<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT (NO. 33-48863) UNDER
THE SECURITIES ACT OF 1933
PRE-EFFECTIVE AMENDMENT NO. /X/
POST-EFFECTIVE AMENDMENT NO. 4
AND
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY
ACT OF 1940
AMENDMENT NO. 6
VANGUARD BALANCED INDEX FUND, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
P.O. BOX 2600, VALLEY FORGE, PA 19482
(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 December 23, 1994, pursuant to paragraph (b) of Rule 485.
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
As soon as practicable after this Registration Statement becomes effective.
THE REGISTRANT HAS REGISTERED AN INDEFINITE NUMBER OF SECURITIES UNDER THE
SECURITIES ACT OF 1933 PURSUANT TO RULE 24f-2 OF THE INVESTMENT COMPANY ACT OF
1940. REGISTRANT FILED ITS RULE 24f-2 NOTICE FOR ITS FISCAL YEAR ENDED DECEMBER
31, 1993 WITH THE COMMISSION ON FEBRUARY 24, 1994.
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<PAGE> 2
VANGUARD BALANCED INDEX FUND, INC.
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...................................... Not Applicable
Item 3. Condensed Financial Information............... Funds' Expenses
Item 4. General Description of Registrant............. Investment Objective; Investment
Limitations; Investment Policies;
General Information
Item 5. Management of the Funds....................... Directors and Officers; Management of
the Funds
Item 6. Capital Stock and Other Securities............ Opening an Account and Purchasing
Shares; Selling Your Shares; Each
Fund's Share Price; Dividends,
Capital Gains, and Taxes; General
Information
Item 7. Purchase of Securities Being Offered.......... Cover Page; Opening an Account and
Purchasing Shares
Item 8. Redemption or Repurchase...................... Selling Your Shares
Item 9. Pending Legal Proceedings..................... Not Applicable
<CAPTION>
FORM N-1A LOCATION IN STATEMENT
ITEM NUMBER OF ADDITIONAL INFORMATION
<C> <S> <C>
Item 10. Cover Page.................................... Cover Page
Item 11. Table of Contents............................. Cover Page
Item 12. General Information and History............... Management of the Fund
Item 13. Investment Objective and Policies............. Investment Limitations
Item 14. Management of the Fund........................ Management of the Fund; Investment
Management
Item 15. Control Persons and Principal Holders of
Securities.................................... Management of the Fund
Item 16. Investment Advisory and Other Services........ Management of the Fund; Investment
Management
Item 17. Brokerage Allocation.......................... Not Applicable
Item 18. Capital Stock and Other Securities............ Financial Statements
Item 19. Purchase, Redemption and Pricing of Securities
Being Offered................................. Purchase of Shares; Redemption of
Shares
Item 20. Tax Status.................................... Appendix
Item 21. Underwriters.................................. Not Applicable
Item 22. Calculations of Yield Quotations of Money
Market Fund................................... Not Applicable
Item 23. Financial Statements.......................... Financial Statements
</TABLE>
<PAGE> 3
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[[LOGO] Members of The Vanguard Group
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PROSPECTUS--DECEMBER 23, 1994
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NEW ACCOUNT INFORMATION: INVESTOR INFORMATION DEPARTMENT--1-800-662-7447 (SHIP)
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SHAREHOLDER ACCOUNT SERVICES: CLIENT SERVICES DEPARTMENT--1-800-662-2739 (CREW)
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INVESTMENT
OBJECTIVES AND
POLICIES Vanguard Index Funds are four separate, individual open-end
diversified investment companies. The Funds are organized as
follows: Vanguard Bond Index Fund, Inc. including the Total
Bond Market, Short-Term Bond, Intermediate-Term Bond and
Long-Term Bond Portfolios; Vanguard Balanced Index Fund,
Inc.; Vanguard Index Trust including the 500, Extended
Market, Total Stock Market, Small Capitalization Stock,
Value and Growth Portfolios; and Vanguard International
Equity Index Fund, Inc. including the European, Pacific and
Emerging Markets Portfolios. Each of the Portfolios invests
in securities (bonds or common stocks) in order to match the
investment performance of a distinct market index.
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OPENING AN
ACCOUNT To open a regular (non-retirement) account, please complete
and return the Account Registration Form. If you need
assistance in completing this Form, please call our Investor
Information Department. To open an Individual Retirement
Account (IRA), please use a Vanguard IRA Adoption Agreement.
To obtain a copy of this form, call 1-800-662-7447, Monday
through Friday, from 8:00 a.m. to 9:00 p.m. and Saturday,
from 9:00 a.m. to 4:00 p.m. (Eastern time). The minimum
initial investment is $3,000 for each Portfolio or $500 for
Uniform Gifts/Transfers to Minors Act accounts. Each of the
Vanguard Index Funds assesses a $10 annual account
maintenance fee. A portfolio transaction fee of 1% is
deducted from purchases of the Extended Market and Small
Capitalization Stock Portfolios of Vanguard Index Trust and
a 0.25% portfolio transaction fee is deducted from purchases
of its Total Stock Market Portfolio. The European and
Pacific Portfolios of Vanguard International Equity Index
Fund assess a 1% portfolio transaction fee on purchases and
its Emerging Markets Portfolio assesses a 2% portfolio
transaction fee on purchases and a 1% portfolio transaction
fee on redemptions. Portfolio transaction fees are paid to
the Portfolios to offset transaction costs of buying and
selling securities of small- and medium-sized companies and
international companies. See "Fund Expenses."
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ABOUT THIS
PROSPECTUS This Prospectus is designed to set forth concisely the
information you should know about the Vanguard Index Funds
before you invest. It should be retained for future
reference. "Statements of Additional Information" containing
additional information about each of the Vanguard Index
Funds have been filed with the Securities and Exchange
Commission. These Statements are dated December 23, 1994 and
have been incorporated by reference into this Prospectus. A
copy may be obtained without charge by writing to the Funds
or by calling our Investor Information Department.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page Page Page
<S> <C> <C> <C> <C> <C>
Highlights.......................... 2 Implementation of Policies.......... 22 SHAREHOLDER GUIDE
Fund Expenses....................... 4 Investment Limitations.............. 30 Opening an Account and
Financial Highlights................ 6 Management of the Funds............. 30 Purchasing Shares................. 35
Yield and Total Return.............. 10 Investment Advisers................. 31 When Your Account Will
FUND INFORMATION Dividends, Capital Gains Be Credited....................... 38
Investment Objectives............... 11 and Taxes........................... 32 Selling Your Shares............... 38
Investment Policies................. 12 The Share Price of Exchanging Your Shares............ 41
Investment Risks.................... 17 Each Portfolio...................... 33 Important Information About
Who Should Invest................... 20 General Information................. 34 Telephone Transactions............ 42
Transferring Registration......... 42
Other Vanguard Services........ 42
</TABLE>
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
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<PAGE> 4
HIGHLIGHTS
Vanguard offers four index funds consisting of a total of
fourteen separate portfolios. Unlike other mutual funds which
generally attempt to "beat" market averages with often
unpredictable results, Vanguard's index funds seek to "match"
the performance of their underlying indexes and thus are
expected to provide a highly predictable return relative to
their benchmarks. The Funds offer investors the advantages of
a "passive" approach to investing. These include low
investment costs, exceptional diversification among
securities, minimal portfolio turnover, and relative
predictability.
As with any mutual fund there is no assurance that the Funds
will meet their objectives.
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INVESTMENT
OBJECTIVES AND
POLICIES Vanguard Bond Index Fund, Vanguard Balanced Index Fund,
Vanguard Index Trust and Vanguard International Equity Index
Fund are each open-end diversified investment companies
designed as "index" funds.
VANGUARD BOND
INDEX FUND The Fund consists of four Portfolios each of which invests in
bonds.
- The TOTAL BOND MARKET PORTFOLIO seeks to replicate the
performance of the Lehman Brothers Aggregate Bond Index.
- The SHORT-TERM BOND PORTFOLIO seeks to replicate the
performance of the Lehman Brothers Mutual Fund Short (1-5)
Government/Corporate Index.
- The INTERMEDIATE-TERM BOND PORTFOLIO seeks to replicate the
performance of the Lehman Brothers Mutual Fund Intermediate
(5-10) Government/Corporate Index.
- The LONG-TERM BOND PORTFOLIO seeks to replicate the
performance of the Lehman Brothers Mutual Fund Long (10+)
Government/Corporate Index.
Each Portfolio will invest at least 80% of its assets in
securities included in its respective index. The Lehman
Brothers Indexes encompass two major classes of investment
grade fixed income securities: U.S. Treasury and agency
securities and corporate bonds. Additionally, the Lehman
Brothers Aggregate Bond Index includes mortgage-backed
securities. PAGE 11
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VANGUARD BALANCED
INDEX FUND The Fund invests in U.S. common stocks and bonds. It seeks to
replicate with respect to 60% of its assets the performance
of the Wilshire 5000 Index and with respect to 40% of its
assets, the Lehman Brothers Index. Under normal circumstances
the Fund will invest primarily in securities of its
underlying indexes. PAGE 11
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VANGUARD INDEX TRUST
The Trust consists of six separate Portfolios each of which
invests in U.S. common stocks.
- The 500 PORTFOLIO seeks to replicate the performance of the
S&P 500 Index.
- The EXTENDED MARKET PORTFOLIO seeks to replicate the
performance of the Wilshire 4500 Index.
- The TOTAL STOCK MARKET PORTFOLIO seeks to replicate the
performance of the Wilshire 5000 Index.
- The SMALL CAPITALIZATION STOCK PORTFOLIO seeks to replicate
the performance of the Russell 2000 Small Stock Index.
- The VALUE PORTFOLIO seeks to replicate the performance of
the S&P/BARRA Value Index.
- The GROWTH PORTFOLIO seeks to replicate the performance of
the S&P/BARRA Growth Index.
PAGE 11
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VANGUARD
INTERNATIONAL
EQUITY INDEX FUND The Fund consists of three Portfolios each of which invests
in international common stocks.
- The EUROPEAN PORTFOLIO seeks to parallel the performance of
the Morgan Stanley Capital International -- Europe (Free)
Index.
- The PACIFIC PORTFOLIO seeks to parallel the performance of
the Morgan Stanley Capital International -- Pacific Index.
- The EMERGING MARKETS PORTFOLIO seeks to parallel the
performance of the Morgan Stanley Capital
International -- Select Emerging Markets Free Index.
The European Portfolio and the Pacific Portfolio invest
primarily in the common stocks included in their respective
indexes. The Emerging Markets Portfolio invests 95% of its
assets in securities which are representative of securities
in its index and 5% in cash reserves. PAGE 12
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2
<PAGE> 5
INVESTMENT
RISKS The Portfolios of the Vanguard Bond Index Fund and the bond
portion of the Vanguard Balanced Fund are subject to risks
associated with fixed income investing including interest
rate, income, call and credit risks. Additionally, since the
Total Bond Market Portfolio of Vanguard Bond Index Fund
invests in mortgage-backed securities, the Portfolio is
subject to prepayment risk.
The equity portion of Vanguard Balanced Index Fund and the
Portfolios of Vanguard Index Trust and Vanguard International
Equity Index Fund are subject to stock market risk, which is
the possibility that common stock prices will decline over
short or extended periods. Both U.S. and foreign stock
markets tend to be cyclical, with periods when stock prices
generally rise and periods when stock prices generally
decline. Additionally, the Portfolios of Vanguard
International Equity Index Fund are subject to currency risk,
the risk that changes in foreign exchange rates will affect
the value of foreign securities held by the Portfolios.
Investors considering the Emerging Markets Portfolio should
be aware that emerging markets can be substantially more
volatile than both U.S. and more developed foreign markets.
Volatility in emerging markets can be exacerbated by
illiquidity in the market for emerging market stocks.
Because of the risks associated with common stocks and bonds,
the Funds are intended to be long-term investment vehicles
and are not designed to provide investors with a means of
speculating on short-term market movements. Investors should
not consider an investment in any one portfolio a complete
investment program, but should maintain holdings of
securities with different risk characteristics -- including
U.S. common stocks, bonds and money market instruments. For
further information concerning the risks associated with
investing in the Funds, see "Investment Risks". PAGE 17
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THE VANGUARD
GROUP The Funds are members of The Vanguard Group of Investment
Companies, a group of more than 30 investment companies with
more than 80 distinct investment portfolios and total assets
in excess of $130 billion. The Vanguard Group, Inc.
("Vanguard"), a subsidiary jointly owned by the Vanguard
Funds, provides all corporate management, administrative,
distribution and shareholder accounting services on an
at-cost basis to the Funds in the Group. PAGE 30
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INVESTMENT
ADVISERS The Vanguard Bond Index Fund and the bond portion of Vanguard
Balanced Index Fund receive investment advisory services from
Vanguard's Fixed Income Group. Vanguard Index Trust, Vanguard
International Equity Index Fund and the equity portion of
Vanguard Balanced Index Fund receive investment advisory
services from Vanguard's Core Management Group. All
investment advisory services are provided to the Index Funds
on an at-cost basis. As a result, the Funds receive
investment advisory services at a substantially lower cost
than would be possible if the Funds paid an investment
advisory fee to an external investment adviser. PAGE 31
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FEES AND EXPENSES The Portfolios are subject to the following transaction fees:
<TABLE>
<CAPTION>
FEE DEDUCTED
FEE DEDUCTED FROM
FROM PURCHASES REDEMPTIONS
<S> <C> <C>
VANGUARD INDEX TRUST
Extended Market Portfolio 1% None
Total Stock Market Portfolio .25% None
Small Capitalization Stock Portfolio 1% None
VANGUARD INTERNATIONAL EQUITY INDEX FUND
European Portfolio 1% None
Pacific Portfolio 1% None
Emerging Markets Portfolio 2% 1%
</TABLE>
Portfolio transaction fees are paid directly to the
Portfolios to offset transaction costs of buying securities
of small- and medium-sized companies and international
companies.
Additionally, shareholders will also incur a $10 annual
account maintenance fee for each account in any of Vanguard's
Index Funds. PAGE 35
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3
<PAGE> 6
FUND EXPENSES The following table illustrates all expenses and fees that
you would incur as a shareholder of Vanguard Index Trust,
Vanguard Bond Index Fund, Vanguard International Equity Index
Fund and Vanguard Balanced Index Fund. The expenses and fees
set forth below are for the 1993 fiscal year.
<TABLE>
<CAPTION>
TOTAL SMALL
SHAREHOLDER EXTENDED STOCK CAPITALIZATION BALANCED
TRANSACTION 500 MARKET MARKET VALUE GROWTH STOCK INDEX
EXPENSES PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO*** FUND
<S> <C> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
Sales Load Imposed on
Purchases................... None None* None** None None None* None
Sales Load Imposed on
Reinvested Dividends........ None None None None None None None
Redemption Fees............... None None None None None None None
Exchange Fees................ None None None None None None None
<FN>
* Shareholders are charged a 1% portfolio transaction fee, payable directly to the Portfolio, on
each purchase of shares.
**Shareholders are charged a 0.25% portfolio transaction fee, payable directly to the Portfolio, on
each purchase of shares.
***Formerly Vanguard Small Capitalization Stock Fund, Inc.
</TABLE>
<TABLE>
<CAPTION>
ANNUAL TOTAL SMALL
FUND EXTENDED STOCK CAPITALIZATION BALANCED
OPERATING 500 MARKET MARKET VALUE GROWTH STOCK INDEX
EXPENSES PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO*** FUND
<S> <C> <C> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------
Management & Administrative
Expenses++.................. 0.15% 0.15% 0.15% 0.14% 0.13% 0.13% 0.14%
Investment Advisory Fees...... None None None None None None None
12b-1 Fees.................... None None None None None None None
Other Expenses
Distribution Costs.......... 0.03 0.02 0.03 0.02 0.02 0.02 0.02
Miscellaneous Expenses...... 0.01 0.03 0.02 0.04 0.05 0.03 0.04
-------- -------- -------- -------- -------- -------- --------
Total Other Expenses.......... 0.04 0.05 0.05 0.06 0.07 0.05 0.06
-------- -------- -------- -------- -------- -------- --------
TOTAL OPERATING EXPENSES... 0.19% 0.20% 0.20% 0.20% 0.20% 0.18% 0.20%
-------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- --------
<FN>
***Formerly Vanguard Small Capitalization Stock Fund, Inc.
++In addition to these costs, each Portfolio assesses an annual account maintenance fee of $10.
</TABLE>
<TABLE>
<CAPTION>
TOTAL SHORT- LONG-
SHAREHOLDER BOND TERM INTERMEDIATE- TERM EMERGING
TRANSACTION MARKET BOND TERM BOND BOND EUROPEAN PACIFIC MARKETS
EXPENSES PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
<S> <C> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------
Sales Load Imposed on
Purchases.............. None None None None None* None* None+
Sales Load Imposed on
Reinvested Dividends... None None None None None None None
Redemption Fees++........ None None None None None None 1%**
Exchange Fees............ None None None None None None None
<FN>
* Shareholders are charged a 1% portfolio transaction fee, payable directly to the Portfolio on each
purchase of shares.
**The 1% portfolio transaction fee withheld from redemption proceeds is paid to the Portfolio.
+ Shareholders are charged a 2% portfolio transaction fee, payable directly to the Portfolio on each
purchase of shares.
++Wire redemptions of less than $5,000 are subject to a $5 processing fee.
</TABLE>
4
<PAGE> 7
<TABLE>
<CAPTION>
TOTAL SHORT-
ANNUAL FUND BOND TERM INTERMEDIATE- LONG-TERM EMERGING
OPERATING MARKET BOND TERM BOND BOND EUROPEAN PACIFIC MARKETS
EXPENSES PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO PORTFOLIO
<S> <C> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------
Management &
Administrative
Expenses***... 0.13% 0.13% 0.13% 0.13% 0.14% 0.18% 0.12%
Investment Advisory
Fees....... None None None None None None None
12b-1 Fees... None None None None None None None
Other Expenses
Distribution Costs.... 0.03 0.03 0.03 0.03 0.02 0.02 0.03
Miscellaneous
Expenses... 0.02 0.02 0.02 0.02 0.16 0.12 0.45
-------- -------- -------- -------- -------- -------- --------
Total Other
Expenses... 0.05 0.05 0.05 0.05 0.18 0.14 0.48
-------- -------- -------- -------- -------- -------- --------
TOTAL OPERATING
EXPENSES... 0.18% 0.18% 0.18% 0.18% 0.32% 0.32% 0.60%
-------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- --------
<FN>
***In addition to these costs, shareholders incur an annual account maintenance fee of $10. (This
maintenance fee will be waived until December 31, 1994 for the Short-Term Bond, Intermediate-Term
Bond, Long-Term Bond and the Emerging Markets Portfolios.)
</TABLE>
The purpose of this table is to assist you in understanding
the various costs and expenses that you would bear directly
or indirectly as an investor in the Funds.
SIX PORTFOLIOS ASSESS
TRANSACTION FEES The Extended Market and Small Capitalization Stock Portfolios
of Vanguard Index Trust and the European and Pacific
Portfolios of Vanguard International Equity Index Fund assess
a portfolio transaction fee on purchases of Portfolio shares
equal to 1% of the dollar amount invested. The Total Stock
Market Portfolio of Vanguard Index Trust assesses a portfolio
transaction fee equal to 0.25% of the dollar amount invested.
The Emerging Markets Portfolio of Vanguard International
Equity Index Fund assess a portfolio transaction fee equal to
2% of the dollar amount invested. The portfolio transaction
fees are paid to the respective Portfolio, not to Vanguard.
They are not sales charges.
These fees apply to initial investments in the respective
Portfolios and all subsequent purchases (including purchases
made by exchange from another Vanguard Fund or from other
Portfolios within a Fund), but not to reinvested dividend or
capital gains distributions. Portfolio transaction fees are
deducted automatically from the amount invested; they cannot
be paid separately.
The purpose of these transaction fees is to allocate
transaction costs associated with new purchases to investors
making those purchases, thus insulating existing shareholders
from those transaction costs. These costs include: (1)
brokerage costs; (2) market impact costs -- i.e., the
increase in market prices which may result when the Portfolio
purchases thinly traded stocks; and, most importantly, (3)
the effect of the "bid-ask" spread in the over-the-counter
market. (Securities in the over-the-counter market are bought
at the "ask" or purchase price, but are valued in the
Portfolio at the mean of the "bid" or sale, and "ask"
prices.)
The fees represent Vanguard's estimate of the brokerage and
other transaction costs incurred by the Portfolios in
acquiring stocks in their respective markets. Without the
fees, the Portfolios, which incur these costs directly, would
experience reduced investment performance for all
shareholders in each Portfolio. With the fees, the
transaction costs of acquiring additional stocks are borne
not by all existing shareholders, but by those investors
making additional purchases. Because the purchaser, not the
Portfolios, bears these costs, the Portfolios are expected to
track their respective benchmark indexes more closely.
THE EMERGING MARKETS
PORTFOLIO CHARGES A
1% REDEMPTION
TRANSACTION FEE The Emerging Markets Portfolio of Vanguard International
Equity Index Fund also assesses a 1% redemption transaction
fee. This 1% charge applies to redemptions or exchanges from
the Portfolio. The 1% fee is deducted from redemption or
exchange proceeds and is paid directly to the Portfolio, not
to Vanguard. It is not a contingent deferred sales charge.
5
<PAGE> 8
EACH PORTFOLIO CHARGES
A $10 ACCOUNT
MAINTENANCE FEE Each Portfolio assesses an annual account maintenance fee of
$10 to allocate part of the fixed costs of maintaining
shareholder accounts equally to all accounts. This fee is
deducted from each Portfolio's dividend at a rate of $2.50
per quarter for accounts in the 500, Total Stock Market,
Value and Growth Portfolios of Vanguard Index Trust, Vanguard
Bond Index Fund and Vanguard Balanced Index Fund and $10
annually for accounts in the Extended Market Portfolio of
Vanguard Index Trust and the European, Pacific and Emerging
Markets Portfolios of Vanguard International Equity Index
Fund. See "Dividends, Capital Gains and Taxes" for more
information on this fee. The $10 fee amounts to 1.00% on a
$1,000 investment in a Portfolio, 0.33% on a $3,000
investment, 0.10% on a $10,000 investment, and 0.01% on a
$100,000 investment.
The following example illustrates the expenses that you would
incur on a $1,000 investment over various time periods,
assuming (1) a 5% annual rate of return and (2) redemption at
the end of each period. The example includes the $10 account
maintenance fee for each Portfolio; the 1% portfolio
transaction fee for the Extended Market and Small
Capitalization Stock Portfolios of Vanguard Index Trust and
the European and Pacific Portfolios of Vanguard International
Equity Index Fund; the 0.25% transaction fee for the Total
Stock Market Portfolio of Vanguard Index Trust; and the 2%
purchase transaction fee and the 1% redemption transaction
fee for the Emerging Markets Portfolio of Vanguard
International Equity Index Fund.
<TABLE>
<CAPTION>
1 3 5 10
YEAR YEARS YEARS YEARS
---- ----- ----- -----
<S> <C> <C> <C> <C>
Total Bond Market Portfolio............................ $ 12 $36 $ 60 $122
Short-Term Bond Portfolio.............................. $ 12 $36 $ 60 $122
Intermediate-Term Bond Portfolio....................... $ 12 $36 $ 60 $122
Long-Term Bond Portfolio............................... $ 12 $36 $ 60 $122
Balanced Index Fund.................................... $ 12 $36 $ 61 $124
500 Portfolio.......................................... $ 12 $36 $ 60 $123
Extended Market Portfolio.............................. $ 22 $46 $ 71 $134
Total Stock Market Portfolio........................... $ 15 $39 $ 63 $127
Value Portfolio........................................ $ 12 $36 $ 61 $124
Growth Portfolio....................................... $ 12 $36 $ 61 $124
Small Capitalization Stock Portfolio................... $ 22 $46 $ 70 $132
European Portfolio..................................... $ 23 $50 $ 77 $148
Pacific Portfolio...................................... $ 23 $50 $ 77 $148
Emerging Markets Portfolio............................. $ 46 $79 $ 114 $204
</TABLE>
Included in these estimates are account maintenance fees of
$10, $30, $50 and $100 for the respective periods shown. The
$10 account maintenance fee is a flat charge which does not
vary by the size of your investment. Accordingly, for
investments larger than $1,000, your total expenses will be
substantially lower in percentage terms than this
illustration implies.
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF
PAST OR FUTURE EXPENSES OR PERFORMANCE. ACTUAL EXPENSES MAY
BE HIGHER OR LOWER THAN THOSE SHOWN.
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FINANCIAL
HIGHLIGHTS The following financial highlights for a share outstanding
throughout each period, insofar as they relate to each of the
five years in the period ended December 31, 1993, (September
30, 1993 with respect to the Small Capitalization Stock
Portfolio) have been audited by Price Waterhouse LLP
independent accountants, whose reports thereon were
unqualified. This financial information should be read in
conjunction with each Fund's financial statements and notes
thereto, which are incorporated by reference in the
Statements of Additional Information and in this Prospectus,
and which appear, along with the reports of Price Waterhouse
LLP, in each Fund's 1993 Annual Report to Shareholders and
inserts thereto. The financial highlights for the Small
Capitalization Stock Portfolio, formerly Vanguard Small
Capitalization Stock Fund, Inc. should be read in conjunction
with the Small Capitalization Stock Fund's above-referenced
financial statements which are incorporated by reference in
the Statement of Additional Information and in this
Prospectus, and which appear, along with the report of Price
Waterhouse LLP, in the Small Capitalization Stock Fund's 1993
Annual Report to Shareholders. The information on selected
per share data and ratios for the six months ended June 30,
1994 for each Fund is unaudited and should be read in
6
<PAGE> 9
conjunction with the financial statements appearing in each
Fund's June 30, 1994 Semi-Annual Report to Shareholders. For
a more complete discussion of each Fund's performance,
please see the 1993 Annual Report and the June 30, 1994
Semi-Annual Report of each Fund, which may be obtained free
of charge by writing to the Funds or calling our Investor
Information Department at 1-800-662-7447.
<TABLE>
<CAPTION>
-----------------------------------------------------------------------
500 PORTFOLIO
-----------------------------------------------------------------------
SIX MONTHS
ENDED YEAR ENDED DECEMBER 31,
JUNE 30, --------------------------------------------------------
1994*** 1993 1992 1991 1990 1989 1988
<S> <C> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD.................. $43.83 $40.97 $39.32 $31.24 $33.64 $27.18 $24.65
-------- ------ ------ ------ ------ ------ ------
INVESTMENT OPERATIONS
Net Investment Income................................ .58 1.13 1.12 1.15 1.17 1.20 1.08
Net Realized and Unrealized Gain (Loss) on
Investments........................................ (2.12) 2.89 1.75 8.20 (2.30) 7.21 2.87
-------- ------ ------ ------ ------ ------ ------
TOTAL FROM INVESTMENT OPERATIONS................... (1.54) 4.02 2.87 9.35 (1.13) 8.41 3.95
- -----------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income................. (.44) (1.13) (1.12) (1.15) (1.17) (1.20) (1.10)
Distributions from Realized Capital Gains............ (.08) (.03) (.10) (.12) (.10) (.75) (.32)
-------- ------ ------ ------ ------ ------ ------
TOTAL DISTRIBUTIONS................................ (.52) (1.16) (1.22) (1.27) (1.27) (1.95) (1.42)
- -----------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD........................ $41.77 $43.83 $40.97 $39.32 $31.24 $33.64 $27.18
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN**........................................ (3.46)% 9.89% 7.42% 30.22% (3.32)% 31.36% 16.22%
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions).................. $8,433 $8,273 $6,547 $4,345 $2,173 $1,804 $1,055
Ratio of Expenses to Average Net Assets............... .19%* .19% .19% .20% .22% .21% .22%
Ratio of Net Investment Income to Average Net
Assets............................................... 2.68%* 2.65% 2.81% 3.07% 3.60% 3.62% 4.08%
Portfolio Turnover Rate............................... 7%*+ 6%+ 4%+ 5%+ 23%+ 8% 10%
<FN>
*Annualized.
**Total return figures do not reflect the annual account maintenance fee of $10.
***Unaudited.
+ Portfolio turnover rates excluding in-kind redemptions were 6%, 2%, 1%, 1%, and 6%, for the six months ended June 30, 1994
and each of the four years in the period ended December 31, 1993 respectively.
</TABLE>
<TABLE>
<CAPTION>
500 PORTFOLIO
----------------------------------------
YEAR ENDED DECEMBER 31,
---------------------------------------
1987 1986 1985 1984
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD.................. $24.27 $22.99 $19.52 $19.70
------ ------ ------ ------
INVESTMENT OPERATIONS
Net Investment Income................................ .88 .89 .91 .88
Net Realized and Unrealized Gain (Loss) on
Investments........................................ .36 3.30 5.08 .30
------ ------ ------ ------
TOTAL FROM INVESTMENT OPERATIONS................... 1.24 4.19 5.99 1.18
- ----------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income................. (.69) (.89) (.91) (.88)
Distributions from Realized Capital Gains............ (.17) (2.02) (1.61) (.48)
------ ------ ------ ------
TOTAL DISTRIBUTIONS................................ (.86) (2.91) (2.52) (1.36)
- ----------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD........................ $24.65 $24.27 $22.99 $19.52
- ----------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
TOTAL RETURN**........................................ 4.71% 18.06% 31.23% 6.21%
- ----------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions).................. $826 $485 $394 $290
Ratio of Expenses to Average Net Assets............... .26% .28% .28% .27%
Ratio of Net Investment Income to Average Net
Assets............................................... 3.15% 3.40% 4.09% 4.53%
Portfolio Turnover Rate............................... 15% 29% 36% 14%
<FN>
*Annualized.
**Total return figures do not reflect the annual account maintenance fee of $10.
***Unaudited.
+ Portfolio turnover rates excluding in-kind redemptions were 6%, 2%, 1%, 1%, and 6%, for the six months ended June 30, 1994
and each of the four years in the period ended December 31, 1993 respectively.
</TABLE>
<TABLE>
<CAPTION>
-----------------------------------------------------
EXTENDED MARKET PORTFOLIO
-----------------------------------------------------
SIX MONTHS
ENDED YEAR ENDED DECEMBER 31,
JUNE 30, --------------------------------------
1994*** 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD......................................... $19.43 $17.35 $15.82 $11.48 $13.92
------ ------ ------ ------ ------
INVESTMENT OPERATIONS
Net Investment Income....................................................... .13 .23 .24 .25 .30
Net Realized and Unrealized Gain (Loss) on Investments...................... (1.23) 2.28 1.72 4.54 (2.25)
------ ------ ------ ------ ------
TOTAL FROM INVESTMENT OPERATIONS.......................................... (1.10) 2.51 1.96 4.79 (1.95)
- ----------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income........................................ -- (.23) (.25) (.25) (.33)
Distributions from Realized Capital Gains................................... (.14) (.20) (.18) (.20) (.16)
------ ------ ------ ------ ------
TOTAL DISTRIBUTIONS....................................................... (.14) (.43) (.43) (.45) (.49)
- -----------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD............................................... $18.19 $19.43 $17.35 $15.82 $11.48
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN**............................................................... (5.73)% 14.49% 12.47% 41.85% (14.05)%
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions)......................................... $919 $928 $585 $372 $179
Ratio of Expenses to Average Net Assets...................................... .20%* .20% .20% .19% .23%
Ratio of Net Investment Income to Average Net Assets......................... 1.44%* 1.48% 1.73% 2.14% 2.68%
Portfolio Turnover Rate...................................................... 23%* 13% 9% 11% 9%
<FN>
*Annualized.
**Total return figures do not reflect the 1% transaction fee on purchases or the annual account maintenance fee of $10.
***Unaudited.
+Commencement of Operations.
</TABLE>
<TABLE>
<CAPTION>
-------------------------------------
EXTENDED MARKET PORTFOLIO
-------------------------------------
YEAR ENDED DECEMBER 31,
---------------------- DEC. 21,+
1989 1988 TO 31, 1987
<S> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD......................................... $11.60 $ 9.99 $10.00
------ ------ ------
INVESTMENT OPERATIONS
Net Investment Income....................................................... .26 .34 .03
Net Realized and Unrealized Gain (Loss) on Investments...................... 2.52 1.63 (.04)
------ ------ ------
TOTAL FROM INVESTMENT OPERATIONS.......................................... 2.78 1.97 (.01)
- -----------------------------------------------------------------------------------------------------------------
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 $9.99
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
TOTAL RETURN**............................................................... 24.10% 19.75% (0.10)%
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions)......................................... $147 $35 $5
Ratio of Expenses to Average Net Assets...................................... .23% .24% 0%
Ratio of Net Investment Income to Average Net Assets......................... 2.92% 2.90% 0%
Portfolio Turnover Rate...................................................... 14% 26% 3%
*Annualized.
**Total return figures do not reflect the 1% transaction fee on purchases or the annual account maintenance fee of $10.
***Unaudited.
+Commencement of Operations.
</TABLE>
7
<PAGE> 10
<TABLE>
<CAPTION>
----------------------------------------------------------
TOTAL STOCK
MARKET PORTFOLIO*** GROWTH PORTFOLIO**
------------------------ ---------------------
SIX MONTHS YEAR MARCH 16+, SIX MONTHS YEAR
ENDED ENDED 1992, TO ENDED ENDED
JUNE 30, DEC. 31, DEC. 31, JUNE 30, DEC. 31,
1994++ 1993 1992 1994++ 1993
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD................................... $11.69 $10.84 $10.00 $10.20 $10.26
------- ------ ------- ------- -------
INVESTMENT OPERATIONS
Net Investment Income................................................. .13 .26 .23 .11 .21
Net Realized and Unrealized Gain (Loss) on Investments................ (.66) .88 .84 (.57) (.06)
------- ------ ------- ------- ------
TOTAL FROM INVESTMENT OPERATIONS.................................... (.53) 1.14 1.07 (.46) .15
- ---------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income.................................. (.12) (.26) (.23) (.10) (.21)
Distributions from Realized Capital Gains............................. -- (.03) -- -- --
------- ------ ------- ------- ------
TOTAL DISTRIBUTIONS................................................. (.12) (.29) (.23) (.10) (.21)
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD......................................... $11.04 $11.69 $10.84 $9.64 $10.20
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN........................................................... (4.58)% 10.62% 10.41% (4.54)% 1.53%
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions)................................... $639 $512 $275 $57 $51
Ratio of Expenses to Average Net Assets................................ .20%* .20% .21%* .20%* .20%
Ratio of Net Investment Income to Average Net Assets................... 2.31%* 2.31% 2.42%* 2.22%* 2.10%
Portfolio Turnover Rate................................................ 3%* 1% 3% 33%* 36%
<CAPTION>
GROWTH
PORTFOLIO** VALUE PORTFOLIO**
------------ ---------------------------------
NOV. 2, SIX MONTHS YEAR NOV. 2,
1992, TO ENDED ENDED 1992, TO
DEC. 31, JUNE 30, DEC. 31, DEC. 31,
1992 1994++ 1993 1992
<S> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD................................... $10.00 $11.74 $10.30 $10.00
------- -------- ------- -------
INVESTMENT OPERATIONS
Net Investment Income................................................. .06 .18 .38 .07
Net Realized and Unrealized Gain (Loss) on Investments................ .26 (.45) 1.50 .30
------ ------- ------ ------
TOTAL FROM INVESTMENT OPERATIONS.................................... .32 (.27) 1.88 .37
- ---------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income.................................. (.06) (.14) (.38) (.07)
Distributions from Realized Capital Gains............................. -- (.11) (.06) --
------ ------- ------ ------
TOTAL DISTRIBUTIONS................................................. (.06) (.25) (.44) (.07)
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD......................................... $10.26 $11.22 $11.74 $10.30
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN........................................................... 3.19% (2.38)% 18.35% 3.70%
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions)................................... $21 $290 $190 $24
Ratio of Expenses to Average Net Assets................................ 0%* .20%* .20% 0%*
Ratio of Net Investment Income to Average Net Assets................... 2.85%* 3.21%* 3.26% 3.46%*
Portfolio Turnover Rate................................................ 2% 32%* 30% 4%
<FN>
* Annualized.
** Total return figures do not reflect the annual account maintenance fee of $10 or applicable portfolio transaction fees.
*** Total return figures do not reflect the .25% transaction fee on purchases or the annual account maintenance fee of $10.
Subscription period for the Portfolio was from March 16, 1992, to April 26, 1992, during which time all assets were held in
money market instruments. Performance measurement begins on April 27, 1992.
+ Commencement of operations.
++ Unaudited.
</TABLE>
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------
SMALL CAPITALIZATION STOCK PORTFOLIO(1)
-----------------------------------------------------------------------------------
OCT. 1,
FEB. 1 TO 1993 TO YEAR ENDED SEPTEMBER 30,
JUNE 30, JAN. 31, ---------------------------------------------------------
1994** 1994** 1993 1992 1991 1990(2) 1989+ 1988
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD....... $16.24 $16.23 $12.63 $12.03 $8.55 $11.88 $11.96 $15.73
-------- ------- ------ ------ ------ ------- ------ ------
INVESTMENT OPERATIONS
Net Investment Income (Loss).............. .08 .05 .20 .19 .20 .17 .10 .03
Net Realized and Unrealized Gain (Loss) on
Investments............................. (1.48) .96 3.73 .88 3.60 (3.46 ) 2.13 (2.59)
------- ------ ----- ----- ----- ------ ----- -----
TOTAL FROM INVESTMENT OPERATIONS........ (1.40) 1.01 3.93 1.07 3.80 (3.29 ) 2.23 (2.56)
- ------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income...... -- (.18) (.18) (.18) (.18) (.04 ) (.14) --
Distributions from Realized Capital
Gains................................... -- (.82) (.15) (.29) (.14) -- (2.17) (1.21)
------- ------ ----- ----- ----- ------ ----- -----
TOTAL DISTRIBUTIONS..................... -- (1.00) (.33) (.47) (.32) (.04 ) (2.31) (1.21)
- ------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD............. $14.84 $16.24 $16.23 $12.63 $12.03 $8.55 $11.88 $11.96
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN++............................. (8.62)% 6.65% 31.60% 9.34% 45.91% (27.73 )% 18.83% (14.30)%
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions)....... $536 $533 $432 $202 $111 $40 $20 $27
Ratio of Expenses to Average Net Assets.... .18%* .18%* .18% .18% .21% .31 % 1.00% .95%
Ratio of Net Investment Income (Loss) to
Average Net Assets........................ 1.29%* 1.16%* 1.47% 1.65% 2.11% 1.91 % .65% .24%
Portfolio Turnover Rate.................... 48%* 5%* 26% 26% 33% 40 % 160% 68%
<CAPTION>
-----------------------------------------------------------------------------------
SMALL CAPITALIZATION STOCK PORTFOLIO(1)
-----------------------------------------------------------------------------------
YEAR ENDED SEPTEMBER 30,
-------------------------------------
1987 1986 1985 1984
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD....... $13.24 $11.68 $13.15 $19.77
------ ------ ------ ------
INVESTMENT OPERATIONS
Net Investment Income (Loss).............. (.04) (.01) (.04) .14
Net Realized and Unrealized Gain (Loss) on
Investments............................. 4.42 1.57 (.51) (4.25)
----- ----- ----- -----
TOTAL FROM INVESTMENT OPERATIONS........ 4.38 1.56 (.55) (4.11)
- ------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income...... -- -- (.15) --
Distributions from Realized Capital
Gains................................... (1.89) -- (.77) (2.51)
----- ----- ----- -----
TOTAL DISTRIBUTIONS..................... (1.89) -- (.92) (2.51)
- ------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD............. $15.73 $13.24 $11.68 $13.15
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN++............................. 38.02% 13.33% (3.67)% (22.89
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions)....... $35 $31 $32 $37
Ratio of Expenses to Average Net Assets.... .92% .92% 1.00% 1.05%
Ratio of Net Investment Income (Loss) to
Average Net Assets........................ (.25)% (.06)% (.28)% 1.11%
Portfolio Turnover Rate.................... 92% 92% 103% 100%
<FN>
* Annualized.
** Unaudited.
(1) Results prior to January 31, 1994, are for the former Vanguard Small Capitalization Stock Fund.
(2) Adjusted to reflect a 3-for-1 stock split as of February 3, 1990.
+ Prior to September 11, 1989, Schroder Capital Management International provided investment advisory services to the Fund.
Effective September 11, 1989, The Vanguard Group, Inc. began providing investment advisory services to the Fund on an at-cost
basis.
++ Total return figures do not reflect the annual account maintenance fees of $10 or applicable portfolio transaction fees.
</TABLE>
8
<PAGE> 11
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------
PORTFOLIO(1)
PACIFIC
EMERGING -------------------
MARKETS EUROPEAN PORTFOLIO(1) YEAR
PORTFOLIO ---------------------------------------- ENDED
--------- SIX MONTHS YEAR ENDED SIX MONTHS DECEMBER
MAY 4+ TO ENDED DECEMBER 31, MAY 1+ TO ENDED 31,
JUNE 30, JUNE 30, ------------------- DEC. 31, JUNE 30, ------
1994*** 1994*** 1993 1992 1991 1990 1994*** 1993
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD........... $10.00 $11.88 $9.33 $9.92 $9.06 $10.00 $10.13 $7.56
------ -------- ------ ----- ----- ------- -------- ------
INVESTMENT OPERATIONS
Net Investment Income......................... .03 .16 .17 .25 .26 .16 .04 .06
Net Realized and Unrealized Gain (Loss) on
Investments................................. .54 (.47) 2.55 (.58) .86 (.94) 1.91 2.62
------ -------- ------ ----- ----- ------- -------- ------
TOTAL FROM INVESTMENT OPERATIONS............ .57 (.31) 2.72 (.33) 1.12 (.78) 1.95 2.68
- ----------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income.......... -- (.03) (.17) (.26) (.26) (.16) -- (.06)
Distributions from Realized Capital Gains..... -- -- -- -- -- -- -- (.05)
------ -------- ------ ----- ----- ------- -------- ------
TOTAL DISTRIBUTIONS......................... -- (.03) (.17) (.26) (.26) (.16) -- (.11)
- ----------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD................. $10.57 $11.54 $11.88 $9.33 $9.92 $9.06 $12.08 $10.13
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN................................... 5.70%(2) (2.61)% 29.13% (3.32)% 12.40% (7.23)% 19.25% 35.46%
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions)........... $20 $668 $601 $256 $161 $96 $693 $493
Ratio of Expenses to Average Net Assets........ -- .32%* .32% .32% .33% .40%* .32%* .32%
Ratio of Net Investment Income to Average Net
Assets........................................ 2.94%* 3.15%* 2.05% 3.05% 3.06% 3.68%* .80%* .75%
Portfolio Turnover Rate........................ 0% 5%* 4% 1% 15%** 3% 3%* 7%
<CAPTION>
---------------------------
PORTFOLIO(1)
PACIFIC
---------------------------
YEAR ENDED MAY 1+ TO
DECEMBER 31, DECEMBER
----------------- 31,
1992 1991 1990
<S> <C> <C> <C>
- ----------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD........... $9.42 $8.56 $10.00
----- ----- -------
INVESTMENT OPERATIONS
Net Investment Income......................... .05 .05 .05
Net Realized and Unrealized Gain (Loss) on
Investments................................. (1.76) .86 (1.44)
----- ----- -------
TOTAL FROM INVESTMENT OPERATIONS............ (1.71) .91 (1.39)
- ----------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income.......... (.05) (.05) (.05)
Distributions from Realized Capital Gains..... (.10) -- --
----- ----- -------
TOTAL DISTRIBUTIONS......................... (.15) (.05) (.05)
- ----------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD................. $7.56 $9.42 $8.56
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN................................... (18.17)% 10.65% (14.01)%
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions)........... $207 $84 $31
Ratio of Expenses to Average Net Assets........ .32% .32% .35%*
Ratio of Net Investment Income to Average Net
Assets........................................ .92% .70% 1.02%*
Portfolio Turnover Rate........................ 3% 21%** 2%
<FN>
* Annualized.
** Portfolio turnover rates for 1991 excluding in-kind redemptions were 3% for the European Portfolio and 1% for the Pacific
Portfolio.
*** Unaudited.
+ Commencement of operations.
(1) Total return figures do not reflect the 1% transaction fee on purchases or the annual account maintenance fee of $10.
Subscription period for Portfolio was May 1, 1990, to June 17, 1990, during which time all assets were held in money market
instruments. Performance measurement begins on June 18, 1990.
(2) Total return does not reflect the 2% transaction fee on purchases, the 1% transaction fee on redemptions, or the annual
account maintenance fee of $10.
</TABLE>
<TABLE>
<CAPTION>
--------------------------------------------------------------
TOTAL BOND MARKET PORTFOLIO
--------------------------------------------------------------
SIX MONTHS
ENDED YEAR ENDED DECEMBER 31,
JUNE 30, -----------------------------------------------
1994** 1993 1992 1991 1990 1989
<S> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD............................... $10.06 $9.88 $9.99 $9.41 $9.44 $9.05
-------- ------ ----- ----- ----- -----
INVESTMENT OPERATIONS
Net Investment Income............................................. .302 .638 .699 .766 .796 .797
Net Realized and Unrealized Gain (Loss) on Investments............ (.668) .300 (.018) .605 (.030) .390
-------- ------ ----- ----- ----- -----
TOTAL FROM INVESTMENT OPERATIONS............................ (.366) .938 .681 1.371 .766 1.187
- ---------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income.............................. (.302) (.638) (.699) (.766) (.796) (.797)
Distributions from Realized Capital Gains......................... (.002) (.120) (.092) (.025) -- --
-------- ------ ----- ----- ----- -----
TOTAL DISTRIBUTIONS......................................... (.304) (.758) (.791) (.791) (.796) (.797)
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD..................................... $9.39 $10.06 $9.88 $9.99 $9.41 $9.44
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN(1).................................................... (3.69)% 9.68% 7.14% 15.25% 8.65% 13.65%
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions)............................... $1,745 $1,540 $1,066 $849 $277 $139
Ratio of Expenses to Average Net Assets............................ .18%* .18% .20% .16% .21% .24%
Ratio of Net Investment Income to Average Net Assets............... 6.28%* 6.24% 7.06% 7.95% 8.60% 8.49%
Portfolio Turnover Rate............................................ 50%*++ 50% 49% 31% 29% 33%
<CAPTION>
--------------------------------------------------------------
TOTAL BOND MARKET PORTFOLIO
--------------------------------------------------------------
DEC. 9,+
YEAR ENDED TO
DECEMBER 31, 31, 1996
------------- --------
1988 1987 1986
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD.................................. $9.20 $9.94 $10.00
----- ----- ---------
INVESTMENT OPERATIONS
Net Investment Income................................................ .807 .834 .028
Net Realized and Unrealized Gain (Loss) on Investments............... (.150) (.740) (.060)
----- ----- ---------
TOTAL FROM INVESTMENT OPERATIONS............................... .657 .094 (.032)
- ------------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income................................. (.807) (.834) (.028)
Distributions from Realized Capital Gains............................ -- -- --
----- ----- ---------
TOTAL DISTRIBUTIONS............................................ (.807) (.834) (.028)
- ------------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD........................................ $9.05 $9.20 $9.94
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN(1)....................................................... 7.35% 1.14% (0.21)%
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions).................................. $58 $43 $3
Ratio of Expenses to Average Net Assets............................... .30% .14% 0%
Ratio of Net Investment Income to Average Net Assets.................. 8.84% 9.01% 6.82%*
Portfolio Turnover Rate............................................... 21% 77% 0%
<FN>
* Annualized.
** Unaudited.
(1) Total return figures do not reflect the annual account maintenance fee of $10.
+ Commencement of operations.
++ Portfolio turnover rate excluding in-kind redemptions was 39%.
</TABLE>
9
<PAGE> 12
<TABLE>
<CAPTION>
------------------------------------------------------
INTERMEDIATE- TERM LONG-TERM
SHORT-TERM BOND PORTFOLIO BOND PORTFOLIO
BOND PORTFOLIO
------------------------------------------------------
JANUARY 18 TO JANUARY 18 TO
JUNE 30, JANUARY 18 TO JUNE 30,
1994** JUNE 30, 1994** 1994**
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD.................................... $10.00 $ 10.00 $10.00
---------- ----------- ----------
INVESTMENT OPERATIONS
Net Investment Income.................................................. .196 .213 .240
Net Realized and Unrealized Gain (Loss) on Investments................. (.270) (.540) (.790)
--------- ---------- ---------
TOTAL FROM INVESTMENT OPERATIONS................................. .074 (.327) (.550)
- ---------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income................................... (.196) (.213) (.240)
Distributions from Realized Capital Gains.............................. -- -- --
--------- ---------- ---------
TOTAL DISTRIBUTIONS.............................................. (.196) (.213) (.240)
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD.......................................... $9.73 $9.46 $9.21
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN(1)......................................................... (.95)% (3.36)% (5.61)%
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions).................................... $59 $52 $5
Ratio of Expenses to Average Net Assets................................. .18%* .18%* --
Ratio of Net Investment Income to Average Net Assets.................... 5.38%* 6.43%* 7.42%*
Portfolio Turnover Rate................................................. 109%* 117%* 164%*
<FN>
*Annualized.
**Unaudited.
(1)Total return reflects the period beginning March 1, 1994, the date on which investment operations commenced. Returns do not
reflect the annual account maintenance fee of $10.
</TABLE>
<TABLE>
<CAPTION>
-----------------------------------------
VANGUARD BALANCED INDEX FUND
-----------------------------------------
YEAR ENDED SEPT. 28, TO
SIX MONTHS ENDED DECEMBER 31, DEC. 31,
JUNE 30, 1994*** 1993 1992
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, BEGINNING OF PERIOD........................................... $10.91 $10.31 $10.00
----------- --------- ---------
INVESTMENT OPERATIONS
Net Investment Income......................................................... .19 .39 .08
Net Realized and Unrealized Gain (Loss) on Investments........................ (.67) .63 .31
---------- -------- --------
TOTAL FROM INVESTMENT OPERATIONS........................................ (.48) 1.02 .39
- ---------------------------------------------------------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income.......................................... (.16) (.39) (.08)
Distributions from Realized Capital Gains..................................... -- (.03) --
---------- -------- --------
TOTAL DISTRIBUTIONS..................................................... (.16) (.42) (.08)
- ---------------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF PERIOD................................................. $10.27 $10.91 $10.31
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL RETURN**................................................................. (4.44)% 10.00% 3.69%
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Period (Millions)........................................... $382 $367 $109
Ratio of Expenses to Average Net Assets........................................ .20%* .20% .22%*
Ratio of Net Investment Income to Average Net Assets........................... 3.67%* 3.53% 3.76%*
Portfolio Turnover Rate........................................................ 18%* 25% 17%
<FN>
*Annualized.
**Total return figures do not reflect the annual account maintenance fee of $10. Subscription period for portfolio was from
September 28, 1992, to November 8, 1992, during which time all assets were held in money market instruments. Performance
measurement begins on November 9, 1992.
***Unaudited.
</TABLE>
- --------------------------------------------------------------------------------
YIELD AND TOTAL
RETURN From time-to-time a Portfolio of the Vanguard Index Funds may
advertise its yield and total return. Both yield and total
return figures are based on historical earnings and are not
intended to indicate future performance. The "total return"
of a Portfolio refers to the average annual compounded rates
of return over one-, five- and ten-year periods or for the
life of the Portfolio (as stated in the advertisement) that
would equate an initial amount invested at the beginning of a
stated period to the ending redeemable value of the
investment, assuming the reinvestment of all dividend and
capital gains distributions.
In accordance with industry guidelines set forth by the U.S.
Securities and Exchange Commission, the "30-day yield" of a
Portfolio is calculated by dividing the net investment income
per share earned during a 30-day period by the net asset
value per share on the last day of the period. Net investment
income includes interest and dividend income earned on a
Portfolio's securities; it is
10
<PAGE> 13
net of all expenses and all recurring and nonrecurring
charges that have been applied to all shareholder accounts.
The yield calculation assumes that net investment income
earned over 30 days is compounded monthly for six months and
then annualized. Methods used to calculate advertised yields
are standardized for all stock and bond mutual funds.
However, these methods differ from the accounting methods
used by a Portfolio to maintain its books and records, and so
the advertised 30-day yield may not fully reflect the income
paid to your own account or the yield reported in a
Portfolio's reports to shareholders.
- --------------------------------------------------------------------------------
INVESTMENT
OBJECTIVES Vanguard Bond Index Fund, Vanguard Balanced Index Fund,
Vanguard Index Trust and Vanguard International Equity Index
Fund are each open-end diversified investment companies
designed as "index" funds.
- --------------------------------------------------------------------------------
BOND INDEX FUND
EACH PORTFOLIO SEEKS
TO MATCH THE
INVESTMENT
PERFORMANCE OF A
PARTICULAR INVESTMENT
GRADE BOND INDEX The Fund consists of four Portfolios, each of which seeks to
match the investment results of a particular investment
grade bond index through the use of index sampling
techniques. The Total Bond Market Portfolio seeks to
replicate the performance of a broad market weighted bond
index, while the Short-Term Bond, Intermediate-Term Bond and
Long-Term Bond Portfolios attempt to replicate the
performance of market weighted bond indexes with prescribed
maturity standards. There is no assurance that any of the
Fund's Portfolios will achieve its stated objective.
- --------------------------------------------------------------------------------
BALANCED INDEX
FUND
THE FUND SEEKS
TO TRACK THE
WILSHIRE 5000 AND THE
LEHMAN BROTHERS
INDEX The objective of the Fund is to replicate, with respect to
60% of its assets, the investment performance of the Wilshire
5000 and, with respect to 40% of its assets, the investment
performance of the Lehman Brothers Index. There is no
assurance that the Fund will achieve its stated objective.
The Wilshire 5000 consists of all U.S. common stocks that
trade on a regular basis on the New York and American Stock
Exchanges and in the NASDAQ over-the-counter market. The
Lehman Brothers Index measures the total return (capital
change plus income) provided by a universe of fixed income
securities, weighted by market value. The securities included
in the index generally have an outstanding market value of at
least $25 million, are of investment grade quality and are
readily available in the marketplace.
- --------------------------------------------------------------------------------
INDEX TRUST
EACH PORTFOLIO SEEKS
TO MATCH THE
INVESTMENT
PERFORMANCE OF A
PARTICULAR STOCK
MARKET INDEX The Trust consists of six Portfolios, each of which seeks to
provide investment results that correspond to a particular
stock market index. The correlation between the performance
of each of the Trust's Portfolio's and the respective index
that each Portfolio attempts to match is expected to be at
least 0.95. The 500, Extended Market, Total Stock Market and
Small Capitalization Stock Portfolios attempt to replicate
the investment performance of broad market indexes, while the
Value and Growth Portfolios attempt to replicate indexes
which possess certain "value" and "growth" investment
characteristics.
- The 500 PORTFOLIO seeks to replicate the aggregate price
and yield performance of the Standard & Poor's 500
Composite Stock Price Index (the "S&P 500 Index"), an index
which emphasizes large-capitalization companies.
- The EXTENDED MARKET PORTFOLIO seeks to replicate the
aggregate price and yield performance of the Wilshire 4500
Index, an index which consists of more than 5,000 medium-
and small-capitalization companies that are not included in
the S&P 500 Index.
- The TOTAL STOCK MARKET PORTFOLIO seeks to replicate the
aggregate price and yield performance of the Wilshire 5000
Index, an index which consists of all U.S. stocks that
trade on a regular basis on either the New York or American
Stock Exchange or the NASDAQ over-the-counter market. These
stocks include the large-capitalization companies of the
S&P 500 Index, with the exception of Royal Dutch and
Unilever, N.V., which trade on the New York Stock Exchange
as ADR's, as well as the medium- and small-capitalization
companies of the Wilshire 4500 Index.
11
<PAGE> 14
- The SMALL CAPITALIZATION STOCK PORTFOLIO seeks to replicate
the aggregate price and yield performance of the Russell
2000 Small Stock Index (the "Russell 2000"), a broadly
diversified small-capitalization stock index consisting of
approximately 2,000 common stocks.
- The VALUE PORTFOLIO seeks to replicate the aggregate price
and yield performance of the S&P/BARRA Value Index, an
index which includes stocks in the S&P 500 Index with lower
than average ratios of market price to book value. These
types of stocks are often referred to as "value" stocks.
- The GROWTH PORTFOLIO seeks to replicate the aggregate price
AND yield performance of the S&P/BARRA Growth Index, an
index which includes stocks in the S&P 500 Index with
higher than average ratios of market price to book value.
These types of stocks are often referred to as "growth"
stocks.
There is no assurance that the Portfolios will achieve their
stated objectives.
- --------------------------------------------------------------------------------
INTERNATIONAL
EQUITY INDEX FUND
EACH PORTFOLIO SEEKS
TO MATCH THE
INVESTMENT
PERFORMANCE OF ITS
RESPECTIVE INDEX The Fund consists of three Portfolios, each of which seeks to
match the investment results of a Morgan Stanley Capital
International Index. The European Portfolio seeks to
replicate the aggregate price and yield performance of the
Morgan Stanley Capital International-Europe (Free) Index
("MSCI-Europe (Free)"), a diversified, capitalization
weighted index comprised of companies located in fourteen
European countries. The Pacific Portfolio seeks to replicate
the aggregate price and yield performance of the Morgan
Stanley Capital International-Pacific Index ("MSCI-Pacific"),
a diversified, capitalization weighted index consisting of
companies located in Australia, Japan, Hong Kong, New
Zealand, Singapore and Malaysia. There is no assurance that
either Portfolio will achieve its stated objective.
By holding both the European and Pacific Portfolios in
appropriate proportions, an investor may create an aggregate
portfolio designed to approximate the total return (income
plus capital change) of the Morgan Stanley Capital
International-Europe, Australia and Far East (Free) Index
("EAFE Free"), a broadly diversified international index
consisting of more than 1,000 equity securities of companies
located outside of the United States. As of December, 31,
1993, the MSCI-Pacific Index represented approximately 52% of
the market capitalization of EAFE (Free), while the
MSCI-Europe (Free) Index represented the remaining 48%.
The Emerging Markets Portfolio seeks, with respect to 95% of
assets, to provide investment results that parallel the
Morgan Stanley Capital International ("MSCI")-Select Emerging
Markets Free Index ("Index"). The MSCI-Select Emerging
Markets Free Index is a diversified index consisting of
common stocks located in 12 countries. This Index provides
broader diversification and more liquidity than other
"published" indexes and also takes into consideration the
trading capabilities of foreigners in emerging stock market
countries.
The Fund is neither sponsored by nor affiliated with Morgan
Stanley Capital International.
The investment objectives of each Portfolio of Vanguard Bond
Index Fund and Vanguard Index Trust are fundamental and so
cannot be changed without the approval of a majority of a
Portfolio's shareholders.
The investment objectives of Vanguard Balanced Index Fund and
each Portfolio of Vanguard International Equity Index Fund
are not fundamental and may be changed by the Board of
Directors without shareholder approval. However, shareholders
would be notified prior to a material change.
- --------------------------------------------------------------------------------
INVESTMENT
POLICIES
EACH FUND USES
A "PASSIVE"
INVESTMENT APPROACHThe Funds are not managed according to traditional methods of
"active" investment management, which involve the buying and
selling of securities based upon economic, financial and
market analysis and investment judgment. Instead, the Funds,
utilizing a "passive" or indexing investment approach,
attempt to approximate the investment performance of their
respective indexes through statistical procedures. The Funds
are managed without regard to tax ramifications.
12
<PAGE> 15
The investment policies of the Funds are not fundamental and
so may be changed by the Board of Directors without
shareholder approval. However, shareholders would be notified
prior to a material change.
- --------------------------------------------------------------------------------
BOND INDEX FUND
EACH PORTFOLIO INVESTS
IN FIXED INCOME
SECURITIES Each Portfolio will invest in a group of fixed income
securities selected from its respective index which, when
taken together, are expected to perform similarly to the
index as a whole. This sampling technique is expected to
enable each Portfolio to track the dividend income and price
movements of its respective index, while minimizing
brokerage, custodial and accounting costs.
The TOTAL BOND MARKET PORTFOLIO will invest in a portfolio of
fixed income securities selected to match the Lehman Brothers
Aggregate Bond Index (the "Aggregate Bond Index"). The
Aggregate Bond Index is a broad market weighted index which
encompasses three major classes of investment grade fixed
income securities in the United States: U.S. Treasury and
agency securities, corporate bonds, and mortgage-backed
securities, with maturities greater than one year.
The SHORT-TERM BOND PORTFOLIO will invest in a portfolio of
fixed income securities selected to match the Lehman Brothers
Mutual Fund Short (1-5) Government/Corporate Index (the
"Short-Term Index"). The Short-Term Index is a market
weighted index which encompasses two major classes of
investment grade fixed income securities: U.S. Treasury and
agency securities and corporate bonds, all with maturities
between 1 and 5 years.
The INTERMEDIATE-TERM BOND PORTFOLIO will invest in a
portfolio of fixed income securities selected to match the
Lehman Brothers Mutual Fund Intermediate (5-10)
Government/Corporate Index (the "Intermediate-Term Index").
The Intermediate-Term Index is a market weighted index which
encompasses two major classes of investment grade fixed
income securities: U.S. Treasury and agency securities and
corporate bonds, all with maturities between 5 and 10 years.
The LONG-TERM BOND PORTFOLIO will invest in a portfolio of
fixed income securities selected to match the Lehman Brothers
Mutual Fund Long (10+) Government/Corporate Index (the "Long-
Term Index"). The Long-Term Index is a market weighted index
which encompasses two major classes of investment grade fixed
income securities: U.S. Treasury and agency securities and
corporate bonds, all with maturities greater than 10 years.
Each Portfolio will invest 80% or more of its assets in
securities included in its respective index. As of December
31, 1993, the major classes of fixed income securities
represented the following proportions of the respective
indexes total market values:
<TABLE>
<CAPTION>
AGGREGATE SHORT-TERM INTERMEDIATE- LONG-TERM
BOND INDEX INDEX TERM INDEX INDEX
<S> <C> <C> <C> <C>
--------------------------------------------------------------------------------------------------
U.S. Treasury and agency securities 53% 88% 63% 68%
Corporate bonds 19% 12% 37% 32%
Mortgage-backed securities 28% 0% 0% 0%
Dollar-weighted Average Maturity (Years) 8.9 yrs 2.9 yrs 7.5 yrs 23.4 yrs
</TABLE>
The Portfolios of the Fund may, from time to time, substitute
one type of investment grade bond for another. For instance,
a Portfolio may hold more short-term corporate bonds (fewer
short U.S. Treasury bonds) than represented in the Index so
as to increase income. This corporate substitution strategy
will entail the assumption of additional credit risk;
however, substantial diversification within the corporate
sector should moderate issue-specific credit risk. In
addition, current investment policy restricts corporate
substitutions to issues with less than 4 years remaining to
maturity and in aggregate no more than 15% of net assets.
Overall, credit risk is expected to be very low for each of
the Portfolios.
Fixed Income Securities will be primarily of investment grade
quality-- i.e., those rated at least Baa3 by Moody's
Investors Service, Inc. or BBB- by Standard & Poor's
Corporation. Securities rated Baa or BBB are considered as
medium grade obligations. Interest payments and principal are
regarded as adequate for the present but certain protective
elements found in higher rated bonds may be lacking. Such
bonds lack outstanding investment characteristics and, in
fact, have speculative characteristics as well.
13
<PAGE> 16
In its efforts to duplicate the investment performance of the
Index, each Portfolio will invest in fixed income securities
in accordance with its relative proportion of the Index's
total market value. For the Total Bond Market Portfolio,
these investments will include U.S. Treasury and agency
securities, mortgage-backed securities and corporate debt.
For the Short-Term Bond, Intermediate-Term Bond and Long-Term
Bond Portfolios, these investments include U.S. Treasury and
agency securities and corporate debt. The Portfolios may
invest in U.S. Treasury bills, notes and bonds and other
"full faith and credit" obligations of the U.S. Government.
The Portfolios may also invest in U.S. Government agency
securities, which are debt obligations issued or guaranteed
by agencies or instrumentalities of the U.S. Government. Such
"agency" securities may not be backed by the "full faith and
credit" of the U.S. Government. Such U.S. Government agencies
may include the Federal Farm Credit Banks, the Resolution
Trust Corporation and in the case of the Total Bond Market
Portfolio, the Government National Mortgage Association. Even
though they all carry top (AAA) credit ratings, "agency"
obligations are not explicitly guaranteed by the U.S.
Government and so are perceived as somewhat riskier than
comparable Treasury bonds.
Each Portfolio may also invest up to 20% of its assets in
short-term money market instruments, and may invest in bond
(interest rate) futures contracts and options to a limited
extent. Such securities will be held only to invest
uncommitted cash balances, to maintain liquidity to meet
shareholder redemptions, or to minimize trading costs. The
Portfolios will not invest in such securities as part of a
temporary defensive strategy (such as altering the aggregate
maturity of a Portfolio) to protect the Fund against
potential bond market declines. Each Portfolio intends to
remain fully invested, to the extent practicable, in a pool
of securities which will duplicate the investment
characteristics of the respective index. See "Implementation
of Policies" for a description of other investment practices
of the Fund.
- --------------------------------------------------------------------------------
BALANCED INDEX
FUND
THE FUND INVESTS IN
STOCKS AND BONDS Under normal circumstances, the Fund will invest 60% of its
net assets in a portfolio of common stocks selected to track
the Wilshire 5000 and 40% of its net assets in a portfolio of
investment-grade bonds designed to track the Lehman Brothers
Index. The Fund may also invest in certain short-term fixed
income securities as cash reserves, although cash and cash
equivalents are normally expected to represent less than 1%
of the Fund's assets.
The Fund's common stock portfolio will invest in a portfolio
of common stock selected to match the Wilshire 5000. The Fund
is expected to invest in approximately 500 of the largest
securities in the Wilshire 5000 as measured by market
capitalization and a representative sample of the remainder.
Typically, the Fund will hold between 950 and 1,050 stocks,
which are selected primarily on the basis of market
capitalization and industry weightings.
The Fund's bond portfolio will invest in a portfolio of fixed
income securities selected to match the Lehman Brothers
Index. The Fund will invest in a representative sample of
fixed income securities in the Lehman Brothers Index, which,
taken together, are expected to perform similarly to the
Index.
The Fund may also invest up to 30% of its assets in stock or
bond futures contracts and options in order to invest
uncommitted cash balances, to maintain liquidity to meet
shareholder redemptions, or to minimize trading costs. The
Fund will not invest in futures contracts, options, or cash
reserves as part of a temporary defensive strategy, such as
lowering the Fund's investment allocation in common stocks to
protect against potential stock market declines. The Fund
intends to remain fully invested, to the extent practicable,
in a pool of securities which will duplicate the investment
characteristics of the Wilshire 5000 and Lehman Brothers
Indexes. See "Implementation of Policies" for a description
of these and other investment practices of the Fund.
- --------------------------------------------------------------------------------
INDEX TRUST
ALL SIX PORTFOLIOS
INVEST IN
COMMON STOCKS The 500, Value, and Growth Portfolios each invest in all the
stocks included in each of their respective indexes in
approximately the same proportion as they are represented in
the index. The Extended Market, Total Stock Market, and Small
Capitalization Stock Portfolios invest in statistically
selected samples of the stocks included in each of their
respective indexes. This sampling technique is expected to
enable each portfolio to track the price movements of its
respective index, while minimizing the brokerage, custodial,
and accounting costs.
14
<PAGE> 17
The 500 PORTFOLIO invests in all 500 stocks in the S&P 500
Index in approximately the same proportions as they are
represented in the Index.
The EXTENDED MARKET PORTFOLIO invests in a statistically
selected sample of the more than 5,000 stocks included in the
Wilshire 4500 Index. Typically, the Portfolio invests in
1,400 to 1,700 stocks. Stocks are selected for inclusion in
the Portfolio based primarily on market capitalization and
industry weightings. The Portfolio is constructed to have
aggregate investment characteristics similar to those of the
Wilshire 4500 Index.
The TOTAL STOCK MARKET PORTFOLIO invests in a statistically
selected sample of the more than 6,000 stocks included in the
Wilshire 5000 Index. Typically, the Portfolio invests in
approximately 1,700 stocks. Stocks are selected for inclusion
in the Portfolio based primarily on market capitalization and
industry weightings. The Portfolio is constructed to have
aggregate investment characteristics similar to those of the
Wilshire 5000 Index.
The SMALL CAPITALIZATION STOCK PORTFOLIO invests in a
statistically selected sample of the approximately 2,000
stocks included in the Russell 2000 Index. Typically, the
Portfolio invests in approximately 1,000 stocks. Stocks are
selected for inclusion in the Portfolio based on their
contribution to the Portfolio's market capitalization,
industry weightings and other fundamental characteristics
such as price-earnings ratios, dividend yields, price-to-book
ratios and financial leverage. The stocks held by the
Portfolio are weighted to make the Portfolio's aggregate
investment characteristics similar to those of the Russell
2000 Index as a whole.
The VALUE PORTFOLIO invests in all of the common stocks
included in the S&P/BARRA Value Index in approximately the
same proportions as they are represented in the Index. As of
December 31, 1993, the S&P/BARRA Value Index included 310 of
the stocks that make up the S&P 500 Index, and 50% of the
total market value of the Index.
The GROWTH PORTFOLIO invests in all of the common stocks
included in the S&P/BARRA Growth Index in approximately the
same proportions as they are represented in the Index. As of
December 31, 1993, the S&P/BARRA Growth Index included 190 of
the stocks that make up the S&P 500 Index, and 50% of the
total market value of the Index.
ALL SIX PORTFOLIOS
ATTEMPT TO REMAIN
FULLY INVESTED Each Portfolio attempts to remain fully invested in common
stocks. Under normal circumstances each Portfolio will invest
at least 95% of its assets in the common stocks of its
respective index and futures contracts and options. Each
Portfolio may invest in certain short-term fixed income
securities as cash reserves, although cash or cash
equivalents are normally expected to represent less than 1%
of each Portfolio's assets. Each Portfolio may also invest up
to 20% of its assets in stock futures contracts and options
in order to invest uncommitted cash balances, to maintain
liquidity to meet shareholder redemptions, or to minimize
trading costs. The Portfolios will not invest in cash
reserves, futures contracts or options as part of a temporary
defensive strategy, such as lowering a Portfolio's investment
in common stocks to protect against potential stock market
declines. The Portfolios intend to remain fully invested, to
the extent practicable, in a pool of securities which will
duplicate the investment characteristics of their respective
indexes. See "Implementation of Policies" for a description
of these and other investment practices of the Trust.
- --------------------------------------------------------------------------------
INTERNATIONAL
EQUITY INDEX FUND
EACH PORTFOLIO
INVESTS IN
INTERNATIONAL STOCKS
Each of the three Portfolios invest in statistically selected
samples of the stocks included in each of their respective
indexes. This sampling technique is expected to enable each
portfolio to track the price movements of its respective
index, while minimizing the brokerage, custodial, and
accounting costs.
The EUROPEAN PORTFOLIO invests in a statistically selected
sample of approximately 575 stocks included in the
MSCI-Europe (Free) Index, an index of equity securities of
companies located in fourteen European countries. Three
countries, the United Kingdom, Germany and France, dominate
MSCI-Europe (Free), with 38%, 14%, and 14% of the market
capitalization of the Index, respectively, as of December 31,
1993. The 11 other countries are individually much less
15
<PAGE> 18
significant to the Index and, consequently, the Portfolio.
The "Free" Index includes only shares that U.S. investors are
"free" to purchase. Specifically, the Index excludes
restricted shares in Finland, Norway, Sweden and Switzerland.
The PACIFIC PORTFOLIO invests in a statistically selected
sample of the more than 425 stocks included in the
MSCI-Pacific Index, an index of equity securities of Pacific
Basin companies. The MSCI-Pacific Index is dominated by the
Japanese stock market, which represented 75% of the market
capitalization of the Index as of December 31, 1993.
The European and Pacific Portfolios are each expected to
invest in approximately 250 stocks or more. Stocks are
selected for inclusion in each Portfolio based on country,
market capitalization, industry weightings, and fundamental
characteristics such as return variability, earnings
valuation, and yield. Each of the two Portfolios is
constructed to have aggregate investment characteristics
similar to those of its respective index. In order to
parallel the performance of its respective index, each
Portfolio will invest in each country in approximately the
same percentage as the country's weight in the index.
Each of the two Portfolio's policy is to remain fully
invested in common stocks. Under normal circumstances at
least 80% of the assets of each Portfolio will be invested in
stocks that are represented in its respective index. Each
Portfolio may invest in certain short-term fixed income
securities such as cash reserves, although cash or cash
equivalents are normally expected to represent less than 1%
of each Portfolio's assets. Each Portfolio may also invest up
to 50% of its assets in stock futures contracts, options, and
warrants in order to invest uncommitted cash balances,
maintain liquidity to meet shareholder redemptions, or
minimize trading costs.
The European and Pacific Portfolios will not invest in cash
reserves, futures contracts, options or warrants as part of a
temporary defensive strategy, such as lowering a Portfolio's
investment in common stocks, to protect against potential
stock market declines. The Portfolios intend to remain fully
invested, to the extent practicable, in a pool of securities
which will approximate the investment characteristics of
their respective indexes. The Portfolios may also enter into
forward foreign currency exchange contracts in order to
maintain the same currency exposure as their respective
indexes, but not as part of a defensive strategy to protect
against fluctuations in exchange rates.
The EMERGING MARKETS PORTFOLIO invests in a statistically
selected sample of approximately 300 stocks included in the
MSCI-Select Emerging Markets Free Index, an index of equity
securities of companies located in the countries of 12
emerging markets. Three countries, Malaysia, Mexico and Hong
Kong represent a majority of the MSCI-Select Emerging Markets
Free Index, with 20%, 19% and 15% of the market
capitalization of the Index, respectively, as of December 31,
1993.
The Index includes only shares that U.S. investors are "free"
or allowed by law, to purchase and sell and that have
sufficient trading liquidity.
The Portfolio is expected to invest in approximately 300
stocks. Stocks are selected for inclusion in the Portfolio in
order to form a statistically representative sample
corresponding to the MSCI-Select Emerging Markets Free Index.
The Portfolio is constructed to have aggregate investment
characteristics (based on country, market capitalization and
industry weightings), fundamental characteristics (such as
return variability, earnings valuation and yield) and
liquidity measures, similar to those of its Index.
The Portfolio's policy is to remain 95% invested in common
stocks. The remaining 5% of the Portfolio will be invested in
cash reserves in order to maintain a higher degree of
portfolio liquidity to meet daily redemption requests.
Under normal circumstances at least 80% of the assets of the
Portfolio will be invested in stocks that are represented in
the Index and futures contracts and options thereon. The
Portfolio may also invest up to 50% of its assets in stock
futures contracts, options, warrants, convertible
16
<PAGE> 19
securities or swap agreements in order to invest uncommitted
cash balances, maintain liquidity to meet shareholder
redemptions, or minimize trading costs.
See "Implementation of Policies" for a description of these
and other investment practices of the Portfolios.
- --------------------------------------------------------------------------------
INVESTMENT
RISKS
EACH PORTFOLIO IS
SUBJECT TO MARKET RISK
As mutual funds investing primarily in common stocks,
Vanguard Balanced Index Fund and the Portfolios of Vanguard
Index Trust and Vanguard International Equity Index Fund are
subject to market risk--i.e., the possibility that common
stock prices will decline over short or even extended
periods. Both U.S. and foreign stock markets tend to be
cyclical, with periods when stock prices generally rise and
periods when prices generally decline.
From 1926 to 1993, common stocks, as measured by the S&P 500
Index, have provided an average annual total return (capital
appreciation plus dividend income), for 10 years of +10.6%.
Average return may not be useful for forecasting future
returns in any particular period, as stock returns are quite
volatile from year-to-year.
- --------------------------------------------------------------------------------
INDEX TRUST
THE EXTENDED MARKET,
TOTAL STOCK MARKET
AND SMALL
CAPITALIZATION STOCK
PORTFOLIOS MAY EXHIBIT
GREATER VOLATILITY Historically, medium- and small-capitalization stocks have
been more volatile in price than the larger-capitalization
stocks included in the S&P 500 Index. Among the reasons for
the greater price volatility of these securities are the less
certain growth prospects of smaller firms, the lower degree
of liquidity in the markets for such stocks, and the greater
sensitivity of medium- and small-size companies to changing
economic conditions. Besides exhibiting greater volatility,
medium- and small-size company stocks may, to a degree,
fluctuate independently of larger company stocks. Medium- and
small-size company stocks may decline in price as large
company stocks rise, or rise in price as large company stocks
decline. Medium- and small-size company stocks constitute the
investments of the Extended Market Portfolio while the Small
Capitalization Stock Portfolio is composed primarily of
small-size company stocks. Investors in the Portfolios should
therefore expect that the Extended Market and Small
Capitalization Stock Portfolios will be more volatile than,
and may fluctuate independently of, the 500 Portfolio.
Similarly, medium- and small-size company stocks constituted
approximately 33% of the net assets of the Total Stock Market
Portfolio on December 31, 1993. Investors in the Portfolio
should therefore anticipate somewhat greater price volatility
in the Total Stock Market Portfolio relative to the 500
Portfolio.
THE VALUE AND
GROWTH PORTFOLIOS
MAY FLUCTUATE
INDEPENDENTLY Stocks that emphasize particular investment characteristics,
such as "value" and "growth," may fluctuate divergently from
the broad market as represented by the S&P 500 Index, and may
also demonstrate greater volatility over short or extended
periods relative to the broad market.
The S&P/BARRA Value Index maintains a lower price-to-book
ratio and historically has had a higher yield than the S&P
500 Index, while the S&P/BARRA Growth Index maintains a
higher price-to-book and historically has had a lower yield
than the S&P 500 Index. Because of these investment
characteristics, the S&P/BARRA Value Index has exhibited
somewhat less short-term volatility than the S&P 500 Index,
while the S&P/BARRA Growth Index has displayed somewhat
greater short-term volatility than the S&P 500 Index from
1975 through 1993. However, as stated above, both Indexes may
be more volatile than the S&P 500 Index over short or
extended periods. The Indexes have been in existence since
May, 1992. Historical performance data was generated by BARRA
by constructing the S&P/BARRA Value and Growth Indexes from
actual S&P 500 Index holdings.
- --------------------------------------------------------------------------------
INTERNATIONAL
EQUITY INDEX FUND
INTERNATIONAL STOCKS
MAY EXHIBIT GREATER
VOLATILITY THAN
U.S. STOCKS Investments in foreign stock markets can be as volatile, if
not more volatile, than investments in U.S. markets.
Over the period from 1970 to 1993 the MSCI-Europe Index has
provided an annual total return, on average, of +14.0%, and
the MSCI-Pacific Index has provided an annual total return,
on average of +18.9%. By comparison, the average annual total
return of U.S. stocks during this same period was +12.3% (as
measured by the Standard & Poor's 500 Composite Stock Price
Index). Note, however, that the period from 1970 to 1993 was
a very favorable one for foreign stock market investing. The
17
<PAGE> 20
figures on total return and stock market volatility are
provided here only as a guide to potential market risk, and
may not be useful for forecasting future returns in any
particular period.
THE JAPANESE STOCK
MARKET IS A MAJOR
COMPONENT OF THE
PACIFIC INDEX Investors should realize that Japanese securities comprised
75% of the MSCI-Pacific Index as of December 31, 1993, and
that therefore stocks of Japanese companies will represent a
correspondingly large component of the Pacific Portfolio's
investment assets. Such a large investment in the Japanese
stock market may entail a higher degree of risk than with
more diversified international portfolios, especially
considering that by fundamental measures of corporate
valuation, such as its high price-earnings ratios and low
dividend yields, the Japanese market as a whole may appear
expensive relative to other world stock markets.
STOCKS FROM THREE
COUNTRIES DOMINATE
THE EUROPE (FREE)
INDEX Stocks from the United Kingdom, Germany and France comprised
38%, 14% and 14% of the MSCI-Europe (Free) Index,
respectively, as of December 31, 1993. The remaining 11
countries in the MSCI-Europe (Free) Index have much less
significant capitalization weightings in the Index and will
therefore have much less impact on the total return of the
Index and the European Portfolio.
EMERGING MARKETS
MAY EXHIBIT GREATER
VOLATILITY THAN
DEVELOPED MARKETS Emerging markets, such as those invested in by the Emerging
Markets Portfolio, are associated with substantial investment
risks. These risks include market volatility, investment
illiquidity, currency risk, political instability and
unexpected changes in economic policy including capital
controls, expropriation, taxes and hyper-inflation.
Investors should be aware that emerging markets can be
substantially more volatile than both U.S. and more developed
foreign markets. For example, from 1989-1993, the average
positive monthly return for the Wilshire 5000 Index, a broad
measure of the U.S. equity market was 3.3%. The average
negative monthly return for the Wilshire 5000 Index was
-2.6%. In contrast, from 1989-1993, the average positive
monthly return of the Morgan Stanley Capital International
Emerging Markets Free Index, a widely quoted emerging market
benchmark, was 5.9%; while the average negative monthly
return was -4.8%.
INVESTMENT ILLIQUIDITY
RISK Volatility in emerging markets may be exacerbated by
illiquidity. Average daily trading volume in all of the
emerging markets combined is a small fraction of the average
daily volume of the U.S. market. Small trading volumes may
result in investors being forced to purchase securities at
substantially higher prices than the current market, or sell
securities at much lower prices than the current market.
INTERNATIONAL STOCKS
ALSO EXPOSE INVESTORS
TO CURRENCY AND OTHER
RISKS For U.S investors, the returns of foreign investments, such
as those held by the three Portfolios are influenced by not
only the returns on foreign common stocks themselves, but
also by the returns on the currencies in which the stocks
are denominated. Currency risk is the risk that changes in
foreign exchange rates will affect, favorably or
unfavorably, the value of foreign securities held by a
Portfolio. In a period when the U.S. dollar generally rises
against foreign currencies, the returns on foreign stocks
for a U.S. investor will be diminished. By contrast, in a
period when the U.S. dollar generally declines, the returns
on foreign stocks will be enhanced. Currency risk in
emerging markets may be exacerbated by unexpected exchange
rate devaluations.
Other risks and considerations of international investing
include: differences in accounting, auditing and financial
reporting standards; generally higher transaction costs on
foreign portfolio transactions; small trading volumes and
generally lower liquidity of foreign stock markets, which may
result in greater price volatility; foreign withholding taxes
payable on a Portfolio's foreign securities, which may reduce
dividend income payable to shareholders; the possibility of
expropriation or confiscatory taxation; adverse change in
investment or exchange control regulations; difficulty in
obtaining a judgement from a foreign court; political
instability which could affect U.S. investment in foreign
countries; and potential restriction on the flow of
international capital.
- --------------------------------------------------------------------------------
18
<PAGE> 21
BOND INDEX FUND
THE PORTFOLIOS ARE
SUBJECT TO INTEREST
RATE RISK INTEREST RATE RISK is the potential for fluctuations in bond
prices due to changing interest rates. As a rule, bond prices
vary inversely with interest rates. If interest rates rise,
bond prices generally decline; if interest rates fall, bond
prices generally rise. In addition, for a given change in
interest rates, longer-maturity bonds fluctuate more in price
than shorter-maturity bonds. To compensate investors for
these larger fluctuations, longer-maturity bonds usually
offer higher yields than shorter-maturity bonds, other
factors, including credit quality, being equal.
These basic principles of bond prices also apply to U.S.
Government securities. A security backed by the "full faith
and credit" of the U.S. Government is guaranteed only as to
its stated interest rate and face value at maturity, not its
current market price. Just like other fixed income
securities, government-guaranteed securities will fluctuate
in value when interest rates change.
The TOTAL BOND MARKET and INTERMEDIATE-TERM BOND PORTFOLIOS
maintain an intermediate-term average weighted maturity, and
are therefore subject to a moderate to high level of interest
rate risk. Interest rate risk for the SHORT-TERM BOND
PORTFOLIO should be modest. Because of the short-term average
weighted maturities, the Portfolio is expected to exhibit low
to moderate price fluctuations as interest rates change. The
LONG-TERM BOND PORTFOLIO is exposed to substantial interest
rate risk. The Portfolio is expected to have an average
maturity in excess of 15 years which exposes it to high to
very high price fluctuations due to changing interest rates.
THE PORTFOLIOS ARE
SUBJECT TO INCOME RISK
INCOME RISK is the potential for a decline in a Portfolio's
income due to falling market interest rates. In relative
terms, income risk will be higher for the Fund's shorter-term
Portfolios and lower for the Fund's longer-term Portfolios.
THE LONG-TERM BOND
PORTFOLIO IS SUBJECT TO
CALL RISK An additional risk associated with long-term corporate bonds
is call risk. CALL RISK is the possibility that corporate
bonds held by the Portfolio will be repaid prior to maturity.
Call provisions, common in many corporate bonds, allow bond
issuers to redeem bonds prior to maturity (at a specific
price). When interest rates are falling, bond issuers often
exercise these call provisions, paying off bonds that carry
high stated interest rates and often issuing new bonds at
lower rates. For the Portfolio, the result would be that
bonds with high interest rates are "called" and must be
replaced with lower-yielding instruments. In these
circumstances, the income of the Portfolio would decline.
Reflecting these additional credit and call risks, the
corporate portion of the portfolio will generally offer
higher yields than the government portion.
THE TOTAL BOND
MARKET PORTFOLIO IS
SUBJECT TO
PREPAYMENT RISK As a mutual fund investing a portion of its assets in
mortgage-backed securities (see chart on page 13), the Total
Bond Market Portfolio is subject to prepayment risk to a
limited extent. PREPAYMENT RISK is the possibility that,
during periods of declining interest rates, the principal
invested in high-yielding mortgage-backed securities will be
repaid earlier than scheduled, and the Fund will be forced to
reinvest the unanticipated payments at generally lower
interest rates.
Prepayment risk has two important effects on the Portfolio.
First, when interest rates fall and principal prepayments are
reinvested at lower interest rates, the income that the
Portfolio derives from mortgage-backed securities is reduced.
Second, like other fixed income securities, mortgage-backed
securities generally decline in price when interest rates
rise. However, because of prepayment risk, mortgage-backed
securities (and thus in part the share price of the Portfolio
and the value of the Index) will not enjoy as large a gain in
market value as ordinary bonds when interest rates fall. In
part to compensate for prepayment risk, mortgage-backed
securities generally offer higher yields than bonds of
comparable credit quality and maturity.
CREDIT RISK IS EXPECTED
TO BE LOW CREDIT RISK is the possibility that an issuer of securities
held by a Portfolio will be unable to make payments of either
interest or principal. The credit risk of a Portfolio is a
function of the credit quality of its underlying securities.
19
<PAGE> 22
The credit quality of each Portfolio is expected to be very
high, and thus credit risk should be low. As of December 31,
1993, the average quality, as rated by Moody's Investors
Service, Inc., of each Portfolio's benchmark index was as
follows:
<TABLE>
<S> <C>
Aggregate Bond Index.................................................... AAA
Short-Term Bond Index................................................... AAA
Intermediate-Term Bond Index............................................ AA2
Long-Term Bond Index.................................................... AA1
</TABLE>
To a limited extent, the Portfolios are also exposed to event
risk, the possibility that corporate fixed income securities
held by the Portfolios may suffer a substantial decline in
credit quality and market value due to a corporate
restructuring. Corporate restructurings, such as mergers,
leveraged buyouts, takeovers or similar events, are often
financed by a significant expansion of corporate debt. As a
result of the added debt burden, the credit quality and
market value of a firm's existing debt securities may decline
significantly. While event risk may be high for certain
corporate securities held by the Portfolios, event risk for
each Portfolio in the aggregate should be low because of each
Portfolios diversified holdings and the small percentage of
the Portfolio assets invested in corporate securities.
The corporate substitution strategy used by the Fund (see
discussion on page 13) will increase credit risk somewhat, as
short-term investment grade corporate bonds are substituted
for U.S. Treasury bonds and notes; however, owing to the
diversified nature of the Portfolios, and policies limiting
the maturity and maximum amount of substitutions, the overall
credit and event risk of the Portfolio is expected to be low.
- --------------------------------------------------------------------------------
WHO SHOULD
INVEST The Funds offer investors the advantage of a "passive"
approach to investing. These include low investment costs,
exceptional diversification among a wide range of stocks and
bonds, minimal portfolio turnover, and relative
predictability. Unlike other mutual funds, which generally
attempt to "beat" market averages with often unpredictable
results, the Portfolios of the Funds seek to "match" the
performance of their underlying indexes and thus are expected
to provide a highly predictable return relative to these
benchmarks.
However, shareholders should expect to be fully exposed to
the market risks inherent in investing in stocks and bonds.
As the prices of stocks and bonds may be volatile, only
investors able to tolerate short-term, possibly substantial
fluctuations in the value of their investment, brought about
by generally declining stock or bond prices, should
contemplate an investment in the Funds.
Investors may wish to reduce the potential risk of investing
in a Portfolio by purchasing shares on a regular, periodic
basis (dollar-cost averaging) rather than making an
investment in one lump sum.
The Funds are intended to be a long-term investment vehicle
and not designed to provide investors with a means of
speculating on short-term market movements. Investors who
engage in excessive account activity generate additional
costs which are borne by all shareholders. In order to
minimize such costs the Funds have adopted the following
policies. The Funds reserve the right to reject any purchase
request (including exchange purchases from other Vanguard
portfolios) that is reasonably deemed to be disruptive to
efficient portfolio management, either because of the timing
of the investment or previous excessive trading by the
investor. Additionally, the Funds have adopted exchange
privilege limitations as described in the section "Exchange
Privilege Limitations." Finally, the Funds reserve the right
to suspend the offering of their shares.
Investors should not consider an investment in any one Fund a
complete investment program, but should maintain holdings of
securities with different risk characteristics -- including
common stocks, bonds and money market instruments.
- --------------------------------------------------------------------------------
20
<PAGE> 23
BOND INDEX FUND
INVESTORS SEEKING TO
PARTICIPATE IN THE
"BOND MARKET" AS A
WHOLE OR ITS VARIOUS
MATURITY SEGMENTS The Portfolios are designed for individual and institutional
investors seeking well-diversified, low-cost ways to
participate in the U.S. fixed income markets. The Portfolios
will be essentially fully invested at all times. Because the
Total Bond Market Portfolio will represent all major sectors
of the investment grade fixed income securities market, the
Portfolio is a suitable vehicle for those investors seeking
ownership in the "bond market" as a whole, without regard to
particular sectors. The Short-Term Bond, Intermediate-Term
Bond and Long-Term Bond Portfolios are suitable vehicles for
those investors seeking ownership in specific maturity
segments of the "bond market." Each Portfolio concentrates on
bonds of various maturities as illustrated in the chart on
page 13. Because of the risks associated with bond
investments, each Portfolio is intended to be a long-term
investment vehicle and is not designed to provide investors
with a means of speculating on short-term bond market
movements.
As with all longer-term, fixed income investments, the share
price of the Total Bond Market, Intermediate-Term Bond and
Long-Term Bond Portfolios will vary, with the Long-Term Bond
Portfolio expected to exhibit the greatest volatility. Share
price volatility should be significantly less for the
Short-Term Bond Portfolio. Credit risk should be minimal for
each Portfolio. The investment risks are described on page
19.
The Portfolios are also suitable for those investors with
common stock holdings who are seeking a complementary fixed
income investment to create a more balanced asset mix.
Because of potential share price fluctuations, the Portfolios
may be inappropriate for investors who have short-term
objectives or who require stability of principal.
- --------------------------------------------------------------------------------
BALANCED INDEX
FUND
INVESTORS SEEKING A
BALANCE BETWEEN
CURRENT INCOME AND
CAPITAL GROWTH The Fund is designed for conservative investors seeking a
long-term investment offering both current income and the
potential for capital growth. By balancing its investments
among common stocks and bonds, the Fund is expected to
provide lower investment risk and share price volatility than
a mutual fund which invests exclusively in common stocks. The
balanced investment approach of the Fund tends to reduce
exposure to stock and bond market risks; it does not
eliminate them. The Fund is thus suitable for investors who
wish to gain exposure to the potential capital growth
provided by the stock market, while limiting investment risk.
Such a balanced investment program might be particularly
well-suited to long-term investment objectives such as
retirement savings.
- --------------------------------------------------------------------------------
INDEX TRUST
LONG-TERM INVESTORS
SEEKING A "PASSIVE"
APPROACH FOR INVESTING
IN COMMON STOCKS All six Portfolios of the Trust are designed for long-term
investors seeking the advantages of investing in a
diversified portfolio of common stocks.
Four Portfolios of the Trust provide a vehicle for investing
in a broad market index:
- The 500 PORTFOLIO is designed for investors seeking to
replicate the total return of the S&P 500 Index, an index
emphasizing large capitalization common stocks.
- The EXTENDED MARKET PORTFOLIO is designed for investors
seeking to replicate the total return of the Wilshire 4500
Index, an index consisting of small and medium
capitalization companies.
- The TOTAL STOCK MARKET PORTFOLIO is designed for investors
seeking to replicate the total return of the Wilshire 5000
Index, an index consisting of all U.S. stocks that trade on
a regular basis on either the New York or American Stock
Exchange or the NASDAQ over-the-counter market. The Total
Stock Market Portfolio will therefore reflect the
performance of the entire U.S. stock market.
- The SMALL CAPITALIZATION STOCK PORTFOLIO is designed for
investors seeking to replicate the total return of the
Russell 2000 Small Stock Index, an index consisting of
approximately 2,000 small-capitalization stocks.
Two Portfolios are designed for investors seeking to
emphasize certain investment characteristics while continuing
to utilize a "passive" investment approach:
- The VALUE PORTFOLIO is designed for investors seeking to
replicate the total return of the S&P/BARRA Value Index, an
index consisting of companies of the S&P 500 Index with
lower
21
<PAGE> 24
than average market price to book value ratios. Such a
"value-oriented" Portfolio may be appropriate for more
conservative stock market investors who are seeking higher
dividend income and somewhat below average stock market
volatility.
- The GROWTH PORTFOLIO is designed for investors seeking to
replicate the total return of the S&P/BARRA Growth Index,
an index consisting of companies of the S&P 500 Index with
higher than average market price to book value ratios. Such
a "growth-oriented" Portfolio may be appropriate for
investors who have little need for current dividend income
and who can tolerate somewhat above average stock market
volatility.
Taken together in appropriate proportions, the Value and
Growth Portfolios are expected to approximate the total
returns achieved by the 500 Portfolio.
- --------------------------------------------------------------------------------
INTERNATIONAL
EQUITY INDEX FUND
LONG-TERM INVESTORS
SEEKING TO INVEST
IN INTERNATIONAL
COMMON STOCKS The Portfolios are designed for investors who seek a low-cost
"passive" approach for investing in a broadly diversified
portfolio of international common stocks. Unlike other equity
mutual funds, which generally seek to "beat" market averages
with often unpredictable results, the Portfolios of the Fund
seek to "match" their respective indexes and thus are
expected to provide a predictable return relative to their
respective benchmarks. In particular, the European Portfolio
is designed for investors seeking to approximate the total
investment results (before fund expenses and withholding
taxes) of the MSCI-Europe (Free) Index, a diversified index
of European common stocks. The Pacific Portfolio is designed
for investors seeking to approximate the total investment
results (before fund expenses and withholding taxes) of the
MSCI-Pacific Index, a diversified index of Pacific Basin
common stocks.
The European and Pacific Portfolios are also suitable for
investors seeking to create a portfolio which parallels the
performance of the MSCI-EAFE (Free) Index, a broadly
diversified index consisting of over 1,000 international
equity securities. By investing in the two portfolios in the
appropriate percentages (52% in the Pacific Portfolio and 48%
in the European Portfolio as of December 31, 1993), a
portfolio approximating the investment characteristics of
EAFE (Free) may be created.
The Emerging Markets Portfolio is designed for investors
seeking to approximate the total investment results (before
fund expenses and withholding taxes) of the MSCI-Select
Emerging Markets Free Index, a diversified index of common
stocks of emerging market countries.
- --------------------------------------------------------------------------------
IMPLEMENTATION
OF POLICIES The Portfolios follow a variety of investment practices in an
effort to duplicate the total return of their respective
indexes.
- --------------------------------------------------------------------------------
BOND INDEX FUND
THE PORTFOLIOS INVEST
IN FIXED INCOME
SECURITIES Each Portfolio will invest at least 80% or more of its assets
in securities included in its benchmark Index. The Indexes
measure the total investment return (capital change plus
income) provided by a universe of fixed income securities,
weighted by the market value outstanding of each security.
The securities included in each Index generally meet the
following criteria, as defined by Lehman Brothers: an
outstanding market value of at least $100 million; and
investment grade quality -- i.e., rated a minimum of Baa by
Moody's Investors Service, Inc. or BBB by Standard & Poor's
Corporation. The maturities of securities included in each
index will vary as described on page 13.
THE PORTFOLIOS USE A
"SAMPLING" TECHNIQUE
The Portfolios will be unable to hold all of the individual
issues which comprise the Indexes because of the large number
of securities involved. Instead, each Portfolio will hold a
representative sample of the securities in its respective
Index, selecting one or two issues to represent entire
"classes" or types of securities in the Index. Each Portfolio
will be constructed so as to match the composition of its
benchmark index as described below.
At the broadest level, each Portfolio will seek to hold
securities which reflect the weighting of the major asset
classes in its respective index. For the Total Bond Market
Portfolio, these classes include U.S. Treasury and agency
securities, corporate bonds, and mortgage-backed securities.
For the Short-Term Bond, Intermediate-Term Bond and Long-Term
Bond Portfolios, the two major classes of securities include
U.S. Treasury and agency securities and corporate bonds.
22
<PAGE> 25
Such a sampling technique is expected to be an effective
means of substantially duplicating the income and capital
returns provided by each Index. Over time, the correlation
between the performance of the Fund and the Index is expected
to be 0.95 or higher. A correlation of 1.00 would indicate
perfect correlation, which would be achieved when the net
asset value of a Portfolio, including the value of its
dividend and capital gain distributions, increases or
decreases in exact proportion to changes in the Index.
Because the Portfolios of the Fund incur operating expenses,
as opposed to their respective indexes, which do not, a
perfect correlation of 1.00 is unlikely to be achieved.
THE TOTAL BOND
MARKET PORTFOLIO MAY
INVEST IN MORTGAGE-
BACKED SECURITIES As part of its effort to duplicate the investment performance
of its Index, the Total Bond Market Portfolio may invest in
mortgage-backed securities. Mortgage-backed securities
represent an interest in an underlying pool of mortgages.
Unlike ordinary fixed income securities, which generally pay
a fixed rate of interest and return principal upon maturity,
mortgage-backed securities repay both interest income and
principal as part of their periodic payments. Because the
mortgages underlying mortgage-backed certificates can be
prepaid at any time by homeowners or corporate borrowers,
mortgage-backed securities give rise to certain unique
"prepayment" risks. See "Investment Risks."
The Total Bond Market Portfolio may purchase mortgage-backed
securities issued by the Government National Mortgage
Association (GNMA), the Federal Home Loan Mortgage
Corporation (FHLMC), the Federal National Mortgage
Association (FNMA), and the Federal Housing Authority (FHA).
GNMA securities are guaranteed by the U.S. Government as to
the timely payment of principal and interest; securities from
other Government-sponsored entities are generally not secured
by an explicit pledge of the U.S. Government. The Portfolio
may also invest in conventional mortgage securities, which
are packaged by private corporations and are not guaranteed
by the U.S. Government. Mortgage securities that are
guaranteed by the U.S. Government are guaranteed only as to
the timely payment of principal and interest. The market
value of such securities is not guaranteed and may fluctuate.
- --------------------------------------------------------------------------------
BALANCED INDEX
FUND
THE FUND INVESTS IN
A SAMPLE OF ALL U.S.
COMMON STOCKS The Fund's common stock investments will be selected from
securities included in the Wilshire 5000, an index of all
regularly and publicly traded U.S. common stocks that trade
on the New York and American Stock Exchanges and in the
NASDAQ over-the-counter market. Approximately 6,000 stocks,
including large, medium, and small capitalization companies,
are included in the Wilshire 5000, which serves as a proxy
for the complete U.S. stock market.
Under normal circumstances, the Fund will invest 60% of its
net assets in common stocks included in the Wilshire 5000. In
an effort to replicate the investment performance of the
Wilshire 5000, the Fund's common stock holdings will include
approximately 500 of the largest market capitalization stocks
in the Index and an additional representative sample of the
remaining stocks. The high transaction costs and illiquidity
of many of the smaller stocks in the Wilshire 5000 make
complete replication of the Index's holding impractical.
COMMON STOCKS ARE
SELECTED USING
OPTIMIZATION
TECHNIQUES ("PORTFOLIO
OPTIMIZATION") The stocks of the Wilshire 5000 included in the Fund are
selected using a statistical technique known as
"optimization." This process selects stocks for the Fund so
that various industry weightings, market capitalizations, and
fundamental characteristics (e.g., price-to-book, price-to-
earnings, and debt-to-asset ratios, as well as dividend
yields) match those of the Wilshire 5000. For instance, if
10% of the capitalization of the Wilshire 5000 consists of
utility companies with relatively large market
capitalizations, then the Fund's stock holdings are
constructed so that approximately 10% of the Fund's stocks
represent utilities with relatively large capitalizations.
The Fund is not sponsored, endorsed, sold or promoted by
Wilshire Associates. Wilshire(R) and Wilshire 5000(R) are
registered service marks of Wilshire Associates.
THE FUND INVESTS IN A
SAMPLE OF ALL U.S.
INVESTMENT GRADE DEBT
Under normal circumstances, the Fund will invest 40% of its
net assets in fixed income securities included in the Lehman
Brothers Index, an index of U.S. investment-grade, fixed
income securities. More than 4,500 individual bond issues,
including U.S. Treasury and Government
23
<PAGE> 26
agency securities, corporate debt obligations, and
mortgage-backed securities are included in the Lehman
Brothers Index.
The securities included in the Lehman Brothers Index in which
the Fund may invest generally meet the following criteria, as
defined by Lehman Brothers: an effective maturity of not less
than one year; an outstanding market value of at least $50
million; investment grade quality--i.e., rated a minimum of
Baa by Moody's Investors Service, Inc. or BBB by Standard &
Poor's Corporation; and general availability in the
marketplace. If a security held in the Fund's portfolio is
downgraded to a rating below these minimum standards, the
Fund may continue to hold it until such time as the adviser
deems it most advantageous to dispose of the security.
BONDS ARE SELECTED
USING A STRATIFIED
SAMPLING TECHNIQUE The large number of issues in the Index makes it impractical
for the Fund to hold all of the individual issues which
comprise the Index. Instead, the Fund will attempt to
replicate the investment performance of the Lehman Brothers
Index by holding a representative sample of the securities in
the Index. In choosing a representative sample of bond
investments from the Lehman Brothers Index, the Fund utilizes
a "stratified sampling" technique, which means that, the Fund
will select one or two individual bond issues to represent
entire "classes" or types of fixed income investments in the
Index.
At the broadest level, the Fund will seek to hold securities
reflecting the three major classes of fixed income
investments in the Lehman Brothers Index -- U.S. Treasury and
Government agency securities, corporate debt obligations, and
mortgage-backed securities. For example, if corporate debt
obligations represent 25% of the Index, then 25% of the
Fund's bond holdings will also be invested in such
securities. As the Fund's assets grow, these classes of
investments will be further delineated along the lines of
sector, term to maturity, coupon, and credit rating. For
example, within the corporate debt class, all long-term, low
coupon AA-rated utility bonds might be represented in the
Fund by one or two individual utility securities, which would
result in less diversification and greater security specific
risk in the Fund compared to the Index.
The Lehman Brothers Index is a trademark of Lehman Brothers,
Inc. Inclusion of a security in the Index in no way implies
an opinion by Lehman Brothers, Inc. as to the attractiveness
or appropriateness of a security as an investment. Lehman
Brothers, Inc. is neither a sponsor of nor in any way
affiliated with the Fund.
THE FUND'S RETURNS
SHOULD BE CLOSELY
CORRELATED WITH ITS
UNDERLYING INDEXES The sampling techniques utilized by the Fund are expected to
be an effective means of substantially duplicating the
investment performance (dividend income plus capital change)
of the Fund's underlying indexes: the Wilshire 5000 (for the
60% of net assets invested in common stocks) and the Lehman
Brothers Index (for the 40% of net assets invested in bonds).
The correlation between the performance of the Fund's stock
and bond investments and the Wilshire 5000 and Lehman
Brothers Indexes, respectively, is expected to be at least
0.95.
Due to the use of sampling techniques, however, neither the
stock nor bond holdings of the Fund are expected to track
their target benchmarks with the degree of accuracy that
complete replication of the indexes would have provided. The
principal advantage of this sampling approach is to provide
an efficient means of investing in a large universe of stocks
and bonds. In particular, the Fund is expected to provide
exceptionally broad diversification, and should operate at
low costs due to both its "passive" approach to portfolio
management and expected low portfolio turnover rate.
- --------------------------------------------------------------------------------
INDEX TRUST
THE 500 PORTFOLIO
INVESTS IN ALL 500 S&P
STOCKS The 500 Portfolio attempts to duplicate the investment
results of the S&P 500 Index by holding all 500 stocks in
approximately the same proportions as they are represented in
the Index. This indexing technique is known as "complete
replication."
The S&P 500 Index is composed of 500 common stocks, which are
chosen by Standard & Poor's Corporation on a statistical
basis to be included in the Index. The inclusion of a stock
in the S&P 500 Index in no way implies that Standard & Poor's
Corporation believes the stock to be an attractive
investment. The 500 securities, most of which trade on the
New York Stock Exchange,
24
<PAGE> 27
represented, as of December 31, 1993, approximately 67.4% of
the market value of all U.S. common stocks. Each stock in the
S&P 500 Index is weighted by its market value.
Because of the market-value weighting, the 50 largest
companies in the S&P 500 Index currently account for
approximately 50% of the Index. Typically, companies included
in the S&P 500 Index are the largest and most dominant firms
in their respective industries. As of December 31, 1993, the
five largest companies in the Index were: General Electric
(2.7%), Exxon Corporation (2.4%), AT&T (2.2%), Wal-Mart
Stores (1.8%) and Coca Cola (1.7%). The largest industry
categories were international oil companies (7.2%), telephone
companies (6.0%), electric power (4.8%), electrical equipment
(3.8%) and diversified health care companies (3.6%).
THE EXTENDED MARKET
PORTFOLIO INVESTS IN
MEDIUM- AND
SMALL-SIZE COMPANY
STOCKS While the S&P 500 Index includes the preponderance of large
market capitalization stocks, it excludes most of the medium-
and small-size companies which comprise the remaining 33% of
the capitalization of the U.S. stock market. The Wilshire
4500 Index consists of all U.S. stocks that are not in the
S&P 500 Index and that trade regularly on the New York and
American Stock Exchanges as well as in the NASDAQ
over-the-counter market. More than 5,000 stocks of medium-
and small-capitalization companies are included in the
Wilshire 4500 Index.
The Extended Market Portfolio will be unable to hold all of
the more than 5,000 issues which comprise the Wilshire 4500
Index because of the costs involved and the illiquidity of
many of the securities. Instead, the Portfolio will hold a
representative sample of the securities in the Wilshire 4500
Index.
THE TOTAL STOCK
MARKET PORTFOLIO
INVESTS IN A SAMPLE OF
ALL U.S. STOCKS Neither the S&P 500 Index nor the Wilshire 4500 Index
independently represents the U.S. stock market as a whole.
The Wilshire 5000 Index, which consists of all regularly and
publicly traded U.S. stocks, provides a complete proxy for
the U.S. stock market. More than 6,000 stocks, including
large-, medium-, and small-capitalization companies are
included in the Wilshire 5000 Index.
In an effort to replicate the investment performance of the
Wilshire 5000 Index, the Total Stock Market Portfolio will
invest in approximately 1,000 of the largest stocks in the
index and an additional representative sample of the
remaining stocks. As in the case for the Extended Market
Portfolio, the high transaction costs and illiquidity of many
of the smaller stocks make complete replication of the
Wilshire 4500 Index's holdings impractical.
The Extended Market and Total Stock Market Portfolios are not
sponsored, endorsed, sold or promoted by Wilshire Associates.
Wilshire(R) and Wilshire 5000(R) are registered service marks
of Wilshire Associates.
THE SMALL
CAPITALIZATION STOCK
PORTFOLIO INVESTS IN
SMALL-SIZE COMPANY
STOCKS The Small Capitalization Stock Portfolio attempts to
duplicate the investment results of the Russell 2000 Index by
investing in approximately 1,000 of the 2,000 stocks in the
Russell 2000 Index. The Russell 2000 Index is composed of
approximately 2,000 small-capitalization common stocks. A
company's stock market capitalization is the total market
value of its floating outstanding shares. As of September 30,
1993, the average stock market capitalization of the Russell
2000 was $360 million. As in the case of the Extended Market
Portfolio, the high transaction costs and illiquidity of many
of the small stocks contained in the Russell 2000 Index make
complete replication of the holdings impractical.
The Portfolio is neither sponsored by nor affiliated with the
Frank Russell Company. Frank Russell's only relationship to
the Portfolio is the licensing of the use of the Russell 2000
Small Stock Index. Frank Russell Company is the owner of the
trademarks and copyrights relating to the Russell indexes.
THE EXTENDED MARKET,
TOTAL STOCK MARKET
AND SMALL
CAPITALIZATION STOCK
PORTFOLIOS USE
SAMPLING TECHNIQUESThe stocks of the Wilshire 4500 Index to be included in the
Extended Market, Total Stock Market and Small Capitalization
Stock Portfolios will be selected utilizing a statistical
sampling technique known as "optimization."
This sampling technique, which is described on page 23, is
expected to be an effective means of substantially
duplicating the income and capital returns of the Extended
Market, Total Stock Market and Small Capitalization Stock
Portfolios' target benchmarks. Over time, the correlation
25
<PAGE> 28
between the performance of the Extended Market, Total Stock
Market and Small Capitalization Stock Portfolios and their
respective indexes, the Wilshire 4500 Index, Wilshire 5000
Index and Russell 2000 Index, is expected to be at least
0.95. A correlation of 1.00 would indicate perfect
correlation, which would be achieved when the net asset value
of a Portfolio, including the value of its dividend and
capital gains distributions, increases or decreases in exact
proportion to changes in the respective target benchmark.
Due to the use of the sampling technique, neither the
Extended Market Portfolio, Total Stock Market Portfolio nor
the Small Capitalization Stock Portfolio is expected to track
its benchmark index with the same degree of accuracy as
evidenced by the high degree of correlation between the 500
Portfolio and its benchmark. However, the principal advantage
of this technique is to provide an efficient means to invest
in the universe of stocks. In particular, the three
Portfolios are expected to provide broad diversification, and
should operate at low costs due both to their "passive"
approach to portfolio management and low portfolio turnover
rate.
THE VALUE AND GROWTH
PORTFOLIOS EMPHASIZE
STOCKS WITH CERTAIN
INVESTMENT
CHARACTERISTICS In an effort to duplicate the investment results of their
respective indexes, the Value and Growth Portfolios will
utilize "complete replication," the same indexing technique
used for the 500 Portfolio. Specifically, the Value and
Growth Portfolios will hold all of the stocks included in the
S&P/BARRA Value and Growth Indexes, respectively, in
approximately the same proportions as those stocks are
represented in the Indexes.
Standard & Poor's Corporation constructs the S&P/BARRA Value
and Growth Indexes semi-annually by ranking all common stocks
included in the S&P 500 Index by their price-to-book ratios.
The resulting list is then divided in half by market
capitalization. Those companies representing half of the
market capitalization of the S&P 500 Index and having lower
price-to-book ratios are included in the S&P/BARRA Value
Index; the remaining companies are incorporated in the
S&P/BARRA Growth Index. On December 31, 1993, after the
semi-annual reconstitution of the indexes, the S&P/BARRA
Value Index consisted of 310 common stocks in the S&P 500
Index, while the S&P/BARRA Growth Index consisted of the
remaining 190. Each Index represented half of the market
capitalization of the S&P 500 Index.
Investment managers may use a number of different methods to
classify stocks as "value" or "growth". There may also be
other ways to define benchmarks for "value" and "growth"
investing. If other methods were applied to the companies
comprising the S&P/BARRA Value and Growth Indexes, the
classification of the stocks as "growth" or "value" might be
different.
Typically, the stocks included in the S&P/BARRA Value Index
exhibit above-average dividend yields and lower price-to-book
ratios. By comparison, the stocks included in the S&P/BARRA
Growth Index exhibit below-average dividend yields and higher
price-to-book ratios. As of December 31, 1993, the five
largest companies in the S&P/BARRA Value Index were Exxon
Corp., Royal Dutch Petroleum Co., DuPont E.I. de Nemour, IBM,
and Mobil, the five largest companies in the S&P/BARRA Growth
Index were Wal Mart Stores, General Electric Co., Exxon
Corporation, American Telephone & Telegraph, and Coca Cola
Co.
The 500, Value and Growth Portfolios are not sponsored,
endorsed, sold or promoted by Standard & Poor's Corporation
("S&P"). S&P makes no representations or warranty, implied or
expressed, to the purchasers of the Portfolios or any member
of the public regarding the advisability of investing in
index funds or the ability of the S&P 500, S&P/BARRA Value
and S&P/BARRA Growth Indexes to track general stock market
performance or to track the general performance of value and
growth stocks. S&P does not guarantee the accuracy and/or the
completeness of the S&P 500, S&P/BARRA Value and S&P/BARRA
Growth Indexes or any data included herein.
S&P's only relationship to the Portfolios is the licensing of
the S&P marks and the S&P 500, S&P/BARRA Value and S&P/BARRA
Growth Indexes, which are determined, composed and calculated
by S&P without regard to the 500, Value and Growth
Portfolios.
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26
<PAGE> 29
INTERNATIONAL
EQUITY INDEX FUND
EUROPEAN PORTFOLIO
AND PACIFIC PORTFOLIO
THE PORTFOLIOS INVEST
IN INTERNATIONAL
COMMON STOCKS USING
SAMPLING TECHNIQUES
("PORTFOLIO
OPTIMIZATION") The MCSI-Europe (Free) Index consists of approximately 575
equity securities from Europe, and the MSCI-Pacific Index
consists of more than 425 equity securities from Australia
and the Far East. The stocks included in each index are
chosen by Morgan Stanley Capital International on a
statistical basis. Each stock in MSCI-Europe (Free) and
MSCI-Pacific is weighted according to its market value as a
percentage of the total market value of all stocks in the
index. (A stock's market value equals the number of shares
outstanding times the most recent price of the security.) The
inclusion of a stock in the index in no way implies the
Morgan Stanley Capital International believes the stock to be
an attractive investment.
The Portfolios will be unable to hold all of the issues that
comprise their respective indexes because of the costs
involved and the illiquidity of many of the securities.
Instead, each Portfolio will attempt to hold a representative
sample of approximately 250 or more of the securities in its
respective Index, which will be selected utilizing the
statistical technique, "portfolio optimization." (See page 23
for a general explanation of "portfolio optimization".)
Due to the use of this sampling or "portfolio optimization"
technique, the Portfolios are not expected to track their
benchmark indexes with the same degree of accuracy as large
capitalization domestic index funds. Over time, the
correlation between the performance of each Portfolio and its
respective index is expected to be greater than 0.95. A
correlation of 1.00 would indicate perfect correlation, which
would be achieved when the net asset value of each Portfolio,
including the value of its dividend and capital gains
distributions, increases or decreases in exact proportion to
changes in its respective index.
- --------------------------------------------------------------------------------
EMERGING MARKETS
PORTFOLIO
THE PORTFOLIO INVESTS
IN INTERNATIONAL
COMMON STOCKS USING
SAMPLING TECHNIQUES
("PORTFOLIO
OPTIMIZATION") The MSCI -- Select Emerging Markets Free Index consists of
approximately 460 equity securities from emerging market
countries in Europe, Latin America and Southeast Asia. The
stocks included in the Index are chosen on a statistical
basis. The companies based in Hong Kong and Singapore are
included in the Index to provide participation in more liquid
emerging markets; their combined weight is limited to 20% of
the Index. Each stock within Hong Kong and Singapore will be
weighted according to its market value as a percentage of the
total market value of all of the Hong Kong and Singapore
stocks included in the index. (A stock's market value equals
the number of shares outstanding times the most recent price
of the security). The remaining portion of the Index will be
comprised of common stocks from 10 other emerging market
countries -- Indonesia, Malaysia, the Philippines, Thailand,
Argentina, Brazil, Mexico, Greece, Portugal and Turkey. Each
stock in these countries will be weighted according to its
market value as a percentage of the total market value of the
companies in the 10 countries multiplied by the percentage of
the index that these countries represent. From time to time,
additional emerging markets will be analyzed for inclusion in
the Index, based on liquidity and tradeability. The inclusion
of a country or stock in the Index in no way implies that the
country or stock is an attractive investment.
The Portfolio will be unable to hold all of the issues that
comprise its Index, because of the transaction costs involved
and the illiquidity of many of the securities. Instead, the
Portfolio will attempt to hold a representative sample of
approximately 300 or more of the securities in its Index by
selecting stocks utilizing the statistical technique,
"portfolio optimization." (See page 23 for a general
explanation of "portfolio optimization".)
Due to the use of this sampling or "portfolio optimization"
technique, the Portfolio is not expected to track its
benchmark with the same degree of accuracy as large
capitalization domestic index funds. Over time, the
correlation between the performance of the Portfolio and the
Index is expected to be greater than 0.95. A correlation of
0.95 or higher is expected to be achieved when the Portfolio
exceeds $100 million in assets.
THE THREE PORTFOLIOS
MAY ENTER INTO
FORWARD CURRENCY
CONTRACTS Each Portfolio may enter into foreign currency forward and
foreign currency futures contracts in order to maintain the
same currency exposure as their respective indexes. A
Portfolio may not enter into such contracts for speculative
purposes, or as a way of protecting against anticipated
adverse changes in exchange rates between foreign currencies
and the U.S. dollar. Specifically, a
27
<PAGE> 30
Portfolio may invest up to 25% of its assets in foreign
currency forward contracts. A foreign currency forward
contract is an obligation to purchase or sell a specific
currency at a future date, which may be any fixed number of
days from the date of the contract agreed upon by the
parties, at a price set at the time of the contract. These
contracts may be bought or sold to protect the Portfolio to a
limited extent against adverse changes in exchange rates
between foreign currencies and the U.S. dollar. Such
contracts, which protect the value of a Portfolio's
investment securities against a decline in the value of a
currency, do not eliminate fluctuations in the underlying
prices of the securities. They simply establish an exchange
rate at a future date. Also, although such contracts tend to
minimize the risk of loss due to a decline in the value of
the hedged currency, at the same time they tend to limit any
potential gain that might be realized should the value of
such currency increase.
THE THREE PORTFOLIOS
MAY BORROW MONEY Each Portfolio may borrow money from a bank up to a limit of
15% of the market value of its assets, but only for temporary
or emergency purposes. A Portfolio may borrow money only to
meet redemption requests prior to the settlement of
securities already sold or in the process of being sold by
the Portfolio. To the extent that a Portfolio borrows money
prior to selling securities, the Portfolio may be leveraged;
at such times, the Portfolio may appreciate or depreciate in
value more rapidly than its benchmark index. Both Portfolios
will repay any money borrowed in excess of 5% of the market
value of their total assets prior to purchasing additional
portfolio securities.
ALL PORTFOLIOS MAY
INVEST IN SHORT-TERM
MONEY MARKET
INSTRUMENTS Although they normally seek to remain substantially fully
invested in securities in the respective indexes, all
Portfolios of the Funds may invest temporarily in certain
short-term money market instruments. Such securities may be
used to invest uncommitted cash balances or to maintain
liquidity to meet shareholder redemptions. These securities
include: obligations of the United States Government and its
agencies or instrumentalities; commercial paper, bank
certificates of deposit, and bankers' acceptances; and
repurchase agreements collateralized by these securities.
- -------------------------------------------------------------------------------
The Funds may use futures contracts, options, warrants,
convertible securities and swap agreements.
BOND INDEX FUND The Portfolios of the Fund may utilize bond (interest rate)
futures contracts and options to a limited extent.
Specifically, each Portfolio may enter into futures contracts
provided that not more than 5% of its assets are required as
a futures contract deposit. In addition, the Portfolios may
enter into futures contracts and options transactions only to
the extent that obligations under such contracts or
transactions represent not more than 20% of a Portfolio's
assets.
- --------------------------------------------------------------------------------
BALANCED INDEX
FUND The Fund may utilize stock and bond (interest rate) futures
contracts, options, warrants, convertible securities and swap
agreements to a limited extent. Specifically, the Fund may
enter into futures contracts and options provided that not
more than 5% of its assets are required as a margin deposit
for futures contracts or options. Additionally, the Fund's
investment in warrants will not exceed more than 5% of its
assets (2% with respect to warrants not listed on the New
York or American Stock Exchanges). The Fund does not intend
to invest more than 5% of its assets in convertible
securities.
- --------------------------------------------------------------------------------
INDEX TRUST Each Portfolio of the Trust may utilize stock futures
contracts, options, warrants, convertible securities and swap
agreements to a limited extent. Specifically, each Portfolio
may enter into futures contracts and options provided that
not more than 5% of its assets are required as a margin
deposit for futures contracts or options and provided that
not more than 20% of a Portfolio's assets are invested in
futures and options at any time. Additionally, the Trust's
investment in warrants will not exceed more than 5% of its
assets (2% with respect to warrants not listed on the New
York or American Stock Exchanges). The Trust does not intend
to invest more than 5% of its assets in convertible
securities.
- --------------------------------------------------------------------------------
INTERNATIONAL
EQUITY INDEX FUND The Portfolios of the Fund may utilize stock futures
contracts, options, warrants, convertible securities and swap
agreements to a limited extent. Specifically, each Portfolio
may enter into futures contracts and options provided that
not more than 5% of its assets are required as a margin
deposit for futures contracts or options. Additionally, the
Fund's investment in warrants
28
<PAGE> 31
will not exceed more than 5% of its assets (for the European
Portfolio and the Pacific Portfolio 2% with respect to
warrants not listed on the New York or American Stock
Exchanges).
Futures contracts, options, warrants, convertible securities
and swap agreements may be used for several reasons: to
simulate full investment in the underlying index while
retaining a cash balance for fund management purposes, to
facilitate trading, to reduce transaction costs or to seek
higher investment returns when a futures contract, option,
warrant, convertible security or swap agreement is priced
more attractively than the underlying equity security or
index. While each of these securities can be used as
leveraged investments, the Portfolios may not use them to
leverage their net assets.
FUTURES CONTRACTS,
OPTIONS, WARRANTS,
CONVERTIBLE SECURITIES
AND SWAP AGREEMENTS
POSE CERTAIN RISKS The risk of loss associated with futures contracts in some
strategies can be substantial due both to the low margin
deposits required and the extremely high degree of leverage
involved in futures pricing. As a result, a relatively small
price movement in a futures contract may result in an
immediate and substantial loss or gain. When investing in
futures contracts, Portfolios of the Vanguard Bond Index Fund
will segregate cash or cash equivalents in the amount of the
underlying obligation. The Portfolios of the Vanguard
Balanced Index Fund, Vanguard Index Trust and Vanguard
International Equity Index Fund will not use futures
contracts, options, warrants, convertible securities or swap
agreements for speculative purposes or to leverage its net
assets. Accordingly, the primary risks associated with the
use of futures contracts, options, warrants, convertible
securities or swap agreements by the Portfolio are: (i)
imperfect correlation between the change in market value of
the stocks held by the Portfolio and the prices of futures
contracts, options, warrants, convertible securities or swap
agreements; (ii) possible lack of a liquid secondary market
for a futures contract and the resulting inability to close a
futures position prior to its maturity date; and (iii) the
risk of the counterparty or guaranteeing agent defaulting.
The risk of imperfect correlation will be minimized by
investing only in those contracts whose behavior is expected
to resemble that of the Portfolio's underlying securities.
The risk that the Portfolio will be unable to close out a
futures position will be minimized by entering into such
transactions on an exchange with an active and liquid
secondary market. However, options, warrants, convertible
securities or swap agreements purchased or sold
over-the-counter may be less liquid than exchange traded
securities. Illiquid securities, in general, including swap
agreements, may not represent more than 15% of the net assets
of the Portfolio.
Since there are no futures traded on the S&P/BARRA Value and
Growth Indexes, MSCI-Europe (Free), Pacific Index or the
MSCI-Select Emerging Markets Free Index, it will be necessary
for the Vanguard Index Trust Value and Growth Portfolios and
the Portfolios of Vanguard International Equity Index Fund to
utilize a composite of other futures contracts to simulate
the performance of the Indexes. This process may magnify the
"tracking error" of a Portfolio's performance compared to
that of its Index, due to lower correlation of the selected
futures with its Index. The investment adviser will attempt
to reduce this tracking error by investing in futures
contracts whose behavior is expected to resemble that of the
underlying securities, although there can be no assurance
that these selected futures will perfectly correlate with the
performance of either Index.
SWAP AGREEMENTS Swap agreements are contracts between parties in which one
party agrees to make payments to the other party based on the
change in market value of a specified index or asset. In
return, the other party agrees to make payments to the first
party based on the return of a different specified index or
asset. Although swap agreements entail the risk that a party
will default on its payment obligations thereunder, the
Portfolios will minimize this risk by entering into
agreements that mark to market no less frequently than
quarterly. However, the Portfolios' daily share price will
take into effect the daily price movement of any swap
agreement entered into by the Portfolios. Swap agreements
also bear the risk that the Portfolios will not be able to
meet its obligation to the counterparty. This risk will be
mitigated by investing the Portfolios in the specific asset
for which it is obligated to pay a return.
ALL PORTFOLIOS MAY
LEND THEIR SECURITIES
All Portfolios may lend their investment securities to
qualified institutional investors for either short-term or
long-term purposes of realizing additional income. Loans of
securities by the
29
<PAGE> 32
Portfolio will be collateralized by cash, letters of credit,
or securities issued or guaranteed by the U.S. Government or
its agencies. The collateral will equal at least 100% of the
current market value of the loaned securities.
PORTFOLIO TURNOVER FOR
ALL PORTFOLIOS IS
EXPECTED TO BE LOW Although they generally seek to invest for the long term,
each Portfolio of Vanguard Bond Index Fund, Vanguard Balanced
Index Fund, Vanguard Index Trust, and Vanguard International
Equity Index Fund retains the right to sell securities
irrespective of how long they have been held. It is
anticipated that the annual portfolio turnover of each
Portfolio of the Funds (except Vanguard Balanced Index Fund)
will not exceed 50%. The annual portfolio turnover rate for
the Vanguard Balanced Index Fund is not expected to exceed
100%. A turnover rate of 50% would occur, for example, if one
half of the securities of a Portfolio were replaced within
one year.
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INVESTMENT
LIMITATIONS
EACH PORTFOLIO HAS
ADOPTED CERTAIN
FUNDAMENTAL
LIMITATIONS Each portfolio of the Funds has adopted certain limitations
on its investment practices. Specifically, each Portfolio
will not:
(a) invest more than 25% of its assets in any one industry;
(b) borrow money, except that the Funds 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 Funds' net assets. Whenever borrowing exceeds 5%
of the value of the Funds' net assets, the Funds will
not make any additional investments.
Each Portfolio of Vanguard Bond Index will not:
(a) invest more than 5% of its assets in the securities of
any single issuer except obligations of the United
States Government;
(b) purchase more than 5% of the voting securities of any
issuer;
(c) pledge, mortgage or hypothecate its assets to an extent
greater than 5% of the value of its total assets.
Each Portfolio of Vanguard Balanced Index Fund, Vanguard
Index Trust, and Vanguard International Equity Index Fund
will not:
(a) with respect to 75% of its assets, purchase securities
of any issuer (except obligations of the U.S. Government
and its instrumentalities) if, as a result, more than 5%
of the value of the Fund's assets would be invested in
the securities of each issuer; and
(b) with respect to 75% of its assets, purchase more than
10% of the voting securities of any issuer.
These investment limitations are considered at the time
investment securities are purchased. The limitations
described here and in the Statement of Additional Information
may be changed for a specific Fund only with the approval of
a majority of the shareholders.
- --------------------------------------------------------------------------------
MANAGEMENT OF
THE FUNDS
VANGUARD ADMINISTERS
AND DISTRIBUTES
THE FUNDS The Funds are members of The Vanguard Group of Investment
Companies, a family of more than 30 investment companies with
more than 80 distinct portfolios and total assets in excess
of $130 billion. Through their jointly owned subsidiary, The
Vanguard Group, Inc. ("Vanguard"), they and the other funds
in the Group obtain at cost virtually all of their corporate
management, administrative, shareholder accounting and
distribution services. Vanguard also provides investment
advisory services on an at-cost basis to certain Vanguard
funds. As a result of Vanguard's unique corporate structure,
the Vanguard funds have costs substantially lower than those
of most competing mutual funds. In 1993, the average expense
ratio (annual costs including advisory fees divided by total
net assets) for the Vanguard funds amounted to approximately
.30% compared to an average of 1.02% for the mutual fund
industry (data provided by Lipper Analytical Services).
30
<PAGE> 33
The Officers of the Funds manage its day to day operations
and are responsible to the Funds Board of Directors
(Trustees). The Directors (Trustees) set broad policies for
the Funds and choose its officers. A list of the Directors
(Trustees) and Officers of the Funds and a statement of their
present positions and principal occupations during the past
five years can be found in each of the Funds Statements of
Additional Information.
Vanguard employs a supporting staff of management and
administrative personnel needed to provide the requisite
services to the funds and also furnishes the funds with
necessary office space, furnishings and equipment. Each fund
pays its share of Vanguard's net expenses, which are
allocated among the funds under methods approved by the Board
of Directors (Trustees) of each fund. In addition, each fund
bears its own direct expenses, such as legal, auditing and
custodian fees.
Vanguard also provides distribution and marketing services to
the Vanguard funds. The funds are available on a no-load
basis (i.e., there are no sales commissions or 12b-1 fees).
However, each fund bears it share of the Group's distribution
costs.
- --------------------------------------------------------------------------------
INVESTMENT
ADVISERS
VANGUARD'S FIXED
INCOME GROUP
MANAGES SOME OF THE
FUNDS' INVESTMENTS Each Portfolio of Vanguard Bond Index Fund and the bond
portion of Vanguard Balanced Index Fund receive all
investment advisory services from Vanguard's Fixed Income
Group. The Fixed Income Group provides investment advisory
services to more than 40 Vanguard money market and bond
portfolios, both taxable and tax-exempt. Total assets under
management by Vanguard's Fixed Income Group were $52 billion
as of December 31, 1993. The Portfolios are not actively
managed, but are instead administered by the Fixed Income
Group using computerized, quantitative techniques. The Fixed
Income Group is supervised by the Officers of the Fund. Ian
A. MacKinnon, Senior Vice President of Vanguard, has been in
charge of the Group since its inception in 1981.
Mr. MacKinnon is responsible for setting the broad investment
strategies employed by the Fund, and for overseeing the
portfolio manager who implements those strategies on a
day-to-day basis.
The portfolio manager for Vanguard Bond Index Fund and the
bond portion of Vanguard Balanced Index Fund is Kenneth E.
Volpert, Assistant Vice President of Vanguard, who serves as
portfolio manager of the Vanguard Variable Insurance
Fund -- High-Grade Portfolio and the bond portion of the
Balanced Portfolio. Mr. Volpert began managing the Vanguard
Bond Index fund in 1992. For six years prior to joining
Vanguard, Mr. Volpert was associated with Mellon Bond
Associates.
The Fixed Income Group places all orders for purchases and
sales of portfolio securities. Purchases of portfolio
securities are made either directly from the issuer or from
securities dealers. The Fixed Income Group may sell portfolio
securities prior to their maturity if circumstances and
considerations warrant and if it believes such dispositions
advisable. The Group seeks to obtain the best available net
price and most favorable execution for all portfolio
transactions.
VANGUARD'S CORE
MANAGEMENT GROUP
MANAGES SOME OF THE
FUNDS, ON AN AT-COST
BASIS Each Portfolio of Index Trust, International Equity Index
Fund and the equity portion of Balanced Index Fund receive
their investment advisory services on an at-cost basis from
Vanguard's Core Management Group, which also provides
investment advisory services to Vanguard Institutional Index
Fund, a portion of the assets of Vanguard/Windsor II and
Vanguard Morgan Growth Fund, and several indexed separate
accounts. Total indexed assets under management as of
December 31, 1993 were $16.4 billion. The Portfolios of the
Fund are not actively managed, but are instead administered
by the Core Management Group using computerized, quantitative
techniques. The Group is supervised by the Officers of the
Fund.
In placing portfolio transactions, Vanguard's Core Management
Group uses its best judgment to choose the broker most
capable of providing the brokerage services necessary to
obtain the best available price and most favorable execution
at the lowest commission rate. The full range and quality of
brokerage services available are considered in making these
determinations. In those instances where it is reasonably
determined that more than one broker can offer the services
needed to obtain the best available price and most favorable
execution, consideration may be
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<PAGE> 34
given to those brokers which supply statistical information
and provide other services in addition to execution services
to the Fund.
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DIVIDENDS,
CAPITAL GAINS
AND TAXES
FOUR PORTFOLIOS PAY
QUARTERLY DIVIDENDS;
TWO PAY DIVIDENDS
ONCE A YEAR Vanguard Index Trust distributes substantially all of its net
investment income in the form of dividends. The 500, Total
Stock Market, Value and Growth Portfolios pay quarterly
dividends, while the Extended Market and Small Capitalization
Stock Portfolios pay annual dividends. For all six
Portfolios, net capital gains, if any, are distributed
annually.
Each Portfolio of the International Equity Index Fund intends
to distribute substantially all of its ordinary income in the
form of dividends. The Portfolios pay annual dividends.
Capital gains distributions, if any, are also made annually.
The Balanced Index Fund will distribute substantially all of
its net investment income in the form of quarterly dividends.
Dividends consisting of virtually all of the ordinary income
of each Portfolio of Bond Index Fund are declared daily and
are payable to shareholders of record at the time of
declaration. Such dividends are paid on the first business
day of each month. Capital gains distributions, if any, are
made annually.
A Portfolio's dividend and capital gains distributions may be
reinvested in additional shares or received in cash. See
"Choosing a Distribution Option" for a description of these
distribution methods. Shareholders of Bond Index Fund who
choose to reinvest their dividend distributions will receive
a quarterly (not monthly) confirmation statement.
Pursuant to the Internal Revenue Code, certain dividend and
capital gains distributions declared by each Portfolio during
December. Such distributions, if received by shareholders by
January 31, are deemed to have been paid by the Funds and
received by shareholders on December 31 of the prior year.
Each Portfolio of the Funds intends to continue to qualify
for taxation as a "regulated investment company" under the
Internal Revenue Code so that each Portfolio will not be
subject to federal income tax to the extent its income is
distributed to shareholders. Dividends paid by each Portfolio
from net investment income, whether received in cash or
reinvested in additional shares, will be taxable to
shareholders as ordinary income. For corporate investors,
dividends from net investment income will generally qualify
in part for the intercorporate dividends-received deduction.
However, the portion of the dividends so qualified depends on
the aggregate taxable qualifying dividend income received by
a Portfolio from domestic (U.S.) sources.
Distributions paid by a Portfolio from long-term capital
gains, whether received in cash or reinvested in additional
shares, are taxable as long-term capital gains, regardless of
the length of time you have owned shares in the Portfolio.
Capital gains distributions are made when a Portfolio
realizes net capital gains on sales of portfolio securities
during the year. A Portfolio does not seek to realize any
particular amount of capital gains during a year; rather,
realized gains are a byproduct of portfolio management
activities. Consequently, capital gains distributions may be
expected to vary considerably from year-to-year; there will
be no capital gains distributions in years when a Portfolio
realizes net capital losses.
Note that if you elect to receive capital gains distributions
in cash, instead of reinvesting them in additional shares,
you are in effect reducing the capital at work for you in a
Portfolio. Also, keep in mind that if you purchase shares in
a Portfolio shortly before the record date for a dividend or
capital gains distribution, a portion of your investment will
be returned to you as a taxable distribution, regardless of
whether you are reinvesting your distributions or receiving
them in cash.
The Funds will notify you annually as to the tax status of
dividend and capital gains distributions paid by each
Portfolio.
32
<PAGE> 35
EACH PORTFOLIO OF
INTERNATIONAL EQUITY
INDEX FUND MAY
"PASS THROUGH"
FOREIGN TAXES Each Portfolio may elect to "pass through" to its
shareholders the amount of foreign income taxes paid by a
Portfolio. The Portfolios will make such an election only if
it is deemed to be in the best interests of the shareholders.
If this election is made, shareholders of a Portfolio will be
required to include in their gross income their pro rata
share of foreign taxes paid by the Portfolio. However,
shareholders will be able to treat their pro rata share of
foreign taxes as either an itemized deduction or a foreign
credit against U.S. income taxes (but not both) on their tax
return.
A CAPITAL GAIN OR LOSS
MAY BE REALIZED UPON
EXCHANGE OR
REDEMPTION A sale of shares of a Portfolio is a taxable event, and may
result in a capital gain or loss. A capital gain or loss may
be realized from an ordinary redemption of shares or an
exchange of shares between two mutual funds (or two
portfolios of the same fund).
Dividend distributions, capital gain distributions, and
capital gains or losses from redemptions and exchanges may be
subject to state and local taxes.
Each Portfolio of the Funds is required to withhold 31% of
taxable dividends, capital gains distributions, and
redemptions paid to shareholders who have not complied with
IRS taxpayer identification regulations. You may avoid this
withholding requirement by certifying on your Account
Registration Form your proper Social Security or Taxpayer
Identification Number and by certifying that you are not
subject to backup withholding.
Vanguard Index Trust is organized as a Pennsylvania business
trust and, in the opinion of counsel, is not liable for any
income or franchise tax in the Commonwealth of Pennsylvania.
The Trust will be subject to Pennsylvania county personal
property tax in the county which is the site of its principal
office. Shareholders who are Pennsylvania residents will not
be subject to county personal property taxes, with the
exception of non-exempt holders who are residents of the City
and School District of Pittsburgh.
The International Equity Index, Balanced Index and Bond Index
Funds have obtained Certificates of Authority to do business
as foreign corporations in Pennsylvania and do business and
maintain offices in that state. In the opinion of counsel,
the shares of each of the Funds are exempt from Pennsylvania
personal property taxes.
The tax discussion set forth above is included for general
information only. Prospective investors should consult their
own tax advisers concerning the tax consequences of an
investment in the Funds.
- --------------------------------------------------------------------------------
THE SHARE
PRICE OF
EACH PORTFOLIO The share price or "net asset value" per share of each
Portfolio is determined by dividing the total market value of
the Portfolio's investments and other assets, less any
liabilities, by the number of outstanding shares of the
Portfolio. Net asset value per share is determined once daily
at the close of regular trading on the New York Stock
Exchange (generally 4:00 p.m. Eastern time).
Portfolio securities that are listed on a securities exchange
are valued at the last quoted sales price on the day the
valuation is made. Price information on listed securities is
taken from the exchange where the security is primarily
traded. Securities which are listed on an exchange and which
are not traded on the valuation date are valued at the mean
of the bid and ask prices. For the 500, Value and Growth
Portfolios of Vanguard Index Trust, Vanguard International
Equity Index Fund, and each Portfolio of Vanguard Bond Index
Fund, unlisted securities for which market quotations are not
readily available are valued at the latest quoted bid price.
For the Extended Market, Total Stock Market and Small
Capitalization Stock Portfolios, and Vanguard Balanced Index
Fund, unlisted securities for which market quotations are not
readily available are valued at the mean of the bid and ask
prices. Temporary cash investments are valued at amortized
cost which approximates market value. For all Funds,
securities for which no current quotations are readily
available are valued at fair market value as determined in
good faith by the Directors (Trustees). Securities may be
valued on the basis of prices provided by a pricing service
when such prices are believed to reflect the fair market
value of such securities.
Each Portfolios's share price can be found daily in the
mutual fund listings of most major newspapers under the
heading of The Vanguard Group.
- --------------------------------------------------------------------------------
33
<PAGE> 36
GENERAL
INFORMATION Vanguard Bond Index, Vanguard Balanced Index and Vanguard
International Equity Index Funds are organized as Maryland
corporations. The Articles of Incorporation permit the
Directors to issue 1,000,000,000 shares of common stock of
each Fund, with a $.001 par value. The Board of Directors has
the power to designate one or more classes ("series") of
shares of common stock and to classify or reclassify any
unissued shares with respect to such series. Currently,
Vanguard Bond Index Fund is offering shares of four series,
Vanguard Balanced Index Fund is offering shares of one series
and Vanguard International Equity Index is offering shares of
three series.
Vanguard Index Trust is a Pennsylvania business trust. The
Declaration of Trust permits the Trustees to issue an
unlimited number of shares of beneficial interest with no par
value. The Board of Trustees has the power to designate one
or more classes or series of shares of common stock and to
classify or reclassify any unissued shares with respect to
such series. Currently, the Trust is offering shares of six
series.
The shares of each series of the Funds are fully paid and
non-assessable; have no preference as to conversion,
exchange, dividends, retirement or other features; and have
no preemptive rights. Such shares have non-cumulative voting
rights, meaning that the holders of more than 50% of the
shares voting for the election of Directors (Trustees) can
elect 100% of the Directors (Trustees) if they so choose.
Annual meetings of shareholders will not be held except as
required by the Investment Company Act of 1940 and other
applicable law. An annual meeting will be held to vote on the
removal of a Director (Trustee) or Directors (Trustees) of a
Fund if requested in writing by the holders of not less than
10% of the outstanding shares of such Fund.
All securities and cash for the Total Bond Market Portfolio
of Vanguard Bond Index Fund are held by Morgan Guaranty Trust
Company, New York, NY. All securities and cash for the
Short-Term Bond, Intermediate-Term Bond and Long-Term Bond
Portfolios are held by State Street Bank and Trust Company
("State Street Bank"), Boston, MA. All securities and cash
for Vanguard Balanced Index Fund are held by CoreStates Bank,
N.A. ("CoreStates"), Philadelphia, PA. All Securities and
cash for Vanguard International Equity Index Fund are held by
Morgan Stanley Trust Company. All securities and cash for the
500, Extended Market, Total Stock Market and Small
Capitalization Stock Portfolios of Vanguard Index Trust are
held by State Street Bank. All securities and cash for the
Value and Growth Portfolios are held by CoreStates.
The Vanguard Group, Inc., Valley Forge, PA, serves as the
Funds' Transfer and Dividend Disbursing Agent. Price
Waterhouse LLP, serves as independent accountants for the
Funds and will audit their financial statements annually. The
Funds are not involved in any litigation.
- --------------------------------------------------------------------------------
34
<PAGE> 37
SHAREHOLDER GUIDE
OPENING AN
ACCOUNT AND
PURCHASING
SHARES You may open a regular (non-retirement) account, either by
mail or wire. Simply complete and return an Account
Registration Form and any required legal documentation,
indicating the Portfolio you have chosen and amount you wish
to invest. Your purchase must be equal to or greater than the
$3,000 minimum initial investment requirement in any
Portfolio ($500 for Uniform Gifts/Transfers to Minors Act
accounts). You must open a new Individual Retirement Account
by mail (IRAs may not be opened by wire) using a Vanguard IRA
Adoption Agreement. Your purchase must be equal to or greater
than the $500 minimum initial investment requirement, but no
more than $2,000 if you are making a regular IRA
contribution. Rollover contributions are generally limited to
the amount withdrawn within the past 60 days from an IRA or
other qualified Retirement Plan. If you need assistance with
the Account Registration Form or have any questions about the
Fund, please call our Investor Information Department
(1-800-662-7447). NOTE: For other types of account
registrations (e.g., corporations, associations, other
organizations, trusts or power of attorney), please call us
to determine which additional forms you may need.
Because of the risks associated with bond and stock
investments, each Portfolio is intended to be a long-term
investment vehicle and is not designed to provide investors
with a means of speculating on short-term bond market
movements. Consequently, the Fund reserves the right to
reject any specific purchase (and exchange purchase) request.
The Fund also reserves the right to suspend the offering of
shares for a period of time.
Each Portfolio's shares are purchased at the next-determined
net asset value after your investment has been received in
the form of Federal Funds. See "When Your Account Will Be
Credited". The Fund is offered on a no-load basis (i.e.,
there are no sales commissions or 12b-1 fees).
IMPORTANT NOTE
ON EXPENSES Transaction fees are charged by Portfolios as follows:
<TABLE>
<CAPTION>
FEES ON FEES ON
PURCHASES REDEMPTIONS
--------- -----------
<S> <C> <C>
Vanguard Bond Index Fund................................. None None
Vanguard Balanced Fund................................... None None
Vanguard Index Trust
500 Portfolio.......................................... None None
Extended Market Portfolio.............................. 1% None
Total Stock Market Portfolio........................... .25% None
Small Capitalization Stock Portfolio................... 1% None
Value Portfolio........................................ None None
Growth Portfolio....................................... None None
Vanguard International Equity Index Fund
European Portfolio..................................... 1% None
Pacific Portfolio...................................... 1% None
Emerging Markets Portfolio............................. 2% 1%
</TABLE>
Additionally, each Portfolio of all of the Funds and the
Trust assessed $10 annual account maintenance fee. See
"Portfolio Expenses" for more information.
ADDITIONAL
INVESTMENTS Subsequent investments may be made by mail ($100 minimum per
Portfolio), wire ($1,000 minimum), exchange from another
Vanguard Fund account ($100 minimum per Portfolio), or
Vanguard Fund Express. Subsequent investments to Individual
Retirement Accounts may be made by mail ($100 minimum) or
exchange from another Vanguard Fund account. In some
instances, contributions may be made by wire or Vanguard Fund
Express. Please call us for more information on these
options.
- --------------------------------------------------------------------------------
35
<PAGE> 38
<TABLE>
<S> <C> <C>
ADDITIONAL INVESTMENTS
NEW ACCOUNT TO EXISTING ACCOUNTS
PURCHASING BY MAIL Please include the amount of your Additional investments should include
initial investment and the name of the the Invest-by-Mail remittance form
Complete and sign the Portfolios you have selected on the attached to your Fund confirmation
enclosed Account registration form, make your check statements. Please make your check
Registration Form payable to The Vanguard Group payable to The Vanguard Group
(Portfolio Number), see below for the (Portfolio Number), write your account
appropriate number and mail to: number on your check, and using the
return envelope provided, mail to the
VANGUARD FINANCIAL CENTER address indicated on the
P.O. BOX 2600 Invest-by-Mail Form. See below for the
VALLEY FORGE, PA 19482 appropriate Portfolio number.
For express or VANGUARD FINANCIAL CENTER All written requests should be mailed
registered mail, 455 DEVON PARK DRIVE to one of the addresses indicated for
send to: WAYNE, PA 19087 new accounts. Do not send registered
or express mail to the post office box
address.
PORTFOLIO NUMBERS
VANGUARD BOND INDEX FUND VANGUARD BALANCED
Total Bond Market Portfolio -- 84 INDEX FUND -- 02
Short-Term Bond Portfolio -- 132
Intermediate-Term Bond VANGUARD INDEX TRUST
Portfolio -- 314 500 Portfolio -- 40
Long-Term Bond Portfolio -- 522 Extended Market Portfolio -- 98
Total Stock Market Portfolio -- 85
VANGUARD INTERNATIONAL Small Capitalization Stock
EQUITY INDEX FUND Portfolio -- 48
European Portfolio -- 79 Value Portfolio -- 06
Pacific Portfolio -- 72 Growth Portfolio -- 09
Emerging Markets Portfolio -- 533
--------------------------------------------------------------------------------------
PURCHASING BY WIRE CORESTATES BANK, N.A.
ABA 031000011
Money should be CORESTATES ACCT NO 0101 9897
wired to: ATTN VANGUARD
NAME OF FUND OR TRUST
BEFORE WIRING NAME OF PORTFOLIO
ACCOUNT NUMBER
Please contact ACCOUNT REGISTRATION
Client Services
(1-800-662-2739) To assure proper receipt, please be sure your bank includes the name of the
Portfolio, the account number Vanguard has assigned to you and the eight digit
CoreStates number. If you are opening a new account, please complete the Account
Registration Form and mail it to the "New Account" address above after completing
your wire arrangement. NOTE: Federal Funds wire purchase orders will be accepted
only when the Fund and Custodian Bank are open for business.
</TABLE>
- --------------------------------------------------------------------------------
PURCHASING BY
EXCHANGE (from a
Vanguard account) You may open an account or purchase additional shares by
making an exchange from an existing Vanguard Fund account.
However, the Funds reserve the right to refuse any exchange
purchase request. Call our Client Services Department
(1-800-662-2739) for assistance. The new account will have
the same registration as the existing account.
Telephone exchanges are not accepted for the Portfolios of
Vanguard Balanced Index Fund, Vanguard Index Trust, and
Vanguard International Equity Index Fund. You may, however,
open an account by exchange by providing the appropriate
information on the Account Registration Form.
- --------------------------------------------------------------------------------
36
<PAGE> 39
PURCHASING BY
FUND EXPRESS
AUTOMATIC INVESTMENT
AND SPECIAL PURCHASE
The Fund Express Automatic Investment option lets you move
money from your bank account to your Vanguard account on the
schedule (monthly, bimonthly [every other month], quarterly
or yearly) you select. Additionally, the Fund Express Special
Purchase option which is only available for Portfolios of the
Vanguard Bond Index Fund lets you move money from your bank
account to your Vanguard account at your request. To
establish this option, please provide the appropriate
information on the Account Registration Form. We will send
you a confirmation of your Fund Express enrollment; please
wait three weeks before using the service.
- --------------------------------------------------------------------------------
CHOOSING A
DISTRIBUTION
OPTION You must select one of three distribution options:
1. AUTOMATIC REINVESTMENT OPTION -- Both dividends and
capital gains distributions will be reinvested in
additional Fund shares. This option will be selected for
you automatically unless you specify one of the other
options.
2. CASH DIVIDEND OPTION -- Your dividends will be paid in
cash and your capital gains will be reinvested in
additional Fund shares.
3. ALL CASH OPTION -- Both dividend and capital gains
distributions will be paid in cash.
You may change your option by calling our Client Services
Department (1-800-662-2739).
In addition, an option to invest your cash dividends and/or
capital gains distributions in another Vanguard Fund account
is available. Please call our Client Services Department
(1-800-662-2739) for information. You may also elect Vanguard
Dividend Express which allows you to transfer your cash
dividends and/or capital gains distributions automatically to
your bank account. Please see "Other Vanguard Services" for
more information.
- --------------------------------------------------------------------------------
TAX CAUTION
INVESTORS SHOULD ASK
ABOUT THE TIMING OF
CAPITAL GAINS AND
DIVIDEND DISTRIBUTIONS
BEFORE INVESTING Under Federal tax laws, the Fund is required to distribute
net capital gains and dividend income to Fund shareholders.
These distributions are made to all shareholders who own Fund
shares as of the distribution's record date, regardless of
how long the shares have been owned. Purchasing shares just
prior to the record date could have a significant impact on
your tax liability for the year. For example, if you purchase
shares immediately prior to the record date of a sizable
capital gain or income dividend distribution, you will be
assessed taxes on the amount of the capital gain and/or
dividend distribution later paid even though you owned the
Fund shares for just a short period of time. (Taxes are due
on the distributions even if the dividend or gain is
reinvested in additional Fund shares.) While the total value
of your investment will be the same after the
distribution -- the amount of the distribution will offset
the drop in the NAV of the shares -- you should be aware of
the tax implications the timing of your purchase may have.
Prospective investors should, therefore, inquire about
potential distributions before investing. Each Fund's annual
capital gains distributions normally occurs in December.
Income dividends are generally paid on the first day of each
month for the four Portfolios of Vanguard Bond Index Fund,
annually in December for the three Portfolios of Vanguard
International Equity Index Fund, and the Extended Market and
Small Capitalization Stock Portfolio of Vanguard Index Trust,
and quarterly in March, June, September and December for
Vanguard Balanced Index Fund, and the 500, Total Stock
Market, and the Value and Growth Portfolios of Vanguard Index
Trust. For additional information on distributions and taxes,
see the section titled "Dividends, Capital Gains, and Taxes."
- --------------------------------------------------------------------------------
IMPORTANT
INFORMATION
ESTABLISHING OPTIONAL
SERVICES The easiest way to establish optional Vanguard services on
your account is to select the options you desire when you
complete your Account Registration Form. IF YOU WISH TO ADD
OPTIONS LATER, YOU MAY NEED TO PROVIDE VANGUARD WITH
ADDITIONAL INFORMATION AND A SIGNATURE GUARANTEE. PLEASE CALL
OUR CLIENT SERVICES DEPARTMENT (1-800-662-2739) FOR FURTHER
ASSISTANCE.
SIGNATURE
GUARANTEES For our mutual protection, we may require a signature
guarantee on certain written transaction requests. A
signature guarantee verifies the authenticity of your
signature and may be obtained
37
<PAGE> 40
from banks, brokers and any other guarantor that Vanguard
deems acceptable. A SIGNATURE GUARANTEE CANNOT BE PROVIDED BY
A NOTARY PUBLIC.
CERTIFICATES Share certificates will be issued upon request for Portfolios
of Vanguard Bond Index Fund, Vanguard Index Trust, and the
European and Pacific Portfolios of Vanguard International
Equity Index Fund. If a certificate is lost, you may incur an
expense to replace it. Share certificates will not be
available for Vanguard Balanced Index Fund and the Emerging
Markets Portfolio of Vanguard International Equity Index
Fund.
BROKER-DEALER
PURCHASES If you purchase shares in Vanguard Funds through a registered
broker-dealer or investment adviser, the broker-dealer or
adviser may charge a service fee.
CANCELLING
TRADES The Fund will not cancel any trade (e.g., a purchase,
exchange or redemption) believed to be authentic, received in
writing or by telephone, once the trade request has been
received.
- --------------------------------------------------------------------------------
WHEN YOUR
ACCOUNT WILL
BE CREDITED The trade date is the date on which your account is credited.
For the Vanguard Bond Index Fund, the trade date is generally
the day on which the Fund receives your investment in the
form of Federal Funds (monies credited to the Fund's
Custodian Bank by a Federal Reserve Bank). Your trade date
varies according to your method of payment for your shares.
For purchases by check the Fund is ordinarily credited with
Federal Funds within one business day. Thus, if your purchase
by check is received by the close of the New York Stock
Exchange (generally 4:00 p.m. Eastern time), your trade date
is the business day following receipt of your check or wire.
If your purchase is received after the close of the Exchange,
your trade date is the second business day following receipt
of your check or wire. Vanguard will not accept third-party
checks to open an account. Please be sure your purchase check
is made payable to the Vanguard Group.
For purchases by Federal Funds wire or exchange, the Fund is
credited immediately with Federal Funds. Thus, if your
purchase by Federal Funds wire or exchange is received by the
close of the Exchange, your trade date is the day of receipt.
If your purchase is received after the close of the Exchange,
your trade date is the business day following receipt of your
wire or exchange.
For Vanguard Balanced Fund, Vanguard Index Trust and Vanguard
International Equity Index Fund, if your purchase is made by
check, Federal Funds wire or exchange, and is received by the
close of regular trading the New York Stock Exchange
(generally 4:00 p.m. Eastern time), your trade date is the
day of receipt. If your purchase is received after the close
of the Exchange, your trade date is the next business day.
Shares of the Funds are purchased at the net asset value
determined on your trade date. Shares of the Extended Market
and Small Capitalization Stock Portfolios are also subject to
a 1% portfolio transaction fee, shares of the Total Stock
Market Portfolio are subject to a 0.25% portfolio transaction
fee. Shares of Vanguard International Equity Index
Fund-Pacific Portfolio and European Portfolio are subject to
a 1% transaction fee while shares of the Emerging Markets
Portfolio are subject to a 2% transaction fee on purchases.
See "Fund Expenses" for additional information.
In order to prevent lengthy processing delays caused by the
clearing of foreign checks, Vanguard will only accept a
foreign check which has been drawn in U.S. dollars and has
been issued by a foreign bank with a U.S. correspondent bank.
The name of the U.S. correspondent bank must be printed on
the face of the foreign check.
Your shares are purchased at the next-determined net asset
value after your investment has been received in the form of
Federal Funds. You will begin to earn dividends on the
calendar day following the trade date. (For a Friday trade
date, you will begin earning dividends on Saturday.)
- --------------------------------------------------------------------------------
SELLING YOUR
SHARES You may withdraw any portion of the funds in your account by
redeeming shares at any time. You may initiate a request by
writing or by telephoning. Your redemption proceeds are
normally mailed, credited or wired -- depending upon the
method of withdrawal you have PREVIOUSLY chosen -- within two
business days after the receipt of the request in Good Order.
- --------------------------------------------------------------------------------
38
<PAGE> 41
SELLING BY WRITING
A CHECK Redemption by check is only available to shareholders of
Vanguard Bond Index Fund. You may withdraw funds from your
Vanguard Bond Index account by writing a check payable in the
amount of $250 or more. When a check is presented for payment
to the Fund's agent, CoreStates Bank, the Fund will redeem
sufficient shares in your account at the next-determined net
asset value to cover the amount of the check.
In order to establish the checkwriting option on your
account, all registered shareholders must sign a signature
card. After your completed signature card is received by the
Fund, an initial supply of checks will be mailed within 10
business days. There is no charge for checks or for their
clearance. CORPORATIONS, TRUSTS AND OTHER ORGANIZATIONS
SHOULD CALL OR WRITE OUR CLIENT SERVICES DEPARTMENT
(1-800-662-2739) BEFORE SUBMITTING SIGNATURE CARDS, AS
ADDITIONAL DOCUMENTS MAY BE REQUIRED TO ESTABLISH THE
CHECKWRITING SERVICE.
Before establishing the checkwriting option, you should be
aware that:
1. Writing a check (a redemption of shares) is a taxable
event.
2. The Fund does not allow an account to be closed through
the checkwriting option.
3. Vanguard cannot guarantee a stop payment on the
checkwriting option. If you wish to reverse a stop payment
order, you must do so in writing.
4. Shares held in certificate form cannot be redeemed using
the checkwriting option.
5. The Fund reserves the right to terminate or alter this
service at any time.
- --------------------------------------------------------------------------------
SELLING BY MAIL Requests should be mailed to VANGUARD FINANCIAL CENTER,
VANGUARD INDEX FUNDS, P.O. BOX 1120, VALLEY FORGE, PA 19482.
(For express or registered mail, send your request to
Vanguard Financial Center, Vanguard Index Funds, 455 Devon
Park Drive, Wayne, PA 19087.)
The redemption price of shares will be the Portfolio's net
asset value next determined after Vanguard has received all
required documents in Good Order.
- --------------------------------------------------------------------------------
DEFINITION OF
GOOD ORDER GOOD ORDER means that the request includes the following:
1. The account number and Portfolio name.
2. The amount of the transaction (specified in dollars or
shares).
3. The signatures of all owners EXACTLY as they are
registered on the account.
4. Any required signature guarantees.
5. Other supporting legal documentation that might be
required, in the case of estates, corporations, trusts,
and certain other accounts.
6. Any certificates you are holding for the account.
IF YOU HAVE QUESTIONS ABOUT THIS DEFINITION AS IT PERTAINS TO
YOUR REQUEST, PLEASE CALL OUR CLIENT SERVICES
(1-800-662-2739).
- --------------------------------------------------------------------------------
SELLING BY
TELEPHONE To sell shares by telephone, you or your pre-authorized
representative may call our Client Services Department at
1-800-662-2739. For telephone redemptions, you may have the
proceeds sent to you either by mail or by wire. In addition
to the details below, please see "Important Information About
Telephone Transactions."
BY MAIL: Telephone mail redemption is automatically
established on your account unless you indicate otherwise on
your Account Registration Form. You may redeem any amount by
calling Vanguard. The proceeds will be paid to the
registered shareholders and mailed to the address of record.
BY WIRE: Telephone wire redemption must be specifically
elected for your account. The best time to elect telephone
wire redemption is at the time you complete your Account
Registration Form. If you do not presently have telephone
wire redemption and wish to establish it, please contact
Client Services.
39
<PAGE> 42
With the wire redemption option, you may withdraw a minimum
of $1,000 and have the amount wired directly to your bank
account. Wire redemptions less than $5,000 are subject to a
$5 charge deducted by Vanguard. There is no Vanguard charge
for wire redemptions of $5,000 or more. However, your bank
may assess a separate fee to accept incoming wires.
A request to change the bank associated with your wire
redemption option must be received in writing, signed by each
registered shareholder, and accompanied by a voided check or
preprinted deposit slip. A signature guarantee is required if
your bank registration is not identical to your Vanguard Fund
account registration.
- --------------------------------------------------------------------------------
SELLING BY FUND
EXPRESS
AUTOMATIC WITHDRAWAL
& SPECIAL REDEMPTION
If you select the Fund Express Automatic Withdrawal option,
money will be automatically moved from your Vanguard Fund
account to your bank account according to the schedule you
have selected. The Special Redemption option (only available
to Vanguard Bond Index Fund Shareholders) lets you move money
from your Vanguard account to your bank account on your
request. You may elect Fund Express on the Account
Registration Form or call our Investor Information Department
(1-800-662-7447) for a Fund Express application.
- --------------------------------------------------------------------------------
SELLING BY
EXCHANGE You may sell shares of the Portfolio by making an exchange
into another Vanguard Fund account. Exchanges to and from
Vanguard Balanced Fund, Vanguard Index Trust and Vanguard
International Equity Index Fund may be made only by mail.
Send your exchange request to Vanguard Financial Center,
Vanguard (insert Fund name), P.O. Box 1120, Valley Forge, PA
19482. Please see "Exchanging Your Shares" for details.
- --------------------------------------------------------------------------------
IMPORTANT REDEMPTION
INFORMATION Shares purchased by check or Fund Express may be redeemed at
any time. However, your redemption proceeds will not be paid
until payment for the purchase is collected, which may take
up to ten calendar days.
- --------------------------------------------------------------------------------
DELIVERY OF
REDEMPTION
PROCEEDS Redemption requests received by telephone prior to the close
of the New York Stock Exchange (generally 4:00 p.m. Eastern
time), are processed on the day of receipt and the redemption
proceeds are normally sent on the following business day.
Redemption requests received by telephone after the close of
the Exchange are processed on the business day following
receipt and the proceeds are normally sent on the second
business day following receipt.
Redemption proceeds must be sent to you within seven days of
receipt of your request in Good Order.
If you experience difficulty in making a telephone redemption
during periods of drastic economic or market changes, your
redemption request may be made by regular or express mail. It
will be implemented at the net asset value next determined
after your request has been received by Vanguard in Good
Order. The Fund reserves the right to revise or terminate the
telephone redemption privilege at any time.
The Fund may suspend the redemption right or postpone payment
at times when the New York Stock Exchange is closed or under
any emergency circumstances as determined by the United
States Securities and Exchange Commission.
If the Board of Directors determines that it would be
detrimental to the best interests of the Fund's remaining
shareholders to make payment in cash, the Fund may pay
redemption proceeds in whole or in part by a distribution in
kind of readily marketable securities.
- --------------------------------------------------------------------------------
VANGUARD'S AVERAGE
COST STATEMENT If you make a redemption from a qualifying account, Vanguard
will send you an Average Cost Statement which provides you
with the tax basis of the shares you redeemed. Please see
"Other Vanguard Services" for additional information.
- --------------------------------------------------------------------------------
MINIMUM ACCOUNT
BALANCE REQUIREMENTDue to the relatively high cost of maintaining smaller
accounts, the Fund reserves the right to redeem shares in any
account that is below the minimum initial investment amount
of $3,000. In
40
<PAGE> 43
addition, if at any time the total investment does not have a
value of at least $1,000, you may be notified that the value
of your account is below the Fund's minimum account balance
requirement. You would then be allowed 60 days to make an
additional investment before the account is liquidated.
Proceeds would be promptly paid to the shareholder. This
minimum requirement does not apply to IRAs, other retirement
accounts, and Uniform Gifts/Transfers to Minors Act accounts.
- --------------------------------------------------------------------------------
EXCHANGING
YOUR SHARES
EXCHANGING BY
TELEPHONE
Call Client Services
(1-800-662-2739) Should your investment goals change, you may exchange your
shares for those of other available Vanguard Funds.
Vanguard Bond Index Fund is the only Vanguard Index Fund that
allows telephone exchange. When exchanging shares by
telephone, please have ready the Portfolio name, account
number, Social Security Number or Employer Identification
number listed on the account, and exact name and address in
which the account is registered. Only the registered
shareholder may complete such an exchange. Requests for
telephone exchanges received prior to the close of the New
York Stock Exchange (generally 4:00 p.m. Eastern time) are
processed at the close of business that same day. Requests
received after the close of the Exchange are processed the
next business day. TELEPHONE EXCHANGES ARE NOT ACCEPTED INTO
OR FROM VANGUARD BALANCED INDEX FUND, VANGUARD INDEX TRUST,
VANGUARD INTERNATIONAL EQUITY INDEX FUND, AND VANGUARD
QUANTITATIVE PORTFOLIOS. If you experience difficulty in
making a telephone exchange, your exchange request may be
made by regular or express mail, and it will be implemented
at the closing net asset value on the date received by
Vanguard provided the request is received in Good Order.
Neither the Funds nor Vanguard is responsible for the
authenticity of exchange instructions received by telephone.
Investors bear the full risk of any loss arising from
unauthorized telephone exchanges. To prohibit telephone
exchanges on your account, please notify the Fund in writing.
Otherwise, the telephone exchange privilege will be
automatically established for your account.
- --------------------------------------------------------------------------------
EXCHANGING BY MAIL Please be sure to include on your exchange request the name
and account number of your current Portfolio, the name of the
Fund you wish to exchange into, the amount you wish to
exchange, and the signatures of all registered account
holders. Send your request to VANGUARD FINANCIAL CENTER,
VANGUARD INDEX FUNDS, P.O. BOX 1120, VALLEY FORGE, PA 19482.
(For express or registered mail, send your request to
Vanguard Financial Center, Vanguard Index Funds, 455 Devon
Park Drive, Wayne, PA 19087.)
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IMPORTANT EXCHANGE
INFORMATION Before you make an exchange, you should consider the
following:
- Please read the Fund's prospectus before making an
exchange. For a copy and for answers to any questions you
may have, call our Investor Information Department
(1-800-662-7447).
- An exchange is treated as a redemption and a purchase.
Therefore, you could realize a taxable gain or loss on the
transaction.
- Exchanges are accepted only if the registrations and the
Taxpayer Identification numbers of the two accounts are
identical.
- New accounts are not currently accepted in Vanguard/Windsor
Fund.
- The redemption price of shares redeemed by exchange is the
net asset value next determined after Vanguard has received
all required documentation in Good Order.
- When opening a new account by exchange, you must meet the
minimum investment requirement of the new Fund.
Every effort will be made to maintain the exchange privilege.
However, the Fund reserves the right to revise or terminate
its provisions, limit the amount of or reject any exchange,
as deemed necessary, at any time.
41
<PAGE> 44
The exchange privilege is only available in states in which
the shares of the Funds are registered for sale. The Funds
shares are currently registered for sale in all 50 states and
each Fund intends to maintain such registration.
- --------------------------------------------------------------------------------
EXCHANGE
PRIVILEGE
LIMITATIONS The Fund's exchange privilege is not intended to afford
shareholders a way to speculate on short-term movements in
the market. Accordingly, in order to prevent excessive use of
the exchange privilege that may potentially disrupt the
management of the Fund and increase transaction costs, the
Fund has established a policy of limiting excessive exchange
activity.
Exchange activity generally will not be deemed excessive if
limited to TWO SUBSTANTIVE EXCHANGE REDEMPTIONS (AT LEAST 30
DAYS APART) from a Portfolio of the Fund during any twelve
month period. Notwithstanding these limitations, the Fund
reserves the right to reject any purchase request (including
exchange purchases from other Vanguard portfolios) that is
reasonably deemed to be disruptive to efficient portfolio
management.
- --------------------------------------------------------------------------------
IMPORTANT
INFORMATION
ABOUT TELEPHONE
TRANSACTIONS The ability to initiate redemptions (except wire redemptions)
and exchanges by telephone is automatically established on
your account unless you request in writing that telephone
transactions on your account not be permitted. The ability to
initiate wire redemptions by telephone will be established on
your account only if you specifically elect this option in
writing.
To protect your account from losses resulting from
unauthorized or fraudulent telephone instructions, Vanguard
adheres to the following security procedures:
1. SECURITY CHECK. To request a transaction by telephone,
the caller must know (i) the name of the Portfolio; (ii)
the 10-digit account number; (iii) the exact name and
address used in the registration; and (iv) the Social
Security or Employer Identification number listed on the
account.
2. PAYMENT POLICY. The proceeds of any telephone redemption
by mail will be made payable to the registered shareowner
and mailed to the address of record, only. In the case of
a telephone redemption by wire, the wire transfer will be
made only in accordance with the shareowner's prior
written instructions.
Neither the Fund nor Vanguard will be responsible for the
authenticity of transaction instructions received by
telephone, provided that reasonable security procedures have
been followed. Vanguard believes that the security procedures
described above are reasonable and that if such procedures
are followed, you will bear the risk of any losses resulting
from unauthorized or fraudulent telephone transactions on
your account. If Vanguard fails to follow reasonable security
procedures, it may be liable for any losses resulting from
unauthorized or fraudulent telephone transactions on your
account.
- --------------------------------------------------------------------------------
TRANSFERRING
REGISTRATION You may transfer the registration of any of your Fund shares
to another person by completing a transfer form and sending
it to: VANGUARD FINANCIAL CENTER, P.O. BOX 1110, VALLEY
FORGE, PA 19482, ATTENTION: TRANSFER DEPARTMENT. The request
must be in Good Order. To obtain a transfer form, please call
our Client Services Department (1-800-662-2739).
- --------------------------------------------------------------------------------
OTHER VANGUARD
SERVICES
STATEMENTS AND
REPORTS For more information about any of these services, please call
our Investor Information Department at 1-800-662-7447.
Vanguard will send you a confirmation statement each time you
initiate a transaction in your account. You will also receive
a comprehensive account statement at the end of each calendar
quarter. The fourth-quarter statement will be a year-end
statement, listing all transaction activity for the entire
calendar year.
Vanguard's Average Cost Statement provides you with the
average cost of shares redeemed from your account, using the
average cost single category method. This service is
available for most taxable accounts opened since January 1,
1986. In general, investors who redeemed shares from a
qualifying Vanguard account may expect to receive their
Average Cost Statement in February of the following year.
Please call our Client Services Department (1-800-662-2739)
for information.
42
<PAGE> 45
Financial reports on the Fund will be mailed to you
semi-annually, according to the Fund's fiscal year-end.
VANGUARD DIRECT
DEPOSIT SERVICE With Vanguard's Direct Deposit Service, most U.S. Government
checks (including Social Security and military pension
checks) and private payroll checks may be automatically
deposited into your Vanguard Fund account. Separate brochures
and forms are available for direct deposit of U.S. Government
and private payroll checks.
VANGUARD AUTOMATIC
EXCHANGE SERVICE Vanguard's Automatic Exchange Service allows you to move
money automatically among your Vanguard Fund accounts. For
instance, the service can be used to "dollar cost average"
from a money market portfolio into a stock or bond fund or to
contribute to an IRA or other retirement plan.
VANGUARD FUND
EXPRESS Vanguard's Fund Express allows you to transfer money between
your Fund account and your account at a bank, savings and
loan association, or a credit union that is a member of the
Automated Clearing House (ACH) system. You may elect this
service on the Account Registration Form or call our Investor
Information Department (1-800-662-7447) for a Fund Express
application.
The minimum amount that can be transferred by telephone is
$100. However, if you have established one of the automatic
options, the minimum amount is $50. The maximum amount that
can be transferred using any of the options is $100,000.
Special rules govern how your Fund Express purchases or
redemptions are credited to your account. In addition, some
services of Fund Express cannot be used with specific
Vanguard Funds. For more information, please refer to the
Vanguard Fund Express brochure.
VANGUARD DIVIDEND
EXPRESS Vanguard's Dividend Express allows you to transfer your
dividends and/or capital gains distributions automatically
from your Fund account, one business day after the Fund's
payable date, to your account at a bank, savings and loan
association, or a credit union that is a member of the
Automated Clearing House (ACH) network. You may elect this
service on the Account Registration Form or call our Investor
Information Department (1-800-662-7447) for a Vanguard
Dividend Express application.
VANGUARD
TELE-ACCOUNT Vanguard Tele-Account is a convenient, automated service that
provides share price, price change and yield quotations on
Vanguard Funds through any TouchToneTM telephone. This
service also lets you obtain information about your account
balance, your last transaction, and your most recent dividend
or capital gains payment. To contact Vanguard's Tele-Account
service, dial 1-800-ON-BOARD (1-800-662-6273). A brochure
offering detailed operating instructions is available from
our Investor Information Department (1-800-662-7447).
- --------------------------------------------------------------------------------
43
<PAGE> 46
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
[LOGO]
---------------------------
THE VANGUARD GROUP
OF INVESTMENT
COMPANIES
Vanguard Financial Center
P.O. Box 2600
Valley Forge, PA 19482
INVESTOR INFORMATION
DEPARTMENT:
1-800-662-7447 (SHIP)
CLIENT SERVICES
DEPARTMENT:
1-800-662-2739 (CREW)
TELE-ACCOUNT FOR
24-HOUR ACCESS:
1-800-662-6273 (ON BOARD)
TELECOMMUNICATION SERVICE
FOR THE HEARING-IMPAIRED:
1-800-662-2738
TRANSFER AGENT:
The Vanguard Group, Inc.
Vanguard Financial Center
Valley Forge, PA 19482
P0----
</TABLE>
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<PAGE> 47
PART B
VANGUARD BALANCED INDEX FUND, INC.
STATEMENT OF ADDITIONAL INFORMATION
DECEMBER 23, 1994
This Statement is not a prospectus but should be read in conjunction with
the Fund's current Prospectus (dated December 23, 1994). To obtain the
Prospectus please call:
VANGUARD INVESTOR INFORMATION CENTER
1-800-662-7447
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Investment Objective and Policies......................................................... 1
Investment Limitations.................................................................... 4
Yield and Total Return.................................................................... 6
Purchase of Shares........................................................................ 6
Redemption of Shares...................................................................... 6
Management of the Fund.................................................................... 6
Portfolio Transactions.................................................................... 8
Financial Statements...................................................................... 8
Comparative Indexes....................................................................... 8
Appendix -- Description of Bond Ratings................................................... 10
</TABLE>
INVESTMENT OBJECTIVE AND POLICIES
REPURCHASE AGREEMENTS Vanguard Balanced Index Fund, Inc. (the "Fund") may
invest in repurchase agreements with commercial banks, brokers or dealers 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 Federal Reserve member bank with
minimum assets of at least $2 billion or a registered securities 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 custodian bank until repurchased. In addition, the Fund's Board of
Directors 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 net 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, or for which there are no readily available market quotations.
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.
1
<PAGE> 48
LENDING OF SECURITIES The Fund may lend its securities to qualified
institutional investors who need to borrow securities in order to complete
certain transactions, such as covering 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 five 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 Fund's Board of
Directors.
FUTURES CONTRACTS, OPTIONS ON FUTURES CONTRACTS, WARRANTS, CONVERTIBLE
SECURITIES AND SWAP AGREEMENTS The Fund may enter into futures contracts,
warrants, options on futures contracts, convertible securities and swap
agreements for the purpose of simulating full investment in the underlying
Indexes and reducing transactions costs. 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 which 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.
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 which 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 initial margin deposit in
cash or 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 which are higher than the exchange
minimums. Futures contracts are customarily purchased and sold with deposits
that may range upward from less than 5% of the value of the contract being
traded. The Fund's initial margin requirement is ordinarily in the form of U.S.
Treasury securities. These securities are segregated in a separate custody
account at the Fund's custodian bank; they are not delivered to the futures
dealer.
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 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 initial margin deposits.
2
<PAGE> 49
Traders in futures contracts may be broadly classified as either "hedgers"
or "speculators." Hedgers use the futures markets primarily to offset
unfavorable changes in the value of securities otherwise held for investment
purposes or expected to be acquired by them. Speculators are less inclined to
own the securities underlying the futures contracts which they trade, and use
futures contracts with the expectation of realizing profits from fluctuations in
the prices of underlying securities. The Fund intends to use futures contracts
only for bona fide hedging purposes.
Regulations of the CFTC applicable to the Fund require that all of its
futures transactions constitute bona-fide hedging transactions. The Fund will
only sell futures contracts to protect securities it owns against price declines
or purchase contracts to protect against an increase in the price of securities
it intends to purchase. As evidence of this hedging interest, the Fund expects
that approximately 75% of its futures contract purchases will be "completed,"
that is, equivalent amounts of related securities will have been purchased or
are being purchased by the Fund upon sale of open futures contracts.
Although techniques other than the sale and purchase of futures contracts
could be used to control the Fund's exposure to market fluctuations, the use of
futures contracts may be a more effective means of hedging this exposure. While
the Fund will incur commission expenses in both opening and closing out futures
positions, these costs are lower than transaction costs incurred in the purchase
and sale of the underlying securities.
RESTRICTIONS ON THE USE OF FUTURES CONTRACTS The Fund will not enter into
futures contract transactions to the extent that, immediately thereafter, the
sum of its initial margin deposits on open contracts exceeds 5% of the market
value of the Fund's total assets.
RISK FACTORS IN FUTURES TRANSACTIONS Positions in futures contracts may be
closed out only on an Exchange which 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 also could have an
adverse impact on the ability to effectively hedge it.
The Fund will minimize the risk that it will be unable to close out a
futures contract by only entering into futures which 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 strategies of the Fund are engaged in only for hedging
purposes, the Adviser does not believe that the Fund is subject to the risks of
loss frequently associated with futures transactions. The Fund would presumably
have sustained comparable losses if, instead of the futures contract, it had
invested in the underlying financial instrument and sold it after the decline.
Utilization of futures transactions by the Fund does involve the risk of
imperfect or no correlation where the securities underlying futures contracts
have different maturities than the portfolio securities being hedged. It is 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.
3
<PAGE> 50
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 Except for transactions the
Fund has identified as hedging transactions, 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.
In order for the Fund to continue to qualify for Federal income tax
treatment as a regulated investment company, at least 90% of its gross income
for a taxable year must be derived from qualifying income; i.e., dividends,
interest, income derived from loans of securities, gains from the sale of
securities or of foreign currencies or other income derived with respect to the
Fund's business of investing in securities. In addition, gains realized on the
sale or other disposition of securities held for less than three months must be
limited to less than 30% of the Fund's annual gross income. It is anticipated
that any net gain realized from the closing out of futures contracts will be
considered gain from the sale of securities and therefore be qualifying income
for purposes of the 90% requirement. In order to avoid realizing excessive gains
on securities held less than three months, the Fund may be required to defer the
closing out of futures contracts beyond the time when it would otherwise be
advantageous to do so. Unrealized gains on futures contracts, which have been
open for less than three months as of the end of the Fund's fiscal year and
which are recognized for tax purposes, will not be considered gains on sales of
securities held less than three months for the purpose of the 30% test.
The Fund will distribute to shareholders annually any net capital gains
which have been recognized for federal income tax purposes (including unrealized
gains at the end of the Fund's fiscal year) on futures transactions. Such
distributions will be combined with distributions of capital gains realized on
the Fund's other investments and shareholders will be advised on the nature of
the transactions.
INVESTMENT LIMITATIONS
The following restrictions and fundamental policies cannot be changed
without approval of the holders of a majority of the outstanding shares of the
Fund (as defined in the Investment Company Act of 1940). The Fund may not:
1) invest in commodities or purchase real estate, although it may purchase
and sell securities of companies which deal in real estate or interests
therein, and the Fund may purchase and sell stock index and interest
rate futures contracts and options;
2) purchase securities on margin or sell securities short (the deposit or
payment by the Fund of initial or variation margin in order to engage
in an interest-rate futures contract is not considered the purchase of
a security on margin);
3) with respect to 75% of its total assets, purchase more than 10% of the
outstanding voting securities of any company;
4) with respect to 75% of the Fund's total assets, invest more than 5% of
the value of its total assets in the securities of any single issuer
except obligations of the U.S. Government and its instrumentalities;
4
<PAGE> 51
5) 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;
6) pledge, mortgage, or hypothecate any of its assets to an extent greater
than 5% of the value of its total assets;
7) issue senior securities, collateral arrangements with regard to initial
and variation margin on interest-rate futures contracts shall not be
considered issuance of a senior security;
8) engage in the business of underwriting securities issued by other
persons except to the extent that the Fund may be deemed to be an
underwriter under the Securities Act of 1933, as amended, in disposing
of investment securities;
9) purchase or acquire securities if more than 15% of its net assets would
be invested in securities that are illiquid (included in this
limitation is the Fund's investment in The Vanguard Group, Inc.);
10) invest for the purpose of controlling management of any company;
11) invest its assets in securities of other investment companies except by
purchase in the open market involving only customary broker's
commissions or as part of a merger, consolidation, reorganization or
purchase of assets approved by the Fund's shareholders or as provided
for by the Investment Company Act of 1940, and any regulations
thereunder, including any interpretation of, or exemptive relief
provided by, the Securities and Exchange Commission;
12) have dealing on behalf of the fund with Officers and Directors of the
Fund, except for the purchase or sale of securities on an agency or
commission basis;
13) make loans to any officers, directors or employees of the fund;
14) invest in assessable securities or securities involving unlimited
liability on the part of the holders thereof;
15) make loans except (i) by purchasing bonds, debentures or similar
obligations (including repurchase agreements, which are either publicly
distributed or customarily purchased by institutional investors) and
(ii) by lending its securities to banks, brokers, dealers and other
financial institutions so long as such loans are not inconsistent with
the Investment Company Act of 1940 or the Rules and Regulations or
interpretations of the Commission thereunder;
16) invest directly in oil, gas or other mineral exploration or development
programs.
The investment limitations set forth above are considered at the time that
the Fund purchases securities. 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. See
"The Vanguard Group." As non-fundamental policies, the Fund will not (i)
purchase or retain securities of an issuer if those officers and directors of
the Fund and/or its Investment Adviser owning more than 1/2 of 1% of such
securities together own more than 5% of such securities; or (ii) invest more
than 5% of total assets in securities of companies which have (with
predecessors) a record of less than three years' continuous operation.
YIELD AND TOTAL RETURN
Yields are calculated daily and premiums and discounts on asset-backed
securities are not amortized.
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<PAGE> 52
Total return is computed by finding the average compounded rates of return
over the one year and since inception periods that would equate an initial
amount invested at the beginning of the periods to the ending redeemable value
of the investment.
The yield of the Fund for the 30 days ended June 30, 1994 was 4.18%. The
total return of the Fund for the one year period ended June 30, 1994 and since
November 9, 1992 (Subscription period September 28, 1992 through November 8,
1992) was -0.30% and 5.33%.
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 for initial and subsequent investments for certain
fiduciary accounts or under circumstances where certain economies can be
achieved in sales of the Fund's shares. The Fund reserves the right to require
investors purchasing shares in the amount of $10 million or more to pay a
transaction fee to offset the transactions costs associated with purchases of
securities by the Fund as a result of such investor's purchases.
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.
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, in investment securities or in cash, as the Directors
may deem advisable; however, payment will be made wholly in cash unless the
Directors 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 Fund's Share Price" and a redeeming shareholder would
normally incur brokerage expenses if he converted these securities to cash.
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 by the Fund.
MANAGEMENT OF THE FUND
THE VANGUARD GROUP The Fund is a member of The Vanguard Group of
Investment Companies which consists of over 30 investment companies.
Through their jointly-owned subsidiary, The Vanguard Group, Inc.
("Vanguard"), the Fund and the other Funds in the Group obtain at cost virtually
all of their corporate management, administrative and distribution services.
Vanguard also provides investment advisory services on an at-cost basis to
certain Vanguard Funds.
Vanguard employs a supporting staff of management and administrative
personnel needed to provide the requisite services to the Funds and also
furnishes the Funds with necessary office space, furnishings and equipment. Each
Fund pays its share of Vanguard's net expenses which are allocated among the
Funds under methods approved by the Board of Directors (Trustees) of each Fund.
In addition, each Fund bears its own direct expenses such as legal, auditing and
custodian fees.
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<PAGE> 53
The Fund's officers are also officers and employees of Vanguard. No officer
or employee owns, or is permitted to own, any securities of any external adviser
for the Funds.
The Vanguard Group was established and operates under a Funds' Service
Agreement which was approved by the shareholders of each of the Funds. The
Fund's Service Agreement was amended on May 15, 1993 to provide for the
following arrangement: (1) each Vanguard Fund may invest a maximum of 0.40% of
its assets in Vanguard and (2) there is no restriction on the maximum cash
investment that the Vanguard Funds may make in Vanguard. The amounts which each
of the Funds have invested are adjusted from time to time in order to maintain
the proportionate relationship between each Fund's relative net assets and its
contribution to Vanguard's capital.
MANAGEMENT Corporate management and administrative services include: (1)
executive staff; (2) accounting and financial; (3) legal and regulatory; (4)
shareholder account maintenance; (5) monitoring and control of custodian
relationships; (6) shareholder reporting; and (7) review and evaluation of
advisory and other services provided to the Funds by third parties. During the
year ended December 31, 1993 and for the six months ended June 30, 1994 the Fund
paid approximately $343,000 and $177,000, respectively, in management and
administration expenses.
DISTRIBUTION Vanguard provides all distribution and marketing activities
for the Funds in the Group. Vanguard Marketing Corporation, a wholly-owned
subsidiary of The Vanguard Group, Inc., acts as Sales Agent for the shares of
the Funds in connection with any sales made directly to investors in the states
of Florida, Missouri, New York, Ohio, Texas and such other states as it may be
required. During the year ended December 31, 1993 and for the six months ended
June 30, 1994 the Fund paid approximately $55,000 and $50,000, respectively, in
distribution and marketing expenses.
The principal distribution expenses are for advertising, promotional
materials and marketing personnel. Distribution services may also include
organizing and offering to the public, from time to time, one or more new
investment companies which will become members of the Group. The directors and
officers of Vanguard determine the amount to be spent annually on distribution
activities, the manner and amount to be spent on each Fund, and whether to
organize new investment companies.
One-half of the distribution expenses of a marketing and promotional nature
is allocated among the Funds based upon relative net assets. The remaining
one-half of those expenses is allocated among the Funds based upon each Fund's
sales for the preceding 24 months relative to the total sales of the Funds as a
Group, provided, however, that no Fund's aggregate quarterly rate of
contribution for distribution expenses of a marketing and promotional nature
shall exceed 125% of average distribution expense rate for the Group, and that
no Fund shall incur annual distribution expenses in excess of 20/100 of 1% of
its average month-end net assets.
INVESTMENT ADVISORY SERVICES Vanguard provides investment advisory
services to Vanguard Municipal Bond Fund, Vanguard Bond Index Fund, Vanguard
Money Market Reserves, Vanguard Institutional Money Market Portfolio, several
Portfolios of Vanguard Variable Insurance Funds, several Portfolios of Vanguard
Fixed Income Securities Fund, Vanguard California Tax-Free Fund, Vanguard
Florida Insured Tax-Free Fund, Vanguard New York Insured Tax-Free Fund, Vanguard
New Jersey Tax-Free Fund, Vanguard Ohio Tax-Free Fund, Vanguard Pennsylvania
Tax-Free Fund, Vanguard International Equity Index Fund, Vanguard Admiral Funds
and Vanguard Institutional Portfolios. These services are provided on an at-cost
basis from a money management staff employed directly by Vanguard. The
compensation and other expenses of this staff are paid by the Funds utilizing
these services.
REMUNERATION OF DIRECTORS AND OFFICERS The Fund pays each Director, who is
not also an officer, an annual fee plus travel and other expenses incurred in
attending Board meetings. The Fund's officers and employees are paid by Vanguard
which, in turn, is reimbursed by the Fund and each other Fund in the Group, for
its proportionate share of officers' and employees' salaries and retirement
benefits.
Directors who are not officers are paid an annual fee upon retirement equal
to $1,000 for each year of service on the Board. Under its retirement plan,
Vanguard contributes annually an amount equal to 10% of each officer's annual
compensation plus 5.7% of that part of the officer's compensation during the
year, if any, that exceeds the Social Security Taxable Wage Base then in effect.
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<PAGE> 54
PORTFOLIO TRANSACTIONS
In placing portfolio transactions, Vanguard 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.
FINANCIAL STATEMENTS
The Fund's financial statements for the year ended December 31, 1993,
including the financial highlights, and for the period from September 28, 1992
(commencement of operations) to December 31, 1992, appearing in the Vanguard
Balanced Index Fund's 1993 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 unaudited financial statements for the six months ended June 30, 1994
appearing in the Fund's June 30, 1994 Semi-Annual Report to Shareholders are
also incorporated by reference in this Statement of Additional Information. The
Fund's 1993 Annual Report and 1994 Semi-Annual Report to Shareholders are
enclosed with this Statement of Additional Information.
PERFORMANCE MEASURES
Each of the investment company members of the Vanguard Group, including
Vanguard Balanced Index Fund, may from time to time, use one or more of the
following unmanaged indexes for comparative performance purposes.
STANDARD AND POOR'S 500 COMPOSITE STOCK PRICE INDEX -- is a well diversified
list of 500 companies representing the U.S. Stock Market.
WILSHIRE 5000 EQUITY INDEX -- consists of approximately 6,000 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 and Poor's 500 Index.
RUSSELL 3000 STOCK INDEX -- a diversified portfolio of over 3,000 common stocks
accounting for over 90% of the market value of publicly traded stocks in the
U.S.
RUSSELL 2000 STOCK INDEX -- a subset of approximately 2,000 of the smallest
stocks contained in the Russell 3000, a widely used benchmark for small
capitalization common stocks.
MORGAN STANLEY CAPITAL INTERNATIONAL EAFE INDEX -- is an arithmetic, market
value-weighted average of the performance of over 900 securities listed on the
stock exchanges of countries in Europe, Australia and the Far East.
GOLDMAN SACHS 100 CONVERTIBLE BOND INDEX -- currently includes 67 bonds and 33
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.
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SHEARSON 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.
SHEARSON 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 INDEX (20 YEAR) BOND -- 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 for 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 and 30% NASDAQ Industrial
Index.
COMPOSITE INDEX -- 35% Standard & Poor's 500 Index and 65% Salomon Brothers
High-Grade Bond Index.
COMPOSITE INDEX -- 65% Standard & Poor's 500 Index and 35% Salomon Brothers
High-Grade Bond Index.
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 $1.3 trillion.
LEHMAN BROTHERS MUTUAL FUND INTERMEDIATE (5-10) GOVERNMENT/CORPORATE INDEX -- is
a market weighted index that contains individually priced U.S. Treasury, agency,
and corporate securities rated BBB- or better with maturities between 5 and 10
years. The index has a market value of over $600 billion.
LEHMAN BROTHERS MUTUAL FUND LONG (10+) GOVERNMENT/CORPORATE INDEX -- is a market
weighted index that contains individually priced U.S. Treasury, agency, and
corporate securities rated BBB- or better with maturities greater than 10 years.
The index has a market value of over $900 billion.
LIPPER SMALL COMPANY GROWTH FUND AVERAGE -- the average performance of small
company growth funds as defined by Lipper Analytical Services, Inc. Lipper
defines a small company growth fund as a fund that by prospectus or portfolio
practice, limits its investments to companies on the basis of the size of the
company. From time to time, Vanguard may advertise using the average performance
and/or the average expense ratio of the small company growth funds. (This fund
category was first established in 1982. For years prior to 1982, the results of
the Lipper Small Company Growth category were estimated using the returns of the
Funds that constituted the Group at its inception.)
LIPPER BALANCED FUND AVERAGE -- An industry benchmark of average balanced funds
with similar investment objectives and policies, as measured by Lipper
Analytical Services, Inc.
LIPPER NON-GOVERNMENT MONEY MARKET FUND AVERAGE -- An industry benchmark of
average non-government money market funds with similar investment objectives and
policies, as measured by Lipper Analytical Services, Inc.
APPENDIX A -- DESCRIPTION OF BOND RATINGS
Excerpts from Moody's Investors Service, Inc. description of its four
highest preferred bond ratings:
Aaa -- judged to be the best quality by all standards. Together with the
Aaa group they comprise what are generally known as high grade bonds;
A -- possess many favorable investment attributes and are to be considered as
"upper medium grade obligations"; Baa -- considered as medium grade obligations;
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for
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<PAGE> 56
the present but certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. Such bonds lack
outstanding investment characteristics and in fact have speculative
characteristics as well.
Moody's also supplies numerical indicators 1, 2 and 3 to rating categories.
The modifier 1 indicates that the security is in the higher end of its rating
category; the modifier 2 indicates a mid-range ranking; and 3 indicates a
ranking toward the lower end of the category.
Excerpts from Standard & Poor's Corporation description of its four highest
stock ratings:
AAA -- highest grade obligations. Capacity to pay interest and repay
principal is extremely strong; AA -- also qualify as high grade obligations, a
very strong capacity to pay interest and repay principal and differs from
AAA -- issues only in small degree; A -- regarded as upper medium grade. They
have a strong capacity to pay interest and repay principal although it is
somewhat susceptible to the adverse effects of changes in circumstances and
economic conditions than debt in higher rated categories; BBB -- regarded as
having an adequate capacity to pay interest and repay principal. Whereas it
normally exhibits adequate protection parameters, adverse economic conditions or
changing circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for debt in this category than in higher rated
categories. This group is the lowest which qualifies for commercial bank
investment.
Standard & Poor's applies indicators "+", no character and "-" to its
rating categories. The indicators show relative standing within the major rating
categories.
APPENDIX B -- HISTORICAL PERFORMANCE ONE-YEAR TOTAL RETURNS*
<TABLE>
<CAPTION>
LEHMAN BROTHERS BALANCED
WILSHIRE AGGREGATE PORTFOLIO
5000 BOND INDEX (60/40)**
-------- --------------- ---------
<S> <C> <C> <C>
1982................................................. 18.71% 32.62% 24.44%
1983................................................. 23.47 8.36 17.31
1984................................................. 3.05 15.15 7.98
1985................................................. 32.56 22.10 28.46
1986................................................. 16.09 15.26 16.04
1987................................................. 2.27 2.76 3.91
1988................................................. 17.94 7.89 13.87
1989................................................. 29.17 14.53 23.29
1990................................................. -6.18 8.96 -0.11
1991................................................. 34.20 16.00 26.90
1992................................................. 8.97 7.40 8.41
1993................................................. 11.28 9.75 10.72
Cumulative........................................... 452.91 340.60 421.49
Annualized........................................... 15.32 13.15 14.75
</TABLE>
* These total return figures are based on historical earnings and are not
intended to indicate future performance.
** A hypothetical portfolio for which 60% of its assets track the Wilshire 5000
and 40% of its assets track the Lehman Brothers Bond Index. Assumes monthly
rebalancing to 60/40 mix.
10
