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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.
POST-EFFECTIVE AMENDMENT NO. 14
AND
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 16
VANGUARD BALANCED INDEX FUND
(EXACT NAME OF REGISTRANT AS SPECIFIED IN DECLARATION OF TRUST)
P.O. BOX 2600, VALLEY FORGE, PA 19482
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)
REGISTRANT'S TELEPHONE NUMBER (610) 669-1000
R. GREGORY BARTON, ESQUIRE
P.O. BOX 876
VALLEY FORGE, PA 19482
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
IT IS PROPOSED THAT THIS FILING BECOME EFFECTIVE:
ON JULY 26, 2000, PURSUANT TO PARAGRAPH (A) OF RULE 485.
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VANGUARD (R)
BALANCED INDEX
FUND
Prospectus
September ., 2000
This prospectus contains
financial data for the
Fund for the six-
months ended
June 30, 2000.
[A Member of
The Vanguard Group(R)]
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VANGUARD BALANCED INDEX FUND
Prospectus
September ., 2000
A Balanced Mutual Fund
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CONTENTS
1 FUND PROFILE 16 FINANCIAL HIGHLIGHTS
4 ADDITIONAL INFORMATION 18 INVESTING WITH VANGUARD
4 AN INTRODUCTION TO INDEX FUNDS 18 Buying Shares
5 A WORD ABOUT RISK 19 Converting Shares
5 WHO SHOULD INVEST 20 Redeeming Shares
6 PRIMARY INVESTMENT STRATEGIES 22 Other Rules You Should Know
12 THE FUND AND VANGUARD 24 Fund and Account Updates
13 INVESTMENT ADVISER 25 Contacting Vanguard
14 DIVIDENDS, CAPITAL GAINS, AND TAXES GLOSSARY (inside back cover)
16 SHARE PRICE
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WHY READING THIS PROSPECTUS IS IMPORTANT
This prospectus explains the objective, risks, and strategies of Vanguard
Balanced Index Fund. To highlight terms and concepts important to mutual fund
investors, we have provided "Plain Talk(R)" explanations along the way.
Reading the prospectus will help you to decide whether the Fund is the right
investment for you. We suggest that you keep it for future reference.
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NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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1
FUND PROFILE
INVESTMENT OBJECTIVE
The Fund seeks to provide current income and long-term growth of income and
capital.
INVESTMENT STRATEGIES
The Fund typically invests 60% of its assets in common stocks and 40% in bonds.
The stock portion of the Fund seeks to match the total return of the Wilshire
5000 Total Market Index, a widely recognized measure for the U.S. stock market.
The Fund's bond portion seeks to replicate the returns of the Lehman Brothers
Aggregate Bond Index, a measure of regularly traded, U.S. investment-grade
bonds.
PRIMARY RISKS
THE FUND'S TOTAL RETURN, LIKE STOCK AND BOND PRICES GENERALLY, WILL FLUCTUATE
WITHIN A WIDE RANGE, SO AN INVESTOR COULD LOSE MONEY OVER SHORT OR EVEN LONG
PERIODS. The Fund is also subject to:
o Stock market risk, which is the chance that stock prices in general will
decline over short or even long periods. The stock market tends to be
cyclical, with periods when stock prices generally rise and periods when
stock prices generally decline.
o Interest rate risk, which is the chance that bond prices overall will
decline over short or even long periods due to rising interest rates.
Interest rate risk should be moderate for the Fund.
o Income risk, which is the chance that falling interest rates will cause the
Fund's income to decline. Income risk should be moderate for the Fund.
o Credit risk, which is the chance that a bond issuer will fail to pay
interest and principal in a timely manner, reducing the Fund's return.
Credit risk should be low for the Fund.
o Prepayment risk, which is the chance that during periods of falling
interest rates, a mortgage-backed bond issuer will repay a higher-yielding
bond before its maturity date because the underlying mortgages have been
paid off ahead of schedule. If a bond is called, the Fund would lose the
opportunity for additional price appreciation, and would be forced to
reinvest the unanticipated proceeds at lower interest rates. As a result,
the Fund would experience a decline in income.
o Index sampling risk, which is the chance that the securities selected for
the Fund will not provide investment performance matching that of the
index. Index sampling risk for the Fund should be low.
PERFORMANCE/RISK INFORMATION
The bar chart and table below provide an indication of the risk of investing in
the Fund. The bar chart shows the Fund's performance in each calendar year since
inception. The table shows how the Fund's average annual total returns for one
and five calendar years and since inception compare to those of a broad-based
securities market index. Both the bar chart and the table present information
for the Fund's Investor Shares; the Fund's Admiral Shares were not available
during the time periods shown. Keep in mind that the Fund's past performance
does not necessarily indicate how it will perform in the future.
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2
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ANNUAL TOTAL RETURNS-INVESTOR SHARES
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1993 10.00%
1994 -1.56%
1995 28.64%
1996 13.95%
1997 22.24%
1998 17.85%
1999 13.61%
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Total return figures do not reflect the annual account maintenance fee of $10.
The Fund's year-to-date return as of the calendar quarter ended June 30, 2000,
was .%.
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During the period shown in the bar chart, the highest return for a calendar
quarter was 12.67% (quarter ended December 31, 1998) and the lowest return for a
quarter was -5.57% (quarter ended September 30, 1998).
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AVERAGE ANNUAL TOTAL RETURNS FOR YEARS ENDED DECEMBER 31, 1999
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SINCE
1 YEAR 5 YEARS INCEPTION*
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Vanguard Balanced Index
Fund-Investor Shares** 13.61% 19.13% 14.89%
Balanced Composite Index+ 13.54 19.30 15.19
Wilshire 5000 Index 23.77 27.11 20.92
Lehman Brothers Aggregate Bond -0.82 7.73 6.57
Index
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*November 9, 1992.
**Total return figures do not reflect the annual account maintenance fee
of $10. +Made up of two unmanaged benchmarks, weighted 60% Wilshire 5000
Index and 40% Lehman Brothers Aggregate Bond Index.
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FEES AND EXPENSES
The following table describes the fees and expenses you may pay if you buy and
hold Investor Shares or Admiral Shares of the Fund. The expenses shown under
Annual Fund Operating Expenses for Investor Shares are based upon expenses
incurred for Investor Shares in the fiscal year ended December 31, 1999; for
Admiral Shares the expenses are estimates for the current fiscal year.
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3
INVESTOR ADMIRAL
SHARES SHARES
---------------- ----------
SHAREHOLDER FEES (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None None
Transaction Fee on Purchases: None None
Sales Charge (Load) Imposed on Reinvested None None
Dividends:
Redemption Fee: None None
Exchange Fee: None None
Account Maintenance Fee (for accounts under $2.50/ None
$10,000): quarter*
ANNUAL FUND OPERATING EXPENSES (expenses deducted from the Fund's assets)
Management Expenses: 0.17% 0.12%
12b-1 Distribution Fee: None None
Other Expenses: 0.03% 0.03%
TOTAL ANNUAL FUND OPERATING EXPENSES: 0.20% 0.15%
*The account maintenance fee will be deducted from your quarterly
distribution of the Fund's dividends. If your distribution is less than the
fee, fractional shares will be automatically redeemed to make up the
difference.
The Fund reserves the right to deduct a transaction fee of 0.08% from an
investor's cumulative purchases over $100 million. Where it applies, the fee is
retained by the Fund to offset transaction costs of investing large new
contributions into the market. The fee is not paid to Vanguard and is not a
sales charge.
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PLAIN TALK ABOUT
FUND EXPENSES
All mutual funds have operating expenses. These expenses, which are deducted
from a fund's gross income or assets, are expressed as a percentage of the net
assets of the fund. Vanguard Balanced Index Fund's Investor Shares had an -
expense ratio of 0.20% in fiscal year 1999, or $2 per $1,000 of average net
assets. It is estimated that the Fund's Admiral Shares will have an annualized
expense ratio of 0.15% for the current fiscal year, or $1.50 per $1,000 of
average net assets. The average balanced mutual fund had expenses in 1999 of
1.33%, or $13.30 per $1,000 of average net assets (derived from data provided by
Lipper Inc., which reports on the mutual fund industry). Management expenses,
which are one part of operating expenses, include investment advisory fees as
well as other costs of managing a fund--such as account maintenance, reporting,
accounting, legal, and other administrative expenses.
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The following example is intended to help you compare the cost of investing in
the Fund's Investor Shares or Admiral Shares with the cost of investing in other
mutual funds. It illustrates the hypothetical expenses that you would incur over
various periods if you invest $10,000 in the Fund. This example assumes that the
Fund provides a return of 5% a year, and that operating expenses remain the same
for Investor Shares and match our estimates for Admiral Shares. The results
apply whether or not you redeem your investment at the end of each period.
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4
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1 YEAR 3 YEARS 5 YEARS 10 YEARS
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Investor Shares $20 $64 $113 $255
Admiral Shares $. $. $. $.
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THIS EXAMPLE SHOULD NOT BE CONSIDERED TO REPRESENT ACTUAL EXPENSES OR
PERFORMANCE FROM THE PAST OR FOR THE FUTURE. ACTUAL FUTURE EXPENSES MAY BE
HIGHER OR LOWER THAN THOSE SHOWN.
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ADDITIONAL INFORMATION
DIVIDENDS AND CAPITAL GAINS CONVERSION FEATURES
Dividends are distributed quarterly
in March, June, September, and Investor Shares--Optional conversion to
December; capital gains, if any, are Admiral Shares for investors registered
distributed annually in December with vanguard.com if account balance is
at least $150,000 after three years or
$50,000 after ten years
Admiral Shares--Automatic conversion to
INVESTMENT ADVISER Investor Shares if no longer eligible
The Vanguard Group, Valley Forge, for Admiral Shares
Pa.,
since inception
NEWSPAPER ABBREVIATION
INCEPTION DATE .
Investor Shares-November 9, 1992
Admiral Shares-September ., 2000 VANGUARD FUND NUMBER
(Expected) .
NET ASSETS (INVESTOR SHARES) AS OF CUSIP NUMBER
JUNE 30, 2000 .
$. billion
SUITABLE FOR IRAS TICKER SYMBOL
Yes .
MINIMUM INITIAL INVESTMENT
Investor Shares--$3,000; $1,000 for
IRAs and custodial accounts for
minors
Admiral Shares--$250,000
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PLAIN TALK ABOUT
THE COSTS OF INVESTING
Costs are an important consideration in choosing a mutual fund. That's because
you, as a shareholder, pay the costs of operating a fund, plus any transaction
costs associated with the fund's buying and selling of securities. These costs
can erode a substantial portion of the gross income or capital appreciation a
fund may achieve. Even seemingly small differences in expenses can, over time,
have a dramatic effect on a fund's performance.
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AN INTRODUCTION TO INDEX FUNDS
WHAT IS INDEXING?
An index is an unmanaged group of securities whose overall performance is used
as a standard to measure the investment performance of a particular market. An
index (or "passively managed") fund tries to match, as closely as possible, the
performance of an established target index. The fund does this by holding all,
or a representative sample, of the securities that comprise the index.
The target index may be a group of stocks or bonds, or a combination of stocks
and bonds. Balanced index funds hold a mix of stocks and bonds.
<PAGE>
5
Index funds do not have active managers who buy and sell securities based on
research and analysis. Rather, index funds are passively managed by the adviser
who seeks to match a market benchmark.
WHY INVEST IN INDEX FUNDS?
Index funds appeal to many investors for a number of reasons:
o Variety of investments. Vanguard index funds generally invest in a wide
variety of companies and industries.
o Relative performance consistency. Because they seek to track market
benchmarks, index funds by definition should not perform dramatically
better or worse than their benchmarks.
o Low cost. Index funds are inexpensive to run as compared with actively
managed funds. They have lower research costs and keep trading activity,
and thus trading costs, to a minimum.
KEEP IN MIND THAT AN INDEX FUND HAS OPERATING EXPENSES AND TRANSACTION COSTS; A
MARKET INDEX DOES NOT. THEREFORE, AN INDEX FUND--WHILE EXPECTED TO TRACK ITS
TARGET INDEX AS CLOSELY AS POSSIBLE--WILL TYPICALLY BE UNABLE TO MATCH THE
PERFORMANCE OF THE INDEX EXACTLY.
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A WORD ABOUT RISK
This prospectus describes risks you would face as an investor in Vanguard
Balanced Index Fund. It is important to keep in mind one of the main axioms of
investing: The higher the risk of losing money, the higher the potential reward.
The reverse, also, is generally true: The lower the risk, the lower the
potential reward. As you consider an investment in the Fund, you should also
take into account your personal tolerance for the daily fluctuations of the
stock and bond markets.
Look for this [FLAG] symbol throughout the prospectus. It is used to mark
detailed information about each type of risk that you would confront as a
shareholder of the Fund.
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WHO SHOULD INVEST
The Fund may be a suitable investment for you if:
o You are seeking moderate current income and long-term growth of income and
capital.
o You are seeking a diversified combination of U.S. stocks and bonds.
o You are willing to invest for the long term--at least five years.
<PAGE>
6
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PLAIN TALK ABOUT
COSTS AND MARKET-TIMING
Some investors try to profit from market-timing--switching money into
investments when they expect prices to rise, and taking money out when they
expect the market to fall. As money is shifted in and out, a fund incurs
expenses for buying and selling securities. These costs are borne by all fund
shareholders, including the long-term investors who do not generate the costs.
Therefore, the Fund discourages short-term trading by, among other things,
limiting the number of exchanges it permits.
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THE VANGUARD FUNDS DO NOT PERMIT MARKET-TIMING. DO NOT INVEST IN THIS FUND IF
YOU ARE A MARKET-TIMER.
The Fund has adopted the following policies, among others, to discourage short-
term trading:
o The Fund reserves the right to reject any purchase request--including
exchanges from other Vanguard funds--that it regards as disruptive to the
efficient management of the Fund. A purchase request could be rejected
because of the timing of the investment or because of a history of
excessive trading by the investor.
o Telephone and online exchanges generally are not accepted for non-IRA
accounts.
o There is a limit on the number of times you can exchange into and out of
the Fund (see "Redeeming Shares" in the INVESTING WITH VANGUARD section).
o The Fund reserves the right to stop offering shares at any time.
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PLAIN TALK ABOUT
BALANCED FUNDS
Balanced funds are generally "middle of the road" investments that seek to
provide some combination of growth, income, and conservation of capital by
investing in a mix of stocks, bonds, and/or money market instruments. Because
the prices of stocks and bonds often move in different directions, balanced
funds are able to use rewards from one type of investment to help offset the
risks from another.
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PRIMARY INVESTMENT STRATEGIES
This section explains the strategies that the investment adviser uses in pursuit
of the Fund's objective--current income and long-term growth of income and
capital. It also explains how the adviser implements these strategies. In
addition, this section discusses several important risks--stock market risk,
interest rate risk, income risk, credit risk, and prepayment risk--faced by
investors in the Fund. The Fund's Board of Trustees, which oversees the
management of the Fund, may change the Fund's investment objective or strategies
in the interest of shareholders, without a shareholder vote.
MARKET EXPOSURE
STOCKS
About 60% of the Fund's assets are invested in common stocks, in an attempt to
replicate with that portion of the assets the performance of the Wilshire 5000
Index.
<PAGE>
7
[FLAG] THE FUND IS SUBJECT TO STOCK MARKET RISK, WHICH IS THE CHANCE THAT STOCK
PRICES OVERALL WILL DECLINE OVER SHORT OR EVEN LONG PERIODS. STOCK MARKETS TEND
TO MOVE IN CYCLES, WITH PERIODS OF RISING PRICES AND PERIODS OF FALLING PRICES.
To illustrate the volatility of stock prices, the following table shows the
best, worst, and average total returns for the U.S. stock market over various
periods as measured by the Standard & Poor's 500 Index, a widely used barometer
of market activity. (Total returns consist of dividend income plus change in
market price.) Note that the returns shown do not include the costs of buying
and selling stocks or other expenses that a real-world investment portfolio
would incur. Note, also, that the gap between best and worst tends to narrow
over the long term.
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U.S. STOCK MARKET RETURNS (1926-1999)
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1 YEAR 5 YEARS 10 YEARS 20 YEARS
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Best 54.2% 28.6% 19.9% 17.9%
Worst -43.1 -12.4 -0.9 3.1
Average 13.2 11.0 11.1 11.1
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The table covers all of the 1-, 5-, 10-, and 20-year periods from 1926 through
1999. You can see, for example, that while the average return on common stocks
for all of the 5-year periods was 11.0%, returns for individual 5-year periods
ranged from a -12.4% average (from 1928 through 1932) to 28.6% (from 1995
through 1999). These average returns reflect past performance on common stocks;
you should not regard them as an indication of future returns from either the
stock market as a whole or this Fund in particular, which invests approximately
40% of its assets in bonds.
While the Fund's holdings will typically include the 500 largest stocks in the
Wilshire 5000 Index, they will not include all of the securities in the Index.
Instead, the Fund will invest in a representative sample of stocks.
Keep in mind, too, that while the Wilshire 5000 Index is dominated by large-cap
stocks (those contained in the S&P 500 Index), small- and mid-cap issues are
also represented. The Fund's stock holdings are adjusted on a regular basis to
reflect the Wilshire 5000 Index. As of December 31, 1999, about 22.16% of the
market value of the Wilshire 5000 Index was comprised of securities that were
not in the S&P 500 Index. Stocks of smaller companies have historically been
more volatile than--and at times have performed quite differently from--the
stocks of larger companies.
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PLAIN TALK ABOUT
LARGE-CAP, MID-CAP, AND SMALL-CAP STOCKS
Stocks of publicly traded companies--and mutual funds that hold these
stocks--can be classified by the companies' market value, or capitalization.
Market capitalization changes over time, and there is no "official" definition
of the boundaries of large-, mid-, and small-cap stocks. Vanguard generally
defines large-capitalization (large-cap) funds as those holding stocks of
companies whose outstanding shares have a market value exceeding $12 billion;
mid-cap funds as those holding stocks of companies with a market value between
$1 billion and $12 billion; and small-cap funds as those typically holding
stocks of companies with a market value of less than $1 billion. Vanguard
periodically reassesses these classifications.
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<PAGE>
8
BONDS
About 40% of the Fund's assets are invested in bonds in an attempt to replicate
with that portion of the assets the performance of the Lehman Brothers Aggregate
Bond Index.
[FLAG] THE FUND IS SUBJECT TO INTEREST RATE RISK, WHICH IS THE CHANCE THAT BOND
PRICES OVERALL WILL DECLINE OVER SHORT OR EVEN LONG PERIODS DUE TO RISING
INTEREST RATES. INTEREST RATE RISK SHOULD BE MODERATE FOR SHORTER-TERM BOND
FUNDS AND HIGH FOR LONGER-TERM BOND FUNDS. BECAUSE THE FUND INVESTS IN A
PORTFOLIO OF BONDS WITH AN INTERMEDIATE AVERAGE MATURITY (5-10 YEARS), INTEREST
RATE RISK IS MODERATE.
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PLAIN TALK ABOUT
BONDS AND INTEREST RATES
As a rule, when interest rates rise, bond prices fall. The opposite is also
true: Bond prices go up when interest rates fall. Why do bond prices and
interest rates move in opposite directions? Let's assume that you hold a bond
offering a 5% yield. A year later, interest rates are on the rise and bonds are
offered with a 6% yield. With higher-yielding bonds available, you would have
trouble selling your 5% bond for the price you paid--causing you to lower your
asking price. On the other hand, if interest rates were falling and 4% bonds
were being offered, you should be able to sell your 5% bond for more than you
paid.
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Although bonds are often thought to be less risky than stocks, there have been
periods when bond prices have fallen significantly due to rising interest rates.
For instance, prices of long-term bonds fell by almost 48% between December 1976
and September 1981.
To illustrate the volatility of bond prices, the following table shows the
effect of both a 1% and a 2% change (both up and down) in interest rates on
three bonds of different maturities, each with a face value of $1,000.
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HOW INTEREST RATE CHANGES AFFECT THE
VALUE OF A $1,000 BOND*
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AFTER A 1% AFTER A 1% AFTER A 2% AFTER A 2%
TYPE OF BOND (MATURITY) INCREASE DECREASE INCREASE DECREASE
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Short-Term (2.5 years) $978 $1,023 $956 $1,046
Intermediate-Term (10 years) 932 1,074 870 1,156
Long-Term (20 years) 901 1,116 816 1,251
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*Assuming a 7% yield.
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These figures are for illustration only and should not be regarded as an
indication of future returns from the bond market as a whole or the Fund in
particular.
Changes in interest rates will affect bond income as well as bond prices.
[FLAG] THE FUND IS SUBJECT TO INCOME RISK, WHICH IS THE CHANCE THAT A FUND'S
DIVIDENDS (INCOME) WILL DECLINE DUE TO FALLING INTEREST RATES. INCOME RISK IS
GENERALLY THE GREATEST FOR SHORT-TERM BOND FUNDS, AND THE LEAST FOR LONG-TERM
BOND FUNDS.
<PAGE>
9
[FLAG] BECAUSE IT INVESTS IN MORTGAGE-BACKED BONDS, THE FUND IS SUBJECT TO
PREPAYMENT RISK, WHICH IS THE CHANCE THAT DURING PERIODS OF FALLING INTEREST
RATES, A MORTGAGE-BACKED BOND ISSUER WILL "CALL"--OR REPAY--A HIGHER-YIELDING
BOND BEFORE ITS MATURITY DATE. IF A BOND IS CALLED, THE FUND WOULD LOSE THE
OPPORTUNITY FOR ADDITIONAL PRICE APPRECIATION, AND WOULD BE FORCED TO REINVEST
THE UNANTICIPATED PROCEEDS AT A LOWER INTEREST RATE. AS A RESULT, THE FUND WOULD
EXPERIENCE A DECLINE IN INCOME.
Since the Fund invests only a portion of its assets in mortgage-backed bonds,
the risk to the Fund is limited.
[FLAG] THE FUND IS SUBJECT TO CREDIT RISK, WHICH IS THE CHANCE THAT A BOND
ISSUER WILL FAIL TO PAY INTEREST AND PRINCIPAL IN A TIMELY MANNER.
The credit quality of the Fund is expected to be very high, and thus credit
risk should be low. The weighted average credit quality of the Fund's holdings,
as rated by Moody's Investors Service, as of June 30, 2000, was ..
To a limited extent, the Fund is also exposed to event risk, which is the
chance that corporate fixed-income securities held by the Fund may suffer a
substantial decline in credit quality and market value due to a corporate
restructuring or other corporate event.
Finally, because stock and bond prices often move in different directions, the
Fund's bond holdings help to dampen--but not eliminate--some of the stock market
volatility experienced by the Fund. Likewise, changes in interest rates may not
have as dramatic an effect on the Fund as they would on a fund made up entirely
of bonds.
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PLAIN TALK ABOUT
BOND MATURITIES
A bond is issued with a specific maturity date--the date when the bond issuer,
or seller, must pay back the bond's initial value (known as its "face value").
Bond maturities generally range from less than one year (short-term) to 30
years (long-term). The longer a bond's maturity, the more risk you, as a bond
investor, face as interest rates rise--but also the more interest you could
receive. Long-term bonds are more suitable for investors willing to take
greater risks in hopes of higher yields; short-term bond investors should be
willing to accept lower yields in return for less fluctuation in the value of
their investment.
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SECURITY SELECTION
INDEXING METHODS
In seeking to track a particular index, a fund may use one of two indexing
methods to select the stocks or bonds in which it invests.
Some index funds hold each stock or bond found in their target indexes in about
the same proportions as represented in the indexes themselves. For example, if
5% of the S&P 500 Index were made up of the stock of a specific company, a fund
tracking that index would invest about 5% of its assets in that company.
Other index funds may use a different selection process. Because it would be
impractical to buy and sell all of the securities represented by an index (the
Wilshire 5000 Index, for example, included more than 7,000 stocks as of December
31, 1999), many funds tracking
<PAGE>
10
these larger indexes use a "sampling" technique. Using a sophisticated computer
program, these funds select securities that will recreate their target indexes
in terms of industry, size, and other characteristics. For instance, if 10% of
the Wilshire 5000 Index were made up of utility stocks, the Balanced Index Fund
would allocate about 10% of its stock investment to the utility stocks of the
index with similar characteristics.
[FLAG] THE FUND IS SUBJECT TO INDEX SAMPLING RISK, WHICH IS THE CHANCE THAT THE
SECURITIES SELECTED WILL NOT PROVIDE INVESTMENT PERFORMANCE MATCHING THAT OF THE
TARGET INDEXES. INDEX SAMPLING RISK SHOULD BE LOW.
STOCKS
The Fund's common stock portfolio is designed to have investment characteristics
that parallel those of the Wilshire 5000 Index. The Fund is expected to
replicate approximately 1,000 of the largest securities in the Wilshire 5000
Index as measured by market capitalization, plus a representative sample of the
remainder, which are selected primarily on the basis of market capitalization,
industry weightings, and other fundamental characteristics. Typically, the Fund
holds a total of between 3,000 and 3,500 stocks.
BONDS
The Fund's bond portfolio is designed to have investment characteristics that
parallel those of the Lehman Brothers Aggregate Bond Index, a broad
market-weighted index that encompasses five major classes of investment-grade
fixed-income securities in the United States: U.S. Treasury and agency
securities, corporate bonds, mortgage-backed securities, international
dollar-denominated bonds, and asset-backed securities with maturities greater
than one year. The Fund will invest in a representative sample of fixed-income
securities in the index, which, taken together, are expected to perform
similarly to the index. These securities are described further as follows:
o U.S. government securities include U.S. Treasury and agency bonds, which
represent loans by an investor to the U.S. Treasury Department or a wide
variety of governmental agencies and instrumentalities. Timely payment of
principal and interest on these bonds is guaranteed by the full faith and
credit of the U.S. government; some agency bonds have the same guarantee.
o Corporate bonds are IOUs issued by businesses that want to borrow money for
some purpose--often to develop a new product or service, to expand into a
new market, or to buy another company. As with other types of bonds, the
issuer promises to repay the principal on a specific date and to make
interest payments in the meantime. The amount of interest offered depends
both on market conditions and on the financial health of the corporation
issuing the bonds; a company whose credit rating is not strong will have to
offer a relatively high interest rate to obtain buyers for its bonds.
o Mortgage-backed securities represent interests in underlying pools of
mortgages. Unlike ordinary bonds, which generally pay a fixed rate of
interest at regular intervals and then repay principal upon maturity,
mortgage-backed bonds pay both interest and principal as part of their
regular payments. Because the mortgages underlying the bonds can be prepaid
at any time by homeowners or corporate borrowers, mortgage-backed bonds are
subject to prepayment risk, as discussed earlier in this prospectus. These
types of bonds are issued by a number of government agencies, including the
Government National Mortgage Association (GNMA), often referred to as
"Ginnie Mae," the Federal Home Loan Mortgage Corporation (FHLMC), the
Federal National Mortgage Association
<PAGE>
11
(FNMA), often referred to as "Fannie Mae," and the Federal Housing
Authority (FHA). GNMA bonds are guaranteed by the full faith and credit of
the U.S. government as to the timely payment of principal and interest;
bonds issued by other government agencies are not. (Note: The Balanced
Index Fund may also invest in conventional mortgage-backed securities,
which are packaged by private corporations and are not guaranteed by the
U.S. government.)
o International dollar-denominated bonds are bonds denominated in U.S.
dollars issued by foreign governments and companies. Because the bond's
value is designated in dollars rather than in the currency of the issuer's
country, the investor is not exposed to currency risk; rather, the issuer
assumes the risk, usually to attract U.S. investors.
o Asset-backed securities are bonds backed by an underlying pool of assets
such as automobile loans, credit card loans, and home equity loans. These
securities are structured with varying amounts of credit risk, depending
primarily on the quality of the underlying assets. They are generally
issued by private corporations and are not guaranteed by the U.S.
government. Asset-backed bonds are subject to prepayment risk as discussed
earlier in this prospectus.
In "sampling" its target index, the Fund has the flexibility to overweight
particular types of bonds relative to their representation in the index. This
normally involves substituting corporate bonds for government bonds of the same
maturity. The corporate substitution strategy increases the Fund's income, but
also marginally increases exposure to credit risk, which is explained on page 9.
The Fund limits corporate substitutions to bonds with less than approximately 4
years' remaining maturity, and the Fund will limit corporate substitutions to
approximately 15% of its net assets.
The Fund is generally managed without regard to tax ramifications.
TURNOVER RATE
Although the Fund generally seeks to invest for the long term, it retains the
right to sell securities regardless of how long the securities have been held.
The Fund's average turnover rate for the past five years has been about 25%. (A
turnover rate of 100% would occur, for example, if the Fund sold and replaced
securities valued at 100% of its total net assets within a one-year period.)
--------------------------------------------------------------------------------
PLAIN TALK ABOUT
TURNOVER RATE
Before investing in a mutual fund, you should review its turnover rate. This
gives an indication of how transaction costs could affect the fund's future
returns. In general, the greater the volume of buying and selling by the fund,
the greater the impact that brokerage commissions and other transaction costs
will have on its return. Also, funds with high turnover rates may be more likely
to generate capital gains that must be distributed to shareholders as income
subject to taxes. As of June 30, 2000, the average turnover rate for all
domestic hybrid funds (a category that includes balanced funds) was
approximately .%, according to Morningstar, Inc.
--------------------------------------------------------------------------------
ACCOUNT MAINTENANCE FEE
Vanguard assesses an account maintenance fee on index fund shareholders whose
account balances are below $10,000 (for any reason, including a decline in the
value of the Fund's shares) on the date a dividend is distributed. This fee is
intended to allocate the costs of maintaining accounts more equitably among
shareholders. The account
<PAGE>
12
maintenance fee is $2.50 per quarter, deducted from the quarterly dividend,
which usually is distributed during the last two weeks of each calendar quarter.
If the fee is deducted from your dividend distribution, you will still be taxed
on the full amount of your dividend (unless you hold your shares through a
nontaxable account). If you are due a dividend that is less than the fee,
fractional shares will be automatically redeemed to make up the difference. This
fee cannot be prepaid.
OTHER INVESTMENT POLICIES AND RISKS
Besides investing in U.S. common stocks and bonds, the Fund may make certain
other kinds of investments to achieve its objective. The Fund may invest in
fixed-income securities not in the target index (non-public, investment grade
securities--generally referred to as 144A securities--as well as smaller public
issues or medium term notes not included in the index due to their size). The
vast majority of these securities will have characteristics and risks similar to
those in the target index. The Fund may also purchase money market instruments
and certain derivatives in order to manage cash flow into and out of the Fund,
reduce transaction costs, or add value when these instruments are favorably
priced.
The Fund may invest, to a limited extent, in foreign securities.
The Fund may also invest, to a limited extent, in stock and bond futures
and options contracts, which are traditional types of derivatives. Losses (or
gains) involving futures can sometimes be substantial--in part because a
relatively small price movement in a futures contract may result in an immediate
and substantial loss (or gain) for a fund. This Fund will not use futures for
speculative purposes or as leveraged investments that magnify the gains or
losses of an investment. The Fund's obligation to purchase securities under
futures contracts will not exceed 20% of its total assets.
The reasons for which the Fund will invest in futures and options are:
o To keep cash on hand to meet shareholder redemptions or other needs while
simulating full investment in stocks and bonds.
o To reduce the Fund's transaction costs or add value when these instruments
are favorably priced.
--------------------------------------------------------------------------------
PLAIN TALK ABOUT
DERIVATIVES
A derivative is a financial contract whose value is based on (or "derived"
from) a traditional security (such as a stock or a bond), an asset (such as a
commodity like gold), or a market index (such as the S&P 500 Index). Futures
and options are derivatives that have been trading on regulated exchanges for
more than two decades. These "traditional" derivatives are standardized
contracts that can easily be bought and sold, and whose market values are
determined and published daily. It is these characteristics that differentiate
futures and options from the relatively new types of derivatives. If used for
speculation or as leveraged investments, derivatives can carry considerable
risks.
--------------------------------------------------------------------------------
THE FUND AND VANGUARD
The Fund is a member of The Vanguard Group, a family of more than 35 investment
companies with more than . funds holding assets worth more than $. billion. All
of the
<PAGE>
13
Vanguard funds share in the expenses associated with business operations, such
as personnel, office space, equipment, and advertising.
Vanguard also provides marketing services to the funds. Although shareholders
do not pay sales commissions or 12b-1 distribution fees, each fund pays its
allocated share of The Vanguard Group's marketing costs.
--------------------------------------------------------------------------------
PLAIN TALK ABOUT
VANGUARD'S UNIQUE CORPORATE STRUCTURE
The Vanguard Group is truly a MUTUAL mutual fund company. It is owned jointly
by the funds it oversees and thus indirectly by the shareholders in those
funds. Most other mutual funds are operated by for-profit management companies
that may be owned by one person, by a group of individuals, or by investors who
own the management company's stock. By contrast, Vanguard provides its services
on an "at-cost" basis, and the funds' expense ratios reflect only these costs.
No separate management company reaps profits or absorbs losses from operating
the funds.
--------------------------------------------------------------------------------
INVESTMENT ADVISER
The Vanguard Group (Vanguard), P.O. Box 2600, Valley Forge, PA 19482, founded in
1975, serves as the Fund's adviser through its Core Management and Fixed Income
Groups. As of the fiscal year ended June 30, 2000, Vanguard served as adviser
for about $. billion in assets. Vanguard manages the Fund on an at-cost basis,
subject to the control of the Trustees and officers of the Fund. For the fiscal
year ended June 30, 2000, the Fund's investment advisory expenses represented an
effective annual rate of approximately .%.
The adviser is authorized to choose brokers-dealers to handle the purchase
and sale of the Fund's securities, and to seek out the best available price and
most favorable execution for all transactions. Also, the Fund may direct the
adviser to use a particular broker for certain transactions in exchange for
commission rebates or research services provided to the Fund.
In the interest of obtaining better execution of a transaction, the adviser
may at times choose brokers who charge higher commissions. If more than one
broker can obtain the best available price and most favorable execution, then
the adviser is authorized to choose a broker who, in addition to executing the
transaction, will provide research services to the adviser or the Fund.
<PAGE>
14
--------------------------------------------------------------------------------
PLAIN TALK ABOUT
THE FUND'S ADVISER
The individuals primarily responsible for overseeing the Fund's investments
are:
GEORGE U. SAUTER, Managing Director of Vanguard and head of Vanguard's Core
Management Group; has worked in investment management since 1985; primary
responsibility for Vanguard's stock indexing investment policy and strategy
since joining the company in 1987; has served as the portfolio manager for
the stock portion of the Fund since inception; A.B., Dartmouth College;
M.B.A., University of Chicago.
IAN A. MACKINNON, Managing Director of Vanguard and head of Vanguard's Fixed
Income Group; has worked in investment management since 1974; primary
responsibility for Vanguard's internal fixed-income policy and strategy since
joining the company in 1981; has been responsible for overseeing the
portfolio management of the bond portion of the Fund since inception; B.A.,
Lafayette College; M.B.A., Pennsylvania State University.
FELIX B. LIM, has worked in investment management since completing his
education in 1996; joined Vanguard in January 1999; worked as a credit
analyst until January 2000; B.A. and M.S., University of Pennsylvania
(Wharton School).
--------------------------------------------------------------------------------
DIVIDENDS, CAPITAL GAINS, AND TAXES
FUND DISTRIBUTIONS
The Fund distributes to shareholders virtually all of its net income (interest
and dividends, less expenses), as well as any capital gains realized from the
sale of its holdings. Income dividends generally are distributed in March, June,
September, and December; capital gains distributions generally occur in
December. In addition, the Fund may occasionally be required to make
supplemental dividend or capital gains distributions at some other time during
the year. You can receive distributions of income dividends or capital gains in
cash, or you can have them automatically reinvested in more shares of the Fund.
BASIC TAX POINTS
Vanguard will send you a statement each year showing the tax status of all your
distributions. In addition, taxable investors should be aware of the following
basic tax points:
o Distributions are taxable to you for federal income tax purposes whether or
not you reinvest these amounts in additional Fund shares.
o Distributions declared in December--if paid to you by the end of
January--are taxable for federal income tax purposes as if received in
December.
o Any dividends and short-term capital gains that you receive are taxable to
you as ordinary income for federal income tax purposes.
o Any distributions of net long-term capital gains are taxable to you as
long-term capital gains for federal income tax purposes, no matter how long
you've owned shares in the Fund.
o Capital gains distributions may vary considerably from year to year as a
result of the Fund's normal investment activities and cash flows.
<PAGE>
15
o A sale or exchange of Fund shares is a taxable event. This means that you
may have a capital gain to report as income, or a capital loss to report as
a deduction, when you complete your federal income tax return.
o Dividend and capital gains distributions that you receive, as well as your
gains or losses from any sale or exchange of Fund shares, may be subject to
state and local income taxes.
GENERAL INFORMATION
BACKUP WITHHOLDING. By law, Vanguard must withhold 31% of any taxable
distributions or redemptions from your account if you do not: n provide us with
your correct taxpayer identification number; n certify that the taxpayer
identification number is correct; and n confirm that you are not subject to
backup withholding. Similarly, Vanguard must withhold from your account if the
IRS instructs us to do so.
FOREIGN INVESTORS. The Vanguard funds generally do not offer their shares for
sale outside of the United States. Foreign investors should be aware that U.S.
withholding and estate taxes may apply to any investments in Vanguard funds.
INVALID ADDRESSES. If a dividend or capital gains distribution check mailed to
your address of record is returned as undeliverable, Vanguard will automatically
reinvest all future distributions until you provide us with a valid mailing
address.
TAX CONSEQUENCES. This prospectus provides general tax information only. If you
are investing through a tax-deferred retirement account, such as an IRA, special
tax rules apply. Please consult your tax adviser for detailed information about
a fund's tax consequences for you.
--------------------------------------------------------------------------------
PLAIN TALK ABOUT
DISTRIBUTIONS
As a shareholder, you are entitled to your share of the fund's income from
interest and dividends, and gains from the sale of investments. You receive
such earnings as either an income dividend or a capital gains distribution.
Income dividends come from both the dividends that the fund earns from its
holdings and the interest it receives from its money market and bond
investments. Capital gains are realized whenever the fund sells securities for
higher prices than it paid for them. These capital gains are either short-term
or long-term, depending on whether the fund held the securities for one year or
less, or more than one year.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
PLAIN TALK ABOUT
"BUYING A DIVIDEND"
Unless you are investing through a tax-deferred retirement account (such as an
IRA), it is not to your advantage to buy shares of a fund shortly before it
makes a distribution, because doing so can cost you money in taxes. This is
known as "buying a dividend." For example: on December 15, you invest $5,000,
buying 250 shares for $20 each. If the fund pays a distribution of $1 per share
on December 16, its share price would drop to $19 (not counting market change).
You still have only $5,000 (250 shares x $19 = $4,750 in share value, plus 250
shares x $1 = $250 in distributions), but you owe tax on the $250 distribution
you received--even if you reinvest it in more shares. To avoid "buying a
dividend," check a fund's distribution schedule before you invest.
--------------------------------------------------------------------------------
<PAGE>
16
SHARE PRICE
The Fund's share price, called its net asset value, or NAV, is calculated each
business day after the close of regular trading on the New York Stock Exchange
(the NAV is not calculated on holidays or other days when the Exchange is
closed). The Fund computes a separate net asset value for each of its share
classes. This is done by dividing the net assets attributed to each share class
by the number of Fund shares outstanding for each share class.
NET ASSETS
NET ASSET VALUE = -------------------------------
NUMBER OF SHARES OUTSTANDING
Knowing the daily net asset value is useful to you as a shareholder because it
indicates the current value of your investment. The Fund's NAV, multiplied by
the number of shares you own, gives you the dollar amount you would have
received had you sold all of your shares back to the Fund that day.
A NOTE ON PRICING: The Fund's investments will be priced at their market value
when market quotations are readily available. When these quotations are not
readily available, investments will be priced at their fair value, calculated
according to procedures adopted by the Fund's Board of Trustees.
The Fund's share price can be found daily in the mutual fund listings of most
major newspapers under the heading "Vanguard Index Funds." Different newspapers
use different abbreviations of the Fund's name, but the most common is BALANCED
for the Fund's Investor Shares and . for the Fund's Admiral Shares.
FINANCIAL HIGHLIGHTS
The following financial highlights table pertains to the Fund's Investor Shares;
the Fund's Admiral Shares were not available during the periods shown. The table
is intended to help you understand the Fund's financial performance for the past
five years, and certain information reflects financial results for a single Fund
share. The total returns in the table represent the rate that an investor would
have earned or lost each year on an investment in the Fund (assuming
reinvestment of all dividend and capital gains distributions). This information
has been derived from the financial statements audited by PricewaterhouseCoopers
LLP, independent accountants, whose report--along with the Fund's financial
statements--is included in the Fund's most recent annual report to shareholders.
You may have the annual report sent to you without charge by contacting
Vanguard.
<PAGE>
17
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------
VANGUARD BALANCED INDEX FUND--INVESTOR SHARES
SIX MONTHS YEAR ENDED DECEMBER 31,
ENDED----------------------------------------------------------------------
JUNE 30, 2000 1999 1998 1997 1996 1995
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $. $18.48 $16.29 $13.92 $12.77 $10.34
--------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income . .58 .54 .520 .50 .45
Net Realized and Unrealized Gain . 1.88 2.33 2.525 1.26 2.48
(Loss) on Investments
-----------------------------------------------------------------------------------
Total from Investment Operations . 2.46 2.87 3.045 1.76 2.93
-----------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income . (.58) (.54) (.530) (.49) (.45)
Distributions from Realized Capital . (.14) (.14) (.145) (.12) (.05)
Gains
-----------------------------------------------------------------------------------
Total Distributions . (.72) (.68) (.675) (.61) (.50)
--------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $. $20.22 $18.48 $16.29 $13.92 $12.77
==========================================================================================================================
TOTAL RETURN* .% 13.61% 17.85% 22.24% 13.95% 28.64%
==========================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $. $3,128 $2,004 $1,260 $826 $590
Ratio of Total Expenses to Average
Net Assets .% 0.20% 0.21% 0.20% 0.20% 0.20%
Ratio of Net Investment Income to
Average Net Assets .% 3.18% 3.29% 3.56% 3.69% 3.85%
Turnover Rate .% 29% 25% 18% 37%** 16%
=========================================================================================================================
</TABLE>
*Total return figures do not reflect the annual account maintenance fee of $10.
**Turnover rate excluding in-kind redemptions was 30%.
--------------------------------------------------------------------------------
PLAIN TALK ABOUT
HOW TO READ THE FINANCIAL HIGHLIGHTS TABLE
The Fund began June 30, 2000 with a net asset value (price) of $18.48 per share.
During the period, the Fund earned $. per share from investment income (interest
and dividends) and $. per share from investments that had appreciated in value
or that were sold for higher prices than the Fund paid for them.
Shareholders received $. per share in the form of dividend and capital gains
distributions. A portion of each period's distributions may come from the prior
period's income or capital gains.
The earnings ($. per share) minus the distributions ($. per share) resulted in a
share price of $. at the end of the period. This was a increase of $. per share
(from $. at the beginning of the period to $. at the end of the period). For a
shareholder who reinvested the distributions in the purchase of more shares, the
total return from the Fund was .% for the period.
As of June 30, 2000, the Fund had $. billion in net assets. For the period its
expense ratio was .% ($. per $1,000 of net assets); and its net investment
income amounted to .% of its average net assets. It sold and replaced securities
valued at .% of its net assets.
--------------------------------------------------------------------------------
"Standard & Poor's(R)," "S&P(R)," "S&P 500(R)," "Standard & Poor's 500," and
"500" are trademarks of The McGraw-Hill Companies, Inc.
<PAGE>
18
--------------------------------------------------------------------------------
INVESTING WITH VANGUARD
This section of the prospectus explains the basics of doing business with
Vanguard. A special booklet, The Vanguard Service Directory, provides details
of our many shareholder services for individual investors. A separate booklet,
The Compass, does the same for institutional investors. You can request either
booklet by calling or writing Vanguard, using the Contacting Vanguard
instructions found at the end of this section.
BUYING SHARES
CONVERTING SHARES
REDEEMING SHARES
OTHER RULES YOU SHOULD KNOW
FUND AND ACCOUNT UPDATES
CONTACTING VANGUARD
--------------------------------------------------------------------------------
BUYING SHARES
ACCOUNT MINIMUMS FOR TO OPEN AND MAINTAIN AN ACCOUNT:$3,000 for regular
INVESTOR SHARES accounts; $1,000 for IRAs and custodial accounts for
minors.
TO ADD TO AN EXISTING ACCOUNT:$100 by mail or
exchange; $1,000 by wire.
ACCOUNT MINIMUMS FOR TO OPEN AND MAINTAIN AN ACCOUNT:$250,000 for new
ADMIRAL SHARES investors; $150,000 or $50,000 for existing investors
who are eligible to convert Investor Shares into
Admiral Shares (see Converting Shares).
Admiral Shares are not available to participants in
employee benefit plans administered by Vanguard or
403(b)(7) custodial accounts.
TO ADD TO AN EXISTING ACCOUNT:$. by mail or exchange;
$. by wire.
HOW TO BUY SHARES BY CHECK: Mail your check and a completed account
registration to Vanguard. When adding to an existing
account, send your check with an Invest-By-Mail form
detached from your last account statement. For
addresses, see Contacting Vanguard.
BY EXCHANGE PURCHASE: You can purchase shares with
the proceeds of a redemption from another Vanguard
fund. All open Vanguard funds permit exchange
purchases requested in writing. MOST VANGUARD FUNDS
- OTHER THAN THE INDEX-ORI ENTED FUNDS - ALSO ACCEPT
EXCHANGE PURCHASES REQUESTED ONLINE OR BY
TELEPHONE. See Other Rules You Should Knowfor
specifics.
BY WIRE: Call Vanguard to purchase shares by wire.
For wire instructions, see Contacting Vanguard.
YOUR PURCHASE CHECK When investing by check, make the check payable to:
The Vanguard Group--02.
<PAGE>
19
YOUR PURCHASE PRICE You buy shares at a fund's next-determined net asset
value (NAV) after Vanguard accepts your purchase
request. As long as your request is accepted
before the close of trading on the New York Stock
Exchange (generally 4 p.m. Eastern time), you
will buy your shares at that day's NAV. This is
known as your TRADE DATE.
PURCHASE RULES YOU THIRD PARTY CHECKS. To protect the funds from check
SHOULD KNOW fraud, Vanguard will not accept checks made payable
to third parties.
U.S. CHECKS ONLY. All purchase checks must be
written in U.S. dollars and drawn on a U.S. bank.
LARGE PURCHASES. Vanguard reserves the right to
reject any purchase request that may disrupt a fund's
operation or performance. Please call us before
attempting to invest a large dollar amount.
NO CANCELLATIONS. Place your transaction requests
carefully. Vanguard will NOT cancel any transaction
once it has been initiated and a confirmation number
has been assigned (if applicable).
FUTURE PURCHASES. All Vanguard funds reserve the
right to stop selling shares at any time.
CONVERTING SHARES
IMMEDIATE CONVERSIONS All shares purchased before the Fund began issuing
INTO ADMIRAL SHARES Admiral Shares are considered Investor Shares. You
may convert Investor Shares into Admiral Shares at
any time if your account balance in the Fund is
at least $250,000. Registered users of
vanguard.com may request a conversion to
Admiral Shares on-line. Or, you may contact
Vanguard by telephone or mail to request this
transaction.
LOYALTY CONVERSIONS THREE YEAR PRIVILEGE. After three years in the Fund,
INTO ADMIRAL SHARES you may convert Investor Shares into Admiral
Shares if your account balance is at least
$150,000 and you are registered with
vanguard.com.
TEN YEAR PRIVILEGE. After ten years in the Fund, you
may convert Investor Shares into Admiral Shares if
your account balance is at least $50,000, you are
registered with vanguard.com, and you meet
Vanguard's requirements for low-cost accounts.
Registered users of vanguard.com may request a
loyalty conversion on-line. Or, you may contact
Vanguard by telephone mail to request this
transaction.
MANDATORY CONVERSIONS If an investor no longer meets the requirements
INTO ADMIRAL SHARES for Admiral Shares, the Fund may convert the
investor's Admiral Shares into Investor Shares. A
decline in theinvestor's account balance due to
market movement may result in such a conversion. Th
Fund will notify the investor in writing before any
mandatory conversion.
<PAGE>
20
REDEEMING SHARES
HOW TO REDEEM SHARES Be sure to check Other Rules You Should Know before
initiating your request.
ONLINE: Request a redemption through our website at
Vanguard.com.
BY TELEPHONE: Contact Vanguard by telephone to
request a redemption. For telephone numbers, see
Contacting Vanguard.
BY MAIL: Send your written redemption instructions to
Vanguard. For addresses, see Contacting Vanguard.
YOUR REDEMPTION PRICE You redeem shares at a Fund's next-determined
net asset value (NAV) after Vanguard accepts your
redemption request, including any special
documentation required under the cir cumstances . As
long as your request is accepted before the close
of trading on the New York Stock Exchange (generally
4 p.m. Eastern time), your shares are redeemed at
that day's NAV. This is known as your TRADE DATE.
TYPES OF REDEMPTION CHECK REDEMPTIONS: Unless instructed otherwise,
Vanguard will mail you a check, normally within two
business days of your redemption.
EXCHANGE REDEMPTIONS: You may instruct Vanguard to
apply the proceeds of your redemption to purchase
shares of another Vanguard fund. All open Vanguard
funds accept exchange redemptions requested in
writing. Most Vanguard funds--other than the index-
oriented funds--also accept exchange redemptions
requested online or by telephone. See Other Rules You
Should Know for specifics.
<PAGE>
21
WIRE REDEMPTIONS: When redeeming from a money market
fund, bond fund, or the Preferred Stock Fund,
you may instruct Vanguard to wire your redemption
proceeds to a previously designated bank account.
Wire redemptions are not available for Vanguard's
other funds, except by exchanging into a bond or
money market fund first. The wire redemption option
is not automatic ; you must establish it by
completing a special form or the appropriate section
of your account registration. Also wire
redemptions must be requested in writing or by
telephone, not online. A $5 fee applies to wire
redemptions under $5,000.
Money Market Funds: For telephone requests accepted
at Vanguard by 10:30 a.m., Eastern time, the
redemption proceeds will arrive at your bank by the
close of business that same day. For other requests
accepted before 4 p.m., the redemption proceeds
will arrive at your bank by the close of business on
the following business day.
Bond Funds: For requests accepted at Vanguard by 4
p.m. Eastern time,the redemption proceeds will
arrive at your bank by the close of business on the
following business day.
REDEMPTION RULES YOU SPECIAL ACCOUNTS. Special documentation may be
SHOULD KNOW required to redeem from certain types of accounts,
such as trust, corporate, non-profit, or retirement
accounts. Please call us before attempting to redeem
from these types of accounts.
POTENTIALLY DISRUPTIVE REDEMPTIONS. Vanguard reserves
the right to pay all or part of your
redemption in-kind--that is, in the form of
securities--if we believe that a cash redemption
would disrupt the fund's operation or performance.
Under these circumstances, Vanguard also reserves
the right to delay payment of your redemption
proceeds for up to seven days. By calling us before
you attempt to redeem a large dollar amount, you are
more likely to avoid in-kind or delayed payment of
your redemption.
RECENTLY PURCHASED SHARES. While you can redeem
shares at any time, proceeds will not be made
available to you until the Fund collects payment for
your purchase. This may take up to ten calendar
days for shares purchased by check or Vanguard Fund
Express.
PAYMENT TO A DIFFERENT PERSON OR ADDRESS. We can make
your redemption check payable to a different
person or send it to a different address. However,
this requires the written consent of all registered
account owners, which must be provided under
signature guarantees. You can obtain a signature
guarantee from most commercial and savings banks,
credit unions, trust companies, or member irms of a
U.S. stock exchange.
<PAGE>
22
NO CANCELLATIONS. Place your transaction requests
carefully. Vanguard will NOT cancel any transaction
once it has been initiated and a confirmation
number has been assigned (if applicable).
EMERGENCY CIRCUMSTANCES. Vanguard funds can postpone
payment of redemption proceeds for up to seven
calendar days at any time. In addition, Vanguard
funds can suspend redemptions and/or postpone payment
of redemption proceeds at times when the New York
Stock Exchange is closed or during emergency
circumstances, as determined by the U.S. Securities
and Exchange Commission.
OTHER RULES YOU SHOULD KNOW
TELEPHONE TRANSACTIONS AUTOMATIC. In setting up your account, we'll
automatically enable you to do business with us by
regular telephone, unless you instruct us otherwise
in writing.
TELE-ACCOUNT. To conduct account transactions
through Vanguard's automated telephone service,
you must first obtain a personal identification
number (PIN). Call Tele- Account to obtain a PIN,
and allow 7 days before using this service.
PROOF OF A CALLER'S AUTHORITY. We reserve the right
to refuse a telephone request if the caller is unable
to provide the following information exactly as
registered on the account
- Ten-digit account number.
- Complete owner name and address.
- Primary Social Security or employer identification
number.
- Personal Identification Number (PIN), if
applicable.
SUBJECT TO REVISION. We reserve the right to revise
or terminate Vanguard's telephone transaction service
at any time, without notice.
SOME VANGUARD FUNDS DO NOT PERMIT TELEPHONE
EXCHANGES. To discourage market-timing, Vanguard's
stock index funds, Growth and Income Fund, and
Balanced Index Fund generally do not permit telephone
exchanges (in or out),except for IRAs and certain
other retirement accounts.
VANGUARD.COM REGISTRATION. You can use your personal computer to
review your account holdings, to sell or exchange
shares of most Vanguard funds, and to perform other
transactions. To establish this service, you can
register online.
SOME VANGUARD FUNDS DO NOT PERMIT ONLINE EXCHANGES.
To discourage market-timing, Vanguard's stock index
funds,Growth and Income Fund, and Balanced
Index Fund do not permit online exchanges (in or out)
, except for IRAs and certain other retirement
accounts.
<PAGE>
23
WRITTEN INSTRUCTIONS "GOOD ORDER" REQUIRED. We reserve the right to reject
any written transaction instructions that are not in
"good order." This means that your instructions must
include:
- The fund name and account number.
- The amount of the transaction (in dollars or
shares).
- Signatures of all owners exactly as registered on
the account.
- Signature guarantees, if required for the
type of transaction.*
*For instance, signature guarantees must be
provided by all registered account shareholders
when redemption proceeds are to be sent to a
different person or address.
RESPONSIBILITY FOR Vanguard will not be responsible for any account
FRAUD losses due to fraud, so long as we reasonably believe
that the person transacting on an account is
authorized to do so. Please take precautions to
protect yourself from fraud. Keep your account
information private and immediately review any
account state ments that we send to you.
Contact Vanguard immediately about any transactions
you believe to be unauthorized.
UNCASHED CHECKS Please cash your distribution or redemption checks
promptly. Vanguard will not pay interest on uncashed
checks.
LIMITS ON ACCOUNT Because excessive account transactions can
ACTIVITY disrupt management of a fund and increase the fund's
costs for all shareholders, Vanguard limits account
activity as follows:
- You may make no more than two substantive "round
trips" through a non-money market fund during any
12-month n period.
- Your round trips through a non-money market fund
must be at least 30 days apart.
- All funds may refuse share purchases at any time,
for any reason.
- Vanguard reserves the right to revise or
terminate the exchange privilege, limit the
amount of an exchange, or reject an exchange, at
any time, for any reason.
- A "round trip" is a redemption from a fund
followed by a purchase back into the same fund.
Also, a "round trip" covers transactions
accomplished by any combination of methods,
including transactions conducted by check, wire,
or exchange to/from another Vanguard fund.
"Substantive" means a dollar amount that Vanguard
determines, in its sole discretion, could
adversely affect the management of the fund.
UNUSUAL CIRCUMSTANCES If you experience difficulty contacting Vanguard
online, by telephone, or by Tele-Account, you can
send us your transaction request by regular or
express mail. See Contacting Vanguard for addresses.
<PAGE>
24
INVESTING WITH You may purchase or sell Investor Shares of most
VANGUARD THROUGH OTHER Vanguard funds through a financial intermediary,
FIRMS such as a bank broker, or investment adviser. Admiral
Shares of the Vanguard funds generally are not
available through financial intermediaries.
If you invest with Vanguard through an intermediary,
please read that firm's program materials carefully
to learn of any spe cial rules that may apply.For
example, special terms may apply to additional
service features, fees, or other policies. Consult
your intermediary to determine when your order
will be priced.
LOW BALANCE ACCOUNTS All Vanguard funds reserve the right to close any
nonretirement account whose balance falls below the
minimum initial investment. Vanguard deducts a $10
fee in June from each nonretirement account whose
balance at that time is below $2,500 ($500 for
Vanguard STAR Fund, and $10,000 for Van guard Tax-
Managed Funds). The fee is waived if your total
Vanguard account assets are $50,000 or more.
FUND AND ACCOUNT UPDATES
PORTFOLIO SUMMARIES We will send you quarterly portfolio summaries to
help you keep track of your accounts throughout the
year. Each sum mary shows the market value of your
account at the close of the statement period,
as well as all distributions, purchases, sale,
and exchanges for the current calendar year.
AVERAGE COST REVIEW For most taxable accounts, average cost review
STATEMENTS statements will accompany the quarterly portfolio
summaries. These statements show the average cost
of shares that you redeemed during the current
calendar year, using the average cost single
category method.
CONFIRMATION Each time you buy, sell or exchange shares, we will
STATEMENTS send you a statement confirming the trade date and
amount of your transaction.
TAX STATEMENTS We will send you annual tax statements to assist in
preparing your income tax returns. These
statements, which are generally mailed in January,
will report the previous year's dividend and
capital gains distributions, proceeds from the sale
of shares, and distributions from IRAs or other
retirement plans.
<PAGE>
25
REPORTS You will receive financial reports about your funds
twice a year in February and August. These
comprehensive reports include an assessment of the
fund's performance (and a comparison to its industry
benchmark), an overview of the markets, a report from
the advisers, and the fund's financial statements
which include a listing of the fund's holdings. To
keep the funds' costs as low as possible (so that you
and other shareholders can keep more of the funds'
investment earnings), Vanguard attempts to eliminate
duplicate mailings to the same address. When we find
that two or more shareholders have the same last name
and address, we send just one fund report to that
address-instead of mailing separate reports to each
shareholder. If you want us to send separate reports,
however, you may notify our Client Services
Department.
CONTACTING VANGUARD
ONLINE VANGUARD.COM
- Your best source of Vanguard news
- For fund, account, and service information
- For most account transactions
- For literature requests n 24 hours per day, 7 days
per week
VANGUARD TELE-ACCOUNT - For automated fund and account information
1-800-662-6273 - For redemptions by check, exchange, or wire
(ON-BOARD) - Toll-free 24 hours per day, 7 days per week
INVESTOR INFORMATION - For fund and service information
1-800-662-7447 (SHIP) - For literature requests
(Text telephone at - Business hours only
1-800-952-3335)
CLIENT SERVICES - For account information
1-800-662-2739 (CREW) - For most account transactions
(Text telephone at - Business hours only
1-800-749-7273)
INSTITUTIONAL DIVISION - For information and services for large
1-888-809-8102 institutional investors
- Business hours only
<PAGE>
26
VANGUARD ADDRESSES REGULAR MAIL (INDIVIDUALS-CURRENT CLIENTS):
The Vanguard Group
P.O. Box 1110
Valley Forge, PA 19482-1110
REGULAR MAIL (INSTITUTIONS):
The Vanguard Group
P.O. Box 2900
Valley Forge, PA 19482-2900
REGULAR MAIL (GENERAL INQUIRIES):
The Vanguard Group
P.O. Box 2600
Valley Forge, PA 19482-2600
REGISTERED OR EXPRESS MAIL:
The Vanguard Group
455 Devon Park Drive
Wayne, PA 19087-1815
FUND NUMBER Always use this fund number when contacting Vanguard
about the Fund: Vanguard Balanced Index Fund - 02
<PAGE>
(THIS PAGE INTENTIONALLY LEFT BLANK.)
<PAGE>
(THIS PAGE INTENTIONALLY LEFT BLANK.)
<PAGE>
GLOSSARY OF INVESTMENT TERMS
ACTIVE MANAGEMENT
An investment approach that seeks to exceed the average returns of the financial
markets. Active managers rely on research, market forecasts, and their own
judgment and experience in selecting securities to buy and sell.
BALANCED FUND
A mutual fund that seeks to provide some combination of income, capital growth,
and conservation of capital by investing in stocks, bonds, and/or money market
instruments.
BOND
A debt security (IOU) issued by a corporation, government, or government agency
in exchange for the money you lend it. In most instances, the issuer agrees to
pay back the loan by a specific date and to make regular interest payments until
that date.
CAPITAL GAINS DISTRIBUTION
Payment to mutual fund shareholders of gains realized on securities that a fund
has sold at a profit, minus any realized losses.
CREDIT QUALITY
A measure of a bond issuer's ability to pay interest and principal in a timely
manner.
DIVIDEND INCOME
Payment to shareholders of income from interest or dividends generated by a
fund's investments.
DURATION
A measure of the sensitivity of bond--and bond fund--prices to interest rate
movements. For example, if a bond has a duration of two years, its price would
fall by about 2% when interest rates rose one percentage point. On the other
hand, the bond's price would rise by about 2% when interest rates fell by one
percentage point.
EXPENSE RATIO
The percentage of a fund's average net assets used to pay its expenses. The
expense ratio includes management fees, administrative fees, and any 12b-1
distribution fees.
FACE VALUE
The amount to be paid at maturity of a bond; also known as the par value or
principal.
INDEX
An unmanaged group of securities whose overall performance is used as a standard
to measure investment performance.
INVESTMENT GRADE
A bond whose credit quality is considered by independent bond-rating agencies to
be sufficient to ensure timely payment of principal and interest under current
economic circumstances. Bonds rated in one of the four highest categories are
considered "investment grade."
MATURITY
The date when a bond issuer agrees to repay the bond's principal, or face value,
to the bond's buyer.
NET ASSET VALUE (NAV)
The market value of a mutual fund's total assets, minus liabilities, divided by
the number of shares outstanding. The value of a single share is called its
share value or share price.
PASSIVE MANAGEMENT
A low-cost investment strategy in which a mutual fund attempts to match--rather
than outperform-- a particular stock or bond market index. Also known as
indexing.
PRICE/EARNINGS (P/E) RATIO
The current share price of a stock, divided by its per-share earnings (profits)
from the past year. A stock selling for $20, with earnings of $2 per share, has
a price/earnings ratio of 10.
TOTAL RETURN
A percentage change, over a specified time period, in a mutual fund's net asset
value, with the ending net asset value adjusted to account for the reinvestment
of all distributions of dividends and capital gains.
VOLATILITY
The fluctuations in value of a mutual fund or other security. The greater a
fund's volatility, the wider the fluctuations between its high and low prices.
YIELD
Income (interest or dividends) earned by an investment, expressed as a
percentage of the investment's price.
<PAGE>
[SHIP]
[THE VANGUARD GROUP(R)]
Post Office Box 2600
Valley Forge, PA 19482-2600
FOR MORE INFORMATION
If you'd like more information about
Vanguard Balanced Index Funds, the
following documents are available
free upon request:
ANNUAL/SEMIANNUAL REPORTS
TO SHAREHOLDERS
Additional information about the
Funds' investments is available in
the Funds' annual and semiannual
reports to shareholders.
STATEMENT OF ADDITIONAL
INFORMATION (SAI)
The SAI provides more detailed
information about the Funds.
The current annual and semiannual
reports and the SAI are
incorporated by reference into
(and are thus legally a part of)
this prospectus.
To receive a free copy of the latest
annual or semiannual report or the
SAI, or to request additional
information about the Funds or other
Vanguard funds, please contact us
as follows:
THE VANGUARD GROUP
INVESTOR INFORMATION
DEPARTMENT
P.O. BOX 2600
VALLEY FORGE, PA 19482-2600
TELEPHONE:
1-800-662-7447 (SHIP)
TEXT TELEPHONE:
1-800-952-3335
WORLD WIDE WEB:
WWW.VANGUARD.COM
If you are a current Fund shareholder
and would like information about
your account, account transactions,
and/or account statements,
please call:
CLIENT SERVICES DEPARTMENT
TELEPHONE:
1-800-662-2739 (CREW)
TEXT TELEPHONE:
1-800-749-7273
INFORMATION PROVIDED BY THE
SECURITIES AND EXCHANGE
COMMISSION (SEC)
You can review and copy information
about the Funds (including the SAI)
at the SEC's Public Reference Room
in Washington, DC. To find out more
about this public service, call the SEC
at 1-202-942-8090. Reports and
other information about the Funds
are also available on the SEC's
website (www.sec.gov), or you can
receive copies of this information,
for a fee, by electronic request at the
following e-mail address:
[email protected], or by writing the
Public Reference Section, Securities
and Exchange Commission,
Washington, DC 20549-0102.
Funds' Investment Company Act
file number: 811-7023
(C) 2000 The Vanguard Group, Inc.
All rights reserved.
Vanguard Marketing Corporation,
Distributor.
P002N-09/2000
<PAGE>
VANGUARD (R)
BALANCED INDEX
FUND
Participant Prospectus
September ., 2000
This prospectus contains
financial data for the
Fund for the six-
months ended
June 30, 2000.
[A Member of
The Vanguard Group(R)]
<PAGE>
VANGUARD BALANCED INDEX FUND
Participant Prospectus
September ., 2000
A Balanced Mutual Fund
--------------------------------------------------------------------------------
CONTENTS
1 FUND PROFILE 14 DIVIDENDS, CAPITAL GAINS, AND TAXES
3 ADDITIONAL INFORMATION 15 SHARE PRICE
4 AN INTRODUCTION TO INDEX FUNDS 16 FINANCIAL HIGHLIGHTS
4 A WORD ABOUT RISK 18 INVESTING WITH VANGUARD
5 WHO SHOULD INVEST 19 ACCESSING FUND INFORMATION BY
COMPUTER
5 PRIMARY INVESTMENT STRATEGIES
GLOSSARY (inside back cover)
13 THE FUND AND VANGUARD
13 INVESTMENT ADVISER
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
WHY READING THIS PROSPECTUS IS IMPORTANT
This prospectus explains the objective, risks, and strategies of Vanguard
Balanced Index Fund. To highlight terms and concepts important to mutual fund
investors, we have provided "Plain Talk(R)" explanations along the way.
Reading the prospectus will help you to decide whether the Fund is the right
investment for you. We suggest that you keep it for future reference.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
IMPORTANT NOTE
The Fund offers two separate classes of shares: Investor Shares and Admiral
Shares. This prospectus offers the Fund's Investor Shares and is intended for
participants in employer-sponsored retirement or savings plans. Another
version--for investors who would like to open a personal investment account--can
be obtained by calling Vanguard at 1-800-662-7447.
The Fund's separate share classes have different expenses; as a result,
their investment performances will vary. UNLESS OTHERWISE NOTED, ALL REFERENCES
IN THIS PROSPECTUS TO FEES, EXPENSES, AND INVESTMENT PERFORMANCE RELATE
SPECIFICALLY TO INVESTOR SHARES.
-------------------------------------------------------------------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE>
1
FUND PROFILE
INVESTMENT OBJECTIVE
The Fund seeks to provide current income and long-term growth of income and
capital.
INVESTMENT STRATEGIES
The Fund typically invests 60% of its assets in common stocks and 40% in bonds.
The stock portion of the Fund seeks to match the total return of the Wilshire
5000 Total Market Index, a widely recognized measure for the U.S. stock market.
The Fund's bond portion seeks to replicate the returns of the Lehman Brothers
Aggregate Bond Index, a measure of regularly traded, U.S. investment-grade
bonds.
PRIMARY RISKS
THE FUND'S TOTAL RETURN, LIKE STOCK AND BOND PRICES GENERALLY, WILL FLUCTUATE
WITHIN A WIDE RANGE, SO AN INVESTOR COULD LOSE MONEY OVER SHORT OR EVEN LONG
PERIODS. The Fund is also subject to:
o Stock market risk, which is the chance that stock prices in general will
decline over short or even long periods. The stock market tends to be
cyclical, with periods when stock prices generally rise and periods when
stock prices generally decline.
o Interest rate risk, which is the chance that bond prices overall will
decline over short or even long periods due to rising interest rates.
Interest rate risk should be moderate for the Fund.
o Income risk, which is the chance that falling interest rates will cause the
Fund's income to decline. Income risk should be moderate for the Fund.
o Credit risk, which is the chance that a bond issuer will fail to pay
interest and principal in a timely manner, reducing the Fund's return.
Credit risk should be low for the Fund.
o Prepayment risk, which is the chance that during periods of falling
interest rates, a mortgage-backed bond issuer will repay a higher-yielding
bond before its maturity date because the underlying mortgages have been
paid off ahead of schedule. If a bond is called, the Fund would lose the
opportunity for additional price appreciation, and would be forced to
reinvest the unanticipated proceeds at lower interest rates. As a result,
the Fund would experience a decline in income.
o Index sampling risk, which is the chance that the securities selected for
the Fund will not provide investment performance matching that of the
index. Index sampling risk for the Fund should be low.
PERFORMANCE/RISK INFORMATION
The bar chart and table below provide an indication of the risk of investing in
the Fund. The bar chart shows the Fund's performance in each calendar year since
inception. The table shows how the Fund's average annual total returns for one
and five calendar years and since inception compare to those of a broad-based
securities market index. Keep in mind that the Fund's past performance does not
necessarily indicate how it will perform in the future.
<PAGE>
2
--------------------------------------------------------------------------------
ANNUAL TOTAL RETURNS
--------------------------------------------------------------------------------
1993 10.00%
1994 -1.56%
1995 28.64%
1996 13.95%
1997 22.24%
1998 17.85%
1999 13.61%
--------------------------------------------------------------------------------
During the period shown in the bar chart, the highest return for a calendar
quarter was 12.67% (quarter ended December 31, 1998) and the lowest return for a
quarter was -5.57% (quarter ended September 30, 1998).
--------------------------------------------------------------------------------
AVERAGE ANNUAL TOTAL RETURNS FOR YEARS ENDED DECEMBER 31, 1999
--------------------------------------------------------------------------------
SINCE
1 YEAR 5 YEARS INCEPTION*
--------------------------------------------------------------------------------
Vanguard Balanced Index Fund 13.61% 19.13% 14.89%
Balanced Composite Index** 13.54 19.30 15.19
Wilshire 5000 Index 23.77 27.11 20.92
Lehman Brothers Aggregate Bond -0.82 7.73 6.57
Index
--------------------------------------------------------------------------------
*November 9, 1992.
**Made up of two unmanaged benchmarks, weighted 60% Wilshire 5000 Index
and 40% Lehman Brothers Aggregate Bond Index.
--------------------------------------------------------------------------------
FEES AND EXPENSES
The following table describes the fees and expenses you may pay if you buy and
hold shares of the Fund. The expenses shown under Annual Fund Operating Expenses
are based upon those incurred in the fiscal year ended December 31, 1999.
SHAREHOLDER FEES (fees paid directly from your investment)
Sales Charge (Load) Imposed on Purchases: None
Sales Charge (Load) Imposed on Reinvested Dividends: None
Redemption Fee: None
Exchange Fee: None
ANNUAL FUND OPERATING EXPENSES (expenses deducted from the Fund's
assets)
Management Expenses: 0.17%
12b-1 Distribution Fee: None
Other Expenses: 0.03%
TOTAL ANNUAL FUND OPERATING EXPENSES: 0.20%
The Fund reserves the right to deduct a transaction fee of 0.08% from an
investor's cumulative purchases over $100 million. Where it applies, the fee is
retained by the Fund to offset transaction costs of investing large new
contributions into the market. The fee is not paid to Vanguard and is not a
sales charge.
<PAGE>
3
--------------------------------------------------------------------------------
PLAIN TALK ABOUT
FUND EXPENSES
All mutual funds have operating expenses. These expenses, which are deducted
from a fund's gross income, are expressed as a percentage of the net assets of
the fund. Vanguard Balanced Index Fund's expense ratio in fiscal year 1999 was
0.20%, or $2 per $1,000 of average net assets. The average balanced mutual fund
had expenses in 1999 of 1.33%, or $13.30 per $1,000 of average net assets
(derived from data provided by Lipper Inc., which reports on the mutual fund
industry). Management expenses, which are one part of operating expenses,
include investment advisory fees as well as other costs of managing a
fund--such as account maintenance, reporting, accounting, legal, and other
administrative expenses.
--------------------------------------------------------------------------------
The following example is intended to help you compare the cost of investing in
the Fund with the cost of investing in other mutual funds. It illustrates the
hypothetical expenses that you would incur over various periods if you invest
$10,000 in the Fund. This example assumes that the Fund provides a return of 5%
a year, and that operating expenses remain the same. The results apply whether
or not you redeem your investment at the end of each period.
--------------------------------------------------------------------------------
1 YEAR 3 YEARS 5 YEARS 10 YEARS
--------------------------------------------------------------------------------
$20 $64 $113 $255
--------------------------------------------------------------------------------
THIS EXAMPLE SHOULD NOT BE CONSIDERED TO REPRESENT ACTUAL EXPENSES OR
PERFORMANCE FROM THE PAST OR FOR THE FUTURE. ACTUAL FUTURE EXPENSES MAY BE
HIGHER OR LOWER THAN THOSE SHOWN.
--------------------------------------------------------------------------------
ADDITIONAL INFORMATION
DIVIDENDS AND CAPITAL GAINS NEWSPAPER ABBREVIATION
Dividends are distributed quarterly in March, Balanced
June, September, and December; capital gains,
if any, are distributed annually in December VANGUARD FUND NUMBER
02
INVESTMENT ADVISER
The Vanguard Group, Valley Forge, Pa., CUSIP NUMBER
since inception 921931101
INCEPTION DATE TICKER SYMBOL
November 9, 1992 VBINX
NET ASSETS AS OF JUNE 30, 2000
$. billion
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
PLAIN TALK ABOUT
THE COSTS OF INVESTING
Costs are an important consideration in choosing a mutual fund. That's because
you, as a shareholder, pay the costs of operating a fund, plus any transaction
costs associated with the fund's buying and selling of securities. These costs
can erode a substantial portion of the gross income or capital appreciation a
fund may achieve. Even seemingly small differences in expenses can, over time,
have a dramatic effect on a fund's performance.
--------------------------------------------------------------------------------
<PAGE>
4
AN INTRODUCTION TO INDEX FUNDS
WHAT IS INDEXING?
An index is an unmanaged group of securities whose overall performance is used
as a standard to measure the investment performance of a particular market. An
index (or "passively managed") fund tries to match, as closely as possible, the
performance of an established target index. The fund does this by holding all,
or a representative sample, of the securities that comprise the index.
The target index may be a group of stocks or bonds, or a combination of stocks
and bonds. Balanced index funds hold a mix of stocks and bonds.
Index funds do not have active managers who buy and sell securities based on
research and analysis. Rather, index funds are passively managed by the adviser
who seeks to match a market benchmark.
WHY INVEST IN INDEX FUNDS?
Index funds appeal to many investors for a number of reasons:
o Variety of investments. Vanguard index funds generally invest in a wide
variety of companies and industries.
o Relative performance consistency. Because they seek to track market
benchmarks, index funds by definition should not perform dramatically
better or worse than their benchmarks.
o Low cost. Index funds are inexpensive to run as compared with actively
managed funds. They have lower research costs and keep trading activity,
and thus trading costs, to a minimum.
KEEP IN MIND THAT AN INDEX FUND HAS OPERATING EXPENSES AND TRANSACTION COSTS; A
MARKET INDEX DOES NOT. THEREFORE, AN INDEX FUND--WHILE EXPECTED TO TRACK ITS
TARGET INDEX AS CLOSELY AS POSSIBLE--WILL TYPICALLY BE UNABLE TO MATCH THE
PERFORMANCE OF THE INDEX EXACTLY.
--------------------------------------------------------------------------------
A WORD ABOUT RISK
This prospectus describes risks you would face as an investor in Vanguard
Balanced Index Fund. It is important to keep in mind one of the main axioms of
investing: The higher the risk of losing money, the higher the potential reward.
The reverse, also, is generally true: The lower the risk, the lower the
potential reward. As you consider an investment in the Fund, you should also
take into account your personal tolerance for the daily fluctuations of the
stock and bond markets.
Look for this [FLAG] symbol throughout the prospectus. It is used to mark
detailed information about each type of risk that you would confront as a
shareholder of the Fund.
--------------------------------------------------------------------------------
WHO SHOULD INVEST
The Fund may be a suitable investment for you if:
o You are seeking moderate current income and long-term growth of income and
capital.
o You are seeking a diversified combination of U.S. stocks and bonds.
<PAGE>
5
o You are willing to invest for the long term--at least five years.
--------------------------------------------------------------------------------
PLAIN TALK ABOUT
COSTS AND MARKET-TIMING
Some investors try to profit from market-timing--switching money into
investments when they expect prices to rise, and taking money out when they
expect the market to fall. As money is shifted in and out, a fund incurs
expenses for buying and selling securities. These costs are borne by all fund
shareholders, including the long-term investors who do not generate the costs.
Therefore, the Fund discourages short-term trading by, among other things,
limiting the number of exchanges it permits.
--------------------------------------------------------------------------------
THE VANGUARD FUNDS DO NOT PERMIT MARKET-TIMING. DO NOT INVEST IN THIS FUND IF
YOU ARE A MARKET-TIMER.
The Fund has adopted the following policies, among others, to discourage short-
term trading:
o The Fund reserves the right to reject any purchase request--including
exchanges from other Vanguard funds--that it regards as disruptive to the
efficient management of the Fund. A purchase request could be rejected
because of the timing of the investment or because of a history of
excessive trading by the investor.
o Telephone and online exchanges generally are not accepted for non-IRA
accounts.
o There is a limit on the number of times you can exchange into and out of
the Fund (see "Exchanges" in the INVESTING WITH VANGUARD section).
o The Fund reserves the right to stop offering shares at any time.
--------------------------------------------------------------------------------
PLAIN TALK ABOUT
BALANCED FUNDS
Balanced funds are generally "middle of the road" investments that seek to
provide some combination of growth, income, and conservation of capital by
investing in a mix of stocks, bonds, and/or money market instruments. Because
the prices of stocks and bonds often move in different directions, balanced
funds are able to use rewards from one type of investment to help offset the
risks from another.
--------------------------------------------------------------------------------
PRIMARY INVESTMENT STRATEGIES
This section explains the strategies that the investment adviser uses in pursuit
of the Fund's objective--current income and long-term growth of income and
capital. It also explains how the adviser implements these strategies. In
addition, this section discusses several important risks--stock market risk,
interest rate risk, income risk, credit risk, and prepayment risk--faced by
investors in the Fund. The Fund's Board of Trustees, which oversees the
management of the Fund, may change the Fund's investment objective or strategies
in the interest of shareholders, without a shareholder vote.
<PAGE>
6
MARKET EXPOSURE
STOCKS
About 60% of the Fund's assets are invested in common stocks, in an attempt to
replicate with that portion of the assets the performance of the Wilshire 5000
Index.
[FLAG] THE FUND IS SUBJECT TO STOCK MARKET RISK, WHICH IS THE CHANCE THAT STOCK
PRICES OVERALL WILL DECLINE OVER SHORT OR EVEN LONG PERIODS. STOCK MARKETS TEND
TO MOVE IN CYCLES, WITH PERIODS OF RISING PRICES AND PERIODS OF FALLING PRICES.
To illustrate the volatility of stock prices, the following table shows the
best, worst, and average total returns for the U.S. stock market over various
periods as measured by the Standard & Poor's 500 Index, a widely used barometer
of market activity. (Total returns consist of dividend income plus change in
market price.) Note that the returns shown do not include the costs of buying
and selling stocks or other expenses that a real-world investment portfolio
would incur. Note, also, that the gap between best and worst tends to narrow
over the long term.
--------------------------------------------------------------------------------
U.S. STOCK MARKET RETURNS (1926-1999)
--------------------------------------------------------------------------------
1 YEAR 5 YEARS 10 YEARS 20 YEARS
--------------------------------------------------------------------------------
Best 54.2% 28.6% 19.9% 17.9%
Worst -43.1 -12.4 -0.9 3.1
Average 13.2 11.0 11.1 11.1
--------------------------------------------------------------------------------
The table covers all of the 1-, 5-, 10-, and 20-year periods from 1926 through
1999. You can see, for example, that while the average return on common stocks
for all of the 5-year periods was 11.0%, returns for individual 5-year periods
ranged from a -12.4% average (from 1928 through 1932) to 28.6% (from 1995
through 1999). These average returns reflect past performance on common stocks;
you should not regard them as an indication of future returns from either the
stock market as a whole or this Fund in particular, which invests approximately
40% of its assets in bonds.
While the Fund's holdings will typically include the 500 largest stocks in the
Wilshire 5000 Index, they will not include all of the securities in the Index.
Instead, the Fund will invest in a representative sample of stocks.
Keep in mind, too, that while the Wilshire 5000 Index is dominated by large-cap
stocks (those contained in the S&P 500 Index), small- and mid-cap issues are
also represented. The Fund's stock holdings are adjusted on a regular basis to
reflect the Wilshire 5000 Index. As of December 31, 1999, about 22.16% of the
market value of the Wilshire 5000 Index was comprised of securities that were
not in the S&P 500 Index. Stocks of smaller companies have historically been
more volatile than--and at times have performed quite differently from--the
stocks of larger companies.
<PAGE>
7
--------------------------------------------------------------------------------
PLAIN TALK ABOUT
LARGE-CAP, MID-CAP, AND SMALL-CAP STOCKS
Stocks of publicly traded companies--and mutual funds that hold these
stocks--can be classified by the companies' market value, or capitalization.
Market capitalization changes over time, and there is no "official" definition
of the boundaries of large-, mid-, and small-cap stocks. Vanguard generally
defines large-capitalization (large-cap) funds as those holding stocks of
companies whose outstanding shares have a market value exceeding $12 billion;
mid-cap funds as those holding stocks of companies with a market value between
$1 billion and $12 billion; and small-cap funds as those typically holding
stocks of companies with a market value of less than $1 billion. Vanguard
periodically reassesses these classifications.
--------------------------------------------------------------------------------
BONDS
About 40% of the Fund's assets are invested in bonds in an attempt to replicate
with that portion of the assets the performance of the Lehman Brothers Aggregate
Bond Index.
[FLAG] THE FUND IS SUBJECT TO INTEREST RATE RISK, WHICH IS THE CHANCE THAT BOND
PRICES OVERALL WILL DECLINE OVER SHORT OR EVEN LONG PERIODS DUE TO RISING
INTEREST RATES. INTEREST RATE RISK SHOULD BE MODERATE FOR SHORTER-TERM BOND
FUNDS AND HIGH FOR LONGER-TERM BOND FUNDS. BECAUSE THE FUND INVESTS IN A
PORTFOLIO OF BONDS WITH AN INTERMEDIATE AVERAGE MATURITY (5-10 YEARS), INTEREST
RATE RISK IS MODERATE.
--------------------------------------------------------------------------------
PLAIN TALK ABOUT
BONDS AND INTEREST RATES
As a rule, when interest rates rise, bond prices fall. The opposite is also
true: Bond prices go up when interest rates fall. Why do bond prices and
interest rates move in opposite directions? Let's assume that you hold a bond
offering a 5% yield. A year later, interest rates are on the rise and bonds are
offered with a 6% yield. With higher-yielding bonds available, you would have
trouble selling your 5% bond for the price you paid--causing you to lower your
asking price. On the other hand, if interest rates were falling and 4% bonds
were being offered, you should be able to sell your 5% bond for more than you
paid.
--------------------------------------------------------------------------------
Although bonds are often thought to be less risky than stocks, there have been
periods when bond prices have fallen significantly due to rising interest rates.
For instance, prices of long-term bonds fell by almost 48% between December 1976
and September 1981.
To illustrate the volatility of bond prices, the following table shows the
effect of both a 1% and a 2% change (both up and down) in interest rates on
three bonds of different maturities, each with a face value of $1,000.
<PAGE>
8
--------------------------------------------------------------------------------
HOW INTEREST RATE CHANGES AFFECT THE
VALUE OF A $1,000 BOND*
--------------------------------------------------------------------------------
AFTER A 1% AFTER A 1% AFTER A 2% AFTER A 2%
TYPE OF BOND (MATURITY) INCREASE DECREASE INCREASE DECREASE
--------------------------------------------------------------------------------
Short-Term (2.5 years) $978 $1,023 $956 $1,046
Intermediate-Term (10 years) 932 1,074 870 1,156
Long-Term (20 years) 901 1,116 816 1,251
--------------------------------------------------------------------------------
*Assuming a 7% yield.
--------------------------------------------------------------------------------
These figures are for illustration only and should not be regarded as an
indication of future returns from the bond market as a whole or the Fund in
particular.
Changes in interest rates will affect bond income as well as bond prices.
[FLAG THE FUND IS SUBJECT TO INCOME RISK, WHICH IS THE CHANCE THAT A FUND'S
DIVIDENDS (INCOME) WILL DECLINE DUE TO FALLING INTEREST RATES. INCOME RISK IS
GENERALLY THE GREATEST FOR SHORT-TERM BOND FUNDS, AND THE LEAST FOR LONG-TERM
BOND FUNDS.
[FLAG] BECAUSE IT INVESTS IN MORTGAGE-BACKED BONDS, THE FUND IS SUBJECT TO
PREPAYMENT RISK, WHICH IS THE CHANCE THAT DURING PERIODS OF FALLING INTEREST
RATES, A MORTGAGE-BACKED BOND ISSUER WILL "CALL"--OR REPAY--A HIGHER-YIELDING
BOND BEFORE ITS MATURITY DATE. IF A BOND IS CALLED, THE FUND WOULD LOSE THE
OPPORTUNITY FOR ADDITIONAL PRICE APPRECIATION, AND WOULD BE FORCED TO REINVEST
THE UNANTICIPATED PROCEEDS AT A LOWER INTEREST RATE. AS A RESULT, THE FUND WOULD
EXPERIENCE A DECLINE IN INCOME.
Since the Fund invests only a portion of its assets in mortgage-backed bonds,
the risk to the Fund is limited.
[FLAG] THE FUND IS SUBJECT TO CREDIT RISK, WHICH IS THE CHANCE THAT A BOND
ISSUER WILL FAIL TO PAY INTEREST AND PRINCIPAL IN A TIMELY MANNER.
The credit quality of the Fund is expected to be very high, and thus credit
risk should be low. The weighted average credit quality of the Fund's holdings,
as rated by Moody's Investors Service, as of June 30, 2000, was ..
To a limited extent, the Fund is also exposed to event risk, which is the
chance that corporate fixed-income securities held by the Fund may suffer a
substantial decline in credit quality and market value due to a corporate
restructuring or other corporate event.
Finally, because stock and bond prices often move in different directions, the
Fund's bond holdings help to dampen--but not eliminate--some of the stock market
volatility experienced by the Fund. Likewise, changes in interest rates may not
have as dramatic an effect on the Fund as they would on a fund made up entirely
of bonds.
<PAGE>
9
--------------------------------------------------------------------------------
PLAIN TALK ABOUT
BOND MATURITIES
A bond is issued with a specific maturity date--the date when the bond issuer,
or seller, must pay back the bond's initial value (known as its "face value").
Bond maturities generally range from less than one year (short-term) to 30
years (long-term). The longer a bond's maturity, the more risk you, as a bond
investor, face as interest rates rise--but also the more interest you could
receive. Long-term bonds are more suitable for investors willing to take
greater risks in hopes of higher yields; short-term bond investors should be
willing to accept lower yields in return for less fluctuation in the value of
their investment.
--------------------------------------------------------------------------------
SECURITY SELECTION
INDEXING METHODS
In seeking to track a particular index, a fund may use one of two indexing
methods to select the stocks or bonds in which it invests.
Some index funds hold each stock or bond found in their target indexes in about
the same proportions as represented in the indexes themselves. For example, if
5% of the S&P 500 Index were made up of the stock of a specific company, a fund
tracking that index would invest about 5% of its assets in that company.
Other index funds may use a different selection process. Because it would be
impractical to buy and sell all of the securities represented by an index (the
Wilshire 5000 Index, for example, included more than 7,000 stocks as of December
31, 1999), many funds tracking these larger indexes use a "sampling" technique.
Using a sophisticated computer program, these funds select securities that will
recreate their target indexes in terms of industry, size, and other
characteristics. For instance, if 10% of the Wilshire 5000 Index were made up of
utility stocks, the Balanced Index Fund would allocate about 10% of its stock
investment to the utility stocks of the index with similar characteristics.
[FLAG] THE FUND IS SUBJECT TO INDEX SAMPLING RISK, WHICH IS THE CHANCE THAT THE
SECURITIES SELECTED WILL NOT PROVIDE INVESTMENT PERFORMANCE MATCHING THAT OF THE
TARGET INDEXES. INDEX SAMPLING RISK SHOULD BE LOW.
STOCKS
The Fund's common stock portfolio is designed to have investment characteristics
that parallel those of the Wilshire 5000 Index. The Fund is expected to
replicate approximately 1,000 of the largest securities in the Wilshire 5000
Index as measured by market capitalization, plus a representative sample of the
remainder, which are selected primarily on the basis of market capitalization,
industry weightings, and other fundamental characteristics. Typically, the Fund
holds a total of between 3,000 and 3,500 stocks.
BONDS
The Fund's bond portfolio is designed to have investment characteristics that
parallel those of the Lehman Brothers Aggregate Bond Index, a broad
market-weighted index that encompasses five major classes of investment-grade
fixed-income securities in the United States: U.S. Treasury and agency
securities, corporate bonds, mortgage-backed securities, international
dollar-denominated bonds, and asset-backed securities with maturities greater
than one year. The Fund will invest in a representative sample of fixed-income
securities in
<PAGE>
10
the index, which, taken together, are expected to perform similarly to the
index. These securities are described further as follows:
o U.S. government securities include U.S. Treasury and agency bonds, which
represent loans by an investor to the U.S. Treasury Department or a wide
variety of governmental agencies and instrumentalities. Timely payment of
principal and interest on these bonds is guaranteed by the full faith and
credit of the U.S. government; some agency bonds have the same guarantee.
o Corporate bonds are IOUs issued by businesses that want to borrow money for
some purpose--often to develop a new product or service, to expand into a
new market, or to buy another company. As with other types of bonds, the
issuer promises to repay the principal on a specific date and to make
interest payments in the meantime. The amount of interest offered depends
both on market conditions and on the financial health of the corporation
issuing the bonds; a company whose credit rating is not strong will have to
offer a relatively high interest rate to obtain buyers for its bonds.
o Mortgage-backed securities represent interests in underlying pools of
mortgages. Unlike ordinary bonds, which generally pay a fixed rate of
interest at regular intervals and then repay principal upon maturity,
mortgage-backed bonds pay both interest and principal as part of their
regular payments. Because the mortgages underlying the bonds can be prepaid
at any time by homeowners or corporate borrowers, mortgage-backed bonds are
subject to prepayment risk, as discussed earlier in this prospectus. These
types of bonds are issued by a number of government agencies, including the
Government National Mortgage Association (GNMA), often referred to as
"Ginnie Mae," the Federal Home Loan Mortgage Corporation (FHLMC), the
Federal National Mortgage Association (FNMA), often referred to as "Fannie
Mae," and the Federal Housing Authority (FHA). GNMA bonds are guaranteed by
the full faith and credit of the U.S. government as to the timely payment
of principal and interest; bonds issued by other government agencies are
not. (Note: The Balanced Index Fund may also invest in conventional
mortgage-backed securities, which are packaged by private corporations and
are not guaranteed by the U.S. government.)
o International dollar-denominated bonds are bonds denominated in U.S.
dollars issued by foreign governments and companies. Because the bond's
value is designated in dollars rather than in the currency of the issuer's
country, the investor is not exposed to currency risk; rather, the issuer
assumes the risk, usually to attract U.S. investors.
o Asset-backed securities are bonds backed by an underlying pool of assets
such as automobile loans, credit card loans, and home equity loans. These
securities are structured with varying amounts of credit risk, depending
primarily on the quality of the underlying assets. They are generally
issued by private corporations and are not guaranteed by the U.S.
government. Asset-backed bonds are subject to prepayment risk as discussed
earlier in this prospectus.
In "sampling" its target index, the Fund has the flexibility to overweight
particular types of bonds relative to their representation in the index. This
normally involves substituting corporate bonds for government bonds of the same
maturity. The corporate substitution strategy increases the Fund's income, but
also marginally increases exposure to credit risk, which is explained on page 8.
The Fund limits corporate substitutions to bonds with less than approximately 4
years' remaining maturity, and the Fund will limit corporate substitutions to
approximately 15% of its net assets.
The Fund is generally managed without regard to tax ramifications.
<PAGE>
11
TURNOVER RATE
Although the Fund generally seeks to invest for the long term, it retains the
right to sell securities regardless of how long the securities have been held.
The Fund's average turnover rate for the past five years has been about 25%. (A
turnover rate of 100% would occur, for example, if the Fund sold and replaced
securities valued at 100% of its total net assets within a one-year period.)
--------------------------------------------------------------------------------
PLAIN TALK ABOUT
TURNOVER RATE
Before investing in a mutual fund, you should review its turnover rate. This
gives an indication of how transaction costs could affect the fund's future
returns. In general, the greater the volume of buying and selling by the fund,
the greater the impact that brokerage commissions and other transaction costs
will have on its return. Also, funds with high turnover rates may be more likely
to generate capital gains that must be distributed to shareholders as income
subject to taxes. As of June 30, 2000, the average turnover rate for all
domestic hybrid funds (a category that includes balanced funds) was
approximately .%, according to Morningstar, Inc.
--------------------------------------------------------------------------------
OTHER INVESTMENT POLICIES AND RISKS
Besides investing in U.S. common stocks and bonds, the Fund may make certain
other kinds of investments to achieve its objective. The Fund may invest in
fixed-income securities not in the target index (non-public, investment grade
securities--generally referred to as 144A securities--as well as smaller public
issues or medium term notes not included in the index due to their size). The
vast majority of these securities will have characteristics and risks similar to
those in the target index. The Fund may also purchase money market instruments
and certain derivatives in order to manage cash flow into and out of the Fund,
reduce transaction costs, or add value when these instruments are favorably
priced.
The Fund may invest, to a limited extent, in foreign securities.
The Fund may also invest, to a limited extent, in stock and bond futures
and options contracts, which are traditional types of derivatives. Losses (or
gains) involving futures can sometimes be substantial--in part because a
relatively small price movement in a futures contract may result in an immediate
and substantial loss (or gain) for a fund. This Fund will not use futures for
speculative purposes or as leveraged investments that magnify the gains or
losses of an investment. The Fund's obligation to purchase securities under
futures contracts will not exceed 20% of its total assets.
The reasons for which the Fund will invest in futures and options are:
o To keep cash on hand to meet shareholder redemptions or other needs while
simulating full investment in stocks and bonds.
o To reduce the Fund's transaction costs or add value when these instruments
are favorably priced.
<PAGE>
12
--------------------------------------------------------------------------------
PLAIN TALK ABOUT
DERIVATIVES
A derivative is a financial contract whose value is based on (or "derived"
from) a traditional security (such as a stock or a bond), an asset (such as a
commodity like gold), or a market index (such as the S&P 500 Index). Futures
and options are derivatives that have been trading on regulated exchanges for
more than two decades. These "traditional" derivatives are standardized
contracts that can easily be bought and sold, and whose market values are
determined and published daily. It is these characteristics that differentiate
futures and options from the relatively new types of derivatives. If used for
speculation or as leveraged investments, derivatives can carry considerable
risks.
--------------------------------------------------------------------------------
THE FUND AND VANGUARD
The Fund is a member of The Vanguard Group, a family of more than 35 investment
companies with more than . funds holding assets worth more than $. billion. All
of the Vanguard funds share in the expenses associated with business operations,
such as personnel, office space, equipment, and advertising.
Vanguard also provides marketing services to the funds. Although shareholders
do not pay sales commissions or 12b-1 distribution fees, each fund pays its
allocated share of The Vanguard Group's marketing costs.
--------------------------------------------------------------------------------
PLAIN TALK ABOUT
VANGUARD'S UNIQUE CORPORATE STRUCTURE
The Vanguard Group is truly a MUTUAL mutual fund company. It is owned jointly
by the funds it oversees and thus indirectly by the shareholders in those
funds. Most other mutual funds are operated by for-profit management companies
that may be owned by one person, by a group of individuals, or by investors who
own the management company's stock. By contrast, Vanguard provides its services
on an "at-cost" basis, and the funds' expense ratios reflect only these costs.
No separate management company reaps profits or absorbs losses from operating
the funds.
--------------------------------------------------------------------------------
INVESTMENT ADVISER
The Vanguard Group (Vanguard), P.O. Box 2600, Valley Forge, PA 19482, founded in
1975, serves as the Fund's adviser through its Core Management and Fixed Income
Groups. As of the fiscal year ended June 30, 2000, Vanguard served as adviser
for about $. billion in assets. Vanguard manages the Fund on an at-cost basis,
subject to the control of the Trustees and officers of the Fund. For the fiscal
year ended June 30, 2000, the investment advisory expenses represented an
effective annual rate of approximately .%.
The adviser is authorized to choose brokers-dealers to handle the purchase and
sale of the Fund's securities, and to seek out the best available price and most
favorable execution for all transactions. Also, the Fund may direct the adviser
to use a particular broker for certain transactions in exchange for commission
rebates or research services provided to the Fund.
<PAGE>
13
In the interest of obtaining better execution of a transaction, the adviser may
at times choose brokers who charge higher commissions. If more than one broker
can obtain the best available price and most favorable execution, then the
adviser is authorized to choose a broker who, in addition to executing the
transaction, will provide research services to the adviser or the Fund.
--------------------------------------------------------------------------------
PLAIN TALK ABOUT
THE FUND'S ADVISER
The individuals primarily responsible for overseeing the Fund's investments
are:
GEORGE U. SAUTER, Managing Director of Vanguard and head of Vanguard's Core
Management Group; has worked in investment management since 1985; primary
responsibility for Vanguard's stock indexing investment policy and strategy
since joining the company in 1987; has served as the portfolio manager for
the stock portion of the Fund since inception; A.B., Dartmouth College;
M.B.A., University of Chicago.
IAN A. MACKINNON, Managing Director of Vanguard and head of Vanguard's Fixed
Income Group; has worked in investment management since 1974; primary
responsibility for Vanguard's internal fixed-income policy and strategy since
joining the company in 1981; has been responsible for overseeing the
portfolio management of the bond portion of the Fund since inception; B.A.,
Lafayette College; M.B.A., Pennsylvania State University.
FELIX B. LIM, has worked in investment management since completing his
education in 1996; joined Vanguard in January 1999; worked as a credit
analyst until January 2000; B.A. and M.S., University of Pennsylvania
(Wharton School).
--------------------------------------------------------------------------------
DIVIDENDS, CAPITAL GAINS, AND TAXES
The Fund distributes to shareholders virtually all of its net income (interest
and dividends, less expenses), as well as any capital gains realized from the
sale of its holdings. Income dividends generally are distributed in March, June,
September, and December; capital gains distributions generally occur in
December. In addition, the Fund may occasionally be required to make
supplemental dividend or capital gains distributions at some other time during
the year.
Your dividend and capital gains distributions will be reinvested in additional
Fund shares and accumulate on a tax-deferred basis if you are investing through
an employer-sponsored retirement or savings plan. You will not owe taxes on
these distributions until you begin withdrawals from the plan. You should
consult your plan administrator, your plan's Summary Plan Description, or your
tax adviser about the tax consequences of plan withdrawals.
<PAGE>
14
--------------------------------------------------------------------------------
PLAIN TALK ABOUT
DISTRIBUTIONS
As a shareholder, you are entitled to your share of the fund's income from
interest and dividends, and gains from the sale of investments. You receive
such earnings as either an income dividend or a capital gains distribution.
Income dividends come from both the dividends that the fund earns from its
holdings and the interest it receives from its money market and bond
investments. Capital gains are realized whenever the fund sells securities for
higher prices than it paid for them. These capital gains are either short-term
or long-term, depending on whether the fund held the securities for one year or
less, or more than one year.
--------------------------------------------------------------------------------
SHARE PRICE
The Fund's share price, called its net asset value, or NAV, is calculated each
business day after the close of regular trading on the New York Stock Exchange
(the NAV is not calculated on holidays or other days when the Exchange is
closed). The Fund computes a separate net asset value for each of its share
classes. This is done by dividing the net assets attributed to each share class
by the number of Fund shares outstanding for each share class.
NET ASSETS
NET ASSET VALUE = -------------------------------
NUMBER OF SHARES OUTSTANDING
Knowing the daily net asset value is useful to you as a shareholder because it
indicates the current value of your investment. The Fund's NAV, multiplied by
the number of shares you own, gives you the dollar amount you would have
received had you sold all of your shares back to the Fund that day.
A NOTE ON PRICING: The Fund's investments will be priced at their market value
when market quotations are readily available. When these quotations are not
readily available, investments will be priced at their fair value, calculated
according to procedures adopted by the Fund's Board of Trustees.
The Fund's share price can be found daily in the mutual fund listings of most
major newspapers under the heading "Vanguard Index Funds." Different newspapers
use different abbreviations of the Fund's name, but the most common is BALANCED
for the Fund's Investor Shares.
<PAGE>
15
FINANCIAL HIGHLIGHTS
The following financial highlights table is intended to help you understand the
Fund's financial performance for the past five years, and certain information
reflects financial results for a single Fund share. The total returns in the
table represent the rate that an investor would have earned or lost each year on
an investment in the Fund (assuming reinvestment of all dividend and capital
gains distributions). This information has been derived from the financial
statements audited by PricewaterhouseCoopers LLP, independent accountants, whose
report--along with the Fund's financial statements--is included in the Fund's
most recent annual report to shareholders. You may have the annual report sent
to you without charge by contacting Vanguard.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------------------
VANGUARD BALANCED INDEX FUND--INVESTOR SHARES
SIX MONTHS YEAR ENDED DECEMBER 31,
ENDED----------------------------------------------------------------------
JUNE 30, 2000 1999 1998 1997 1996 1995
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET ASSET VALUE, BEGINNING OF YEAR $. $18.48 $16.29 $13.92 $12.77 $10.34
--------------------------------------------------------------------------------------------------------------------------
INVESTMENT OPERATIONS
Net Investment Income . .58 .54 .520 .50 .45
Net Realized and Unrealized Gain . 1.88 2.33 2.525 1.26 2.48
(Loss) on Investments
-----------------------------------------------------------------------------------
Total from Investment Operations . 2.46 2.87 3.045 1.76 2.93
-----------------------------------------------------------------------------------
DISTRIBUTIONS
Dividends from Net Investment Income . (.58) (.54) (.530) (.49) (.45)
Distributions from Realized Capital . (.14) (.14) (.145) (.12) (.05)
Gains
-----------------------------------------------------------------------------------
Total Distributions . (.72) (.68) (.675) (.61) (.50)
--------------------------------------------------------------------------------------------------------------------------
NET ASSET VALUE, END OF YEAR $. $20.22 $18.48 $16.29 $13.92 $12.77
==========================================================================================================================
TOTAL RETURN* .% 13.61% 17.85% 22.24% 13.95% 28.64%
==========================================================================================================================
RATIOS/SUPPLEMENTAL DATA
Net Assets, End of Year (Millions) $. $3,128 $2,004 $1,260 $826 $590
Ratio of Total Expenses to Average
Net Assets .% 0.20% 0.21% 0.20% 0.20% 0.20%
Ratio of Net Investment Income to
Average Net Assets .% 3.18% 3.29% 3.56% 3.69% 3.85%
Turnover Rate .% 29% 25% 18% 37%** 16%
=========================================================================================================================
</TABLE>
*Turnover rate excluding in-kind redemptions was 30%.
<PAGE>
16
--------------------------------------------------------------------------------
PLAIN TALK ABOUT
HOW TO READ THE FINANCIAL HIGHLIGHTS TABLE
The Fund began June 30, 2000 with a net asset value (price) of $18.48 per share.
During the period, the Fund earned $. per share from investment income (interest
and dividends) and $. per share from investments that had appreciated in value
or that were sold for higher prices than the Fund paid for them.
Shareholders received $. per share in the form of dividend and capital gains
distributions. A portion of each period's distributions may come from the prior
period's income or capital gains.
The earnings ($. per share) minus the distributions ($. per share) resulted in a
share price of $. at the end of the period. This was a increase of $. per share
(from $. at the beginning of the period to $. at the end of the period). For a
shareholder who reinvested the distributions in the purchase of more shares, the
total return from the Fund was .% for the period.
As of June 30, 2000, the Fund had $. billion in net assets. For the period its
expense ratio was .% ($. per $1,000 of net assets); and its net investment
income amounted to .% of its average net assets. It sold and replaced securities
valued at .% of its net assets.
--------------------------------------------------------------------------------
"Standard & Poor's(R)," "S&P(R)," "S&P 500(R)," "Standard & Poor's 500,"
and "500" are trademarks of The McGraw-Hill Companies, Inc.
<PAGE>
17
INVESTING WITH VANGUARD
The Fund is an investment option in your retirement or savings plan. Your plan
administrator or your employee benefits office can provide you with detailed
information on how to participate in your plan and how to elect the Fund as an
investment option.
o If you have any questions about the Fund or Vanguard, including those about
the Fund's investment objective, strategies, or risks, contact Vanguard's
Participant Access Center, toll-free, at 1-800-523-1188.
o If you have questions about your account, contact your plan administrator
or the organization that provides recordkeeping services for your plan.
INVESTMENT OPTIONS AND ALLOCATIONS
Your plan's specific provisions may allow you to change your investment
selections, the amount of your contributions, or how your contributions are
allocated among the investment choices available to you. Contact your plan
administrator or employee benefits office for more details.
TRANSACTIONS
Contributions, exchanges, or redemptions of the Fund's shares are processed as
soon as they have been received by Vanguard in good order. Good order means that
your request includes complete information on your contribution, exchange, or
redemption, and that Vanguard has received the appropriate assets.
In all cases, your transaction will be based on the Fund's next-determined net
asset value after Vanguard receives your request (or, in the case of new
contributions, the next-determined net asset value after Vanguard receives the
order from your plan administrator). As long as this request is received before
the close of trading on the New York Stock Exchange, generally 4 p.m. Eastern
time, you will receive that day's net asset value.
EXCHANGES
The exchange privilege (your ability to redeem shares from one fund to purchase
shares of another fund) may be available to you through your plan. Although we
make every effort to maintain the exchange privilege, Vanguard reserves the
right to revise or terminate this privilege, limit the amount of an exchange or
reject any exchange, at any time, without notice. Because excessive exchanges
can potentially disrupt the management of the Fund and increase its transaction
costs, Vanguard limits participant exchange activity to no more than FOUR
SUBSTANTIVE "ROUND TRIPS" THROUGH THE FUND (at least 90 days apart) during any
12-month period. A "round trip" is a redemption from the Fund followed by a
purchase back into the Fund. "Substantive" means a dollar amount that Vanguard
determines, in its sole discretion, could adversely affect the management of the
Fund.
Before making an exchange to or from another fund available in your plan,
consider the following:
o Certain investment options, particularly funds made up of company stock or
investment contracts, may be subject to unique restrictions.
o Make sure to read that fund's prospectus. Contact Vanguard's Participant
Access Center, toll-free, at 1-800-523-1188 for a copy.
o Vanguard can accept exchanges only as permitted by your plan. Contact your
plan administrator for details on the exchange policies that apply to your
plan.
<PAGE>
18
ACCESSING FUND INFORMATION BY COMPUTER
--------------------------------------------------------------------------------
VANGUARD ON THE WORLD WIDE WEB www.vanguard.com
Use your personal computer to visit Vanguard's education-oriented website, which
provides timely news and information about Vanguard funds and services; an
online "university" that offers a variety of mutual fund classes; and
easy-to-use, interactive tools to help you create your own investment and
retirement strategies.
--------------------------------------------------------------------------------
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<PAGE>
GLOSSARY OF INVESTMENT TERMS
ACTIVE MANAGEMENT
An investment approach that seeks to exceed the average returns of the financial
markets. Active managers rely on research, market forecasts, and their own
judgment and experience in selecting securities to buy and sell.
BALANCED FUND
A mutual fund that seeks to provide some combination of income, capital growth,
and conservation of capital by investing in stocks, bonds, and/or money market
instruments.
BOND
A debt security (IOU) issued by a corporation, government, or government agency
in exchange for the money you lend it. In most instances, the issuer agrees to
pay back the loan by a specific date and to make regular interest payments until
that date.
CAPITAL GAINS DISTRIBUTION
Payment to mutual fund shareholders of gains realized on securities that a fund
has sold at a profit, minus any realized losses.
CREDIT QUALITY
A measure of a bond issuer's ability to pay interest and principal in a timely
manner.
DIVIDEND INCOME
Payment to shareholders of income from interest or dividends generated by a
fund's investments.
DURATION
A measure of the sensitivity of bond--and bond fund--prices to interest rate
movements. For example, if a bond has a duration of two years, its price would
fall by about 2% when interest rates rose one percentage point. On the other
hand, the bond's price would rise by about 2% when interest rates fell by one
percentage point.
EXPENSE RATIO
The percentage of a fund's average net assets used to pay its expenses. The
expense ratio includes management fees, administrative fees, and any 12b-1
distribution fees.
FACE VALUE
The amount to be paid at maturity of a bond; also known as the par value or
principal.
INDEX
An unmanaged group of securities whose overall performance is used as a standard
to measure investment performance.
INVESTMENT GRADE
A bond whose credit quality is considered by independent bond-rating agencies to
be sufficient to ensure timely payment of principal and interest under current
economic circumstances. Bonds rated in one of the four highest categories are
considered "investment grade."
MATURITY
The date when a bond issuer agrees to repay the bond's principal, or face value,
to the bond's buyer.
NET ASSET VALUE (NAV)
The market value of a mutual fund's total assets, minus liabilities, divided by
the number of shares outstanding. The value of a single share is called its
share value or share price.
PASSIVE MANAGEMENT
A low-cost investment strategy in which a mutual fund attempts to match--rather
than outperform-- a particular stock or bond market index. Also known as
indexing.
PRICE/EARNINGS (P/E) RATIO
The current share price of a stock, divided by its per-share earnings (profits)
from the past year. A stock selling for $20, with earnings of $2 per share, has
a price/earnings ratio of 10.
TOTAL RETURN
A percentage change, over a specified time period, in a mutual fund's net asset
value, with the ending net asset value adjusted to account for the reinvestment
of all distributions of dividends and capital gains.
VOLATILITY
The fluctuations in value of a mutual fund or other security. The greater a
fund's volatility, the wider the fluctuations between its high and low prices.
YIELD
Income (interest or dividends) earned by an investment, expressed as a
percentage of the investment's price.
<PAGE>
[SHIP]
[THE VANGUARD GROUP(R)]
Institutional Division
Post Office Box 2900
Valley Forge, PA 19482-2900
FOR MORE INFORMATION
If you'd like more information about
Vanguard Admiral Funds, the
following documents are available
free upon request:
ANNUAL/SEMIANNUAL REPORTS
TO SHAREHOLDERS
Additional information about the
Funds' investments is available in
the Funds' annual and semiannual
reports to shareholders.
STATEMENT OF ADDITIONAL
INFORMATION (SAI)
The SAI provides more detailed
information about the Funds.
The current annual and semiannual
reports and the SAI are
incorporated by reference into
(and are thus legally a part of)
this prospectus.
To receive a free copy of the latest
annual or semiannual report or the
SAI, or to request additional
information about the Funds or other
Vanguard funds, please contact us
as follows:
THE VANGUARD GROUP
PARTICIPANT ACCESS CENTER
P.O. BOX 2900
VALLEY FORGE, PA 19482-2900
TELEPHONE:
1-800-523-1188
TEXT TELEPHONE:
1-800-523-8004
WORLD WIDE WEB:
WWW.VANGUARD.COM
INFORMATION PROVIDED BY THE
SECURITIES AND EXCHANGE
COMMISSION (SEC)
You can review and copy information
about the Funds (including the SAI)
at the SEC's Public Reference Room
in Washington, DC. To find out more
about this public service, call the SEC
at 1-202-942-8090. Reports and
other information about the Funds
are also available on the SEC's
website (www.sec.gov), or you can
receive copies of this information,
for a fee, by electronic request at the
following e-mail address:
[email protected], or by writing the
Public Reference Section, Securities
and Exchange Commission,
Washington, DC 20549-0102.
Funds' Investment Company Act
file number: 811-7023
(C) 2000 The Vanguard Group, Inc.
All rights reserved.
Vanguard Marketing Corporation,
Distributor.
I002N-09/2000
<PAGE>
PART B
VANGUARD BALANCED INDEX FUND
(THE FUND)
STATEMENT OF ADDITIONAL INFORMATION
SEPTEMBER ., 2000
This Statement is not a prospectus but should be read in conjunction with the
Fund's current Prospectus (dated September ., 2000). To obtain, without charge,
the Prospectus or the most recent Annual Report to Shareholders, which contains
the Fund's financial statements as hereby incorporated by reference, please
call:
INVESTOR INFORMATION DEPARTMENT:
1-800-662-7447
TABLE OF CONTENTS
DESCRIPTION OF THE FUND......................................................B-1
INVESTMENT POLICIES .........................................................B-3
FUNDAMENTAL INVESTMENT LIMITATIONS...........................................B-7
YIELD AND TOTAL RETURN.......................................................B-9
PURCHASE OF SHARES..........................................................B-10
SHARE PRICE.................................................................B-11
REDEMPTION OF SHARES........................................................B-12
MANAGEMENT OF THE FUND......................................................B-12
PORTFOLIO TRANSACTIONS......................................................B-15
FINANCIAL STATEMENTS........................................................B-16
COMPARATIVE INDEXES.........................................................B-16
APPENDIX A--DESCRIPTION OF BOND RATINGS.....................................B-19
DESCRIPTION OF THE FUND
ORGANIZATION
Vanguard Balanced Index Fund was organized as Vanguard Balanced Index Fund,
Inc., a Maryland corporation, in 1992, and was reorganized as a Delaware
business trust in July 1998. The Fund is registered with the United States
Securities and Exchange Commission (the Commission) under the Investment Company
Act of 1940 (the 1940 Act) as an open-end diversified management investment
company. The Fund has the ability to offer multiple portfolios and classes of
shares. There is no limit on the number of full and fractional shares that the
Fund may issue for a single portfolio or class of shares. The Fund currently
offers a single portfolio (also known as Vanguard Balanced Index Fund,) and two
classes of shares (Investor Shares and Admiral Shares).
SERVICE PROVIDERS
CUSTODIAN. First Union National Bank, PA4943, 530 Walnut Street,
Philadelphia, Pennsylvania 19106, serves as the Fund's custodian. The custodian
is responsible for maintaining the Fund's assets and keeping all necessary
accounts and records of Fund assets.
INDEPENDENT ACCOUNTANTS. PricewaterhouseCoopers LLP, 30 South 17th Street,
Philadelphia, Pennsylvania 19103, serves as the Fund's independent accountants.
The accountants audit financial statements for the Fund and provide other
related services.
TRANSFER AND DIVIDEND-PAYING AGENT. The Fund's transfer and dividend-paying
agent is The Vanguard Group, Inc., 100 Vanguard Boulevard, Malvern, Pennsylvania
19355.
B-1
<PAGE>
CHARACTERISTICS OF THE FUND'S SHARES
RESTRICTIONS ON HOLDING OR DISPOSING OF SHARES. There are no restrictions on
the right of shareholders to retain or dispose of the Fund's shares, other than
the possible future termination of the Fund. The Fund may be terminated by
reorganization into another mutual fund or by liquidation and distribution of
the assets of the affected fund. Unless terminated by reorganization or
liquidation, the Fund will continue indefinitely.
SHAREHOLDER LIABILITY. The Fund is organized under Delaware law, which
provides that shareholders of a business trust are entitled to the same
limitations of personal liability as shareholders of a corporation organized
under Delaware law. Effectively, this means that a shareholder of the Fund will
not be personally liable for payment of the Fund's debts except by reason of his
or her own conduct or acts. In addition, a shareholder could incur a financial
loss on account of a Fund obligation only if the Fund itself had no remaining
assets with which to meet such obligation. We believe that the possibility of
such a situation arising is extremely remote.
DIVIDEND RIGHTS. The shareholders of a fund are entitled to receive any
dividends or other distributions declared for such fund. No shares have priority
or preference over any other shares of the same fund with respect to
distributions. Distributions will be made from the assets of a fund, and will be
paid ratably to all shareholders of the fund (or class) according to the number
of shares of such fund (or class) held by shareholders on the record date. The
amount of income dividends per share may vary between separate share classes of
the same fund based upon differences in the way that expenses are allocated
between share classes pursuant to a multiple class plan.
VOTING RIGHTS. Shareholders are entitled to vote on a matter if: (i) a
shareholder vote is required under the 1940 Act; (ii) the matter concerns an
amendment to the Declaration of Trust that would adversely affect to a material
degree the rights and preferences of the shares of any class or fund; or (iii)
the Trustees determine that it is necessary or desirable to obtain a shareholder
vote. The 1940 Act requires a shareholder vote under various circumstances,
including to elect or remove Trustees upon the written request of shareholders
representing 10% or more of the Fund's net assets, and to change any fundamental
policy of the Fund. Shareholders of the Fund receive one vote for each dollar of
net asset value owned on the record date, and a fractional vote for each
fractional dollar of net asset value owned on the record date. However, only the
shares of the fund affected by a particular matter are entitled to vote on that
matter. Voting rights are noncumulative and cannot be modified without a
majority vote.
LIQUIDATION RIGHTS. In the event of liquidation, shareholders will be
entitled to receive a pro rata share of the Fund's net assets.
PREEMPTIVE RIGHTS. There are no preemptive rights associated with the Fund's
shares.
CONVERSION RIGHTS. There are no conversion rights associated with the Fund's
shares.
REDEMPTION PROVISIONS. The Fund's redemption provisions are described in its
current prospectus and elsewhere in this Statement of Additional Information.
SINKING FUND PROVISIONS. The Fund has no sinking fund provisions.
CALLS OR ASSESSMENT. The Fund's shares, when issued, are fully paid and
non-assessable.
TAX STATUS OF THE FUND
The Fund intends to continue to qualify as a "regulated investment company"
under Subchapter M of the Internal Revenue Code. This special tax status means
that the Fund will not be liable for federal tax on income and capital gains
distributed to shareholders. In order to preserve its tax status, the Fund must
comply with certain requirements. If the Fund fails to meet these requirements
in any taxable year, it will be subject to tax on its taxable income at
corporate rates, and all distributions from earnings and profits, including any
distributions of net tax-exempt income and net long-term capital gains, will be
taxable to shareholders as ordinary income. In addition, the Fund could be
required to recognize unrealized gains, pay substantial taxes and
B-2
<PAGE>
interest, and make substantial distributions before regaining its tax status as
a regulated investment company.
INVESTMENT POLICIES
The following policies supplement the Fund's investment policies as set forth in
the Prospectus.
REPURCHASE AGREEMENTS. 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
fixed-income security (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 Trustees will monitor the Fund's
repurchase agreement transactions generally and will establish guidelines and
standards for review of the creditworthiness of any bank, broker, or dealer
party to a repurchase agreement with the Fund.
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 bankruptcy 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 adviser acknowledges these risks, it is expected
that they will be controlled through careful monitoring procedures.
LENDING OF SECURITIES. The Fund may lend its securities to qualified
institutional investors (typically brokers, dealers, banks or other financial
institutions) 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 terms, the structure, and the aggregate amount of such
loans must be consistent with the 1940 Act, and the rules or interpretations of
the Commission thereunder. These provisions limit the amount of securities the
fund may lend to 33 1/3% of the Fund's total assets, and 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 (the Exchange), which rules presently
require the borrower, after notice, to redeliver the securities within the
normal settlement time of three business days. All relevant facts and
circumstances, including the creditworthiness of the broker, dealer, or
institution, will be considered in making decisions with respect to the lending
of securities, subject to review by the Fund's Board of Trustees.
B-3
<PAGE>
VANGUARD INTERFUND LENDING PROGRAM. The Commission has issued an exemptive
order permitting the Fund and other Vanguard funds to participate in Vanguard's
interfund lending program. This program allows the Vanguard funds to borrow
money from and loan money to each other for temporary or emergency purposes. The
program is subject to a number of conditions, including the requirement that no
fund may borrow or lend money through the program unless it receives a more
favorable interest rate than is available from a typical bank for a comparable
transaction. In addition, a Vanguard fund may participate in the program only if
and to the extent that such participation is consistent with the fund's
investment objective and other investment policies. The Boards of Trustees of
the Vanguard funds are responsible for ensuring that the interfund lending
program operates in compliance with all conditions of the Commission's exemptive
order.
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 transaction 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. Assets committed to futures
contracts will be segregated to the extent required by law.
Although futures contracts by their terms call for actual delivery or
acceptance of the underlying securities, in most cases the contracts are closed
out before the settlement date without the making or taking of delivery. Closing
out an open futures position is done by taking an opposite position ("buying" a
contract 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.
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.
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 except to the extent that
the aggregate initial margins and premiums required to establish any non-hedging
positions do not exceed five percent of the
B-4
<PAGE>
value of the Fund. 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.
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 will be 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.
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
B-5
<PAGE>
during a particular trading day and therefore does not limit potential losses,
because the limit may prevent the liquidation of unfavorable positions. Futures
contract prices have occasionally moved to the daily limit for several
consecutive trading days with little or no trading, thereby preventing prompt
liquidation of future positions and subjecting some futures traders to
substantial losses.
FEDERAL TAX TREATMENT OF FUTURES CONTRACTS. The Fund is required for federal
income tax purposes to recognize as income for each taxable year its net
unrealized gains and losses on certain futures contracts as of the end of the
year as well as those actually realized during the year. In these 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. Gains and losses on
certain other futures contracts (primarily non-U.S. futures contracts) are not
recognized until the contracts are closed and are treated as long-term or
short-term depending on the holding period of the contract. Sales of futures
contracts which are intended to hedge against a change in the value of
securities held by a Fund may affect the holding period of such securities and,
consequently, the nature of the gain or loss on such securities upon
disposition. A Fund may be required to defer the recognition of losses on
futures contracts to the extent of any unrecognized gains on related positions
held by the Fund.
In order for a 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 or currencies. It is anticipated that any net gain
recognized on futures contracts will be considered qualifying income for
purposes of the 90% requirement.
The Fund will distribute to shareholders annually any net capital gains which
have been recognized for federal income tax purposes on futures transactions.
Such distributions will be combined with distributions of capital gains realized
on the Fund's other investments and shareholders will be advised on the nature
of the distributions.
FEDERAL TAX TREATMENT OF NON-U.S. TRANSACTIONS. Special rules govern the
Federal income tax treatment of certain transactions denominated in terms of a
currency other than the U.S. dollar or determined by reference to the value of
one or more currencies other than the U.S. dollar. The types of transactions
covered by the special rules include the following: (i) the acquisition of, or
becoming the obligor under, a bond or other debt instrument (including, to the
extent provided in Treasury regulations, preferred stock); (ii) the accruing of
certain trade receivables and payables; and (iii) the entering into or
acquisition of any forward contract, futures contract, option or similar
financial instrument if such instrument is not marked to market. The disposition
of a currency other than the U.S. dollar by a taxpayer whose functional currency
is the U.S. dollar is also treated as a transaction subject to the special
currency rules. However, foreign currency-related regulated futures contracts
and nonequity options are generally not subject to the special currency rules if
they are or would be treated as sold for their fair market value at year-end
under the marking-to-market rules applicable to other futures contracts unless
an election is made to have such currency rules apply. With respect to
transactions covered by the special rules, foreign currency gain or loss is
calculated separately from any gain or loss on the underlying transaction and is
normally taxable as ordinary income or loss. A taxpayer may elect to treat as
capital gain or loss foreign currency gain or loss arising from certain
identified forward contracts, futures contracts and options that are capital
assets in the hands of the taxpayer and which are not part of a straddle. The
Treasury Department issued regulations under which certain transactions subject
to the special currency rules that are part of a "section 988 hedging
transaction" (as defined in the Internal Revenue Code of 1986, as amended, and
the Treasury regulations) will be integrated and treated as a single transaction
or otherwise treated consistently for purposes of the Code. Any gain or loss
attributable to the foreign currency component of a transaction engaged in by a
fund which is not subject to the special currency rules (such as foreign equity
investments other than certain preferred stocks) will be treated as capital gain
or loss and will not be segregated from the gain or loss on the underlying
transaction. It is anticipated that some of the non-U.S. dollar-denominated
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<PAGE>
investments and foreign currency contracts the Fund may make or enter into will
be subject to the special currency rules described above.
ILLIQUID SECURITIES. The Fund may invest up to 15% of its net assets in
illiquid securities. Illiquid securities are securities that may not be sold or
disposed of in the ordinary course of business within seven business days at
approximately the value at which they are being carried on the Fund's books.
The Fund may invest in restricted, privately placed securities that, under
securities laws, may be sold only to qualified institutional buyers. Because
these securities can be resold only to qualified institutional buyers or after
they have been held for a number of years, they may be considered illiquid
securities--meaning that they could be difficult for the Fund to convert to cash
if needed.
If a substantial market develops for a restricted security held by the Fund,
it will be treated as a liquid security, in accordance with procedures and
guidelines approved by the Fund's Board of Trustees. This generally includes
securities that are unregistered that can be sold to qualified institutional
buyers in accordance with Rule 144A under the Securities Act of 1933 (the 1933
Act). While the Fund's investment adviser determines the liquidity of restricted
securities on a daily basis, the Board oversees and retains ultimate
responsibility for the adviser's decisions. Several factors that the Board
considers in monitoring these decisions include the valuation of a security, the
availability of qualified institutional buyers, and the availability of
information about the security's issuer.
FOREIGN INVESTMENTS. The Fund will invest in securities issued by foreign
governments, companies, and agencies.
The Fund is, therefore, subject to country risk, which is the possibility that
political events (such as a war), financial problems (such as government
default), or natural disasters (such as an earthquake) will weaken a country's
economy and cause securities issued by entities in that country to lose money.
As foreign companies are not generally subject to uniform accounting,
auditing, and financial reporting standards and practices comparable to those
applicable to domestic companies, there may be less publicly available
information about certain foreign companies than about domestic companies.
Securities of some foreign companies are generally less liquid and more volatile
than securities of comparable domestic companies. There is generally less
government supervision and regulation of foreign stock exchanges, brokers, and
listed companies than in the U.S. In addition, with respect to certain foreign
countries, there is the possibility of expropriation or confiscatory taxation,
political or social instability, or diplomatic developments which could affect
U.S. investments in those countries.
FUNDAMENTAL INVESTMENT LIMITATIONS
The Fund is subject to the following fundamental investment limitations, which
cannot be changed in any material way without the approval of the holders of a
majority of the Fund's shares. For these purposes, a "majority" of the Fund's
shares means shares representing the lesser of: (i) 67% or more of the Fund's
shares, so long as shares representing more than 50% of the Fund's net asset
value are present or represented by proxy; or (ii) more than 50% of the Fund's
outstanding shares.
BORROWING. The Fund may not borrow money, except for temporary or emergency
purposes in an amount not exceeding 15% of the Fund's net assets. The Fund may
borrow money through banks, reverse repurchase agreements, or Vanguard's
interfund lending program only, and must comply with all applicable regulatory
conditions. The Fund may not make any additional investments whenever its
outstanding borrowings exceed 5% of net assets.
COMMODITIES. The Fund may not invest in commodities, except that it may invest
in bond and stock futures contracts, bond and stock options and options on bond
and stock futures contracts. No more than 5% of the Fund's total assets may be
used as initial margin deposit for futures contracts,
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<PAGE>
and no more than 20% of the Fund's total assets my be invested in futures
contracts or options at any time.
DIVERSIFICATION. With respect to 75% of its total assets, the Fund may not:
(i) purchase more than 10% of the outstanding voting securities of any one
issuer; or (ii) purchase securities of any issuer if, as a result, more than 5%
of the Fund's total assets would be invested in that issuer's securities. This
limitation does not apply to obligations of the United States Government, its
agencies, or instrumentalities.
ILLIQUID SECURITIES. The Fund may not acquire any security if, as a result,
more than 15% of its net assets would be invested in securities that are
illiquid.
INDUSTRY CONCENTRATION. The Fund may not invest more than 25% of its total
assets in any one industry.
INVESTING FOR CONTROL. The Fund may not invest in a company for purposes of
controlling its management.
INVESTMENT COMPANIES. The Fund may not invest in any other investment company,
except through a merger, consolidation or acquisition of assets, or to the
extent permitted by Section 12 of the 1940 Act. Investment companies whose
shares the Fund acquires pursuant to Section 12 must have investment objectives
and investment policies consistent with those of the Fund.
LOANS. The Fund may not lend money to any person except by purchasing
fixed-income securities or by entering into repurchase agreements, lending its
portfolio securities, or through Vanguard's interfund lending program.
MARGIN. The Fund may not purchase securities on margin or sell securities
short, except as permitted by the Fund's investment policies relating to
commodities.
OIL, GAS, MINERALS. The Fund may not invest in interests in oil, gas, or
other mineral exploration or development programs.
PLEDGING ASSETS. The Fund may not pledge, mortgage, or hypothecate more than
15% of its net assets.
REAL ESTATE. The Fund may not invest directly in real estate, although it may
invest in securities of companies that deal in real estate and bonds secured by
real estate.
RELATED PARTY TRANSACTIONS. The Trust may not have dealings on behalf of the
Trust with officers and Trustees, except for the purchase or sale of securities
on an agency or commission basis. The Trust may not make loans to any officers,
Trustees, or employees of the Trust.
SENIOR SECURITIES. The Fund may not issue senior securities, except in
compliance with the 1940 Act.
UNDERWRITING. The Fund may not engage in the business of underwriting
securities issued by other persons. The Fund will not be considered an
underwriter when disposing of its investment securities.
None of these limitations prevents the Fund from participating in The Vanguard
Group (Vanguard). As a member of the Group, the Fund may own securities issued
by Vanguard, make loans to Vanguard, and contribute to Vanguard's costs or other
financial requirement. See "Management of the Fund" for more information.
Compliance with the investment limitations set forth above is measured at the
time the investment is made, a later change in percentage resulting from a
change in the market value of assets will not constitute a violation of such
restriction.
YIELD AND TOTAL RETURN
Yields are calculated daily and premiums and discounts on asset-backed
securities are not amortized.
B-8
<PAGE>
The yield of the Fund's Investor Shares for the 30 days ended June 30, 2000
was .%. The average annual total return of the Fund's Investor Shares for the
one and five years ended December 31, 1999 and since November 9, 1992 was
13.61%, 19.13%, and 14.89%, respectively. Performance figures are not adjusted
for the $10 annual account maintenance fee.
AVERAGE ANNUAL TOTAL RETURN
Average annual total return is the average annual compounded rate of return for
the periods of one year, five years, ten years, or the life of the Fund, all
ended on the last day of a recent month. Average annual total return quotations
will reflect changes in the price of the Fund's shares and assume that all
dividends and capital gains distributions during the respective periods were
reinvested in Fund shares.
Average annual total return is calculated by finding the average annual
compounded rates of return of a hypothetical investment over such periods
according to the following formula (average annual total return is then
expressed as a percentage):
T = (ERV/P) /1/N /- 1
Where:
T = average annual total return.
P = a hypothetical initial investment of $1,000.
n = number of years.
ERV = ending redeemable value: ERV is the value, at the end of the
applicable period, of a hypothetical $1,000 investment made at
the beginning of the applicable period.
AVERAGE ANNUAL AFTER-TAX TOTAL RETURN QUOTATION
We calculate the Fund's average annual after-tax total return by finding the
average annual compounded rate of return over the 1-, 5-, and 10-year periods
(or for periods of the Fund's operations) that would equate the initial amount
invested to the after-tax value, according to the following formulas:
After-tax return:
P (1+T) /N/ = ATV
Where:
P = a hypothetical initial payment of $1,000
T = average annual after-tax return
n = number of years
ATV = after-tax value at the end of the 1-, 5-, or 10-year periods of
a hypothetical $1,000 payment made at the beginning of the time
period, assuming no liquidation of the investment at the end of
the measurement periods.
Instructions.
1.Assume all distributions by the Fund are reinvested--less the taxes due on
such distributions--at the price on the reinvestment dates during the period.
Adjustments may be made for subsequent re-characterizations of distributions.
2.Calculate the taxes due on distributions by the Fund by applying the highest
federal marginal tax rates to each component of the distributions on the
reinvestment date (e.g., ordinary income, short-term capital gain, long-term
capital gain, etc.). For periods after December 31, 1997, the federal marginal
tax rates used for the calculations are 39.6% for ordinary income and
short-term capital gains and 20% for long-term capital gains. Note that the
applicable tax rates may vary over the measurement period. Assume no taxes are
due on the portions of any
B-9
<PAGE>
distributions classified as exempt interest or non-taxable (i.e., return of
capital). Ignore any potential tax liabilities other than federal tax
liabilities (e.g., state and local taxes).
3.Include all recurring fees that are charged to all shareholder accounts. For
any account fees that vary with the size of the account, assume an account
size equal to the Fund's mean (or median) account size. Assume that no
additional taxes or tax credits result from any redemption of shares required
to pay such fees.
4. State the total return quotation to the nearest hundredth of one percent.
CUMULATIVE TOTAL RETURN
Cumulative total return is the cumulative rate of return on a hypothetical
initial investment of $1,000 for a specified period. Cumulative total return
quotations reflect changes in the price of the Fund's shares and assume that all
dividends and capital gains distributions during the period were reinvested in
Fund shares. Cumulative total return is calculated by finding the cumulative
rates of a return of a hypothetical investment over such periods, according to
the following formula (cumulative total return is then expressed as a
percentage):
C = (ERV/P) - 1
Where:
C = cumulative total return.
P = a hypothetical initial investment of $1,000.
ERV = ending redeemable value: ERV is the value, at the end
of the applicable period, of a hypothetical $1,000
investment made at the beginning of the applicable
period.
SEC YIELDS
Yield is the net annualized yield based on a specified 30-day (or one month)
period assuming semiannual compounding of income. Yield is calculated by
dividing the net investment income per share earned during the period by the
maximum offering price per share on the last day of the period, according to the
following formula:
YIELD = 2[((A-B)/CD+1) /6/- 1]
Where:
a = dividends and interest earned during the period.
b = expenses accrued for the period (net of reimbursements).
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends.
d = the maximum offering price per share on the last day of the
period.
PURCHASE OF SHARES
The Fund reserves the right in its sole discretion (i) to suspend the offerings
of its shares, (ii) to reject purchase orders when in the judgment of management
such rejection is in the best interest of the Fund, and (iii) to reduce or waive
the minimum investment for or any other restrictions on initial and subsequent
investments as well as redemption fees 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 deduct a transaction fee of .08% from an
investor's cumulative purchases over $100 million. The Fund may incur
substantial transaction costs in absorbing very large investments, and the
fee--paid directly to the Fund--is intended to protect existing shareholders
from being unfairly impacted by such costs. The Fund's adviser will consider
several factors in determining whether to apply the fee, including the
following:
B-10
<PAGE>
. The transaction costs of buying securities, determined in part by the
availability of securities at that time.
. The offsetting effect of any Fund redemptions occurring at that time.
. The Fund's then current rate of growth.
. Whether the Fund's corporate substitution strategy provides adequate
additional returns to help offset transaction costs associated with the large
investment under then current market conditions (as discussed in the
prospectus).
TRADING SHARES THROUGH CHARLES SCHWAB
The Fund has authorized Charles Schwab & Co., Inc. (Schwab) to accept on its
behalf purchase and redemption orders under certain terms and conditions. Schwab
is also authorized to designate other intermediaries to accept purchase and
redemption orders on the Fund's behalf subject to those terms and conditions.
Under this arrangement, the Fund will be deemed to have received a purchase or
redemption order when Schwab or, if applicable, Schwab's authorized designee,
accepts the order in accordance with the Fund's instructions. Customer orders
that are properly transmitted to the Fund by Schwab, or if applicable, Schwab's
authorized designee, will be priced as follows:
Orders received by Schwab before 3 p.m. Eastern time on any business day, will
be sent to Vanguard that day and your share price will be based on the Fund's
net asset value calculated at the close of trading that day. Orders received by
Schwab after 3 p.m. Eastern time, will be sent to Vanguard on the following
business day and your share price will be based on the Fund's net asset value
calculated at the close of trading that day.
SHARE PRICE
The Fund's share price, or "net asset value" per share, is calculated by
dividing the net assets attributable to each share class, by the total number of
shares outstanding for that class. The net asset value is determined as of the
close of the New York Stock Exchange, generally 4:00 p.m. Eastern time on each
day that the Exchange is open for trading.
Portfolio securities for which market quotations are readily available
(including those securities listed on national securities exchanges, as well as
those quoted on the NASDAQ Stock Market) will be valued at the last quoted sales
price on the day the valuation is made. Such securities which are not traded on
the valuation date are valued at the mean of the bid and ask prices. Price
information on exchange-listed securities is taken from the exchange where the
security is primarily traded. Securities may be valued on the basis of prices
provided by a pricing service when such prices are believed to reflect the fair
market value of such securities.
Short term instruments (those acquired with remaining maturities of 60 days or
less) may be valued at cost, plus or minus any amortized discount or premium,
which approximates market value.
Bonds and other fixed-income 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. The prices provided by a pricing service may be
determined without regard to bid or last sale prices of each security, but take
into account institutional-size transactions in similar groups of securities as
well as any developments related to specific securities.
Other assets and securities for which no quotations are readily available or
which are restricted as to sale (or resale) are valued by such methods as the
Board of Trustees deems in good faith to reflect fair value.
The share price for the Fund can be found daily in the mutual fund listings of
most major newspapers under the heading of Vanguard Index Funds.
B-11
<PAGE>
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 Commission, (ii) during any period
when an emergency exists as defined by 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.
No charge is made by the Fund for redemptions. Shares redeemed may be worth
more or less than what was paid for them, depending on the market value of
the securities held by the Fund.
MANAGEMENT OF THE FUND
OFFICERS AND TRUSTEES
The officers of the Fund manage its day-to-day operations and are responsible to
the Fund's Board of Trustees. The Trustees set broad policies for the Fund and
choose its officers. The following is a list of the Trustees and officers of the
Fund and a statement of their present positions and principal occupations during
the past five years. As a group, the Fund's Trustees and officers own less than
1% of the outstanding shares of the Fund. Each Trustee also serves as a Director
of The Vanguard Group, Inc., and as a Trustee of each of the 103 funds
administered by Vanguard (102 in the case of Mr. Malkiel and 93 in the case of
Mr. MacLaury). The mailing address of the Trustees and officers of the Fund is
Post Office Box 876, Valley Forge, PA 19482.
JOHN J. BRENNAN,(DOB: 7/29/1954) Chairman, Chief Executive Officer, and Trustee*
Chairman, Chief Executive Officer, and Director of The Vanguard Group, Inc., and
Trustee of each of the investment companies in The Vanguard Group.
JOANN HEFFERNAN HEISEN, (DOB: 1/25/1950) Trustee Vice President, Chief
Information Officer, and member of the Executive Committee of Johnson and
Johnson (Pharmaceuticals/Consumer Products); Director of Johnson & Johnson*MERCK
Consumer Pharmaceuticals Co., The Medical Center at Princeton, and Women's
Research and Education Institute.
BRUCE K. MACLAURY, (DOB: 5/7/1931) Trustee President Emeritus of The Brookings
Institution (Independent Non-Partisan Research Organization); Director of
American Express Bank, Ltd., The St. Paul Companies, Inc. (Insurance and
Financial Services), and National Steel Corp.
BURTON G. MALKIEL, (DOB: 8/28/1932) Trustee Chemical Bank Chairman's Professor
of Economics, Princeton University; Director of Prudential Insurance Co. of
America, Banco Bilbao Gestinova, Baker Fentress & Co. (Investment Management),
The Jeffrey Co. (Holding Company), and Select Sector SPDR Trust (Exchange-Traded
Mutual Fund).
ALFRED M. RANKIN, JR., (DOB: 10/8/1941) Trustee Chairman, President, Chief
Executive Officer, and Director of NACCO Industries, Inc. (Machinery/
Coal/Appliances); Director of The BFGoodrich Co. (Aircraft
Systems/Manufacturing/Chemicals), and The Standard Products Co. (Rubber Products
Company).
JAMES O. WELCH, JR., (DOB: 5/13/1931) Trustee Retired Chairman of Nabisco
Brands, Inc. (Food Products); retired Vice Chairman and Director of RJR Nabisco
(Food and Tobacco Products); Director of TECO Energy, Inc., and Kmart Corp.
B-12
<PAGE>
J. LAWRENCE WILSON, (DOB: 3/2/1936) Trustee Retired Chairman of Rohm & Haas Co.
(Chemicals); Director of Cummins Engine Co. (Diesel Engine Company), The Mead
Corp. (Paper Products); and AmeriSource Health Corp.; and Trustee of Vanderbilt
University.
RAYMOND J. KLAPINSKY, (DOB: 12/7/1938) Secretary* Managing Director of The
Vanguard Group, Inc.; Secretary of The Vanguard Group, Inc. and of each of the
investment companies in The Vanguard Group.
THOMAS J. HIGGINS, (DOB: 5/21/1957) Treasurer* Principal of The Vanguard Group,
Inc.; Treasurer of each of the investment companies in The Vanguard Group.
ROBERT D. SNOWDEN, (DOB: 9/4/1961) Controller* Principal of The Vanguard Group,
Inc.; Controller of each of the investment companies in The Vanguard Group.
*Officers of the Fund are "interested persons" as defined in the 1940 Act.
THE VANGUARD GROUP
The Fund is a member of the Vanguard Group of Investment Companies which
consists of more than 100 funds. Through their jointly-owned subsidiary, The
Vanguard Group, Inc. (Vanguard), the Trust and the other Trusts in The Vanguard
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 each fund. In addition, each fund bears its own
direct expenses such as legal, auditing and custodian fees.
The funds' 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.
Vanguard and the Fund has adopted a Code of Ethics designed to prevent
employees who may have access to nonpublic information about the trading
activities of the Fund (access persons) from profiting from that information.
The Code permits access persons to invest in securities for their own accounts,
including securities that may be held by the Fund, but places substantive and
procedural restrictions on their trading activities. For example, the Code
requires that access persons of the Fund receive advance approval for every
securities trade to ensure that there is no conflict with the trading activities
of the Fund.
Vanguard was established and operates under a Funds' Service Agreement which
was approved by the shareholders of each of the funds. The amounts which each of
the funds has 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. The Amended and Restated Funds' Service
Agreement provides for the following arrangement: (1) each Vanguard fund may be
called upon to 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. At December 31, 1999, the Balanced Index Fund had contributed
capital of $595,000 to Vanguard, representing 0.02% of the Fund's net assets and
0.60% of Vanguard's capitalization.
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.
B-13
<PAGE>
DISTRIBUTION. Vanguard Marketing Corporation, a wholly-owned subsidiary of The
Vanguard Group, Inc., provides all distribution and marketing activities for the
funds in the Group. 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 Vanguard. The Trustees 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 funds aggregate quarterly rate of contribution for
distribution expenses of a marketing and promotional nature shall exceed 125% of
average distribution expense rate for Vanguard, and that no fund shall incur
annual distribution expenses in excess of 20/100 of 1% of its average month-end
net assets.
During the fiscal years ended December 31, 1997, 1998, and 1999, the Fund
incurred the following approximate amounts of The Vanguard Group's management
(including transfer agency) distribution, and marketing expenses: $974,000,
$1,715,000, and $4,542,000, respectively.
INVESTMENT ADVISORY SERVICES
Vanguard provides investment advisory services to the Fund. 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 and funds utilizing these services. During the fiscal years ended December
31, 1997, 1998, and 1999, the Fund paid approximately $80,000, $123,000, and
$205,000, respectively, of Vanguard's expenses relating to investment advisory
services.
TRUSTEE COMPENSATION
The same individuals serve as Trustees of all Vanguard funds (with two
exceptions, which are noted in the table appearing on page B-15), and each fund
pays a proportionate share of the Trustees' compensation. The funds employ their
officers on a shared basis, as well. However, officers are compensated by
Vanguard, not the funds.
INDEPENDENT TRUSTEES. The funds compensate their independent Trustees--that
is, the ones who are not also officers of the Fund--in three ways:
. The independent Trustees receive an annual fee for their service to the funds,
which is subject to reduction based on absences from scheduled Board meetings.
. The independent Trustees are reimbursed for the travel and other expenses that
they incur in attending Board meetings.
. Upon retirement, the independent Trustees receive an aggregate annual fee of
$1,000 for each year served on the Board, up to fifteen years of service. This
annual fee is paid for ten years following retirement, or until each Trustee's
death.
"INTERESTED" TRUSTEE. Mr. Brennan serves as a Trustee, but is not paid in
this capacity. He is, however, paid in his role as officer of The Vanguard
Group, Inc.
COMPENSATION TABLE. The following table provides compensation details for each
of the Trustees. We list the amounts paid as compensation and accrued as
retirement benefits by the Fund for each Trustee. In addition, the table shows
the total amount of benefits that we expect each Trustee to receive from all
Vanguard funds upon retirement, and the total amount of compensation paid to
each Trustee by all Vanguard funds.
B-14
<PAGE>
VANGUARD BALANCED INDEX FUNDS
TRUSTEES' COMPENSATION TABLE
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
PENSION OR
RETIREMENT TOTAL
BENEFITS COMPENSATION
AGGREGATE ACCRUED AS ESTIMATED FROM ALL
COMPENSATION PART OF THESE ANNUAL VANGUARD
FROM THESE FUNDS' BENEFITS UPON FUNDS PAID TO
NAMES OF TRUSTEES FUNDS(1) EXPENSES(1) RETIREMENT TRUSTEES(2)
---------------------------------------------------------------------------------------------------------------
John C. Bogle(3) None None None None
John J. Brennan None None None None
JoAnn Heffernan Heisen $439 $24 $15,000 $80,000
Bruce K. MacLaury $457 $42 $12,000 $75,000
Burton G. Malkiel $443 $40 $15,000 $80,000
Alfred M. Rankin, Jr. $439 $29 $15,000 $80,000
John C. Sawhill(4) $439 $37 $15,000 $80,000
James O. Welch, Jr. $439 $43 $15,000 $80,000
J. Lawrence Wilson $439 $31 $15,000 $80,000
</TABLE>
(1) The amounts shown in this column are based on the Funds' fiscal year ended
January 31, 2000.
(2) The amounts reported in this column reflect the total compensation paid to
each Trustee for his or her service as Trustee of 103 Vanguard funds (102
in the case of Mr. Malkiel; 93 in the case of Mr. MacLaury) for the
1999 calendar year.
(3) Mr. Bogle has retired from the Funds' Board, effective December 31, 1999.
(4) Mr. Sawhill passed away on May 18, 2000.
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 the
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.
The Fund's bond investments are generally purchased and sold through principal
transactions, meaning that the Fund normally purchases bonds directly from the
issuer or a primary market-maker acting as principal for the bonds on a net
basis. Explicit brokerage commissions are not paid on these transactions,
although the purchase price for bonds usually includes an undisclosed
compensation. Purchases from underwriters of bonds typically include a
commission or concession paid by the issuer to the underwriter, and purchases
from dealers serving as market makers typically include a dealer's mark-up
(i.e., a spread between the bid and the asked prices).
The Vanguard Group chooses brokers or dealers to handle the purchase and sale
of the Fund's bonds, and is responsible for getting the best available price and
most favorable execution for all transactions. When the Fund purchases a newly
issued bond at a fixed price, Vanguard may designate certain members of the
underwriting syndicate to receive compensation associated with that transaction.
Certain dealers have agreed to rebate a portion of such compensation directly to
the Fund to offset its management expenses. Vanguard is required to seek best
execution of all transactions and is not authorized to pay a higher brokerage
commission solely on account of the receipt of research or other services.
B-15
<PAGE>
The Fund's adviser evaluates the reasonableness of any commissions paid by
considering: (a) historical commission rates; (b) rates which other
institutional investors are paying, based upon publicly available information;
(c) rates quoted by brokers and dealers; (d) the size of a particular
transaction, in terms of the number of shares, dollar amount, and number of
clients involved; (e) the complexity of a particular transaction in terms of
both execution and settlement; (f) the level and type of business done with a
particular firm over a period of time; and (g) the extent to which the broker or
dealer has capital at risk in the transaction. During the fiscal years ended
December 31, 1997, 1998, and 1999, the Fund paid approximately $70,745,
$139,894, and $141,882 in brokerage commissions, respectively.
FINANCIAL STATEMENTS
The Fund's financial statements as of and for the year ended December 31, 1999,
appearing in the Vanguard Balanced Index Fund's 1999 Annual Report to
Shareholders, and the report thereon of PricewaterhouseCoopers LLP, independent
accountants, also appearing therein, are incorporated by reference in this
Statement of Additional Information. For a more complete discussion of the
performance, please see the Fund's Annual Report to Shareholders, which may be
obtained without charge.
COMPARATIVE INDEXES
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 & POOR'S 500 COMPOSITE STOCK PRICE INDEX--includes stocks selected by
Standard & Poor's Index Committee to include leading companies in leading
industries and to reflect the U.S. stock market.
STANDARD & POOR'S MIDCAP 400 INDEX--is composed of 400 medium sized domestic
stocks.
STANDARD & POOR'S 500/BARRA VALUE INDEX--consists of the stocks in the Standard
& Poor's 500 Composite Stock Price Index (S&P 500) with the lowest price-to-book
ratios, comprising 50% of the market capitalization of the S&P 500.
STANDARD & POOR'S SMALLCAP 600/BARRA VALUE INDEX--contains stocks of the S&P
SmallCap 600 Index which have a lower than average price-to-book ratio.
STANDARD & POOR'S SMALLCAP 600/BARRA GROWTH INDEX--contains stocks of the S&P
SmallCap 600 Index which have a higher than average price-to-book ratio.
RUSSELL 1000 VALUE INDEX--consists of the stocks in the Russell 1000 Index
(comprising the 1,000 largest U.S.-based companies measured by total market
capitalization) with the lowest price-to-book ratios, comprising 50% of the
market capitalization of the Russell 1000.
WILSHIRE 5000 TOTAL MARKET INDEX--consists of more than 7,000 common equity
securities, covering all stocks in the U.S. for which daily pricing is
available.
WILSHIRE 4500 COMPLETION 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 approximately 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, Australasia, and the Far East.
B-16
<PAGE>
GOLDMAN SACHS 100 CONVERTIBLE BOND INDEX--currently includes 71 bonds and 29
preferreds. The original list of names was generated by screening for
convertible issues of $100 million or greater in market capitalization. The
index is priced monthly.
SALOMON BROTHERS GNMA INDEX--includes pools of mortgages originated by private
lenders and guaranteed by the mortgage pools of the Government National Mortgage
Association.
SALOMON BROTHERS HIGH-GRADE CORPORATE BOND INDEX--consists of publicly issued,
non-convertible corporate bonds rated Aa or Aaa. It is a value-weighted, total
return index, including approximately 800 issues with maturities of 12 years or
greater.
LEHMAN BROTHERS LONG-TERM TREASURY BOND INDEX--is a market weighted index that
contains individually priced U.S. Treasury securities.
MERRILL LYNCH CORPORATE & GOVERNMENT BOND INDEX--consists of over 4,500 U.S.
Treasury, agency and investment grade corporate bonds.
LEHMAN BROTHERS CORPORATE (BAA) BOND INDEX--all publicly offered fixed-rate,
nonconvertible domestic corporate bonds rated Baa by Moody's, with a maturity
longer than one year and with more than $100 million outstanding. This index
includes over 1,500 issues.
LEHMAN BROTHERS LONG-TERM CORPORATE BOND INDEX--is a subset of the Lehman
Brothers Corporate Bond Index covering all corporate, publicly issued,
fixed-rate, nonconvertible U.S. debt issues rated at least Baa, with at least
$100 million principal outstanding and maturity greater than ten years.
BOND BUYER MUNICIPAL BOND INDEX--is a yield index on current coupon high-grade
general obligation municipal bonds.
STANDARD & POOR'S PREFERRED INDEX--is a yield index based upon the average yield
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--65% Standard & Poor's 500 Index and 35% Lehman Brothers
Long-Term Corporate AA or Better Bond Index.
COMPOSITE INDEX--65% Lehman Brothers Long-Term Corporate AA or Better Bond Index
and a 35% weighting in a blended equity composite (75% Standard & Poor's/BARRA
Value Index, 12.5% Standard & Poor's Utilities Index and 12.5% Standard & Poor's
Telephone Index).
LEHMAN BROTHERS LONG-TERM CORPORATE AA OR BETTER BOND INDEX--consists of all
publicly issued, fixed rate, nonconvertible investment grade,
dollar-denominated, SEC-registered corporate debt rated AA or AAA.
LEHMAN BROTHERS AGGREGATE BOND INDEX--is a market-weighted index that contains
individually priced U.S. Treasury, agency, corporate, and mortgage pass-through
securities corporate rated Baa- or better. The Index has a market value of over
$5 trillion.
LEHMAN BROTHERS CORPORATE A OR BETTER BOND INDEX--consists of all publicly
issued, investment grade corporate bonds rated A or better, of all maturity
levels.
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 one and five years. The index has a market value of over $1.6 trillion.
LEHMAN BROTHERS MUTUAL FUND INTERMEDIATE (5-10) GOVERNMENT/CORPORATE INDEX--is a
market-weighted index that contains individually priced U.S. Treasury, agency,
and corporate securities rated BBB- or better with maturities between five and
ten years. The index has a market value of over $800 billion.
B-17
<PAGE>
LEHMAN BROTHERS LONG (10+) GOVERNMENT/CORPORATE INDEX--is a market-weighted
index that contains individually priced U.S. Treasury, agency, and corporate
securities rated BBB-or better with maturities greater than ten years. The index
has a market value of over $1.1 trillion.
LIPPER SMALL COMPANY GROWTH FUND AVERAGE--the average performance of small
company growth funds as defined by Lipper 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 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 Inc.
LIPPER GOVERNMENT MONEY MARKET FUND AVERAGE--an industry benchmark of average
government money market funds with similar investment objectives and policies,
as measured by Lipper Inc.
LIPPER GENERAL EQUITY FUND AVERAGE--an industry benchmark of average general
equity funds with similar investment objectives and policies, as measured by
Lipper Inc.
LIPPER FIXED-INCOME FUND AVERAGE--an industry benchmark of average fixed-income
funds with similar investment objectives and policies, as measured by Lipper
Inc.
B-18
<PAGE>
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. They carry the smallest degree of
investment risk.
AA--Judged to be of high 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 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 they are somewhat more 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.
B-19
<PAGE>
SAI002-BALANCED INDEX
B-20
<PAGE>
PART C
VANGUARD BALANCED INDEX FUND
OTHER INFORMATION
ITEM 23. EXHIBITS
(a) Declaration of Trust**
(b) By-Laws**
(c) Not applicable
(d) Investment Advisory Contract**
(e) Not applicable
(f) Reference is made to the section entitled "Management of the Fund" in the
Registrant's Statement of Additional Information
(g) Custodian Agreement**
(h) Amended and Restated Funds' Service Agreement**
(i) Legal Opinion**
(j) Consent of Independent Accountants***
(k) Not Applicable
(l) Not Applicable
(m) Not Applicable
(n) Not Applicable
(o) Rule 18f-3 Plan*
(p) Code of Ethics**
*Filed herewith
**Filed previously
***To be filed by amendment
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
Registrant is not controlled by or under common control with any person.
ITEM 25. INDEMNIFICATION
The Registrant's organizational documents contain provisions indemnifying
Trustees and officers against liability incurred in their official capacity.
Article VII, Section 2 of the Declaration of Trust provides that the Registrant
may indemnify and hold harmless each and every Trustee and officer from and
against any and all claims, demands, costs, losses, expenses, and damages
whatsoever arising out of or related to the performance of his or her duties as
a Trustee or officer. However, this provision does not cover any liability to
which a Trustee or officer would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence, or reckless disregard of the duties
involved in the conduct of his or her office. Article VI of the By-Laws
generally provides that the Registrant shall indemnify its Trustees and officers
from any liability arising out of their past or present service in that
capacity. Among other things, this provision excludes any liability arising by
reason of willful misfeasance, bad faith, gross negligence, or the reckless
disregard of the duties involved in the conduct of the Trustee's or officer's
office with the Registrant.
ITEM 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
Investment advisory services are provided to the Registrant on an at-cost basis
by The Vanguard Group, Inc., a jointly-owned subsidiary of the Registrant and
the other Trusts in the Group. See the information concerning The Vanguard Group
set forth in Parts A and B.
C-1
<PAGE>
ITEM 27. PRINCIPAL UNDERWRITERS
(a) Not Applicable
(b) Not Applicable
(c) Not Applicable
ITEM 28. LOCATION OF ACCOUNTS AND RECORDS
The books, accounts, and other documents required to be maintained by Section 31
(a) of the Investment Company Act and the rules promulgated thereunder will be
maintained at the offices of Registrant; Registrant's Transfer Agent, The
Vanguard Group, Inc., 100 Vanguard Boulevard Malvern, Pennsylvania 19355; and
the Registrant's Custodian, First Union National Bank, Philadelphia,
Pennsylvania 19106.
ITEM 29. MANAGEMENT SERVICES
Other than as set forth under the description of The Vanguard Group in Part B of
this Registration Statement, the Registrant is not a party to any
management-related service contract.
ITEM 30. UNDERTAKINGS
Not Applicable
C-2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant hereby certifies that it has duly caused
this Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the Town of Valley Forge and the Commonwealth of
Pennsylvania, on the 26th day of July, 2000.
VANGUARD BALANCED INDEX FUND
BY:_________________________________
(signature)
(HEIDI STAM)
JOHN J. BRENNAN*
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment to the Registration Statement has been signed below by
the following persons in the capacities and on the date indicated:
SIGNATURE TITLE DATE
--------------------------------------------------------------------------------
By:/S/ JOHN J. BRENNAN President, Chairman, Chief July 26, 2000
------------------------- Executive Officer, and Trustee
(Heidi Stam)
John J. Brennan*
By:/S/ JOANN HEFFERNAN HEISEN Trustee July 26, 2000
---------------------------
(Heidi Stam)
JoAnn Heffernan Heisen*
By:/S/ BRUCE K. MACLAURY Trustee July 26, 2000
---------------------------
(Heidi Stam)
Bruce K. MacLaury*
By:/S/ BURTON G. MALKIEL Trustee July 26, 2000
---------------------------
(Heidi Stam)
Burton G. Malkiel*
By:/S/ ALFRED M. RANKIN, JR. Trustee July 26, 2000
---------------------------
(Heidi Stam)
Alfred M. Rankin, Jr.*
By:/S/ JAMES O. WELCH, JR. Trustee July 26, 2000
---------------------------
(Heidi Stam)
James O. Welch, Jr.*
By:/S/ J. LAWRENCE WILSON Trustee July 26, 2000
---------------------------
(Heidi Stam)
J. Lawrence Wilson*
By:/S/ THOMAS J. HIGGINS Treasurer and Principal July 26, 2000
-------------------------- Financial Officer and
(Heidi Stam) Principal Accounting Officer
Thomas J. Higgins*
*By Power of Attorney. See File Number 33-4424, filed on January 25, 1999.
Incorporated by Reference.
<PAGE>
EXHIBIT INDEX
Rule 18f-3 Plan . . . . . . . . . . . . . . . . . . . . . . . . . . . EX-99.BO
