Funds reserve the right to reject any purchase request into the Funds
-- including exchanges from other Vanguard funds -- that they regard as
disruptive to the efficient management of the Funds.
The Funds may exercise this right because of the timing of the investment or
because of a history of excessive trading by the investor.
- - Five of Vanguard Index Trust's Portfolios (Extended Market, Mid
Capitalization Stock, Small Capitalization Stock, Small Capitalization
Value Stock, and Small Capitalization Growth Stock) charge a transaction
fee on purchases.
- - There is a limit on the number of times you can exchange into or out of the
Funds (see "Exchanges" in the INVESTING WITH VANGUARD section).
- - The Funds reserve the right to stop offering shares at any time.
PLAIN TALK ABOUT
COSTS AND MARKET-TIMING
Some investors try to profit from a strategy called "market-timing" -- switching
money into investments when they expect prices to rise, and taking money out
when they expect the market to fall. As money is shifted in and out, a fund
incurs expenses for buying and selling securities. These costs are borne by all
fund shareholders, including the long-term investors who do not generate the
costs. Therefore, the Funds discourage short-term trading by, among other
things, closely monitoring daily transactions.
INVESTMENT STRATEGY
This section explains how the investment adviser pursues the Funds' objective of
matching the performance of specific stock
17
<PAGE> 23
indexes. It also explains the market and objective risks faced by the Funds'
shareholders. Unlike the investment objective of the Funds, the adviser's
investment strategy is not fundamental and can be changed by the Funds' Board of
Trustees without shareholder approval. However, before making any important
change in their strategy, the Funds will give shareholders 30 days' notice, in
writing.
PLAIN TALK ABOUT
LARGE-CAP, MID-CAP, AND SMALL-CAP STOCKS
Stocks of publicly traded companies -- and mutual funds that hold these stocks
- -- can be classified by the companies' market value, or capitalization. Vanguard
defines large-capitalization, or large-cap, funds as those holding stocks of
companies with a median total market value exceeding $7.5 billion. Mid-cap funds
hold stocks of companies with a median market value between $1 billion and $7.5
billion. Small-cap funds hold stocks of companies with a median market value of
less than $1 billion. Historically, large-cap funds have exhibited lower
volatility than mid-cap and small-cap funds. Note that a fund's capitalization
parameters (that is, what constitutes a large-, mid-, or small-cap stock) may
vary from the parameters set by a particular index.
MARKET EXPOSURE
To track their target indexes as closely as possible, the Funds attempt to
remain fully invested in stocks.
[FLAG] THE FUNDS ARE SUBJECT TO MARKET RISK, WHICH IS THE POSSIBILITY THAT
STOCK PRICES OVERALL WILL DECLINE OVER SHORT OR EVEN EXTENDED PERIODS. STOCK
MARKETS TEND TO MOVE IN CYCLES, WITH PERIODS OF RISING STOCK PRICES AND PERIODS
OF FALLING STOCK PRICES.
To illustrate the volatility of stock prices, the following table shows the
best, worst, and average total returns (dividend income plus change in market
value) for the U.S. stock market over various periods as measured by the S&P 500
Index, which -- in addition to being the target index for the Institutional
Index Fund -- is a widely used barometer of stock market activity. Note that the
returns shown do not include the costs of buying and selling stocks or other
expenses that a real-world investment portfolio would incur. Note, also, that
the gap between the best and worst tends to narrow over the long term.
U.S. STOCK MARKET RETURNS (1926 - 1997)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS 20 YEARS
<S> <C> <C> <C> <C>
Best 53.9% 23.9% 20.1% 16.9%
Worst -43.3 -12.5 -0.9 3.1
Average 13.0 10.5 10.9 10.9
- ----------------------------------------------------------------------
</TABLE>
The table covers all of the 1-, 5-, 10-, and 20-year periods from 1926
through 1997. For example, while the average return on stocks for all of the
5-year periods was 10.5%, returns for these 5-year periods ranged from a -12.5%
average (from 1928 through 1932) to 23.9% (from 1950 through 1954). These
average returns reflect past performance on common stocks and should not be
regarded as an indication of future returns from either the stock market as a
whole or the Funds in particular.
Keep in mind that the S&P 500 Index tracks mainly large-cap stocks.
Historically, the mid- and small-cap stocks of the Wilshire 4500, S&P MidCap
400, and Russell 2000 Indexes (the target indexes for the Extended Market, Mid
Capitalization Stock, and Small Capitalization Stock Portfolios, respectively)
have been more volatile than -- and at times have performed quite differently
from --
18
<PAGE> 24
the large-cap stocks of the S&P 500 Index. This is due to several factors,
including less-certain growth and dividend prospects for smaller companies.
Even indexes that are subsets of the S&P 500 Index -- such as the S&P/BARRA
Value Index, and the S&P/BARRA Growth Index, will not perform in the same way as
the broader S&P 500 Index. Historically, stocks of the S&P/BARRA Value Index has
been less volatile than the stocks found in the broader S&P 500 Index; stocks of
the S&P/BARRA Growth Index and the S&P SmallCap 600/BARRA Growth Index, on the
other hand, have displayed somewhat greater short-term volatility than the S&P
500 Index's stocks. Historical performance aside, however, both value and growth
stocks have the potential to be more volatile than the broader market.
[FLAG] THE FUNDS ARE SUBJECT, IN VARYING DEGREES, TO OBJECTIVE RISK, WHICH
IS THE POSSIBILITY THAT RETURNS FROM A SPECIFIC TYPE OF STOCK (FOR INSTANCE,
SMALL-CAP OR VALUE) WILL TRAIL RETURNS FROM THE OVERALL STOCK MARKET. EACH TYPE
OF STOCK TENDS TO GO THROUGH CYCLES OF OUTPERFORMANCE AND UNDERPERFORMANCE IN
COMPARISON TO THE STOCK MARKET IN GENERAL. THESE PERIODS HAVE, IN THE PAST,
LASTED FOR AS LONG AS SEVERAL YEARS.
PLAIN TALK ABOUT
ACTIVE VERSUS PASSIVE MANAGEMENT
Vanguard index portfolios are not actively managed by investment advisers who
buy and sell securities based on research and analysis. Instead, each "passively
managed" portfolio tries to match, as closely as possible, the performance of a
target index by either holding all the securities in the index or by holding a
representative sample. Indexing appeals to many investors because of its
simplicity (indexing is a straightforward market-matching strategy);
diversification (indexes generally cover a wide variety of companies and
industries); relative performance predictability (an index portfolio is expected
to move in the same direction -- up or down -- as its target index); and low
cost (index funds do not have many of the expenses of an actively managed fund
- -- such as research -- and their relatively low turnover of securities helps
keep brokerage commissions to a minimum).
SECURITY SELECTION
The Funds employ a "passively managed" investment approach to implement their
indexing strategies. Vanguard Core Management Group, adviser to the Funds,
creates a mix of securities that will match the performance of a benchmark
index.
Vanguard Institutional Index Fund and the Mid Capitalization Stock, Value,
Small Capitalization Value Stock, Growth, and Small Capitalization Growth Stock
Portfolios hold each stock found in their respective indexes in roughly the same
proportions as represented in the indexes themselves. For example, if a
particular company made up 5% of the assets in the S&P 500 Index, the Fund would
try to invest the same percentage of its assets in that company.
The Total Stock Market, Extended Market, and Small Capitalization Stock
Portfolios use a different selection process. Because it would be very expensive
to hold all of the stocks in each Portfolio's target index (the Total Stock
Market Portfolio's target index, for example, includes more than 7,400 stocks),
these three Portfolios employ a "sampling" technique. Using a sophisticated
computer program, each Portfolio selects stocks that will recreate its target
index in terms of industry, size, and other characteristics (such as projected
earnings, financial strength, and debt). For instance, if 10% of the Wilshire
4500 Index were made up of utility stocks, the Extended Market Portfolio would
invest 10% of its assets in utility stocks with similar characteristics to the
Wilshire group.
19
<PAGE> 25
PLAIN TALK ABOUT
PORTFOLIO DIVERSIFICATION
In general, the more diversified a fund's portfolio of stocks, the less likely
that a specific stock's poor performance will hurt the fund. One measure of a
fund's level of diversification is the percentage of total net assets
represented by its ten largest holdings. The average U.S. equity mutual fund has
about 30% of its assets invested in its ten largest holdings, while some
less-diversified mutual funds have more than 50% of their assets invested in the
stocks of just ten companies.
The following tables show the number of stocks generally held by Vanguard
Institutional Index Fund and the Total Stock Market, Extended Market, Small
Capitalization Stock, Value, and Growth Portfolios as of December 31, 1997. The
Mid Capitalization Stock, Small Capitalization Value Stock, and Small
Capitalization Growth Stock Portfolios did not begin operations until April 20,
1998. (Note: Numbers for Vanguard Institutional Index Fund apply to both
Institutional and Institutional Plus Shares; numbers for Vanguard Index Trust's
Portfolios apply to both Institutional and Investor Shares, except for the Value
and Growth Portfolios, which did not begin issuing Institutional Shares until
April 20, 1998.)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------
NUMBER OF NUMBER OF STOCKS
PORTFOLIO STOCKS HELD IN TARGET INDEX
- ----------------------------------------------------------------------
<S> <C> <C>
Vanguard Institutional
Index Fund [bullet] [bullet]
- ----------------------------------------------------------------------
NUMBER OF NUMBER OF STOCKS
PORTFOLIO STOCKS HELD IN TARGET INDEX
- ----------------------------------------------------------------------
Total Stock Market 2,800 7,400
Extended Market 2,150 6,900
MidCap Stock N/A 400
SmallCap Stock 1,700 1,900
Value 360 360
SmallCap Value Stock N/A 380
Growth 140 140
SmallCap Growth Stock N/A 220
- ----------------------------------------------------------------------
</TABLE>
The top ten holdings for Vanguard Institutional Index Fund and the Total
Stock Market, Extended Market, Small Capitalization Stock, Value, and Growth
Portfolios as of December 31, 1997, follow. The Mid Capitalization Stock, Small
Capitalization Value Stock, and Small Capitalization Growth Stock Portfolios did
not begin operations until April 20, 1998. (Note: Holdings for Vanguard
Institutional Index Fund apply to both Institutional and Institutional Plus
Shares; holdings for Vanguard Index Trust's Portfolios apply to both
Institutional and Investor Shares, except for the Value and Growth Portfolios,
which did not begin issuing Institutional Shares until April 20, 1998.)
20
<PAGE> 26
<TABLE>
<CAPTION>
INSTITUTIONAL INDEX FUND TOTAL STOCK MARKET PORTFOLIO
<S> <C>
1. General Electric Co. 1. General Electric Co.
2. The Coca-Cola Co. 2. The Coca-Cola Co.
3. Microsoft Corp. 3. Microsoft Corp.
4. Exxon Corp. 4. Exxon Corp.
5. Merck & Co., Inc. 5. Merck & Co., Inc.
6. Royal Dutch Petroleum 6. Intel Corp.
7. Intel Corp. 7. Philip Morris Cos., Inc.
8. Philip Morris Cos., Inc. 8. Procter & Gamble Co.
9. Procter & Gamble Co. 9. International Business
10. International Business Machines Corp.
Machines Corp. 10. AT&T Corp.
18% of the Portfolio's total net assets. 13% of the Portfolio's total net assets.
EXTENDED MARKET PORTFOLIO SMALLCAP STOCK PORTFOLIO
1. Berkshire Hathaway 1. Associated Banc-Corp.
2. Electronic Data Systems 2. U.S. Office Products Co.
3. Carnival Corp. Class A 3. Jacor Comm. Warrants
4. Safeway, Inc. 4. Allied Waste Industries
5. The Coca-Cola Co. 5. Brooks Fiber Properties
6. RJR Nabisco Holdings 6. Keystone Financial, Inc.
Corp. 7. Mack-Cali Realty Corp.
7. Franklin Resources Corp. 8. Arterial Vascular
8. Republic Industries, Inc. Engineering, Inc.
9. Cox Communications 9. Citrix Systems, Inc..
Class A 10. Sovereign Bancorp, Inc.
10. The Equitable Cos. 2% of the Portfolio's total net assets.
6% of the Portfolio's total net assets.
VALUE PORTFOLIO GROWTH PORTFOLIO
1. Exxon Corp. 1. General Electric Co.
2. Royal Dutch Petroleum Co. 2. The Coca-Cola Co.
3. International Business 3. Microsoft Corp.
Machines Corp. 4. Merck & Co., Inc.
4. AT&T Corp. 5. Intel Corp.
5. The Walt Disney Co. 6. Philip Morris Cos., Inc.
6. Travelers Group Inc. 7. Procter & Gamble Co.
7. Ford Motor Co. 8. Pfizer, Inc.
8. Citicorp 9. Bristol-Myers Squibb Co.
9. Mobil Corp. 10. Wal-Mart Stores, Inc.
10. Bellsouth Corp. 34% of the Portfolio's total net assets.
22% of the Portfolio's total net assets.
</TABLE>
Keep in mind that, because the makeup of the Funds changes daily, these
listings are only "snapshots" at one point in time. Note, too, that portfolios
that track indexes comprising a relatively small number of securities tend to be
less diversified than portfolios whose target indexes contain thousands of
securities. For instance, the Growth Portfolio, which seeks to parallel an index
of about
21
<PAGE> 27
140 stocks, has far more of its assets invested in its top ten holdings
(34%) than the Total Stock Market Portfolio (13%), which seeks to track a much
larger universe of more than 7,400 stocks. This means that the Growth Portfolio
stands a greater chance than the Total Stock Market Portfolio of being hurt by
the poor performance of a single stock.
PLAIN TALK ABOUT
PORTFOLIO TURNOVER
Before investing in a mutual fund, you should review its portfolio turnover
rate for an indication of the potential effect of transaction costs on the
fund's future returns. In general, the greater the volume of buying and selling
by the fund, the greater the impact that brokerage commissions and other
transaction costs will have on its return. Also, funds with high portfolio
turnover rates may be more likely than low-turnover funds to generate capital
gains that must be distributed to shareholders as taxable income. The average
turnover rate for passively managed domestic index funds investing in common
stocks is roughly 10%; for all domestic stock funds, the average turnover rate
is approximately 80%.
PORTFOLIO TURNOVER
Although the Funds seek to invest for the long term, they retain the right to
sell any security at any time. Generally, a passively managed fund sells
securities only to respond to redemption requests or to adjust the number of
shares held to reflect a change in the portfolio's target index. Because of
this, the turnover rates for the Funds are expected to remain extremely low.
Averages for Vanguard Institutional Index Fund (Institutional Shares), for
example, have ranged from 4% to 23% over the past five years. (A turnover rate
of 100% would occur if a portfolio sold and replaced securities valued at 100%
of its total net assets within a one-year period.)
PLAIN TALK ABOUT
DERIVATIVES
A derivative is a financial contract whose value is based on (or "derived" from)
a traditional security (such as a stock or a bond), an asset (such as a
commodity like gold), or a market index (such as the S&P 500 Index). For
instance, futures and options are derivatives that have been trading on
regulated exchanges for more than two decades. These "traditional" derivatives
are standardized contracts that can be easily bought and sold, and whose market
values are determined and published daily. It is these characteristics that
differentiate futures and options from the relatively new types of derivatives
- -- some of which can carry considerable risks.
INVESTMENT POLICIES
Besides investing in the stocks found in their respective target indexes, the
Funds may follow a number of other investment policies to achieve their
objectives.
[FLAG] THE FUNDS RESERVE THE RIGHT TO INVEST, TO A LIMITED EXTENT, IN STOCK
FUTURES AND OPTIONS CONTRACTS, WARRANTS, CONVERTIBLE SECURITIES, AND SWAP
AGREEMENTS, WHICH ARE TYPES OF DERIVATIVES.
Losses (or gains) involving futures contracts can sometimes be substantial
- -- in part because a relatively small price movement in a futures contract may
result in an immediate and substantial loss (or gain) for a Fund. Similar risks
exist for warrants (securities that permit their owners to purchase a specific
number of shares of stock at a predetermined price), convertible securities
(securities that may be exchanged for another asset), and swap agreements
(contracts between two parties in which each agrees to make payments to the
other based on the return of a specified index or asset).
For this reason, the Funds will not use futures, options, warrants,
convertible securities, or swap agreements for speculative purposes or as
leveraged investments that magnify the gains or losses of an investment. Rather,
the Funds will keep separate cash reserves or other liquid portfolio securities
in the amount of the obligation underlying the contract. Only a limited
percentage of the Funds' assets -- 5% -- may be applied toward the deposits
22
<PAGE> 28
PLAIN TALK ABOUT
CASH RESERVES
With mutual funds, holding cash reserves -- or "cash" -- does not mean literally
that the fund holds a stack of currency. Rather, cash reserves refer to
short-term, interest-bearing securities that can easily and quickly be converted
to cash. Most mutual funds keep at least a small percentage of assets in cash
reserves to accommodate shareholder redemptions. While some funds, like index
funds, strive to keep cash reserve levels at a minimum and to always remain
fully invested in stocks, others allow investment advisers to hold up to 20% of
a fund's assets in cash reserves.
required on such contracts, and the value of all such contracts in which any of
the Funds acquires an interest cannot exceed 20% of the Fund's total assets.
The reasons for which the Funds will invest in futures, options, warrants,
convertible securities, and swap agreements are:
- - To keep cash on hand to meet shareholder redemptions or other needs while
simulating full investment in stocks.
- - To reduce the Funds' transaction costs and add incremental value by buying
futures instead of actual stocks.
- - To add value to the Funds by buying assets that mimic the performance of
particular stocks, but trade at a discount because of a short term market
inefficiency.
INVESTMENT LIMITATIONS
The Funds have adopted limitations on some of their investment policies. Some of
these limitations are that a Fund will not:
- - Invest more than 25% of its assets in any one industry.
- - Borrow money, except for temporary or emergency purposes in an amount not
exceeding 15% of its assets. Whenever the Fund's outstanding borrowing is
more than 5% of its assets, it will stop making investments. With respect
to 75% of its assets, a Fund will not:
- - Invest more than 5% in the outstanding securities of any one company.
- - Buy more than 10% of the outstanding voting securities of any company.
A complete list of the Funds' investment limitations can be found in the
Statements of Additional Information. These limitations are fundamental and may
be changed only by approval of a majority of a Fund's shareholders.
PLAIN TALK ABOUT
PAST PERFORMANCE
Whenever you see information on a fund's performance, do not consider the
figures to be an indication of the performance you could expect by making an
investment in the fund today. The past is an imperfect guide to the future;
history does not repeat itself in neat, predictable patterns.
INVESTMENT PERFORMANCE
The performance of the Funds is expected to mirror the performance of a specific
U.S. stock market segment (or, in the case of the Total Stock Market Portfolio,
the entire stock market). Historically, stock market performance has been
characterized by sharp up-and-down swings in the short term and by more stable
growth over the long term.
23
<PAGE> 29
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS -- INSTITUTIONAL SHARES
PERIODS ENDED DECEMBER 31, 1997
- -----------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS
<S> <C> <C> <C>
Institutional Index Fund --
Institutional Shares 33.4% 20.3% 17.6%
S&P 500 Index [BULLET] [BULLET] [BULLET]
Institutional Index Fund --
Institutional Plus Shares 7.3* -- --
S&P 500 Index [BULLET] [BULLET] [BULLET]
- -----------------------------------------------------------------------------
Total Stock Market 8.6* -- --
Wilshire 5000 Index 8.9* -- --
- -----------------------------------------------------------------------------
Extended Market** 11.8* -- --
Wilshire 4500 Index 12.1* -- --
- -----------------------------------------------------------------------------
SmallCap Stock** 11.4* -- --
Russell 2000 Index 11.1* -- --
- -----------------------------------------------------------------------------
</TABLE>
Note: The Mid Capitalization Stock, Small Capitalization Value Stock, and Small
Capitalization Growth Stock Portfolios did not begin operations until March 30,
1998; the Value and Growth Portfolios did not begin offering Institutional
Shares until April 20, 1998.
*Since inception; see pages 2 and 3.
**Does not include transaction fee; see pages 2 and 3.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS -- INVESTOR SHARES
PERIODS ENDED DECEMBER 31, 1997
- -----------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Total Stock Market 31.0% 18.9% 18.5%*
Wilshire 5000 Index 31.4 19.3 18.9*
- -----------------------------------------------------------------------------
Extended Market** 26.7% 17.5% 16.4%
Wilshire 4500 Index 25.7 17.0 16.3
- -----------------------------------------------------------------------------
SmallCap Stock** 24.6% 17.5% 15.8%
Russell 2000 Index 22.4 16.4 15.8
- -----------------------------------------------------------------------------
Value 29.8% 20.5% 20.7%*
S&P/BARRA Value Index 30.0 20.7 20.9*
- -----------------------------------------------------------------------------
Growth 36.3% 19.5% 19.5%*
S&P/BARRA Growth Index 36.5 19.6 19.8*
- -----------------------------------------------------------------------------
</TABLE>
Note: The Mid Capitalization Stock, Small Capitalization Value Stock, and Small
Capitalization Growth Stock Portfolios did not begin operations until April 20,
1998.
*Since inception; see pages 2 and 3.
**Does not include transaction fee; see pages 2 and 3.
The results shown represent the "average annual total return" performance of
Vanguard Institutional Index Fund (Institutional and Institutional Plus Shares)
and of each Portfolio of Vanguard Index Trust (Institutional and Investor
Shares), which assumes that any distributions of capital gains and dividends
were rein-
24
<PAGE> 30
vested for the indicated periods. Also included is comparative information on
the appropriate unmanaged benchmark index. The Portfolios' returns are not
adjusted for the purchase fee for the Extended Market and Small Capitalization
Stock Portfolios, or for the purchase fee for the Total Stock Market Portfolio
that was eliminated at year-end 1995, nor has an allowance been made for
federal, state, or local income taxes that shareholders must pay on a current
basis. Note also that the Mid Capitalization Stock, Small Capitalization Value
Stock, and Small Capitalization Growth Stock Portfolios did not begin operations
until April 20, 1998; the Value and Growth Portfolios did not begin offering
Institutional Shares until April 20, 1998.
SHARE PRICE
The share price of the Funds, called the net asset value, or NAV, is calculated
each business day after the close of trading (generally 4 p.m. Eastern time) on
the New York Stock Exchange. Net asset value per share for each of the Funds is
calculated by adding up the total assets of the Funds, subtracting all of its
liabilities, or debts, and then dividing by the total number of Fund shares
outstanding:
TOTAL ASSETS - LIABILITIES
NET ASSET VALUE = ------------------------------------------------
NUMBER OF SHARES OUTSTANDING
The daily net asset value is useful to you as a shareholder because the NAV,
multiplied by the number of each of the Funds shares you own, gives you the
dollar amount you would have received had you sold your shares back to the Fund
that day.
The share price of the Funds can be found daily in the mutual fund listings
of most major newspapers under the heading Vanguard Index Funds. Different
newspapers use different abbreviations for the Funds, but the most common are:
InstIdx, InstPlus, TotStIst, ExtndIst, MidCapIst, SmCapIst, ValIst, SmValIst,
GroIst, and SmGroIst (for Institutional Shares); and TotSt, Extnd, MidCap,
SmCap, Value, SmValue, Growth, and SmGrowth (for Investor Shares).
PLAIN TALK ABOUT
DISTRIBUTIONS
As a shareholder, you are entitled to your share of the fund's income from
interest and dividends, and gains from the sale of investments. You receive such
earnings as either an income dividend or capital gains distribution. Income
dividends come from the dividends that the fund earns from its holdings as well
as interest it receives from its money market and bond investments. Capital
gains are realized whenever the fund sells securities for higher prices than it
paid for them. These capital gains are either short-term or long-term, depending
on whether the fund held the securities for less than or more than one year.
DIVIDENDS, CAPITAL GAINS, AND TAXES
Each March, June, September, and December, Vanguard Institutional Index Fund and
the Total Stock Market, Value, and Growth Portfolios of Vanguard Index Trust
distribute virtually all of their income from interest and dividends to their
shareholders; the Extended Market, Mid Capitalization Stock, Small
Capitalization Stock, Small Capitalization Value Stock, and Small Capitalization
Growth Stock Portfolios of Vanguard Index Trust
25
<PAGE> 31
distribute their income in December. The Funds distribute any capital gains
realized from the sale of securities in December. In addition, the Funds may
occasionally be required to make supplemental dividend or capital gains
distributions at some other time during the year. Keep in mind that index
portfolios tend to provide less in capital gains distributions than actively
managed funds generally do.
If you own shares of a Fund as an investment option in an employer-sponsored
retirement or savings plan, these dividend and capital gains distributions will
be reinvested in additional Fund shares and accumulate on a tax-deferred basis.
You will not owe taxes on these distributions until you begin withdrawals. You
should consult your plan administrator, your plan's Summary Plan Document, or
your tax adviser about the tax consequences of an investment in the Fund and of
any plan withdrawals.
If your Fund investment is not part of an employer-sponsored plan, you can
receive distributions of income or capital gains in cash, or you may have them
automatically reinvested in more shares of the Fund. Both dividend and capital
gains distributions -- whether received in cash or reinvested in additional
shares -- are subject to federal (and possibly state and local) income taxes, no
matter how long you have held the shares in the Fund. You should consult your
tax adviser about other tax consequences of an investment in any of the Funds.
PLAIN TALK ABOUT
VANGUARD'S UNIQUE
CORPORATE STRUCTURE
The Vanguard Group, Inc. is the only MUTUAL mutual fund company. It is owned
jointly by the funds it oversees and by the shareholders in those funds. Other
mutual funds are operated by for-profit management companies that may be owned
by one person, by a group of individuals, or by investors who bought the
management company's publicly traded stock. Because of its structure, Vanguard
operates its funds at cost. Instead of distributing profits from operations to a
separate management company, Vanguard returns profits to fund shareholders in
the form of lower operating expenses.
THE FUNDS AND VANGUARD
Vanguard Institutional Index Fund and Vanguard Index Trust are members of The
Vanguard Group, a family of more than 30 investment companies with more than 95
distinct investment portfolios and total net assets of more than $350 billion.
All of the Vanguard funds share in the expenses associated with business
operations, such as personnel, office space, equipment, and advertising.
Vanguard also provides marketing services to the funds. Although
shareholders do not pay sales commissions or 12b-1 marketing fees, each fund
pays its allocated share of The Vanguard Group's costs.
A list of the Trustees and officers of the Funds, and their present
positions and principal occupations during the past five years, can be found in
the Statements of Additional Information.
INVESTMENT ADVISER
Vanguard Core Management Group, P.O. Box 2600, Valley Forge, PA 19482, provides
advisory services to the Funds.
26
<PAGE> 32
PLAIN TALK ABOUT
THE FUNDS' ADVISER
Vanguard Core Management Group provides investment advisory services to many
Vanguard funds; as of December 31, 1997, the Group managed more than $99 billion
in total assets. The individual primarily responsible for overseeing the Funds'
investments is:
GEORGE U. SAUTER, Managing Director of Vanguard; has worked in investment
management since 1985; with Vanguard since 1987, including primary
responsibility for Vanguard Core Management Group since 1987; A.B., Dartmouth
College; M.B.A., University of Chicago.
Under the terms of an advisory agreement, Vanguard pays for all of Vanguard
Institutional Index Fund's expenses (except taxes and brokerage commissions). In
exchange, the Fund pays Vanguard a quarterly advisory fee of 0.02% that is based
on average daily net assets of the Fund for the quarter. In addition, the Fund
pays Vanguard a fee of 0.04% for shareholder services related to the
Institutional Shares, and a fee of 0.005% for shareholder services related to
the Institutional Plus Shares. (The Institutional Shares and Institutional Plus
Shares each bear their own expenses for shareholder services.)
Each of Vanguard Index Trust's Portfolios receives advisory services from
Vanguard on an at-cost basis. For the fiscal year ended December 31, 1997, the
Institutional Shares of the Portfolios paid a total of $[BULLET] in investment
advisory expenses. (The Total Stock Market Portfolio paid $[BULLET], the
Extended Market Portfolio paid $[BULLET], and the Small Capitalization Stock
Portfolio paid $[BULLET].) For the fiscal year ended December 31, 1997, the
Investor Shares of the Portfolios paid a total of $[BULLET] in investment
advisory expenses. (The Total Stock Market Portfolio paid $[BULLET], the
Extended Market Portfolio paid $[BULLET], the Small Capitalization Stock
Portfolio paid $[BULLET], the Value Portfolio paid $[BULLET], and the Growth
Portfolio paid $[BULLET].) (Note: the Mid Capitalization Stock, Small
Capitalization Value Stock, and Small Capitalization Growth Stock Portfolios did
not begin operations until April 20, 1998; the Value and Growth Portfolios did
not begin offering Institutional Shares until April 20, 1998.)
The Group is authorized to choose brokers or dealers to handle the purchase
and sale of the Funds' securities, and is directed to get the best available
price and most favorable execution from these brokers with respect to all
transactions. However, the Group will not pay higher commissions specifically
for the purpose of obtaining research services. The Funds may direct the Group
to use a particular broker for certain transactions in exchange for commission
rebates or research services provided to the Funds.
GENERAL INFORMATION
Vanguard Institutional Index Fund is organized as a Pennsylvania business trust.
The Fund offers two separate classes of shares: Institutional Shares and
Institutional Plus Shares. The Institutional Shares are available to investors
who meet the $10 million investment minimum and may require special employee
benefit plan services. The Institutional Plus Shares are available to investors
who meet the $200 million investment minimum and do not require special employee
benefit plan services.
27
<PAGE> 33
Vanguard Index Trust is organized as a Pennsylvania business trust. The Trust
offers two separate classes of shares: Institutional Shares and Investor Shares.
The Institutional Shares are available to investors who meet the $10 million
investment minimum. The Investor Shares are available to investors who meet the
$3,000 investment minimum (these shares are offered by a separate prospectus).
Shareholders of the Funds have rights and privileges similar to those
enjoyed by other corporate and trust shareholders. For example, shareholders
will not be responsible for any liabilities of the Funds. If any matters are to
be voted on by shareholders (such as a change in a fundamental investment
objective or the election of Trustees), each of Funds share outstanding at that
point would be entitled to one vote. Annual meetings will not be held by the
Funds except as required by the Investment Company Act of 1940. A meeting will
be scheduled to vote on the removal of a Trustee if the holders of at least 10%
of a Fund's shares request a meeting in writing.
The Funds are not sponsored, endorsed, sold or promoted by Standard & Poor's
Corporation ("S&P"). S&P makes no representation or warranty, implied or
express, to the purchasers of the Funds 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. S&P
MAKES NO WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS TO BE OBTAINED BY THE
FUNDS, OWNERS OF THE FUNDS, OR ANY PERSON OR ANY ENTITY FROM THE USE OF THE S&P
500 INDEX 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 INDEX OR ANY DATA INCLUDED THEREIN. S&P's only relationship to the Funds
is the licensing of the S&P marks and S&P 500, which is determined, composed,
and calculated by S&P without regard to the Funds. "Standard & Poor's 500," "S&P
500(R)," "Standard & Poor's(R)," "S&P(R)," and "500" are trademarks of The
McGraw-Hill Companies, Inc. "Wilshire 4500" and "Wilshire 5000" are registered
trademarks of Wilshire Associates. Frank Russell Company is the owner of the
trademarks and copyrights relating to the Russell Indexes.
28
<PAGE> 34
INVESTING WITH VANGUARD
FOR PLAN PARTICIPANTS
The Funds described in this prospectus are investment options in your retirement
or savings plan. Your plan administrator or your employee benefits office can
provide you with detailed information on how to participate in your plan and how
to elect any of the Funds as an investment option.
- - If you have any questions about the Funds, or Vanguard, including the
Funds' investment objective, strategy, or risks, contact Vanguard's
Participant Services Center, toll-free, at 1-800-523-1188.
- - If you have questions about your account, contact your plan administrator
or the organization that provides recordkeeping services for your plan.
INVESTMENT OPTIONS AND ALLOCATIONS
Your plan's specific provisions may allow you to change your investment
selections, the amount of your contributions, or how your contributions are
allocated among the investment choices available to you. Contact your plan
administrator or employee benefits office for more details.
TRANSACTIONS
Contributions, exchanges, or redemptions of the Funds' shares are processed as
soon as they have been received by Vanguard in good order. Good order means that
your request includes complete information on your contribution, exchange, or
redemption, and that Vanguard has received the appropriate assets.
EXCHANGES
The exchange privilege (your ability to redeem shares from one fund to purchase
shares of another fund) may be available to you through your plan. Although we
make every effort to maintain the exchange privilege, Vanguard reserves the
right to revise or terminate the exchange privilege, limit the amount of an
exchange, or reject any exchange, at any time, without notice. Because excessive
exchanges can potentially disrupt the management of the Funds and increase its
transaction costs, Vanguard limits exchange activity to TWO SUBSTANTIVE EXCHANGE
REDEMPTIONS (at least 30 days apart) from any of the Funds during any 12-month
period. "Substantive" means either a dollar amount or a series of movements
between Vanguard funds that Vanguard determines, in its sole discretion, could
have an adverse impact on the management of a Fund. In addition, certain
investment options, particularly funds made up of company stock or investment
contracts, may be subject to unique restrictions. Contact your plan
administrator for details on the exchange policies that apply to your plan.
Before making an exchange, you should consider the following:
- - Before you exchange to another Vanguard fund available in your plan, you
should read that fund's prospectus. Contact Vanguard's Participant Services
Center, toll-free, at 1-800-523-1188 for a copy.
- - Vanguard can accept exchanges only as permitted by your plan. Your plan
administrator can explain how frequently exchanges are allowed.
29
<PAGE> 35
INVESTING WITH VANGUARD (continued)
FOR OTHER INSTITUTIONAL INVESTORS
If you have questions about the Funds, including how to establish an account,
call Vanguard, toll-free, at 1-800-523-1036.
If you have questions about an existing account, contact your Vanguard
account administrator.
TRANSACTIONS
Purchases, exchanges, or redemptions of a Fund's shares are processed as
soon as they have been received by Vanguard in good order. Good order means that
your request includes complete information on your purchase, exchange, or
redemption, and that Vanguard has received the appropriate assets. The price of
shares bought, exchanged, or sold will be the Funds' next-determined net asset
value after Vanguard has processed your request, provided your request has been
received before the close of trading on the New York Stock Exchange (generally 4
p.m. Eastern time).
Vanguard must consider the interests of all of the Funds' shareholders and
so reserves the right to:
- - Delay or reject any purchase or exchange request that may disrupt the
Funds' operation or performance.
- - Revise or terminate the exchange privilege or limit the amount of an
exchange, at any time, without notice.
- - Take up to seven days to deliver your redemption proceeds.
- - Pay redemption proceeds -- in whole or in part -- through a distribution in
kind of readily marketable securities.
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 Total Stock Market,
Extended Market, Mid Capitalization Stock, Small Capitalization Stock, Value,
Small Capitalization Value Stock, Growth, and Small Capitalization Growth Stock
Portfolios each reserves the right to convert an investor's Institutional Shares
into the Investor Shares of the same Portfolio if the investor's account balance
falls below $10 million. Any such conversion will be preceded by written notice
to the investor. No portfolio transaction fee will be imposed on share-class
conversions.
ACCESSING FUND INFORMATION BY COMPUTER
VANGUARD ONLINE(R)
www.vanguard.com
Use your personal computer to learn more about Vanguard's funds and services;
keep in touch with your Vanguard accounts; map out a long-term investment
strategy; initiate certain transactions; and ask questions, make suggestions,
and send messages to Vanguard.
Our education-oriented website provides timely news and information about
Vanguard's funds and services; an online "university" that offers a variety of
mutual fund classes; and easy-to-use, interactive tools to help you create your
own investment and retirement strategies.
30
<PAGE> 36
PROSPECTUS POSTSCRIPT
This prospectus is designed to provide you with pertinent information about
Fund/Portfolio Name, including its investment objective, risks, strategy, and
expenses, as well as services available to you as a shareholder.
It is important that you understand these facts so that you can decide
whether an investment in this Fund/Portfolio is right for you. The following
questions offer a quick review of some of the subjects covered by this
prospectus.
IN READING THE PROSPECTUS, DID YOU LEARN . . .
- The Fund's/Portfolio's objective? (page 00)
- The Fund's/Portfolio's investment strategy? (page 00)
- Who should invest in the Fund/Portfolio? (page 00)
- The risks associated with the Fund/Portfolio? (pages 00 - 0)
- Whether the Fund/Portfolio is federally insured?
(inside front cover)
- The Fund's/Portfolio's expenses? (page 00)
- The background of the Fund's/Portfolio's investment
managers? (pages 00 - 00)
- How to open an account? (page 00)
- How to sell or exchange shares? (page 00)
- How often you'll receive statements and financial reports?
(page 00)
PLAIN TALK ABOUT
KEEPING YOUR PROSPECTUS
Reading this prospectus will help you to decide whether one or more of the
Portfolios is suitable for your investment goals. If you decide to invest, don't
throw the prospectus out; you will no doubt need it for future reference.
31
<PAGE> 37
ABOUT THE QUIZ
Knowing your risk tolerance is important when you are making an investment
decision. To give you a general idea of your comfort level with investing,
circle the response that most closely matches your personal situation. Keep in
mind, though, that there is no "foolproof" way to gauge your risk tolerance.
Scoring for the quiz is below.
A SIMPLE RISK QUIZ
A. I HAVE BEEN INVESTING IN STOCK AND BOND MUTUAL FUNDS (OR IN INDIVIDUAL
STOCKS OR BONDS) FOR...
1. Less than a year
2. 1 - 2 years
3. 3 - 4 years
4. 5 - 9 years
5. 10 years or more
B. WHEN IT COMES TO INVESTING IN STOCK OR BOND MUTUAL FUNDS (OR INDIVIDUAL
STOCKS OR BONDS), I WOULD SAY I'M...
1. A very inexperienced investor
2. A somewhat inexperienced investor
3. A somewhat experienced investor
4. An experienced investor
5. A very experienced investor
C. I AM COMFORTABLE WITH INVESTMENTS THAT MAY LOSE MONEY FROM TIME TO TIME IF
THEY OFFER THE POTENTIAL FOR HIGHER RETURNS.
1. I strongly disagree
2. I disagree
3. I somewhat agree
4. I agree
5. I strongly agree
D. I WILL KEEP AN INVESTMENT EVEN IF IT LOSES 10% OF ITS VALUE OVER THE COURSE
OF A YEAR.
1. I strongly disagree
2. I disagree
3. I somewhat agree
4. I agree
5. I strongly agree
E. IN ADDITION TO MY LONG-TERM INVESTMENTS, I HAVE EMERGENCY SAVINGS EQUAL TO
____ MONTHS OF MY TAKE-HOME PAY.
1. Zero
2. One
3. Two
4. Three
5. Four or more
F. I FIND IT EASY TO PAY MY MONTHLY BILLS FROM MY CURRENT PAY.
1. I strongly disagree
2. I disagree
3. I somewhat agree
4. I agree
5. I strongly agree
G. OVERALL, MY PERSONAL FINANCIAL SITUATION IS SECURE.
1. I strongly disagree
2. I disagree
3. I somewhat agree
4. I agree
5. I strongly agree
HOW TO SCORE THE QUIZ
Use the number of your answer as the number of points scored. For instance, if
you chose answer #3 to a question, that's worth three points. Add up your points
and check below for the type of investor you are. (Note: If you chose answer #1
or #2 to Question C, subtract five points from your total score.)
- - If you scored between 0 and 25 points, you are considered a conservative
investor.
- - If you scored between 26 and 32 points, you are considered a moderate
investor.
- - If you scored between 33 and 35 points, you are considered an aggressive
investor.
32
<PAGE> 38
GLOSSARY OF INVESTMENT TERMS
ACTIVE MANAGEMENT
An investment approach that seeks to exceed the average returns of the financial
markets. Active managers rely on research, market forecasts, and their own
judgment and experience in selecting securities to buy and sell.
CAPITAL GAINS DISTRIBUTION
Payment to mutual fund shareholders of gains realized during the year on
securities that the fund has sold at a profit, minus any realized losses.
CASH RESERVES
Cash deposits as well as short-term bank deposits, money market instruments,
U.S. Treasury bills, bank certificates of deposit (CDs), repurchase agreements,
commercial paper, and banker's acceptances.
COMMON STOCK
A security representing ownership rights in a corporation. A stockholder is
entitled to share in the company's profits, some of which may be paid out as
dividends.
DIVIDEND INCOME
Payment to shareholders of income from interest or dividends generated by a
fund's investments.
DOLLAR-COST AVERAGING
Investing equal amounts of money at regular intervals on an ongoing basis. This
technique ensures that an investor buys fewer shares when prices are high and
more shares when prices are low.
EXPENSE RATIO
The percentage of a fund's average net assets used to pay its expenses. The
expense ratio includes account management fees, administrative fees, and any
12b-1 marketing fees.
INDEX
An unmanaged group of securities whose overall performance is used as a standard
to measure investment performance.
INVESTMENT ADVISER
An organization that makes the day-to-day decisions regarding a portfolio's
investments.
MUTUAL FUND
An investment company that pools the money of many people and invests it in a
variety of securities in an effort to achieve a specific objective over time.
NET ASSET VALUE (NAV)
The market value of a mutual fund's total assets, minus liabilities, divided by
the number of shares outstanding. The value of a single share is called its
share value or share price.
PASSIVE MANAGEMENT
A low-cost investment strategy in which a mutual fund attempts to match --
rather than outperform -- a particular stock or bond market index. Also known as
indexing.
PORTFOLIO DIVERSIFICATION
Holding a variety of securities so that a portfolio's return is not hurt by the
poor performance of a single security or industry.
PRICE/EARNINGS (P/E) RATIO
The current price of a stock, divided by its per-share earnings (profits) from
the past year. A stock selling for $20, with earnings of $2 per share, has a
price/earnings ratio of 10.
PRINCIPAL
The amount of your own money you put into an investment.
SECURITIES
Stocks, bonds, and other investment vehicles.
TOTAL RETURN
A percentage change, over a specified time period, in a mutual fund's net asset
value, with the ending net asset value adjusted to account for the reinvestment
of all distributions of dividends and capital gains.
VOLATILITY
The fluctuations in value of a mutual fund or other security. The greater a
fund's volatility, the wider the fluctuations between its high and low prices.
YIELD
Current income (interest or dividends) earned by an investment, expressed as a
percentage of the investment's price.
<PAGE> 39
[THE VANGUARD GROUP LOGO]
Institutional Division
Post Office Box 2900
Valley Forge, PA 19482
<TABLE>
<CAPTION>
<S> <C> <C>
FOR PARTICIPANTS IN FOR OTHER INSTITUTIONAL ELECTRONIC ACCESS TO THE
EMPLOYER-SPONSORED PLANS INVESTORS VANGUARD MUTUAL FUND
1-800-523-1036 EDUCATION AND INFORMATION
PARTICIPANT SERVICES CENTER For information on Vanguard CENTER
1-800-523-1188 funds and services World Wide Web
TEXT TELEPHONE: www.vanguard.com
1-800-523-8004
For information on the E-mail
Vanguard funds in your plan, [email protected]
Monday through Friday
8:30 a.m. to 9 p.m.,
Eastern time
</TABLE>
(C) 1998 Vanguard Marketing
Corporation, Distributor
1854N
<PAGE> 40
SUBJECT TO COMPLETION
PRELIMINARY STATEMENT OF ADDITIONAL INFORMATION
DATED JANUARY 9, 1998
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. INSTITUTIONAL SHARES OF THE MID
CAPITALIZATION STOCK PORTFOLIO, THE VALUE PORTFOLIO, THE SMALL
CAPITALIZATION VALUE STOCK PORTFOLIO, THE GROWTH PORTFOLIO, AND THE SMALL
CAPITALIZATION GROWTH STOCK PORTFOLIO OF VANGUARD INDEX TRUST MAY NOT BE
SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION
STATEMENT BECOMES EFFECTIVE. THIS STATEMENT OF ADDITIONAL INFORMATION DOES
NOT CONSTITUTE A PROSPECTUS. TO OBTAIN A CURRENTLY EFFECTIVE PROSPECTUS FOR
VANGUARD INSTITUTIONAL INDEX FUND AND VANGUARD INDEX TRUST PLEASE CONTACT
VANGUARD'S INSTITUTIONAL INVESTOR GROUP AT 1-800-523-1036.
PART B
VANGUARD INSTITUTIONAL INDEX FUND
STATEMENT OF ADDITIONAL INFORMATION
APRIL 20, 1998
This Statement is not a prospectus but should be read in conjunction with the
Fund's Prospectus dated April 20, 1998, 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> 41
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> 42
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 either held for investment purposes or
expected to be acquired by them. Speculators are less inclined to own, or intend
to purchase, 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 except to the extent that
the aggregate initial margins and premiums required to establish any non-hedging
positions do not exceed five percent of the value of the Fund's portfolio. 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 the majority 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.
B-3
<PAGE> 43
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 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. 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.
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
The following restrictions supplement the Fund's investment limitations set
forth in the Prospectus. Except as otherwise indicated, these restrictions are
fundamental policies of the Fund which cannot be changed without the approval of
a majority (as defined in the Investment Company Act of 1940 (the "1940 Act"))
of the Fund's outstanding voting shares. 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 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;
B-4
<PAGE> 44
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.
The investment limitations set forth above are considered at the time that
investment securities are purchased. If a percentage restriction is adhered to
at the time the investment is made, a later increase in percentage resulting
from a change in the market value of assets will not constitute a violation of
such restriction. 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 rights
which are reflected in the market price of accepted securities at the time of
valuation become the property
B-5
<PAGE> 45
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.
SHARE PRICE
The Fund's share price, or "net asset value" per share, is calculated by
dividing the net assets of the Fund, by the total number of shares outstanding.
The net asset value is determined as of the close of the New York Stock Exchange
(generally 4:00 p.m. Eastern time) on each day the exchange is open for trading.
Portfolio securities for which market quotations are readily available (includes
those securities listed on national securities exchanges, as well as those
quoted on the NASDAQ Stock Market) will be valued at the last quoted sales price
on the day the valuation is made. Such securities which are not traded on the
valuation date are valued at the mean of the bid and ask prices. Price
information on exchange-listed securities is taken from the exchange where the
security is primarily traded. Any foreign securities are valued at the latest
quoted sales price available before the time when assets are valued. Securities
may be valued on the basis of prices provided by a pricing service when such
prices are believed to reflect the fair market value of such securities.
Short-term instruments (those with remaining maturities of 60 days or less) may
be valued at cost, plus or minus any amortized discount or premium, which
approximates market value.
Other assets and securities for which no quotations are readily available or
which are restricted as to sale (or resale) are valued by such methods as the
Board of Trustees deems in good faith to reflect fair value.
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> 46
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, (DOB: 5/8/1929) Senior Chairman and Trustee*
Senior 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, (DOB: 7/29/1954), Chairman Chief Executive Officer & Trustee*
Chairman, 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, (DOB: 9/28/1935) 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, (DOB: 10/11/1928) Trustee
Director of The Great Atlantic and Pacific Tea Company, IKON Office
Solutions, Inc., Raytheon Company, Knight-Ridder, Inc., Massachusetts
Mutual Life Insurance Co., and Ladies Professional Golf Association; and
Trustee Emerita of Wellesly College.
BRUCE K. MACLAURY, (DOB: 5/7/1931) Trustee
President Emeritus of The Brookings Institution; Director of American
Express Bank, Ltd., The St. Paul Companies, Inc., and National Steel
Corporation.
BURTON G. MALKIEL, (DOB: 8/28/1932) 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
Telecommunications Company.
ALFRED M. RANKIN, JR., (DOB: 10/8/1941) Trustee
Chairman, President, Chief Executive Officer, and Director of NACCO
Industries, Inc.; Director of The BFGoodrich Company, and The Standard
Products Company.
JOHN C. SAWHILL, (DOB: 6/12/1936) Trustee
President and Chief Executive Officer of The Nature Conservancy; formerly,
Director and Senior Partner of McKinsey & Co., and President of New York
University; Director of Pacific Gas and Electric Company, Procter & Gamble
Company, and NACCO Industries.
JAMES O. WELCH, JR., (DOB: 5/13/1931) Trustee
Retired Chairman of Nabisco Brands, Inc.; retired Vice Chairman and
Director of RJR Nabisco; Director of TECO Energy, Inc., and Kmart
Corporation.
J. LAWRENCE WILSON, (DOB: 3/2/1936) Trustee
Chairman and Chief Executive Officer of Rohm & Hass Company; Director of
Cummins Engine Company, and The Mead Corporation; Trustee of Vanderbilt
University.
RAYMOND J. KLAPINSKY, (DOB: 12/7/1938) Secretary*
Managing Director and Secretary of The Vanguard Group, Inc.; Secretary of
each of the investment companies in The Vanguard Group.
RICHARD F. HYLAND, (DOB: 3/22/1937) Treasurer*
Treasurer of The Vanguard Group, Inc., and of each of the investment
companies in The Vanguard Group.
KAREN E. WEST, (DOB: 9/13/1946) 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.
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<PAGE> 47
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, 1997.
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) None None
John J. Brennan(1) None None
Barbara Barnes Hauptfuhrer $15,000 $70,000
Robert E. Cawthorn $13,000 $70,000
Bruce K. MacLaury $12,000 $65,000
Burton G. Malkiel $15,000 $70,000
Alfred M. Rankin, Jr. $15,000 $70,000
John C. Sawhill $15,000 $70,000
James O. Welch, Jr. $15,000 $70,000
J. Lawrence Wilson $15,000 $70,000
</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 35 Vanguard funds
(34 in the case of Mr. Malkiel; 28 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 95 distinct investment
portfolios and total assets in excess of $350 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, a portion of Vanguard/Windsor II, a portion of
Vanguard/Morgan Growth Fund and a portion of Vanguard/Explorer Fund as well as
to several indexed separate accounts. Total assets under management by the Core
Management Group were approximately $99 billion as of December 31, 1997. The
Fund is not actively managed, but is instead administered by the Core Management
Group, using computerized, quantitative techniques.
B-8
<PAGE> 48
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, 1995, 1996, and 1997, the Fund paid approximately $3,057,000,
$5,580,669, and -- , respectively, to Vanguard for services rendered under
the Service and Advisory Agreement in effect for the Fund's 1995, 1996 and 1997
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, 1995, 1996, and 1997, the
Fund paid $496,995, $862,036, and $820,969, 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> 49
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 as of and for the year ended December 31, 1997,
appearing in the Vanguard Institutional Index Fund 1997 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 1997 Annual Report to
Shareholders is enclosed with this Statement of Additional Information.
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, 1997, and since inception on July
31, 1990 was + 33.36%, + 31.20%, + 20.28% and +17.58%, 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,
1997 was + 1.61%.
- ---------------
* 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.
STANDARD & POOR'S/BARRA VALUE INDEX -- contains common stocks of the S&P Index
which have lower than average price-to-book ratios.
STANDARD & POOR'S/MIDCAP 400 INDEX -- is composed of 400 medium sized domestic
stocks.
STANDARD & POOR'S SMALLCAP 600/BARRA VALUE INDEX -- contains stocks of the S&P
SmallCap 600 Index which have a lower than average price-to-book ratio.
B-10
<PAGE> 50
STANDARD & POOR'S SMALLCAP 600/BARRA GROWTH INDEX -- contains stocks of the S&P
SmallCap 600 Index which have a higher than average price-to-book ratio.
RUSSELL 1000 VALUE INDEX -- consists of the stocks in the Russell 1000 Index
(comprising the 1,000 largest U.S.-based companies measured by total market
capitalization) with the lowest price-to-book ratios, comprising 50% of the
market capitalization of the Russell 1000.
WILSHIRE 5000 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.
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, Australasia 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 INDEX -- 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 INDEX -- 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 -- 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, 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.
B-11
<PAGE> 51
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 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-12
<PAGE> 52
PART C
VANGUARD INSTITUTIONAL INDEX FUND
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
(A) FINANCIAL STATEMENTS.
The Registrant's financial statements as of and for the year ended December 31,
1997, appearing in the Vanguard Institutional Index Fund's 1997 Annual Report to
Shareholders and the reports thereon of Price Waterhouse LLP, independent
accountants, are incorporated by reference in this Statement of Additional
Information, from the Registrant's 1997 Annual Report to Shareholders which has
been filed with the Commission. The Financial Statements included in the Annual
Report are:
1. Statement of Net Assets as of December 31, 1997.
2. Statement of Operations for the year ended December 31, 1997.
3. Statement of Changes in Net Assets for the years ended December 31, 1996 and
1997.
4. Financial Highlights for the respective periods ended December 31, 1997.
5. Notes to Financial Statements.
6. Report of Independent Accountants.
(B) EXHIBITS
1. Declaration of Trust.**
2. By-Laws of Registrant.**
3. Not Applicable.
4. Not Applicable.
5. Not Applicable.
6. Not Applicable.
7. Reference is made to the section entitled "Management and Advisory Services"
in the Registrant's Statement of Additional Information.
8. Form of Custody Agreement.**
9. Form of Vanguard Service Agreement.**
10. Opinion of Counsel.**
11. Consent of Independent Accountants.*
13. Not Applicable.
14. Not Applicable.
15. Not Applicable.
16. Schedule for Computation of Performance Quotations.*
18. Registrant's Form of Multiple Class Plan Pursuant to Rule 18f-3 under the
Investment Company Act of 1940.**
19. Powers-of-Attorney.**
27. Financial Data Schedule.*
- ---------------
* Filed herewith.
** Previously filed.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
Registrant is not controlled by or under common control with any person. The
Officers of the Registrant, the investment companies in The Vanguard Group of
Investment Companies and The Vanguard Group, Inc. are identical. Reference is
made to the caption "Management and Investment Advisory Services" in the
Prospectus constituting Part A and "Management and Advisory Services" in the
Statement of Additional Information constituting Part B of this Registration
Statement.
<PAGE> 53
ITEM 26. NUMBER OF HOLDERS OF SECURITIES
As of December 31, 1997 there were 17,036 shareholders of the Fund.
ITEM 27. INDEMNIFICATION
Reference is made to Article XI of Registrant's Declaration of Trust.
Insofar as indemnification for liability arising under the Securities Act of
1933 may be permitted to trustees, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
trustee, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
Investment advisory services are provided to the Registrant by The Vanguard
Group, Inc. a jointly-owned subsidiary of the Funds in the Vanguard Group of
Investment Companies. See the information concerning The Vanguard Group, Inc.
set forth in Parts A and B. For information as to any other business, vocation
or employment of a substantial nature in which each director or officer of the
Registrant's investment advisor is or has been engaged for his own account or in
the capacity of trustee, officer, employee, partner or trustee, reference is
made to Form ADV (File #801-11953) filed by it under the Investment Advisers Act
of 1940.
ITEM 29. PRINCIPAL UNDERWRITERS
(a) None.
(b) Not Applicable.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
The books, accounts and other documents required by Section 31(a) under the
Investment Company Act and the rules promulgated thereunder will be maintained
in the physical possession of Registrant; Registrant's Transfer Agent, The
Vanguard Group, Inc. c/o The Vanguard Financial Center, Valley Forge, PA 19482;
and the Registrant's Custodian, CoreStates Bank, N.A., Broad and Market Streets,
Philadelphia, PA 19103.
ITEM 31. MANAGEMENT SERVICES
Other than the Service and Advisory Agreement with The Vanguard Group, Inc.
which was previously filed as an Exhibit and described in Part B hereof under
"Management and Advisory Services," the Registrant is not a party to any
management-related service contract.
ITEM 32. UNDERTAKINGS
Registrant hereby undertakes to provide an Annual Report to Shareholders or
prospective investors, free of charge, upon request.
<PAGE> 54
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant hereby certifies that it meets the
requirements for effectiveness pursuant to paragraph (b) of Rule 485 and has
duly caused this Post-Effective Amendment to this Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the Town
of Valley Forge and the Commonwealth of Pennsylvania, on the 26th day of March,
1998.
VANGUARD INSTITUTIONAL INDEX FUND
BY: (Raymond J. Klapinsky)*
John J. Brennan, Chairman and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Post-Effective
Amendment to this Registration Statement has been signed below by the following
persons in the capacities and on the date indicated:
BY: (Raymond J. Klapinsky)*
John C. Bogle, Senior Chairman, Trustee
March 26, 1998
BY: (Raymond J. Klapinsky)*
John J. Brennan, Chairman, Trustee and Chief Executive Officer
March 26, 1998
BY: (Raymond J. Klapinsky)*
Robert E. Cawthorn, Trustee
March 26, 1998
BY: (Raymond J. Klapinsky)*
Barbara B. Hauptfuhrer, Trustee
March 26, 1998
BY: (Raymond J. Klapinsky)*
Bruce K. MacLaury, Jr., Trustee
March 26, 1998
BY: (Raymond J. Klapinsky)*
Burton G. Malkiel, Trustee
March 26, 1998
BY: (Raymond J. Klapinsky)*
Alfred M. Rankin, Jr., Trustee
March 26, 1998
BY: (Raymond J. Klapinsky)*
John C. Sawhill, Trustee
March 26, 1998
BY: (Raymond J. Klapinsky)*
James O. Welch, Jr., Trustee
March 26, 1998
BY: (Raymond J. Klapinsky)*
J. Lawrence Wilson, Trustee
March 26, 1998
BY: (Raymond J. Klapinsky)*
Richard F. Hyland, Treasurer and Principal
Financial Officer and Accounting Officer
March 26, 1998
* As Attorney-in-Fact, pursuant to Power-of-Attorney. See Form SE filed for the
Windsor Funds, Inc. (File Number 2-14336), as filed with the Commission on or
about January 23, 1990, incorporated by reference.
<PAGE> 55
INDEX TO EXHIBITS
<TABLE>
<S> <C>
Consent of Independent Accountants.......................... EX-99.B11
Schedule for Computation of Performance Quotations.......... EX-99.B16
Financial Data Schedule..................................... EX-27
</TABLE>
<PAGE> 1
EX-99.B11
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus and
Statement of Additional Information constituting parts of this Post-Effective
Amendment No. 13 to the registration statement on Form N-1A (the "Registration
Statement") of our report dated February 6, 1998, relating to the financial
statements and financial highlights appearing in the December 31, 1997 Annual
Report to Shareholders of Vanguard Institutional Index Fund, which are
incorporated by reference into the Registration Statement. We also consent to
the references to us under the heading "Financial Highlights" in the Prospectus
and "Financial Statements" in the Statement of Additional Information.
PRICE WATERHOUSE LLP
Philadelphia, PA
March 24, 1998
<PAGE> 1
EX-99.B16
SCHEDULE FOR COMPUTATION OF PERFORMANCE QUOTATIONS*
VANGUARD INSTITUTIONAL INDEX FUND -- INSTITUTIONAL SHARES
1. Average Annual Total Return
P (1 + T)(n) = ERV
<TABLE>
<S> <C> <C>
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
N = number of years
ERV = ending redeemable value at the end of the period
EXAMPLE:
--------------------------------------------------------------------------------
One Year
--------------------------------------------------------------------------------
P = $1,000
T = 33.36%
N = 1
ERV = $1,333.62
Five Year
--------------------------------------------------------------------------------
P = $1,000
T = 20.28
N = 5
ERV = $2,517.11
Since inception**
--------------------------------------------------------------------------------
P = $1,000
T = 17.58%
N = Since inception
ERV = $3,325.59
</TABLE>
**July 31, 1990
2. YIELD (30 Days Ended December 31, 1997)
Yield = 2[(a - b +1)(6th power)-1]
-----
c x d
<TABLE>
<C> <S>
Where: a = dividends and interest paid during the period
b = expense dollars during the period (net of
reimbursements)
c = the average daily number of shares outstanding during
the period
d = the maximum offering price per share on the last day of
the period
Example: a = $21,275,665.68
b = $749,287.24
c = 171,778,943.83
d = $89.56
Yield = 1.61%
</TABLE>
*Figures presented are as of the year ended December 31, 1997.
<PAGE> 2
EX-99.B16
SCHEDULE FOR COMPUTATION OF PERFORMANCE QUOTATIONS*
VANGUARD INSTITUTIONAL INDEX FUND -- INSTITUTIONAL PLUS SHARES
1. Average Annual Total Return
P (1 + T)n = ERV
<TABLE>
<S> <C> <C>
Where: P = a hypothetical initial payment of $1,000
T = average annual total return
N = number of years
ERV = ending redeemable value at the end of the period
EXAMPLE:
--------------------------------------------------------------------------------
Since inception*
--------------------------------------------------------------------------------
P = $1,000
T = 7.29%
N = Since inception
ERV = $1,072.85
</TABLE>
*July 7, 1997
2. YIELD (30 Days Ended December 31, 1997)
Yield = 2[(a - b +1)6-1]
---------------------------
c x d
<TABLE>
<C> <S>
Where: a = dividends and interest paid during the period
b = expense dollars during the period (net of
reimbursements)
c = the average daily number of shares outstanding during
the period
d = the maximum offering price per share on the last day of
the period
Example: a = $4,153,010.04
b = $59,783,43
c = 33,567,507.30
d = $89.56
Yield = 1.64%
</TABLE>
*Figures presented are as of the year ended December 31, 1997.
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000862084
<NAME> VANGUARD INSTITUTIONAL INDEX FUND
<SERIES>
<NUMBER> 001
<NAME> INSTITUTIONAL SHARES
<MULTIPLIER> 1,000
<CURRENCY> US
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 12134784
<INVESTMENTS-AT-VALUE> 18975217
<RECEIVABLES> 578376
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 19553593
<PAYABLE-FOR-SECURITIES> 510104
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 207682
<TOTAL-LIABILITIES> 717786
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<PAID-IN-CAPITAL-COMMON> 11962015
<SHARES-COMMON-STOCK> 171368
<SHARES-COMMON-PRIOR> 165942
<ACCUMULATED-NII-CURRENT> 93
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 33087
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 6840612
<NET-ASSETS> 15347841
<DIVIDEND-INCOME> 270560
<INTEREST-INCOME> 10977
<OTHER-INCOME> 0
<EXPENSES-NET> 8915
<NET-INVESTMENT-INCOME> 272622
<REALIZED-GAINS-CURRENT> 270779
<APPREC-INCREASE-CURRENT> 3767863
<NET-CHANGE-FROM-OPS> 4311264
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 244664
<DISTRIBUTIONS-OF-GAINS> 122571
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 71347
<NUMBER-OF-SHARES-REDEEMED> 69894
<SHARES-REINVESTED> 3973
<NET-CHANGE-IN-ASSETS> 7409392
<ACCUMULATED-NII-PRIOR> 10130
<ACCUMULATED-GAINS-PRIOR> 26442
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 8915
<AVERAGE-NET-ASSETS> 14052122
<PER-SHARE-NAV-BEGIN> 68.86
<PER-SHARE-NII> 1.391
<PER-SHARE-GAIN-APPREC> 21.415
<PER-SHARE-DIVIDEND> 1.391
<PER-SHARE-DISTRIBUTIONS> 0.715
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 89.56
<EXPENSE-RATIO> 0.06
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 6
<CIK> 0000862084
<NAME> VANGUARD INSTITUTIONAL INDEX FUND
<SERIES>
<NUMBER> 002
<NAME> INSTITUTIONAL PLUS SHARES
<MULTIPLIER> 1,000
<CURRENCY> US
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JUL-07-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<INVESTMENTS-AT-COST> 12134784
<INVESTMENTS-AT-VALUE> 18975217
<RECEIVABLES> 578376
<ASSETS-OTHER> 0
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 19553593
<PAYABLE-FOR-SECURITIES> 510104
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 207682
<TOTAL-LIABILITIES> 717786
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 11962015
<SHARES-COMMON-STOCK> 38945
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 93
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 33087
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 6840612
<NET-ASSETS> 3487966
<DIVIDEND-INCOME> 270560
<INTEREST-INCOME> 10977
<OTHER-INCOME> 0
<EXPENSES-NET> 8915
<NET-INVESTMENT-INCOME> 272622
<REALIZED-GAINS-CURRENT> 270779
<APPREC-INCREASE-CURRENT> 3767863
<NET-CHANGE-FROM-OPS> 4311264
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 27865
<DISTRIBUTIONS-OF-GAINS> 20702
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 39499
<NUMBER-OF-SHARES-REDEEMED> 1113
<SHARES-REINVESTED> 559
<NET-CHANGE-IN-ASSETS> 7409392
<ACCUMULATED-NII-PRIOR> 10130
<ACCUMULATED-GAINS-PRIOR> 26442
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 8915
<AVERAGE-NET-ASSETS> 2469948
<PER-SHARE-NAV-BEGIN> 84.91
<PER-SHARE-NII> 0.681
<PER-SHARE-GAIN-APPREC> 5.455
<PER-SHARE-DIVIDEND> 0.866
<PER-SHARE-DISTRIBUTIONS> 0.620
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 89.56
<EXPENSE-RATIO> 0.025
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
